Granite Group Advisors -


2009-01-01 :: 2009 4th Quarter Commentary

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Looking Back

The 4th quarter of 2009 continued its upward climb with multiple factors involved: the belief in a continued economic recovery; the carry trade of the weak U.S. dollar; and decent earnings from a broad base of index constituents. Growth outperformed Value due to the fact that the growth sector’s earnings continued to outperform the consistent earnings of the Value sectors. Outside of the U.S., emerging markets continued to rally, mostly due to the weakness in the dollar and their commodity based economies, while the enormous amounts of government spending in the developed markets hurt their growth perspectives. The international developed nations also continued their rally, but relatively equivalent to the U.S. Just to put this year’s rebound into perspective, had you invested in the major indexes at the beginning of 2008, as of year end 2009 you would be down 20.3% in the S&P 500, down 29.9% in the EAFE and down 20.6% in Emerging Markets.

Fixed income ended the year with relatively decent returns in almost every sector except for Treasuries which were down around 10%. TIPS also performed well as the inflation trade or the perceived inflation trade helped boost performance. Municipal bond returns were average and High Yield and Convertibles were the best performing as the risk trade ruled the day.

Absolute Hedge fund of funds had a very solid year, consistently making good returns while keeping volatility low.

Real Estate, on the housing front continued to stabilize and prices even showed a bit of an increase. New and existing home sales were up but foreclosures also sped up in the 4th quarter and now are entering the prime loan market. The problems in the commercial real estate market continue to hide. As long as they stay hidden, they may cause less trouble than anticipated.

Commodities started to rally much stronger in the second half of the year and most of that has to do with the weakness in the dollar although a stronger economy also increases demand.

2009 YTD
Russell 1000 28.43%
Mid-cap 40.48%
Russell 2000 27.17%
Russell 1000 Value 19.69%
Mid-cap Value 34.21%
Russell 2000 Value 20.58%
Russell 1000 Growth 37.21%
Mid-cap Growth 46.29%
Russell 2000 Growth 34.47%
MSCI EAFE 27.75%
MSCI Emerge Mkts 74.50%
S&P 500 26.46%

Looking Forward

We expect the markets to continue to go up through 2010 but not at the same pace as in 2009. Based on present valuations, our expectations have moved to a lower return environment for the foreseeable future. Dividend oriented stocks should do better in this environment, whether domestic or international. Opportunities exist in M&A, and Mid Cap stocks have the best opportunity to outperform the general markets. Headwinds, such as massive debt and money printing, cannot continue without repercussions. Whether it is inflation from a devalued dollar or higher interest rates, the rubber must meet the road and paying the bill will cause slower growth.

Longer dated fixed income markets become less attractive as an increase in interest rates is inevitable. Additionally, the non-essential municipal bonds are in a difficult situation as states across the country grapple with budget gaps and a lower tax revenue base. Essential service municipal bonds and taxable municipal bonds should be the most durable but durations should remain relatively short. Treasury yields are starting their move to higher ground as the 10 year rates edge above 4% over the next 12-18 months. The risk reward ratio for high yield has become less attractive.

Commercial Real Estate continues to be a problem, but a well hidden problem. Shadow inventory on both the housing and commercial side keep inventory high. With interest rates rising this will make refinancing and purchasing more difficult. Please see our 3rd Qtr 2005 commentary and our 4th Qtr 2008 call on real estate. Real Estate is attractive for a primary residence or a commercial bargain opportunity, otherwise we do not see upside in commercial or residential for awhile.

Absolute return hedge funds will probably perform in parity to the equity markets, however, it will be done with much less volatility. A very good allocation for the long term.

The commodity markets will continue to trade in ranges, but there will be gyrations depending upon the commodity. Gold and the price of oil could become a problem based on the dollar and potential geo-political risks.

Inflation as the fed calculates will be moderate however prices paid for resources will go up. Wage inflation is the biggest component of the CPI and we think that will be moderate for some time to come.

The business environment will be difficult but the world has stabilized and we expect things to move forward albeit at a slower pace. We should be ok until government debt becomes unmanageable.

Have a good Winter!

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