Granite Group Advisors -


2008-01-01 :: 2008 4th Quarter Commentary

Download as a PDF

Looking Back

Well, it’s over! The 4th quarter of 2008 was one of the worst quarters ever
with a negative return of 21.94%. We did write the market would move lower, but we
did not expect the crisis in confidence that unfolded with the demise of some of the
greatest Wall Street names. The only place to be was cash, Treasuries and absolute
return hedge fund of funds. There was not one positive place to be in any domestic or
international equity market.

Fixed income (treasuries) had a good quarter as fears of the future scared the
masses into almost zero interest rate environment. As we reached the middle of the
quarter corporate debt was beaten down along with the equity markets.

As Granite Group predicted, Absolute Hedge fund of funds out-performed all
equity markets and even churned out some light positive performance. This turned out
to be one of the few places as our hedge funds did much better than the overall market.

Real Estate concerns continued even as the fed lowered rates, partially due to
the credit crisis, keeping lenders from lowering rates along with the fed. (See
September 2005 quarterly commentary)

Commodities collapsed across the board as the fear of a global recession
came to fruition. We expect this to moderate over time as we crawl out of this
historical global credit crisis.

2008 YTD
Russell 1000 -37.6% Mid-cap -41.5% Russell 2000 -33.8%
Russell 1000 Value -36.9% Mid-cap Value -38.4% Russell 2000 Value -28.9%
Russell 1000 Growth -38.4% Mid-cap Growth -44.3% Russell 2000 Growth -38.5%
MSCI EAFE - 45.1% MSCI Emerge Mkts -54.5%

Looking Forward

With lower oil, lower interest rates and the fed flooding the market with
liquidity, it may take many turns, but we believe this is a recipe for a higher equity
market. There will be a lot of headwinds and certain volatility with news that will
get much worse before it gets better. We will have rising unemployment and
negative GDP growth for at least the next two quarters. We will also have more
bankruptcies, especially in the retail sector, in the upcoming few quarters.
Fortunately, our markets have priced much of this in and markets will usually rise
well before the bottom of the economic cycle. There are still many problems
facing the globe and will take time to unwind them. Inflation will probably hold
off for a while even with the new President creating an additional stimulus
package. Since most countries are suffering and printing money as well, this
should put the inflation trade on hold for a year or so.

The Bond market has become an interesting place. Treasuries will
probably have their worst year ever in 2009. The corporate bond market, which
had their worst year, will probably have their best year. The municipal market
could have a tough year again as almost all states are suffering along with the rest
of the economy and running deficits. There will be some municipal bankruptcies
affecting generic municipal bonds. Credit quality will dictate these situations.

Commercial real estate will suffer greatly this year as retail and corporate
bankruptcies will be rising. Residential real estate will probably flatten out this
year and form a bottom that should stay low for a few years (this a shift from our
negative bias for the past 3 ½ years). We believe that it’s time to stop window
shopping and walk into the store, but be careful! There is massive residential
inventory available, choose wisely and don’t pay more.

Absolute return hedge funds will underperform the equity market this year,
they may even underperform the corporate bond market, but it will still be a
suitable way to reduce volatility and garnish decent returns.

The commodity market should begin to re-inflate after its horrible 2nd half
but with more calm and less upside. Oil will most likely rebound to the mid $60
range and Gold will stay high and bounce around a bit.

We believe this will be a much better year than 2008 in every market with
the exception of treasuries. The markets will be volatile and filled with negative
information early in the year but should start moving in the right direction towards
the back half of the year. The road has become more treacherous but is also filled
with many opportunities for the future.

Have a Wonderful Winter!

linked in facebook blog