Granite Group Advisors -


2010-10-25 :: 2010 3rd Quarter Commentary - 9/30/2010

Looking Back
As we had discussed in our 2nd qtr commentary “looking forward”, the 3rd quarter of 2010 was enormously volatile but still added roughly 11% of return. Stock valuations in the market were too low and an upturn was in the cards. The U.S. however was not the big winner in the quarter as EAFE put in over a 15% return and Emerging Markets put in a 17% return. Much of this out performance can be attributed to the weakness in the U.S. dollar, as that weakness added roughly 7% to Emerging Markets and 8% in the developed markets. Economic indicators demonstrated that the economy was slowing, and while growth is visible, it appears to be moving at a much slower pace, which we also predicted in previous commentaries. The economy is chugging along but it could be like this for years to come.

Fixed income has continued to do well as more money was pulled from equity funds and plowed into the fixed income markets. This has been going on for roughly a year and may prove to be a continuing trend as it is possible the equity markets have lost a generation of investors.

Absolute return Hedge funds did not put in a good quarter as they gathered enough upside from July and September and protected during August, but this kind of movement in the markets is not good for hedged vehicles.

Real Estate: Housing and the Commercial sectors continued to stabilize but there is no excitement coming from this sector of the market. With tailwinds from low interest rates and declining prices, it was still difficult to get this area growing and that does not bode well for the future.

Commodities continued to trade in ranges as demand for oil and other industrial sectors is relatively flat; however Gold and other metals are reaching all time highs as the lack of good currencies seem to be driving these metals to new highs.

2010 YTD

Russell 1000 4.40% Mid-cap 10.97%
Russell 2000 9.12%
Russell 1000 Value 4.49%
Mid-cap Value 11.15%
Russell 2000 Value 7.92%
Russell 1000 Growth 4.36%
Mid-cap Growth 10.85%
Russell 2000 Growth 10.23%
MSCI EAFE -1.25%
MSCI Emerge Mkts 8.70%
S&P 500 3.89%

Looking Forward

We expect the equity markets to continue to move moderately higher through the rest of the year with pullbacks along the way. On the surface, there are very few places to make outsized returns, but the 4th quarter is traditionally a good one. The upcoming election will bring gridlock to Washington, which historically means positive returns for the equity markets. We estimate that the equity move upward could last 3 to 9 months, but the situation is fluid. We maintain that a slower growth environment will keep valuations below their historical norms of 15 times earnings for the foreseeable future (as of this writing, the markets are approx 12 times forward earnings). Corporations continue to hoard cash as they try to decipher the future costs of healthcare, regulations and taxes while they ascertain the effects of a slow growing economy. We continue to beat the drum that in this type of environment, domestic and international value and dividend oriented stocks will do better but the market has not yet caught up with our outlook. The US debt situation continues to worry us as we see the currency markets taking it out on the dollar. There are not many paths we can take to solve that problem and believe that investors should seek out low volatility solutions in every asset class.

Fixed income markets moved higher with equity markets and historically this does not happen. One of these markets will need to adjust. The incessant money flow from equities to fixed income makes contrarians like us believe yields have bottomed. We continue to believe the safest way to play the market is with shorter rather than longer dated paper.

Commercial & Residential Real Estate will continue to sputter. Residential housing will continue to stay down for years to come, not only because of the economy, but due the continued demographic shift in population. On the Commercial front, refinancing will be happening this quarter. Continued low economic growth translates to low demand to buy properties. We believe that certain markets have bottomed, but do not see any major upside even with the lowest lending rates ever.

Absolute return hedge funds will under perform equities through the end of the year but continue to be a good way to lower volatility in an overall portfolio allocation and possibly hedge out some bond risk.

Commodities are based in US dollars, we believe commodities will strengthen, but we run the risk of a stagflation environment.

Don’t be intimidated by negative headline news, market valuations are still not expensive.
Have a pleasant Autumn!

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