NEWS

2011-05-11 :: 2011 - 1st Quarter Commentary - 03/31/2011

Looking BackAs discussed in our 4th quarter “looking forward” commentary, the 1st quarter of 2011 was another positive quarter for equities, with pullbacks caused from global disturbances. Stock valuations were still trading at a discount to historical norms. Slow growing Corporate profits continue to keep the valuations from exceeding trend. The U.S. was the biggest winner as positive economic news and the influx of QE2 helped. The International markets were not as robust as the European debt crisis and the Japan crisis added to fears.

Fixed income put in a positive quarter in most sectors, municipal bond issuance was down 50% from the same time period last year. Infrastructure projects across the country are being threatened by the lack of new funding. There as has been several months of redemptions from municipal bond funds which helped counter the lack of new issuances in the muni-market. The 10 year treasury yield started the quarter at 3.3% and ended at 3.4%.

Absolute return Hedge funds, as predicted had a steady quarter but underperformed the equity markets. The low volatility hedge fund of fund strategies Granite Group employs did lower volatility during some of the quick downturns, but returns were equivalent to their volatility.

Real Estate: Housing continued to waver as prices started creeping a bit lower. This is expected and predicted, as we continue to have demographic shifts in the economy. The Commercial sector continued to stabilize, specifically in the rental area, as foreclosures are moving people to go back to renting. The retail sector did not fare as well as, many companies are shuttering brick and mortar shops and moving to the internet.

Commodities continued to trade higher as there is no great currency to use as an alternative. Generally, most commodities trade higher as the US dollar weakens. Oil is up to dangerous levels and most investment houses lowered GDP forecasts. This is not good because this will directly impact families’ disposable income.

2011 YTD

Russell 1000 6.24%
Mid-cap 7.63%     Russell 2000 7.94%
Russell 1000 Value 6.46%      Mid-cap Value 7.42%      Russell 2000 Value 6.60%
Russell 1000 Growth 6.03%   Mid-cap Growth 7.85%   Russell 2000 Growth 9.24%
MSCI EAFE 2.67%    MSCI Emerge Mkts 1.69%     S&P 500 5.92%


Looking Forward

We have no real change in our forecast for the equity markets for 2011. We expect equity markets higher by year end. The big upward movement from our March 15th call sets us up for a decent pull back in the second quarter. The global economy continues to improve but the promise of higher global interest rates, higher commodity prices and lower domestic forward indicators will dampen overall growth. This will lead to a period of mild Stagflation which we have written about in past commentaries. There is much to worry about as oil, gold & silver hit new highs, housing prices continue to lower, the geopolitical problems and tsunami business disruptions continue. Equity valuations have accurately predicted much of the turmoil. Valuations always rule the day and the stock market will continue to trade at a 2011 P/E range of 12X to 15X forward earnings which is a discount to historical valuations. The market is starting to catch up to our equity thesis of dividend value and dividend growth allocations.

Fixed income markets We expect the 10 year treasury to trade in a .5% yield range for 2011. We expect interest rates to rise slightly because of the dollar. The fed is in a conundrum as debt service will become unsustainable if rates go too high as the Fed will use every financial weapon available to keep bond yields from rising too much. The municipal bond market had
“default headline risk” like Harrisburg and Jefferson County, but do not be fooled, most municipalities are in good shape. In general, fixed income will not have big moves this year, but high yield bond valuations are fully valued. A safe way to play the bond market is higher credit quality with shorter rather than longer dated paper, i.e. taxable municipal bonds

Commercial & Residential Real Estate There is no change to our forecast in real estate. It is simply going nowhere for years to come based on US demographics. Inventories need to be worked off for price stability. Please refer to our previous commentaries starting from Q3 2005.We think multiple unit rental properties are one of the few places to be in real estate. The short term issue: when will banks start lending in earnest? As for commercial real estate, we are generally flat on office space and negative on the retail sector.

Absolute return hedge funds As we have previously stated, hedge fund of funds will under-perform equities this year, but they will do so with one third of the volatility. Granite Group uses special hedge fund of fund products as an alternative to fixed income markets which reduces volatility in overall portfolio allocation.

Commodities should continue to do well because of the weakness in the US dollar (most commodities are based in US Dollars.) We believe this has become a market dominated by speculators.

We are changing our stance from bullish to cautiously bullish.

Here’s to a prosperous 2011!