Gramercy Consulting Group LLC

Monthly Commentary – October 2011

Ashok Gangolli — Mon, 07 Nov 2011 21:35:19 +0000

After five consecutive months of negative US equity market performance, October produced a sharp reversal and US equity markets exhibited the best monthly performance since 1987 (Dow up +9.7%; S&P 500 up +10.9%; Russell 2000 up +15.1%). The industry sectors that performed most poorly over the past six months were the same sectors that rebounded most strongly in October (financials, industrial goods, and basic materials – see sector performance charts). Bond markets ended the month slightly up with the long end of the interest rate curve backing up most significantly after September’s dramatic drop in long-term yields. The Barclays Aggregate Bond Index was up +0.11% for October with the 10 year US Treasury yield rising 26 basis points to 2.18% yield at month-end. The month of October was brought economic indications that the US economy is not imminently headed for a double dip recession. The labor market report for September at the beginning of the month showed solid gains in the private sector employment (+137k) with upward revisions for each of the past two months. Retail sales numbers out for the month of September showed that the consumer is still spending and this was further substantiated by the stronger than expected 3^rd quarter 2011 GDP growth numbers of +2.5% annualized pace. Towards the end of the month the EU summit meetings produced a communiqué that stated that agreement had been reached amongst the EU nations to amongst other things: (i) impose a “voluntary” Greek debt exchange that would result in a 50% haircut on the face amount of debt; (ii) mandate a recapitalization of the banking sector to get to a 9% Tier I capital ratio (valuing sovereign debt at market values) by end June 2012; (iii) establish facilities for guaranteeing bank liabilities; and (iv) leveraging the unused portion of the committed European Financial Stability Fund (EFSF) by up to four or five times to get to a level of roughly € 1 Trillion by providing first loss credit protection on newly issued sovereign debt when necessary. Though equity markets surged on the news, there are many questions as to how these objectives will actually be implemented. Further at the close of business at the end of October, the Greek Prime Minister Papandreou called for a populous vote referendum in January to determine whether Greece will accept the EU agreement. With numerous uncertainties surrounding the ability of the EU to implement the bailout agreement, the uncertainty around Greece accepting it thereafter is certain to put downward pressure on equity markets until some resolution is reached.

Historical US Equity Sector Performance

Amidst this sharp rebound in risk markets, the Limited Risk Portfolio posted its best monthly return since inception up +7.40%. The performance was driven by the strong equity markets and in particular extremely strong monthly performance from an emerging market ETF (tkr: VWO, +16%), a Russell 2000 ETF (tkr: IWM, +15%), a financial sector ETF (tkr: XLF, +14%), and a number of high dividend stocks (Honeywell, Philip Morris International, France Telecom, and Pfizer). Commodity exposure performance lagged in October but still posted a very strong month with gold up +6% and a commodity index ETN up +7%. The only position that was down in October was the small allocation to Dr. Pepper Snapple Group (tkr: DPS) which was down -3.4% despite a solid 3Q11 earnings report.

With the scaling back of equity risk towards the end of the month and a short-term equity hedge position that was put in place towards the end of the month, the overall equity risk was quite low at month end to avoid the market gyrations caused by uncertainty surrounding the EU Greek debt bailout package and Greece’s willingness to participate. This equity market hedge is meant to be short-term in nature and plans are for it to be liquidated and equity market exposure re-established once markets seem to have stabilized.

The Bond Portfolio was up +0.70% in October, compared to the Barclays Aggregate Bond Index return of +0.11% in October. The Bond Portfolio benefitted from no exposure to long-term US Treasuries which underperformed other sectors as long-term Treasury yields rose over the month. The best performing sector in the Bond Portfolio was the intermediate-term corporate sector which benefited from a tightening of credit spreads to Treasuries over the month. Year-to-date the Bond Portfolio has returned +4.70% through end October.

