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Early Spring 2020

March 13th, 2020

Good afternoon Friends and Clients.  Today marks three weeks of very difficult times in the markets and in investor portfolios.  We know that we have talked directly to many of you recently, but we think that a short update may be helpful to all.  So, here goes:

  • In the first week of December, it was clear that China had a serious outbreak of coronavirus that spread rapidly and had deadly consequences.
  • At that time, the U.S. government thought that the virus was an Asian problem and travel restrictions could protect America.
  • In January, it became clear that the virus was migrating to other parts of the world and South Korea, Iran and Italy were in trouble.
  • Shortly after, Europe and the United States began to have coronavirus cases, but the full extent of the magnitude of and pace of spread were unknown or underestimated.
  • The virus has been with us in America for several months now and the preparedness of the public health system is challenged, but hopefully getting better by the day.
  • The markets began to experience losses in January directly related to the spread of the virus. In response, Compass Rose identified higher risk investments and began paring those positions.
  • In an odd occurrence, the markets immediately rebounded in late January and went on to set new all-time highs in February. While we continued to ride the wave to new highs, we continued to prepare for a market sell-off that we thought was coming.
  • In the second week of February, the markets began to decline. In response, we sold the riskier stocks, raised cash and re-evaluated every position that remained in the portfolio.
  • Two weeks ago, as market volatility began to spike as economists and investment managers (including us) began to be concerned that the that the spread of the virus could have serious negative effects on the U.S. and world economies. Interruption of supply chains from Asia and Europe would impact America. Possible interruption of consumer demand in the U.S. could reduce economic activity in the country dramatically.
  • Given these developments, Compass Rose made the determination that the U.S. would likely enter a Recession shortly, if we were not already in recession.
  • Our portfolio response was to raise even more cash, purchase gold and establish short positions (investments that go up in value as the market loses value). We also sold stocks and fixed income positions that were showing signs of price erosion. The goal was to preserve as much value as possible.
  • On Thursday, March 12th, the market hit new panic lows. Our portfolios did better than the markets overall. We do not know if Thursday was the market bottom, but we hope that it is near a bottom.
  • Over the past four weeks, we have not purchased one long term investment since we do not have evidence of a sustainable rally. We have however continued to build our Buy Watchlist for investments that could be purchased once there is evidence of that sustainable rally.

So, here is the bottom line for all of us.  We do not know the eventual trajectory of the coronavirus in the United States.  This will unfold over the next month.  We do not know exactly where the market bottom is, but we may be close.  We do not know when the right time is to jump back into the markets, but our analytics will give us a clear signal at some point.

Please take some comfort that we have been on the job seven days a week for over a month.  We have taken actions that have preserved value in the portfolios.  As a result, virtually all clients in our actively managed portfolios are outperforming the down market.  If you want to learn where you stand, just give us a call, we would love to hear from you.

We pledge that we will remain vigilant as the Bear Market unfolds.  There will be external events (news on the virus, government’s ability to deliver adequate health care, and citizens ability to financially navigate through disruptions to daily life).  In addition, there will be steps taken by the President, the Congress, the Federal Reserve, Governors, Mayors, foreign governments and sovereign banks that may have very significant impacts on the markets.  Our job is to track those initiatives, evaluate the market response and position our portfolios to benefit as much as possible.  Please take comfort that you are not alone in this, we are right beside you.

In a few months, the market will begin again its upward rise as economic activity becomes “normal” again, corporate earnings rise in response to higher revenues, and government actions begin to bear fruit.  It will happen.  And, we will micro-manage the portfolios to put us all in position to benefit from the rebound.  For those of you who have been with us for decades, you have experienced similar recoveries before.  Take comfort that it can happen again.

One last note.  All of you have family, friends and acquaintances that have suffered the full impact of the recent market decline.  They are scared and may not know where to turn.  Many have Advisors that may not have taken the steps we outlined above.  If any in your circle of family or friends want to talk to us about how to proceed from here, we would welcome an opportunity to help wherever we can.

Thank you all for your cooperation and patience.  All the Best!

Dr. Jim, Karen, and Jim Sambold