Granite Group Advisors -


2010-01-01 :: 2010 1st Quarter Commentary - 3/31/2010

Download as a PDF

Looking Back

The 1st quarter of 2010 was a predictor for this year. We started the year off to the races with the equity markets moving up quickly followed by a decent downturn and then recovered all our losses in March, helping bring us to an up quarter. The U.S. was the leader in this movement as International stocks gained a paltry 0.2% and Emerging stocks gained a moderate 2%. All the gains came in March as we entered the month negative for the year in almost every market place. As we mentioned in past issues, value and dividend stocks should outperform growth sectors, as growth outperformed value from 2007 thru 2009. The U.S. dollar strengthened during the quarter specifically against the Euro due to the problems with Greece, Spain and the like. Outside of the U.S., emerging markets are in rally mode, 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 prospects. The international developed nations moved up as well, but were relatively mute compared to the U.S.

Fixed income had another decent quarter in almost all sectors, but ended the quarter behind equities. If equities stay stable the bond market should demand higher yield. However, don’t underestimate when markets falter and the risk trade makes bonds move higher.

Absolute Hedge fund of funds had a very solid but boring quarter. This is looking like an atypical year for the hedgies as low volatility moderate returns will continue.

Real Estate: while the housing sector continued to stabilize and prices even showed a bit of an increase, we are now seeing signs of slowing again (Please see 3rd qtr 2005 and 4th qtr 2008 commentaries). The problems in the commercial real estate market continue to hide. As long as they stay hidden, they may cause less trouble than anticipated, but may show some pain later in the 4th qtr.

Commodities continued to rally on a rebound in the economy but may be ahead of  themselves once again.

2010 YTD
Russell 1000 6.51% Mid-cap 9.75% Russell 2000 9.71%
Russell 1000 Value 7.86% Mid-cap Value 10.87% Russell 2000 Value 11.04%
Russell 1000 Growth 5.20% Mid-cap Growth 8.58% Russell 2000 Growth 8.30%
MSCI EAFE 0.22% MSCI Emerge Mkts 2.11% S&P 500 5.39%

Looking Forward

We expect the equity markets to slow, as equity valuations have taken into consideration the
economic recovery. Business has improved, but we expect a “U” shaped recovery as
opposed to a “V” shaped recovery. Value oriented and dividend oriented stocks will do better than the overall market. Opportunities will exist in M&A, but many companies will probably hold on to their cash until they feel safer with policy and the future. The US massive debt situation will become more of a problem, the rubber must meet the road and we eventually will have to pay the bill. The promise of higher interest rates, higher commodity prices and low employment is a recipe for slower growth.

Fixed income markets will surely have some gyrations for the rest of the year as higher
interest rates will be forthcoming. For those who are income oriented, shorter duration bonds
will be a better place as opposed to longer duration bonds. Most fixed income sectors are
either fairly valued or slightly overvalued with just a few exceptions. A word of caution, high
yield debt should be pared back in portfolios as credit spreads have tightened dramatically.
Investment Grade Corporate bonds are slightly overvalued. 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 to 4% and moderately higher over the next 12 months.

Commercial & Residential Real Estate continues to be a problem, but a well hidden
problem. Banks and real estate companies have been told to extend, pretend and kick the can down the road. Many of these loans will be coming due later this year with more in 2011 and 2012 and with interest rates rising this will become a bigger problem. As for the housing
sector, evidence is starting to show that we may actually dip again due to higher interest rates
on mortgages and inventory issues. The government tax advantage for first time home buyers
has had a nominal impact. US demographics work against us for housing, coupled with higher rates, residential housing will remain flat for years.

Absolute return hedge funds will continue to perform in parity to the equity markets,
however, advantages can be had as markets peak and pare back at different times during the
year. This will continue to be a very good allocation for the long term.

The commodity markets will continue to trade toward the higher level of ranges, but there
will be economic risks that will keep most commodities from peaking. However, some
people will be playing commodities as a hedge against inflation.

The business environment and the economy continue to be moving forward albeit at a slow
pace. This should continue for many years.

Have a good Spring!

linked in facebook blog