First Quarter 2012 Summary for Clients of Florida Wealth Advisors

The following comments and opinions are from some of the Purcell Advisory Services signal providers, and are taken from the quarterly report sent out to advisors like us. They are intended to help us better understand the investment dynamics involved with each of these programs so that we can better assure our clients that we have at least some clue to what is going on.

During the first quarter of 2012 the equity markets (stocks) improved rather dramatically. At the end of the quarter there was some gnashing of teeth as it was expected the upswing would not last. And it didn’t. Europe is still a mess, housing in this country is still a mess, but companies are generally profitable and have huge amounts of cash on their balance sheets. This all leads to uncertainty which in turn leads to confusion and no clear direction for the markets.

For existing clients and prospects alike, the programs offered by Purcell Advisory Services are, in my opinion, the best mix of tactical and strategic choices for investing your money I have ever found. If you have concerns or questions, please call or send an email. I promise to get back to you quickly.

Columbus High Yield Signal Provider

Following a relatively uneventful year in 2011, the markets have been revived. Not to be left out are high yield bonds. In the first quarter of 2012, the Columbus High Yield Bond program has provided investors with respectable, reduced-volatility. We anticipate that further gains are in store for the program as the year progresses. Then, when volatility raises its “ugly head” and poses a threat to investors’ capital, the program will move to the safety of cash until the next opportunity arises.

Equity Alternative Signal Provider
In January, the Treasury Bond program held a long position for most of the month driven by its forecasting models pointing towards weakness in hard assets. Toward month end the program switched to being short bonds as the indicators pointed towards possible increase in demand for hard assets as well as being technically bearish over the short term. December and January were challenging for the program as the Treasury yields were stuck in a sideways pattern since last fall where the 10 year rate bounced back and forth around 2% due in part to a “tug of war” created by mixed economic readings in the US and the week-to-week uncertainty on the resolution of the European debt situation.

The program held a short position during February. The initial part of the month saw a sharp selloff in treasuries driven mainly by an unexpectedly strong number in the labor market where unemployment declined to 8.3%. Manufacturing also showed signs of improvement with rising US factory orders and a robust number of manufacturing jobs added. The remainder of the month saw some choppy action but treasuries trended down with volatility increasing after Bernanke’s month end speech and his ambivalence about doing QE3. One point to note is that despite ongoing positive economic news and a rising stock market, treasury yields have stayed low. This might be attributed to general risk aversion in the global markets as well as the fed’s Operation Twist where its own holdings have been overweighted toward longer term bonds.

The program continued to hold a short position during March. Treasuries were in a sustained downtrend until about mid month after which they rose by around 2 points toward month end. The bond price rally in the later part of the month was driven partially by a dampening in the current positive sentiment after existing homes sales data came in below expectations. There also appeared to be buyers due to perceived oversold price action in the treasury market. From a slightly longer term perspective, yields do appear to be moderately on the rise; the ten year treasury yield ended this quarter at 2.22%, rising from end of last quarter when it was 1.87%.

Managed Alternative Assets Signal Provider

While the broad stock market indexes made significant gains in the first quarter 2012, the outcome was mixed when looking at industry sectors. There were major divergences with technology, financials, and health care leading in market gains, while industry sectors including commodity based oil, precious metals, and basic materials all retreated in March. There is growing concern that the worldwide demand for commodities in these sectors will slow down as China’s economy begins to slow, and a recession in Europe reduces demand. Over the last few quarters, market sectors have tended to move together based on credit and sovereign debt crisis news events, so this divergence in industry sectors performance may indicate that economic recovery is facing some difficulty.

Dynamic US Gov’t Bond Signal Provider
Some investors look for opportunities to buy on the dips, or periods where investments are under-performing; as common wisdom suggests, “buy low, sell high.” Short term performance dips provide periodic buying opportunities. Clearly, the volatility in recent years has given us plenty of those buying opportunities. Is that true with a mechanical program such as the Dynamic US Government Bond?

To answer that question and to understand if drawdowns truly were buying opportunities, we did some analysis. First, we studied the number of instances when the Dynamic Bond was in a drawdown of 10% or more (from a previous high) and then examined the performance that followed those drawdowns.

Here are the results: Since its inception over seven years ago, the Dynamic US Bond program has recorded a drawdown of more than 10% on five separate occasions.

Second, if you bought the Dynamic US Bond program when the drawdown was 10% or more, and held it for 3 months, the average return was 7.7%. If you held it for 6 months, the average return was 16.9%. Finally, if you held it for a year, the return averaged 38.9% (although some of those examples have yet to play out). Obviously, dips in performance in the Dynamic Bond did provide valid buying opportunities.

Although this is not a buy-and-hold program, tactically managed programs such as Dynamic US Government Bond work best if held over a full market cycle. Dynamic Bond has significantly outperformed the treasury bond index for the three year period ending March 31, 2012. Investors in Dynamic Bond or any Purcell program should have an investment time horizon of three to five years and understand that past performance is no guarantee of future results or that those results will be profitable.

Growth Plus Signal Provider
If we could finally tune our crystal ball well enough to know in advance what the quarterly performance of the broad market would be for a given quarter, the first quarter of 2012 is not one in which we would have expected to see tactically managed strategies keep pace with the US equity market. Of course, I’m joking about the fact that we use a crystal ball, finely tuned or otherwise (sarcasm runs thick around here); but let’s face it – it was just a good quarter to have been a buy and hold investor in domestic equities. The Dow and the S&P 500 each had their best first quarter in 14 years, and they did it with relatively low volatility. The problem is that, to my knowledge, no one has quite figured out exactly how to project where the market will be a quarter from now. So, we only know in hindsight that passively holding the indices was a good investment strategy last quarter. Not very helpful in looking forward, is it?

As our readers here may know, in our approach to managing the Growth Plus strategy, we don’t place any weight on our ability to project where the market will be a quarter, a month, or even a week from now. The Growth Plus strategy is designed to react to the information that the market gives us on a daily basis, and to make a decision each and every day as to whether we should be positioning long, inverse, or neutral to the S&P 500. This is a reactive strategy, not a predictive strategy.

So, as we reflect on a phenomenal quarter for our buy and hold friends, and as we are also pleased with the 1st quarter performance of the Growth Plus strategy, are we suggesting that the same should always be expected of this strategy? Goodness, no!

However, we will use this opportunity to highlight a couple points about the needs that the Growth Plus strategy was designed to meet: 1) This strategy was not designed to be exclusively a bear market strategy. While that has historically been where investors have experienced the most highly positive results, the strategy does not necessarily require a bear market in order to generate positive returns, or even to outperform its benchmark. 2) Connected with the first point – this strategy was designed to provide traditional asset classes with a non-correlated return stream.