DISCLAIMER

Past performance is not necessarily indicative of future results and future accuracy and profitable results cannot be guaranteed. Performance is gross of all investment adviser fees which vary by account. Actual performance for any individually managed account may vary significantly from the above numbers as these represent composite portfolio performance and not individual account performance. Any information, data, statements, opinions, or projections made in any materials, newsletter, website (“Website”), article, presentation, or any other communication, service, or product, whether written or verbal (collectively, the “Materials”), affiliated with Gramercy Consulting Group,LLC (“GCG”) may contain certain forward looking statements, projections and information that are based on the beliefs of GCG as well as assumptions made by, and information currently available to, GCG. Such statements in the Materials reflect the view of GCG with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the Materials. Furthermore, although carefully verified, data is not guaranteed as to accuracy or completeness. Any quotations of individuals other than the authors or providers of the Materials are provided for informational purposes only and their accuracy and veracity are not guaranteed. The statements, opinions, and/or data expressed in the Materials are subject to change without notice based on market and other conditions. The Materials are based on information available as of the time they were written, provided, or communicated and GCG disclaims any duty to update the Materials and any content, research or information contained therein. Accordingly, neither GCG nor its principals or affiliates make any representation as to the timeliness of any information in the Materials. As a result of all of the foregoing, inter alia, neither GCG nor its principals can be held responsible for trades executed by the recipients or viewers of the Materials based on the statements, projections, research, or any other information of any other kind included therein. Investments in securities are speculative and involve a high degree of risk; you should be aware that you could lose all or a substantial amount of your investment if you attempt to apply any of the information in the Materials. GCG is currently registered as a Registered Investment Advisor with the State of New York, but is not a securities broker-dealer either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority or with any foreign country. In no event shall GCG or their principals be liable for any claims, liabilities, losses, costs or damages, even if GCG has been advised of the possibility of damages.

Monthly Commentary – September 2011

Ashok Gangolli — Mon, 07 Nov 2011 21:22:27 +0000

The fear trade was in its highest gear in September with virtually all asset classes getting clobbered with the exception of intermediate and long-term US Treasury bonds, long-term Corporate bonds, and the US Dollar. US stock markets ended the 3^rd quarter with the worst performance since the depths of the financial crisis in the Fall of 2008. The S&P 500 index was down -7.0% in September and -13.9% for 3Q11, and the small cap Russell 2000 index was even harder hit down -11.2% in September and -21.9% for 3Q11. Markets were in turmoil in Europe due to the lack of a credible solution to stem the Greek debt crisis resulting in contagion effects on other European sovereign debt as well as the European banking sector. Concern over the stability of French banks in particular saw top-tier banks such as BNP and Societe Generale have numerous days with intraday price drops as high as -10%. By month end, both bond markets and stock markets were pricing in a very high probability of at double dip recession. The US labor market report in the early part of the month added to concerns with an initial estimate of 0 change in non-farm payroll numbers for the month of August. In this market downturn, even prior safe havens such as Gold were no longer safe with the precious metal falling -11% over the month. Emerging markets (down -18% for VWO ETF), oil (down -11%), and commodity markets (down -16% for the index) felt the wrath of risk aversion. The bond markets were the star performers in the long end of the yield curve with the Federal Reserve announcing mid-month that they would commence their operation of selling short-term Treasury securities to buy long-term Treasury securities, labeled by the market as “Operation Twist”. The 30 year US Treasury yield dropped from 3.60% to 2.90% (-70 bps) and the 10 year yield dropped from 2.23% to 1.92% (-31 bps). The combination of the Fed’s promise to hold short-term rates at current levels for at least two years, in addition to purchasing long term Treasuries driving long term yields down, has resulted in a strong yield curve flattening trend. The Vanguard Long-Term Treasury Fund gained 10.2% in the month, its second biggest single month gain since 2001 inception (Nov 2008 being the biggest). The performance of the long-term bonds resulted in the Barclays Aggregate Bond Index gaining 0.7% in the month, though shorter maturity bond index performance was much more muted.

There is a real danger that the Fed’s attempts at assisting the economy with lower long-term rates could backfire. Large corporations will see limited benefit from the lower long-term interest rates as many are cash rich and are not investing in expansionary projects so will have little need for additional borrowing. While some of the general population will benefit from once again being able to refinance at the lower interest rates, the portion of the population that needs the assistance of lower mortgage rates the most will not qualify for refinancing due to negative home equity or unemployment. The lower long-term rates will however put severe pressure on defined benefit plans which have to discount future liabilities using market rates and a drop of 1% in long-term yields typically results in an increase of 15% in the present value of the pension benefits.

