2015 performance +8.42%
At the end of 2014 we viewed the coming year as a poor return environment for passive allocation as well as a poor risk adjusted return year for stocks overall. In light of this we established a portfolio with dual objectives; tactical allocation to asset classes while avoiding some asset classes altogether and 2) invest in specific stock or stock sectors we like only on corrections in the market. Although in hindsight that strategy proved to be correct a vast majority of our performance for the year was attributed to 3 factors. 1) we did not allocate or exited quickly any capital allocation to high yield, emerging markets, and oil during outsized declines. 2) our market timing on the equity market was one of the best in a very long time. As seen in the history of the blog- we went to 100% cash in july and reentered the equity market at the end of september, sidestepping the market declines and catching the majority of Octobers 8.3% move. In terms of individual stocks, we maintained our strategy of committing most of our capital to positions on significant pull backs. See a graph of our winners and losers on a relative basis.
Going into 2016 we have the same view about the poor risk adjusted return in the market and the performance of a passive allocation model. We also believe its possible to have significant drawdowns in 2016 without corresponding quick bounces of the magnitude we saw in 2015. Ie tactical and agile, even more than in 2015.
Still think the market has another 2-3% upside till year end. Our market forecast is for overall calmer waters in November with a few little clouds
I’m back from my travels. The market has moved much higher and in a faster time period than I thought and the performance from the leverage in our options positions has led us today to the decision to start taking profits on 70% of our portfolio which we execute opportunistically till the end of the month. We think the market still has about 2-3% upside till the end of the year but this has been a market in which taking profits has proven to be a good strategy.
First, I wanted to let those who follow the blog that I will be on the west coast and europe for the next three weeks and posts will be sporadic or non existent.
As those following know, we went to 100% cash at the end of July, leaving only small remaining option positions in the portfolio. This month we have added to our oil stock positions adding XOM, CVX, APC with a total 4% allocation. We also have added long term calls 2017 on Alibaba ($baba) (see post below). We think the market has gone way too far in this sell off but quite frankly are quite nervous about market sentiment. We want to increase our exposure significantly. Our strategy, limit our downside by buying a portfolio of long term options 2017,2018 on what we want to own: FB,GOOG,BABA,MSFT,AMZN, V, GE, as well as both consumer discretionary and industrial elf’s (outright). We are paying the price of premium to have leveraged upside and known downside as this market still seems quite unstable. Hopefully buying low and buying time with options will give us the chance to sell high over the remaining qtr of 2015 or beyond. Our outlook for October is clearing skies.
The Fed’s decision last week to keep rates at 0% instead of starting the normalization process ( note: NOT tightening), was a bit of surprise to us as we thought they should have shown strength and demonstrated confidence in US economy, especially given the declines in the stock market. They chose to once again kick the start of the normalization process down the road, making the fixed income sector once again an area of little interest (pun intended).
We previously outlined a 2% allocation to oil stocks: $CVX , XOM, APC (see post below). We are now adding another 2%, although we are now 4% allocated to the sector it is still half our normal exposure. As noted below, we have had no exposure to this sector all year.
As we approach the September FOMC meeting it is worth watching the movement of the 10 year note over the next few weeks. The reaction function of the yield level has been much lower to the volatile global equity & currency market movements this summer and this month. Having made successive higher lows over the last year, I think its very important to watch if it retests the highs of the year and whether it is in the process of an adjusting to a slightly higher range than we have seen for the year. Market expectations have been for a flatter yield curve as the Fed normalizes, however this may not be the case. It is on my radar screen.