Strange Quarter

Who knew, on the 1st hot day of July, that the mortgage market was on the verge of collapse, highly leveraged hedge funds were going to be forced to dump assets at fire sale prices in a desperate attempt to de-lever, that rumors of a rebound in residential construction would die such a swift death, that thousands of mortgage lenders would soon be out of a job, that Citibank would be writing off over a billion dollars of sub-prime loan exposure at quarter-end, or that Swiss banking giant UBS would be writing off more than $3 billion, or that nearly a half dozen announced and ostensibly already financed leveraged-buyout deals would be cancelled because liquidity in the junk bond market would evaporate in a heartbeat?

And if you had known these events would transpire, who would have guessed that the S&P 500 would rise 1.5% during the quarter?

Had we known these events were on deck, we certainly would not have guessed that our ETF portfolio would be up +4.3% during the tumultuous 3-month period to follow. Had we perfect foresight and known that the Fed’s response would be to cut interest rates, causing the dollar to implode, we might have surmised that our heavy international exposure and commodity oriented investments would benefit from that particular consequence. At least that part makes sense. But how do you explain an up market when the fundamentals are being battered and bruised on a daily basis?

One day in August, the market fell 285 points, only to rebound by 250 points the day after that. It’s a tough way to lose 35 points! To be sure, this year has been rough, but also rewarding. The ETF Scout portfolio is closing in a gain of almost double the market. In spite of such performance, this market has been unnerving to us as it has been to many of you.

Headline news aside, the market continues to climb the proverbial “wall of worry.” Perhaps we ought to be rejoicing each calamity as it unfolds. We are not. Neither, however, are we full of panic. Instead, humbled once again by our inability to precisely predict the future, we are trusting our instruments and letting our investment disciplines guide us.

A limber mindset and a flexible portfolio remain critical elements of investment success.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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