The Euro zone debt crisis desperately needs some form of credible resolution for markets to return to stability. Authorities must find a way to allow Greece to default without it resulting in a domino effect of large bank failures, which in turn would result in Euro zone countries being pushed to the brink of default. The slow pace of politics necessary for consensus building across the 17 Euro zone countries is almost surely going to result in a disorderly default for Greece when the time comes. With 2 year Greek debt yielding over 80% (i.e. trading at levels of around 30% of face value), the market is pricing in that the time for default is very near at hand. Requiring banks to raise more capital to be able to withstand the large write-downs of sovereign debt to come is a step in the right direction, but this is sure to put dilutive pressure on their equity prices and thereby weigh down on European equity markets at large once this process is commenced.

With little progress in the US from the House or Senate in reaching agreements on the budget cuts that will need to be decided upon by year end, it is a very real concern that these negotiations will come down to the last minute leaving considerable uncertainty as to whether the default budget cut option will be what is put into place. The default budget cut option would result in higher cuts next year than what the market is currently expecting so this could be yet another source of market volatility heading into year end. The 3^rd quarter 2011 earnings season is likely to show some disappointing earnings in the banking sector and there is a high risk that corporations will be very conservative in their earnings outlooks given the large decreases forecasted in global economic growth for next year. Amidst the economic gloom, there are glimmering signs of hope in the form of relatively robust consumer spending, better than expected manufacturing numbers, and expansive readings on the purchasing managers index.

The Limited Risk Portfolio was down -6.7% for September, but has recouped +5.3% in the first two weeks of October. The outperformance over the S&P 500 index for the month came largely from exposure to defensive high dividend yielding stocks many of which had positive performance for the month (BMY, VZ, DPS, FTE, and T). However exposure to commodities (DJP down -15.6%) and gold (GLD down -11.1%), together with exposure to emerging markets (VWO down -18.4% and MINDX down -10.4%), were a drag on the portfolio.

The Bond Portfolio was up down -0.03% for September. The largest position in the portfolio to the Vanguard Intermediate Term Corporate Bond fund was down -0.34% for the month due to the widening of credit spreads to Treasury securities. The Fed’s “Operation Twist” resulted in the short to intermediate portion of the yield curve rising in yield, while the long end of the yield curve dropped dramatically in yield as the initial announcement was successful in resulting in the yield curve twist. The Bond Portfolio lagged the Barclays Aggregate Bond Index due to the lack of exposure to bonds in the 10 to 30 year sector, which were by far the best performing yield curve sector for the month. The Bond Portfolio slightly outperformed the Barclays Intermediate Government / Credit Index was down -0.12% for September.

DISCLAIMER

Monthly Commentary – August 2011

Ashok Gangolli — Tue, 06 Sep 2011 22:29:26 +0000

So much for a slow month to end the summer, August was the most volatile month in equity markets since the financial crisis in 2008. The month started off with the US Congress waiting until the very last minute to agree upon terms to raise the federal debt ceiling in a compromise that leaves most of the future budget cuts still to be determined between now and January 2012. The lack of significant budget cuts, along with the ineptitude of Congress to come to decisions, led S&P to follow through on their warning and cut the US federal debt credit rating to AA+. Concerns over the European sovereign debt crisis contagion spreading to Italy continued, buoying the European Central Bank to commence buying Spanish and Italian government bonds to stem the sharp selloffs in those markets. The focus in Europe also turned towards French bank exposure to European sovereign debt resulting in sharp equity market drops throughout Europe in mid-month. Economic data showing a slowdown in German GDP, mixed data on the US economy including a sharp drop in the Philadelphia Fed index of current business activity to -30.7 in August (from +3.2 in July), and signs of a slowdown in China, resulted in most economists lowering their forecast for US GDP growth significantly to levels of around 1% to 2% for the remainder of 2011 and all of 2012. The Federal Reserve promised to keep short-term interest rates low for the next two years at least, but Bernanke was non-committal about any further quantitative easing at the central bank symposium held annually at Jackson Hole.

Markets went wild as a result of all of the uncertainty and consumer confidence in the US took a sharp downturn to 44.5 for August from 59.7 in July. Consumer confidence and its effects on consumption will be a key determinant of whether the US heads back into a double dip recession or not. The S&P 500 index finished the month down -5.4%, after being down as much as -13.4% on 8-August, and small cap stocks were hit even harder with the Russell 2000 index down -8.7% for the month. Volatility spiked as there were four straight days of returns greater than +/- 4% with the VIX volatility index hitting levels of 48% prior to coming back down at month end to 32%. Program trading levels were more than three times normal levels exacerbating the market volatility beyond the rational fundamentals. The Dow Jones Industrial Average reached a low of 10,588 before bouncing back and closing out the month at 11,613 (see graph below of Open-High-Low-Close daily ranges for the Dow). The financial sector equities were hit the hardest (-8.5%) while the defensive utility and healthcare sectors fared much more favorably (+0.9% and -1.4%, respectively – see table below).

