Granite Group Advisors -


2011-07-12 :: 2011 Second Quarter Commentary - 6.30.2011
Granite Group Second Quarter 2011 Commentary

Looking BackAs we discussed in our 1st quarter “looking forward” commentary, the 2nd quarter of 2011 experienced a retracement in the equity markets. This began in May and left the market at the end of the quarter almost exactly where it started. Most indexes ended the quarter virtually flat, including developed non-US markets. The biggest losers were Emerging Markets and Small Cap Stocks. From our perspective, stock valuations had gotten a little ahead of themselves in April. Add in the end of QE2 and a renewed fear in the European debt crisis, we were ready to pull back in equities. We expected this and put money to work in equities before the bounce back up in the final week of June.

Fixed income had a very nice quarter as investors’ renewed fears of equities and moved money into most of the fixed income sectors. We ended the quarter with prices higher and yields as low as we have seen them this year. Inflows into fixed income mutual funds have continued unabated.

Absolute return Hedge funds did not have a great quarter, specifically in May where the quick downturn in equities affected their portfolios. They did not get hit as hard as the equity markets, but unfortunately did not participate in the rebound as much as equities.

Real Estate: Housing continued to sputter as prices moved a bit lower. We expected this to be long and painful, and it should remain until we have a demographic shift in our population. The Commercial sector is continuing to stabilize, specifically in the rental area, as foreclosures move people back to rentals. The retail sector was relatively stable but demand is much slower and pricing power is just not there for the owners of these properties. The mall sector, as far as we are concerned, may be in trouble for years to come. However, as we all know, real estate has a lot to do with the 3L’s: location, location, location.

Commodities Gold edged higher but not dramatically, and oil pulled back from its peaks. As oil pulled back so did many other commodities as future economic growth concerns continued to weigh on prices. Silver was the hardest hit metal with a big pull back in price. By the end of the quarter commodities stabilized and will most likely trade higher for the rest of the year. Gold continues to move upward as we still have government debt weighing on currencies worldwide.

2011 YTD

Russell 1000 6.37%
Mid-cap 8.08%
Russell 2000 6.21%
Russell 1000 Value 5.92%
Mid-cap Value 6.69%
Russell 2000 Value 3.77%
Russell 1000 Growth 6.83%
Mid-cap Growth 9.59%
Russell 2000 Growth 8.59%
MSCI Emerge Mkts -0.45%
S&P 500 6.02%

Looking Forward

Equities: There is no change to our equity forecast for the time being. Markets will continue to trade at a discount to normalized P/E ratio as a sputtering economy will not create a catalyst for big upward movements in the markets. We have growth, but it is tepid! We still expect to be higher at year end but not significantly. US Corporations have plenty of cash and are in better condition than most governments. There are only a few things corporations can do with cash: pay dividends, buyback stock or make acquisitions. We continue to believe that large dividend growth and value along with stock buybacks will be a good place to be for several years. Stagflation, geopolitical problems and to a lesser extent the Tsunami are still a threat to the markets, but we believe the markets accurately reflect the disruptions and growth prospects.

Fixed income markets The 10 year treasury traded at the low end of our range, sub 3%. Core inflation will not be a problem until there is hiring in earnest (wages make up 70% of core inflation). We do think yields will go higher from here, but in a moderate range. Bonds in general are trading at very low yields and we do not believe this is a good time to enter into U.S. fixed income market. The municipal bond market has calmed down from the fears that were in the headlines earlier this year. There will be some problems, but they will be specific to certain types of municipal debt depending on the state or local municipality. High yield and treasury bond valuations are fully valued. We continue to believe higher credit quality with shorter durations is the safest way to play this market

Commercial & Residential Real Estate There continues to be no change to our forecast in real estate: It is simply going nowhere for years. Even with low interest rates, demand has not improved significantly. 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. Residential lending has not increased by the banks. As for commercial real estate, we continue to be flat on office space and negative on the retail sector.

Absolute return hedge funds In the short term, hedge funds of funds should underperform equities and outperform fixed income and will continue to be a great way to protect portfolios from gyrations in both of these markets. However, on a longer-term basis, these type of hedge funds of funds should do well in a slow growth economy.

Commodities should continue to do well either because of weakness in the U.S dollar or due to increases in demand. However, there will not be dramatic moves except for certain commodities that were hit hard in last quarter’s downturn, i.e. silver

Have a wonderful Summer!

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