NEWS
2012-07-10 :: 2nd Quarter Commentary, 2012
Looking Back
As we discussed in our previous commentary, the equity markets had gone too far too fast and we saw almost every sector of the market drop roughly 5%. All the debt problems in Europe combined with the slow-down in China helped fuel the move in the markets. Trading volumes continued to be low as a generic fear loomed over the market. There were no safe havens in equities as every cap structure as well as geographic placement were all down significantly.
Fixed income had a good second quarter as fear re-gripped the equity markets and money moved into the safe havens of fixed income instruments. We ended the quarter with longer term treasury yields at roughly 1.6% which was much lower than the market expected.
Absolute return hedge funds hedged out the volatility in the equity market during the quarter but are still having a very flat year due to their lack of upside capture of the 1st qtr.
Real Estate: Showed some signs of improvement but as far as we are concerned that movement was very moderate and cyclical rather than a full move towards longer term growth. Rentals continued to shine but the retail sector is still not making any major headway. Low interest rates should be helping much more than they have and that is not a great sign for the short term future.
Commodities Gold, metals and energy had a tough quarter as the US dollar rallied significantly and economic growth showed signs of a slowdown.
2012 YTD (Total Return)
Russell 1000 9.38% Mid-cap 7.97% Russell 2000 8.53%
Russell 1000 Value 8.68% Mid-cap Value 7.78% Russell 2000 Value 8.23%
Russell 1000 Growth10.08% Mid-cap Growth 8.10% Russell 2000 Growth 8.81%
MSCI EAFE 0.77% MSCI Emerg Mkts 2.29% S&P 500 9.49%
Looking Forward
Equities: Our long term view on the equity markets continues to be slow growth and moderate returns for the foreseeable future. For the upcoming few quarters, we see a continued increase in volatility as the landscape has not changed very much in the last two plus years. We expect earnings to start to flatten as corporate America has done what they can to maximize earnings. There continues to be a huge overhang in the world based upon debt that has enveloped entire developed markets. The Eurozone, while making some progress, will continue to be a long term problem that is not going away anytime soon. We have been preaching dividends, dividends, dividends for the last two years and will continue to do so until we see a real positive change in the direction of our economy. We still like Emerging Market equities due to demographics, but it will be very volatile, as it often is, with the highest opportunity to outperform. Oil prices have come down which will help with some private sector spending but it may be temporary. The US dollar has rallied dramatically since the beginning of the year but at some point our own debt overhang will come to haunt us in this sector.
Fixed income markets We believe yields will continue trade within a range. Our longer term view does not favor a low interest rate environment, as we see the yield slowly moving up over a long period of time. We feel it is prudent to keep bond portfolio durations at the shorter end of the duration curve. We continue to be negative on US Treasuries for economic reasons, but the US is the assumed safe haven for now. We also believe that for proper diversification, bond investments need to be diversified with inflation protected and emerging markets bonds among other sectors that would help balance out the risk.
Commercial & Residential Real Estate There continues to be no change to our forecast in real estate: Housing has not improved much and we expect it is going nowhere for years. Even with low interest rates, demand has not improved significantly. We are not as negative on housing but still see little upside in that sector. Our feeling is we will not see significant housing price appreciation for 7-10yrs. 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, however even that area is getting overcrowded. As for commercial real estate, we continue to be flat on office space and negative on the retail sector.
Absolute return hedge funds will continue to be a good place to hedge out equity volatility. Our perspective is that with high single digit returns in equities and low single digit returns in fixed there are opportunities to outperform with this type of strategy but it has been difficult for these firms for the last couple of years.
Commodities will be trading in a range for the rest of the year and it will be volatile. The financial problems facing the world could negatively impact developed markets. We are upping our forecast for Gold as sovereign banks will continue to increase their holdings as there is a lack of an alternative currency in the world.
Have a nice Summer !!!!
Disclaimer: The views expressed by Granite Group Advisors, LLC through the end of every quarter are subject to change at any time based on market and other conditions. This commentary is prepared exclusively for Granite Clients. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. This is not intended as investment advice, please contact your personal investment advisor before taking any action.