Open-High-Low-Close Daily Bar Graph of DJIA in August 2011

US Equity Sector Performance in August 2011

In credit markets, credit spreads widened with high yield bond markets getting hit the hardest with most high yield bond funds down over -3% for the month. Amidst the panicked market, US Treasury bond markets, particularly in the intermediate-term and long-term sectors had their best performance month in recent history with 10 year US Treasury yields dropping from 2.80% at the beginning of the month to 2.21% at month end, getting to below 2% intermonth. With the 2 year US Treasury yield pinned around 0.2% yield after the FOMC meeting, the 10 year US Treasury yield steadily dropped to narrow the spread from 246 bps to 203 bps as the yield curve flattened substantially. The Barclays Aggregate Bond Index closed up +1.46% for the month, driven by the long-term Treasury sector performance. Performance in the intermediate corporate sector was also up but much more muted than US Treasuries at +0.27%. Performance in the short-term corporate sector was surprisingly down -0.41% as credit spread widening dominated the drop in short-term treasury yields.

The Limited Risk Portfolio performed well relative to other risk assets but was down -2.82% for the month, relative to the S&P 500 index drop of –5.4%. Equity risk was nearly fully hedged heading into the US debt ceiling final negotiations, but after a compromise had been settled upon, hedges were removed and equity risk was slowly added back to the portfolio on price dips through the course of the month to get the overall Limited Risk Portfolio back up to roughly 60% equity risk by month end. Market timing asset allocation decisions helped avoid some losses in equities, but positions taking the view that long-term Treasury yields had dropped too far to be justified hurt the portfolio and were removed mid-month when it was deemed that the momentum for downward long-term Treasury interest rates was just too strong in the current market and defied economic fundamentals. Towards month-end a position in a high dividend yielding REIT with a high balance sheet leverage ratio (ticker: NLY) was sold with the view that either future equity issuance or future dividend cuts will be necessary. The portfolio finished the month with a high cash balance of 21% which will likely be opportunistically deployed in coming weeks.

The Bond Portfolio was up +0.45% for the month with most of the performance coming from the short-term Treasury sector (VFIRX up +0.5%) and the government guaranteed mortgage sector (VFIJX up +1.7%). Exposures to credit markets lagged other sectors due to credit spread widening and the lack of significant exposure to the long-term US Treasury sector led to underperformance to aggregate market benchmarks for the month, though with considerably less market risk. Exposure to short-term corporate exposure will be analyzed for possible changes as recent performance has been negative over two of the past three months.

DISCLAIMER

Monthly Commentary – July 2011

Ashok Gangolli — Mon, 29 Aug 2011 19:55:57 +0000

July was dominated by the impending US Congressional standoff on raising the debt ceiling limit and continued concerns in Europe over the Greek bailout and the contagion effects of the sovereign debt crisis. Towards the end of the month the US reported disappointing GDP growth numbers for 2Q11 (+1.3% vs. +1.7% expected) and a sharply lower downward revision for 1Q11 (+0.4% vs. +1.9% previously reported), resulting in a realization that growth has been much slower than expectations despite significant stimulus. Equity markets were down for the third straight month with the S&P 500 down -2.0% and small cap stocks hit even harder with the Russell 2000 down -3.6%. US bond markets benefitted by the fear induced by a US economic slowdown and a potential imminent US government default. 10 year US Treasury yields dropped 36 basis points to 2.80% from 3.16% at the beginning of the month. The Barclays Aggregate Bond Index was up +1.6% for the month as long-term (>15 years) corporate and government bond sectors far outperformed short- and intermediate-term sectors with the US interest rate yield curve flattening substantially. The Vanguard Long-Term Investment Grade Bond fund and Long-Term Treasury Bond fund were up +4.5% and +4.2%, respectively, while the Short-Term fund counterparts were only up +0.6% and +0.5%, respectively.

