Monthly Commentary – September 2010
Posted on 08. Oct, 2010 by Ashok Gangolli in Monthly Commentary
September was a remarkable month for price action in US stock and currency markets given how sparse the new economic data set was. The month exhibited the largest one month move for September in US stock prices since 1939 (S&P 500 up +8.8%) buoyed by the mid-month reiteration by the Federal Reserve of their commitment to pursue additional monetary measures (i.e. quantitative easing by means of additional long-term US Treasury purchases) if the economy does not show signs of rebounding. For the first time in recent history, the Federal Reserve noted their concerns with the inflation rate being too low for their comfort level. Despite significant intermonth volatility in bond yields, the 10 year US Treasury yield finished the month at 2.52%, roughly the same level where it started the month at 2.48%, and the Barclays Aggregate Bond Index (“BABI”) returned a paltry 0.11%, its worst one month return since March of this year. The Fed actions led to the largest one month depreciation of the US dollar vs. the euro (-7.5%) since December 2008. Dollar depreciation led to nearly all asset prices in US dollars inflating as commodities rose in tandem across the board (Gold up +4.7%; Oil up +11.2%; Copper up +8.4%; Silver up +12.3%; Soybeans up +9.8%).
Amidst this backdrop the Limited Risk Portfolio returned +2.82% for the month, bringing the year-to-date total to +7.47%, versus +3.65% year-to-date performance for the S&P 500. The Limited Risk Portfolio performance was driven by exposures to domestic equity markets in the start of the month, particularly in the financial sector (tickers: UYG, GS, MS), but those positions were taken off by mid-month as equity beta market risk was scaled back amidst the strong run up in prices. International equity market exposure was kept on throughout the month in the form of an Indian equity market fund (ticker: MINDX) and this position was up +12.4% for the month. The Limited Risk Portfolio carried a high cash balance (28%) for much of the month as equity price action did not seem to be substantiated by economic fundamentals, but as quantitative easing expectations by the Fed resulted in a decisive weakening of the US dollar versus currencies and commodities, exposures were added to foreign emerging market currency funds (ticker: PELBX) and to gold ETFs. Additional high yield credit exposure (ticker: PHIYX) was added in the month as the trend of investors stretching for yield has been pronounced, and defensive equity beta risk was added towards the end of the month in the form of high dividend ETFs (tickers: DVY and XLU). Large capitalization, high dividend paying stocks with access to the US bond markets should be able to take advantage of an opportune time for long dated debt financing with both interest rates and credit spreads at historic lows. With the absence of projects to invest in, these companies have amassed the highest level of cash balances since the 1960’s and these will be most likely put to work in share buybacks for some of the companies. By month end cash balances in the Limited Risk Portfolio had dropped to 12% of the portfolio.
The Bond Portfolio returned +0.37% for the month versus a +0.11% return for the month for the BABI, bringing the year-to-date total to +5.92%, versus +7.95% year-to-date performance for the BABI. The Bond Portfolio performance was driven by exposure to the intermediate term corporate bond sector (tickers: VFIDX and FCBFX) as these were the best performing investment grade bond sectors for the month of September as US Treasury yields remained relatively flat for the month while credit spreads remained tight. Heading into 4Q10, the key performance driver for the Bond Portfolio will be duration risk and the effects that quantitative easing by the Fed has on the intermediate and longer-term sectors of the yield curve. Look for sharp moves either downward or upward in yields based on the perception of the extent of further announcements of quantitative easing after the Fed’s November 3rd FOMC meeting. This manager is currently positioned slightly long duration relative to the benchmark, but will be monitoring this closely.
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.
