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Beyond the
Trading Desk
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Winter arrived with a bang this year with our first storm being one for the memory books. A good foot of snow at my house combined with 40+ MPH winds made for quite a blizzard. I like a good snowstorm, but this one was a bit much for my tastes. I hope you all managed to shovel out without incident. Winter and the associated cold sometimes get a bad rap. I like the warm weather better, but winter gives me a chance to hunker down in my woodworking shop and get a few things done. All the while I can reminisce about the great summer we just had and how I hope the coming summer will be as good. Enjoy it as best you can and look ahead to better weather only a few months away. Sandra and I recently became part of Torrington Downtown Partners, LLP and I have to say that this effort is quite exciting. These are the good guys! They are investing in our Downtown and helping to make it something special. Success won't come overnight, but with this group involved, I believe it will succeed. This type of grass-roots community work is great and I encourage everyone to check it out at www.torringtondowntownpartners.com
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Last Quarter Round-Up
My outlook last quarter was mostly neutral. I expected little overall market momentum. That expectation did not play out due to the large influence of a second round of quantitative easing from the Federal Reserve in early November, commonly called QEII. QEII is a way for the Government to directly inject money into the economy. This resulted in positive asset price momentum and pushed the S&P 500 index to a close of 1258... a 10% gain for the quarter. Fundamentally, the economy is getting stronger, but it remains a slow and uncertain process, hence the reason for QEII. If the Government believed the economy was truly out of the woods, QEII would not have happened. The equity strategy last quarter was to take some equity profits and move to a greater balance of small cap to large cap and growth to value. The fixed income strategy was to hold cash, reduce long and short bond exposure and add to alternative fixed income positions. Quarterly asset class results: Growth +14.05%; Value +9.46%; Large cap +8.95%; Small cap +14.55%; Long bonds -10.80%; Short bonds -0.46%
Global Economic Outlook
My belief is that the fair market value of the S&P 500 index remains in the 1050 to 1150 range. However, the manipulation of the market via QEII has skewed it beyond its fundamentals. This could mean the market is advancing too quickly based on the economic recovery...much like we saw this past April. This coming quarter we may see economic data that comes in "less positive" than expected. Housing and employment in particular will likely remain disappointing. This data disappointment may act as a catalyst for a return of market volatility from its very low current levels. The accompanying market decline would present a good buying opportunity. It is very possible for QEII to become QEIII if the Fed feels it is needed. Currently, inflation is non-existent with the exception of assets inflating artificially with the help of QEII such as commodities. My equity strategy is to hold equities with more normal allocations, but add top equity hedge positions. For fixed income, I intend to reduce both long and short bonds, and add to inflation-protected bonds and cash.
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