Amidst this backdrop, equity risk was scaled back significantly in the beginning of the month through sales of S&P 500 and Nasdaq 100 index ETFs (SPY, QQQ), bringing equity risk down to roughly 25% of the Limited Risk Portfolio. Equity risk was further scaled back towards the end of the month with the addition of an equity hedge amounting to roughly 10% of the Limited Risk Portfolio put on in the form of a short-biased Dow Jones Industrial Average ETF (DOG). By month-end, equity risk was only roughly 15% of the Limited Risk Portfolio. The Limited Risk Portfolio was thus able to significantly outperform equity benchmarks and posted a +1.6% gain for July. The positive performance was driven primarily by exposure to gold (GLD up +8.4% for the month) and to commodity indexes (DJP up +4.0% for the month).

The Bond Portfolio benefited from the sharp drop in US interest rate yields over the month and produced a total return of +1.6% for the month. The largest gain came from the overweight exposure to medium-term investment grade corporate bonds (VFIDX up +2.3% for the month).

DISCLAIMER

Monthly Commentary – June 2011

Ashok Gangolli — Sat, 23 Jul 2011 21:27:53 +0000

June was a roller-coaster month for risk markets with the “PIIGS” sovereign debt crisis once again taking center stage. The Greek government had to overcome a confidence vote, pass through unpopular austerity and privatization measures, and go on a road show to garner EU and IMF support for additional bailout funds that ought to keep them solvent until 2014, but that was not enough to convince bond markets that an eventual principal haircut will be necessary. Greek government bond yields have remained above 25% in the 2 year sector and above 16% in the 10 year sector which is indisputably unsustainable in the medium-term. While US equity markets recovered sharply in the last week from their lows for the month hit on 24-June, sovereign spreads across the other PIIGS countries widened as the market speculated that Portugal will be the next to follow suit in asking for additional funds from the EU and IMF. Portuguese government bond yields are hovering around 12% from the 2 year sector to the 10 year sector which is also unsustainable and, to compound concerns, Moody’s downgraded Portugal’s long-term credit rating to Ba2 (junk bond status) from Baa1 (investment grade) just after the close of the month. US equity markets were also beset during the month with concerns over an economic slowdown as indicated by the weak employment report at the beginning of the month and a sharp scale back in risk positions precipitated by margin calls in the commodity futures markets in response to the announcement of upcoming releases of oil reserves from the Strategic Petroleum Reserve and the International Energy Agency. Still, US equity markets finished the month with the S&P 500 down only -1.66% and the Dow Jones Industrial Average closing the month at 12,414 (down -1.10%) after spending considerable time during the month below 12,000. US bond markets gave back some of the strong gains of the past 2 months with the Barclays Aggregate Bond Index (“BABI”) down -0.29% for the month. Credit spreads widened resulting in the corporate credit sector underperforming the treasury and mortgage sectors, and the yield curve steepened with the 10 year US Treasury yield rising 13 basis points to 3.16%.

Amidst this market and economic backdrop, the Limited Risk Portfolio was down -1.69% in June and the Bond Portfolio was down -0.47%. In the Limited Risk Portfolio, gains from the high dividend equity basket (BMY, DPS, and VZ) and from the leveraged agency mortgage REIT position (NLY), were offset by losses from the commodity sector and gold (DJP and GLD) and losses from the energy equity sector (XLE) and the general equity market exposure ETFs (SPY and QQQ). This manager believes that commodity exposures will resume their upward trend since their recent pullback since beginning of May and that US equity markets in general represent better value than US bond markets for the medium term, however, opportunities to temporarily reduce equity exposure in the near-term amidst the strong positive trend seen recently may be seized given the overriding economic uncertainties. In the Bond Portfolio, the widening of corporate credit spreads hurt the overweight positioning in the intermediate corporate bond sector (VFIDX) resulting in a modest underperformance relative to the BABI benchmark. Due to uncertainties over exposures of money market funds to European bank credit, as a precautionary measure, cash positions in money market funds were reduced substantially and invested in short-term Vanguard government and GNMA agency mortgage funds (VFIRX and VFIJX), thus resulting in Bond Portfolio duration increasing to closer to the duration of the BABI index.

