Monthly Commentary – June 2010
Posted on 08. Jul, 2010 by Gramercy Consulting Group in Monthly Commentary
The Bond Portfolio performance led the way in June with its best monthly performance of the year coming in at +1.44% (gross). The Limited Risk Portfolio performance was hurt in the last 6 days of trading in the month and went from a gain to a loss of -1.08% (gross) as all risk markets did an about face in response to signs of economic slowdown in China and commitments to global deficit reductions by European nations. The S&P 500 Total Return equity market index was down -5.23% for the month of June after the very poor showing in May. The Barclays Aggregate Bond Index (“BABI”) was up +1.57% for the month of June driven by performance in the long-term US Treasury and long-term Corporate sectors, as spread widening abated and interest rates plummeted.
June saw a flurry of economic “news” as the US Financial Reform Bill was agreed upon (though not yet enacted), China agreed to revalue its currency (though it did not state the pace), and EU nations came to the G-20 summit in Toronto stating that they would cut their deficits significantly by 2013, while seeking a balanced budget by 2016 (though they did not say how). Volatility stayed persistently high through the month of June with the VIX volatility index repeatedly touching levels of 36%, though off from the 46% highs in May. The Dow Jones Industrial Average closed the month well below 10,000 at 9,774 and this time nobody was blaming “fat fingers”, only fat Portuguese, fat Irish, fat Greeks and fat Spaniards (aka fat “PIGS”). In the bond markets the deflationary camp won out over the inflationary camp in a landslide as residential mortgage rates hit their lowest levels since this data started being tracked 40 years ago and the 10 year US Treasury crossed below the “psychologically Japan-esque” level of 3.00% yield ending the month at 2.95% yield. The Fed reiterated their “low for long” interest rate policy and cited the global economic slowdown for the first time. However, given the view that 2Q10 earnings are going to come out quite favorably for the large financial firms, especially in their fixed income divisions, it is the view of this manager that equity markets have come down too far too fast and are poised for a bounce back up to 10,000 levels on the Dow for the near term. Similarly, interest rate markets are poised to bounce from current yield lows as well in the near term. Longer term it will remain to be seen how much impact the deficit cutbacks will have on the global GDP slowdown and to what extent the consumers can come to fill the void of government spending. Some analysts are calling for a global slowdown in the magnitude of -1.0% of global GDP in 2011 due to the deficit reductions, but that would still keep global 2011 GDP in positive growth territory. We expect to see some large gyrations in global equity markets in 3Q10 as investor sentiment regarding the magnitude of the growth effects from deficit reduction keep shifting. We will also closely watch the direction that legislative changes are taking such as tax policy (AMT, dividend taxation, estate tax) in the leadup towards mid-term elections this November.
In the Limited Risk Portfolio, risk was managed through the month by (i) cutting the short EUR position when it dipped below 1.20 (sold tkr: DRR), (ii) legging into India and out of China, given the concerns from the collapse of the onshore A-share market; (iii) replacing the energy sector ETF (tkr: XLE) with a straight oil ETF (tkr: USL), given the concerns around the effects of the offshore drilling regulation; (iv) layering on hedges on portions of the equity risk through use of a short-biased Russell 2000 ETF (tkr: RWM), and (v) selectively layering in long equity positions in the financial sector (tkr: UYG) and switching the short position to a long position on the Russell 2000 (tkr: IWM) when markets appeared to have overshot towards the end of the month. The active trading allowed the Limited Risk Portfolio to fare much better (down only -1.08%) than the overall equity markets (S&P 500 index down -5.23%) with gains coming from short positions and MLP positions added on the dip at the end of May, while losses were concentrated in the financial sector (Citi Preferreds, Goldman Sachs, Morgan Stanley and UYG) which looked very oversold by month end.
In the Bond Portfolio, the US Treasury yield curve continued to flatten significantly in June with long end Treasury yields coming down sharply. 10 year US Treasury yields came down from levels of 3.30% towards the end of May to 2.95% by month end June. Both the investment grade and high yield credit spreads widening trend abated resulting in long-end Corporates and long-end Treasury sectors being the best sector fund performers (see Vanguard comparative fund table below; VUSUX was top performer at +4.68% followed by VWETX in close second for the month at +4.10%). However, the decision was taken to scale back duration in the Bond Portfolio as yields dropped below 3.20% given the outright low level of interest rates and the view that risks are now weighted more to the downside than the upside unless convincing data were to come out to argue for long-term deflationary trends. Given the volatility that resulted from thinly traded interest rate swap markets ahead of feared legislation that at times was suggesting that swaps desks be spun off from banks, long duration and short duration ETFs were utilized (tkrs: TLT and TBT) to take advantage of opportunistic interest rate moves while keeping overall duration risk through the month at lower levels than the benchmark Barclays Aggregate Bond Index.
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.
