After making sizable moves higher and lower, the markets finished the quarter flat, with the S&P 500 gaining just 0.1%. In late May, as a result of the decline, we exited from our emerging markets and developed international stock positions. By early June, we had completed exiting from our US stock and high yield bond positions and were allocated to cash across all portfolios. From its peak, the S&P fell 7.2% before turning higher in late June. Our portfolios finished the quarter allocated 100% to cash.
As we write this letter, the market is continuing the advance that began in the last week of June into the 3rd quarter. As a result, our system began to move back into the markets in the first week of July. Should this market rise prove to be very short lived and markets turn lower over the short term, our system is poised to exit once again to cash.
The Risks from External Factors Remain High
Although the turnaround for stocks in the past few weeks has been robust, the risks to the market from factors external to the stock market remain high. The decline that began in the fall of 2007 that wiped out half of stock market valuations over the following 18 months started as a result of hyper-inflated home prices. Yet coming into the fall of 2007, corporate profits and growth were showing few signs of weakening. When home prices fell, it set off a chain reaction. Under-collateralized mortgages threatened to bankrupt banks. Banks and other financial institutions which had exposure to derivatives that insured against losses in debt instruments saw huge liabilities emerge on their balance sheets. The banking crisis quickly fed into the real economy and depressed corporate revenue markedly.
Much of the coverage during the decline last quarter focused on the possible default on debt by Greece. So, at a time when corporate profits are growing and the U.S. economy continues to recover, why does Greece matter? It matters for precisely the same reason that defaults on mortgages mattered during the previous crisis. Should Greece default on its debt obligations, it would potentially set off a chain reaction of instability throughout the financial sector. Banks (primarily in France and Germany) would be weakened. The destabilization could push other already weak Euro zone countries and organizations into default, which would accelerate debt exposure globally throughout the banking system.
All of this is occurring at a time when many developed economies are struggling to recover from the recent downturn and when many stock investors are unwilling to tolerate significant losses. In our view, the primary threat from the sovereign debt situation is that it will create a crisis of confidence similar to what we saw during the mortgage driven crisis. Should this play out, it could present considerable risks to the stock market.
Choosing Safety over Speed
In our year-end commentary we made the analogy between investments and airline manufacturers. One airline manufacturer, we posited, produces planes designed to fly at 500 miles per hour but are built to endure all levels of turbulence. Another produces planes designed to fly at 600 miles per hour but are only built to fly safely at low levels of turbulence. At high levels of turbulence these planes are vulnerable to…break up.
At Toews, we designed our system to attempt to avoid “breaking-up.” Based on a rigorous study, our system attempts to exit markets in the early stage of declines, before major losses are realized. We believe that this provides our investors a competitive advantage. It allows investors to commit to the stock market, even at a time of elevated risk. However, it also means that there will be many times when we’ll advance slower than the stock market. When risk events happen, at least as far as your investment portfolio is concerned, remain calm. We’ve got it covered.
Prior performance is no guarantee of future results and there can be no assurance, and individuals should not assume, that future performance of any of the portfolios referenced will be comparable to past performance.
There can be no assurance that Toews will achieve its performance objectives.
This document refers to the performance of the majority of Toews portfolios to illustrate the effect of Toews management on US and intl. stocks and high yield bonds. Performance of individual accounts varied based on the client’s investment risk profile and their specific investment funds. For your individual account performance, please refer to the enclosed quarterly statement or the quarterly statement recently sent you. In addition, not all model portfolios were referenced in this letter. It is not, nor is it intended to be, a comprehensive accounting of Toews asset management. There are other portfolios that Toews manages that performed differently than what is referenced in this letter.
This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
This article is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice. Please contact your investment adviser, accountant, and/or attorney for advice appropriate to your specific situation.