DISCLAIMER

Monthly Commentary – May 2011

Ashok Gangolli — Sat, 23 Jul 2011 21:14:54 +0000

There is an investment adage: “Sell in May and go away” to suggest that investors are better off being out of the market than in during most months of May. This year was no different in the risk markets as the very strong returns from April in risk markets in part reversed. It started with commodity markets which had run up substantially in April, most pronounced was silver’s April gain of +28%. The first week in May saw silver quickly give up all of April’s monstrous gains and though at first it led the way down, all other commodity markets followed with one day drops in oil prices of as much as -9%! The US dollar reversed what had been a steady depreciating trend gaining +5.2% vs. the euro before giving some of that back to end the month up +2.8% vs. the euro. European jitters came back to the market as uncertainties over how an imminent Greek debt restructuring would occur and what repercussions would result plagued the market. Greek debt yields climbed over 16% in the 10 year sector and well over 20% in the 2 year sector indicative of a near-term default or “re-profiling” as some bureaucrats were apt to call it. The US economy showed signs of slowing down with significantly weaker than expected numbers in retail sales, consumer confidence, durable goods orders, and existing home sales. US Equity markets dropped with the falling commodity prices, strengthening US dollar, anxieties over Europe, and signs of a weakening domestic economy. Much of the equity market losses were regained in the last four days of trading and the markets finished the month down only modestly with the S&P 500 down -1.1%, the Dow Jones Industrial Average down -1.5%, and the Russell 2000 small cap equity index down -1.9%. The bond market benefited from the market risk aversion and the Barclays Aggregate Bond Index finished the month up +1.3%, its best monthly performance since June 2010, as 10 year Treasury yields dropped from 3.30% at the beginning of the month to 3.04% by month end.

Amidst this economic and market backdrop the Limited Risk Portfolio was down -1.36% in May. Hurt primarily by its modest allocation to the commodity sector, performance was balanced by exposure to the high yield bond market and the addition mid-month of a basket of high quality, high dividend yielding stocks such as T, PM, PFE, and JNJ. With 10 year Treasury yields approaching sub 3.0% levels, the outlook for high quality, high dividend yielding stocks looks rosier than that for US Treasuries in all but the “double dip” recession economic scenario and it would appear that the US is still on track to produce GDP growth for the year in the range of 2.5% to 3.0%. Therefore, in addition to increasing exposure to high dividend yielding equities, exposure to the high yield bond market was reduced during the month of May in anticipation of higher interest rates to come and a potential widening of credit spreads.

The Bond Portfolio counterbalanced drops in the risk markets and was up +0.62%. In anticipation of higher future bond yields, a very high cash balance was maintained throughout the month in the bond portfolio and no exposure was taken to the long-term sector of the interest rate yield curve. This defensive stance was a drag on performance relative to aggregate bond market benchmarks, but under the current economic outlook, this manager believes this defensive posture is currently warranted.

As markets look to June for direction, it is expected that price action will be most greatly affected by the perceived repercussions and contagion effects of an imminent Greek default, the domestic US economic data and signs for growth directions, and the necessity for a near-term agreement by Congress to raise the debt ceiling together with the potential for compromise on projected deficit reduction.

DISCLAIMER

Monthly Commentary – April 2011

Ashok Gangolli — Tue, 03 May 2011 23:12:46 +0000

The month of April saw a resurgence of equity markets (S&P 500 up +2.9%) as strong 1^st quarter 2011 earnings, combined with a weaker US dollar, to propel domestic equity markets higher. The US dollar weakness (down -4.5% vs. the Euro; down -6.2% vs. the Australian dollar; and down -3.0% vs. the Brazilian Real) was the driving force behind the surging equity market as the correlation, as witnessed in the strong tracking of the two graphs below, between USD weakness and S&P 500 equity market strength was very pronounced through the entire month and especially so in the past five trading days.

Graph of EUR/USD exchange rate (red line) and S&P 500 equity index (blue line) performance over last one month (left) and last five days (right)

Commodity markets also continued to surge amidst the weaker USD with Gold up +8.1%, Oil up +6.2%, and Silver up a whopping +28.2%! The month saw a brief dip in equity markets when S&P announced that they were putting a “negative outlook” on the credit rating of the United States, but quickly bounced back from that.

The Federal Reserve gave its first ever post-meeting press conference after the FOMC meeting and reiterated their commitment to keeping short-term interest rates low for an “extended period” and to finish out their quantitative easing plans to purchase $600 billion of US Treasuries by end of June 2011, thereafter using both proceeds from maturing mortgages and maturing Treasuries to purchase additional Treasuries in the future. Continued tensions in Libya together with mass killings in Syria resulted in heightened Mid-East concerns and oil prices remaining high throughout the month. The 1Q11 GDP growth report showed a slowdown of the annualized GDP rate from +3.0% annualized in 4Q10 to +1.8% annualized in 1Q11 but this slowdown was dismissed by the Fed as due to “transitory effects”.

Amidst this backdrop, the Limited Risk Portfolio posted a gross return of +2.9% with very strong positive contributions from commodity exposures (GLD up +8.9%; DJP up +3.4%), very solid contributions from the equity sector exposures including those added at the outset of the month (SPY up +2.9%; VWO up +3.4%), and steady, though lagging, positive performance from high yield exposures. All positions for the Limited Risk Portfolio finished positively for the month and the asset allocation at month-end remained very balanced with 42% domestic equity exposure, 16% international equity exposure, 21% high yield exposure, and 19% commodity exposure.

In bond markets, the US Treasury yield curve steepened through the month of April with 2 year yields dropping to 0.61% (down -19 bps) and 5 year yields dropping to 1.96% (down -27 bps), while the longer end of the yield curve came down though not as much with 10 year yields dropping to 3.30% (down -15 bps). Credit spreads continued to tighten with the North American investment grade CDS index 5 year spreads tightening from 95 bps to 88 bps. The Barclays Aggregate Bond Index (“BABI”) was up +1.27% in April with the intermediate-term credit sector performing the best. Amidst this market environment, the Bond Portfolio was up +1.19% (gross), benefitting from overweight exposure to short-term and intermediate-term corporate sectors which were the best performing sectors. The Bond Portfolio slightly lagged the BABI performance due to the continued intent to keep duration risk underweighted relative to the benchmark given the perception that downside risk in bond markets from rising future interest rates is currently much greater than upside potential. Duration risk was significantly underweighted relative to the BABI benchmark index with a high cash balance maintained for the month of April in the Bond Portfolio. Year-to-date, the Bond Portfolio is up +1.81% (gross) vs. 1.70% for the BABI.

DISCLAIMER

Monthly Commentary – March 2011

Ashok Gangolli — Mon, 04 Apr 2011 21:41:43 +0000

March saw tremendous volatility caused by the unfortunate earthquake and tsunami in Japan, followed by the partial meltdown of nuclear reactors in Fukushima and concerns of spreading radiation. The Libya ‘situation’ took center stage in the global political front with the NATO forces commencing enforcement of a ‘no-fly’ zone causing oil prices to continue to skyrocket upward. Despite the initial global market reaction of falling equity prices and a flight to quality bond market rally, the domestic equity markets bounced back with tremendous strength to finish the month in positive return territory (S&P +0.04%, Dow +0.91%; and Russell 2000 +2.95% for the month of March). Equity markets were particularly buoyed by the surging merger and acquisition activity headlined by the proposed AT&T acquisition of T-Mobile and the Berkshire Hathaway acquisition of Lubrizol. 10 year US Treasury yields bounced off their lows of 3.15% mid-month to finish the month at 3.44%, just 1 basis point above where they started the month. The Barclays Aggregate Bond Index posted a +0.21% gain, bringing the total return for the 1Q11 to +0.58%.

Amidst this volatile backdrop, the Limited Risk Portfolio returned +0.03% for the month of March. A defensive posture was taken in the portfolio after the Japan earthquake and resultant tsunami given the uncertainties of the effects it would have on global economic growth and the supply chain for manufacturers that rely on parts supplied by Japanese companies. The equity exposure was scaled back significantly and reallocated to cash which led to the Limited Risk Portfolio missing some of the upside that came from the equity market bounce, but gave the portfolio a much lower risk profile for the month. Still the overall portfolio was able to attain positive returns for the month with strong performances from exposure to the Indian equity market (MINDX +10.2%), which bounced from two prior months of weak emerging market performance, and exposure to gold (GLD +1.6%) and commodity indexes (DJP +2.0%).

The Bond Portfolio returned -0.09% for the month of March as duration has been scaled back to 2.6 years which is considerably lower than the Barclays Aggregate Bond Index duration of 5.2 years. Treasury and mortgage exposure has been underweighted in the Bond Portfolio in anticipation of a rise in bond yields ahead of the June end of the QE2 Treasury bond buying program by the Fed, and inflationary pressures from the continued surge in food and energy prices. April will be an interesting month as some Fed officials have already made comments in the public about their concerns with keeping monetary policy as accommodative as it has been and the European Central Bank is expected to start raising short-term interest rates at their April 7 meeting in response to inflationary pressures in Europe.

DISCLAIMER

Monthly Commentary – February 2011

Ashok Gangolli — Mon, 04 Apr 2011 20:09:28 +0000

February saw the sixth straight month of positive US equity market gains amidst increased geopolitical risks, significantly higher oil prices, and central bank rate hikes in emerging market countries such as China, Indonesia, and Brazil (on 2-Mar). With investor flows fleeing emerging market equities and both taxable and municipal US fixed income markets, the US equity market is being propelled by a lack of better investment alternatives and the surge in merger and acquisition activity. The S&P 500 was up +3.43% for February and +27.73% over the past 6 months. Bond markets are feeling the pressure of increasing inflation and anxiety over who will fill the buying void when QE 2 comes to an end this June. The Barclays Aggregate Bond Index finished the month +0.25%, despite 10 year US Treasury yields climbing 6 basis points, as long-term credit exposure outperformed other sectors in the bond market.

Amidst this backdrop, the Limited Risk Portfolio was up +1.59% in February. The Limited Risk Portfolio return was driven by exposure to Gold (GLD +6%) and domestic equity markets (SPY +3.1%; QQQ +3.5%). Commodity index exposure (DJP +1.6%) and high yield bond exposure (PHIYX +0.8%) also added positive contributions to the portfolio. The Limited Risk Portfolio was hurt by exposure to emerging market equities which continued to slump amidst turmoil in the Middle East and tightening monetary policy in some of the countries. Exposure to emerging markets was scaled back considerably to only 6% of the portfolio as a defensive risk management maneuver given the high degree of uncertainties in the current environment.

The Bond Portfolio was up +0.20% in February, bringing the year-to-date total return to 0.75% which is +0.35% ahead of the Barclays Aggregate Bond Index for this year. Gains in the Bond Portfolio came primarily from interest accruals from the month as interest rates ended the month quite close to where they started the month with the 10 year US Treasury yielding 3.43% at end February, up +6 basis points from the end January yield. Exposure to the intermediate term corporate sector provided the greatest contribution to the bond portfolio.

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Monthly Commentary – January 2011

Ashok Gangolli — Mon, 14 Feb 2011 16:00:41 +0000

January was mixed for global markets as some trends reversed, notably emerging market equities and gold, while others continued with renewed vigor, notably large cap US equities and European equity markets. Emerging markets had a decisive pull back due to concerns over rising inflation (particularly food inflation) and the expected central bank monetary tightening to come within the “emerging” economies. Central banks in India, South Korea, and Brazil all tightened their lending rates following China’s rate hike in late December. US equity markets on the other hand were strong with large caps (Dow +2.85%) and technology stocks (Nasdaq 100 +2.95%) leading the way, while small capitalization equities lagged (Russell 2000 -0.26%). The S&P 500 finished the month +2.37%, getting off to a very solid start for the new year. US equity market returns were driven by positive earnings announcements as well as a surge in announced merger and acquisition activity. US equities also benefitted from overtures by President Obama at the State of the Union address that he will be proposing tax rate cuts for corporations. Protests in Egypt calling for the resignation of the Mubarak regime started towards the end of the month caused some jitters in the markets but the “developed” markets seem to have looked past that for now.

The Bond Portfolio was +0.53% for January, significantly outperforming the Barclays Aggregate Bond Index (“BABI”) return of +0.12% for January. The outperformance was driven by the underweighting of the long-end sector of the yield curve which underperformed. The intermediate sector of the yield curve outperformed the long-end sector significantly as 30 year Treasury yields rose 24 basis points while 5 year Treasury yields dropped by 6 basis points over the month. Outperformance of the Bond Portfolio over the BABI was also driven by the overweight exposure to intermediate term credit which outperformed other sectors.

The Limited Risk Portfolio was down -1.59% hurt by exposure to emerging market equities and gold. Thirty percent of the Limited Risk Portfolio was allocated to emerging market equities which were hurt by inflationary concerns (particularly food inflation) and the resultant actions by central banks to tighten monetary policy. Inflation in India hit new highs of 8.4% annualized rate in December and Indonesia was not far behind posting inflation rates of 7% annualized rate in January. Still the growth prospects of emerging market economies and the relatively attractive price/earnings ratios in those markets argue for some continued exposure, though these positions are likely to be scaled back some in the coming weeks. Losses from emerging market exposure were offset by gains from domestic equity exposure, gains from commodity index exposure, and gains from high yield credit exposure. The Limited Risk Portfolio had 30% exposure to a combination of the S&P 500 ETF (SPY) and the Nasdaq 100 ETF (QQQQ) which both contributed positively to the overall performance.

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