Commentary Archive 2007

Commentary Archive 2007 background

Commentary Archive 2007

Disclosure

Performance results are based on estimates. Although the information contained in the commentary sections have been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. Past performance is not necessarily indicative of future results. Different types of investments involve varying degrees of risk.

December 2007 Summary

For the year 2007

The Hanseatic Large Cap portfolio outperformed the Russell benchmark by 11.16% and the S&P 500 Total Return index by 17.48%.

During the fourth quarter of 2007, Hanseatic’s Large Cap product gained 3.37% outperforming the Russell 1000 Growth benchmark by 4.14% and outperforming the S&P 500 Total Return index by 6.70%.

Hanseatic’s Large Cap gained 2.63% during the month of December exceeding the Russell 1000 Growth benchmark by 2.99% and the S&P 500 Total Return index by 3.32%.

For 2007, outPerformance in the Large Cap portfolio derived primarily from exposure to selected Technology stocks and the Energy and Materials sectors. Healthcare, industrial, Utility and Telecommunications stocks also contributed positively. Finance and Consumer Discretionary stocks modestly subtracted from portfolio Performance, though underweighting these two sectors contributed to relative Performance.

November 2007 Summary

Hanseatic’s Large Cap product lost 4.95% in the month of November, underperforming the Russell 1000 Growth benchmark by 1.27% and underperforming the S&P 500 Total Return index by 0.77%.

Year to Date

The Large Cap has gained 19.76% and leads the Russell 1000 Growth benchmark by 7.54% and leads the S&P 500 Total Return index by 13.53%.

Technology was the clear underperformer in November. The broad market correction impacted every Sector with Materials, Consumer Discretionary and Energy leading the rest to the downside.

October 2007 Summary

Hanseatic’s Large Cap product gained 5.86% in the month of October, outperforming the Russell 1000 Growth benchmark by 2.46% and outperforming the S&P 500 Total Return index by 4.27%.

Year to Date

The Large Cap has gained 25.93% and leads the Russell 1000 Growth benchmark by 9.42% and leads the S&P 500 Total Return index by 15.06%.

Technology, Telecommunications and Materials stocks were the best performers in October. Relative Performance benefited from being underweight the Finance and Consumer Discretionary sectors.

September 2007 Summary

Hanseatic’s Large Cap product gained 6.95% in the month of September, outperforming the Russell 1000 Growth benchmark by 2.76% and outperforming the S&P 500 Total Return index by 3.21%.

For the third quarter of 2007, Hanseatic’s Large Cap product gained 7.05% outperforming the Russell 1000 Growth benchmark by 2.84% and outperforming the S&P 500 Total Return index by 5.02%.

Year to Date

The Large Cap has gained 18.84% and leads the Russell 1000 Growth benchmark by 6.16% and leads the S&P 500 Total Return index by 9.71%.

Healthy gains in selected Technology, Materials and Healthcare stocks accounted for most of the positive Large Cap Performance in the third quarter. The credit contraction modestly penalized Performance in the form of Financial, Utility and Consumer Discretionary stocks.

August 2007 Summary

Hanseatic’s Large Cap product gained 1.66% in the month of August, outperforming the Russell 1000 Growth benchmark by 0.07% and outperforming the S&P 500 Total Return index by 0.16%.

Year to Date

The Large Cap has gained 11.13% and leads the Russell 1000 Growth benchmark by 2.98% and leads the S&P 500 Total Return index by 5.93%.

By Hanseatic proprietary measures of correction and volatility, the turmoil in August 2007 was comparable to the Long Term Capital Management crisis in October, 1998, particularly with smaller capitalization stocks. As a wide spectrum of portfolio managers were forced to adjust to abrupt changes in the price of risk and credit in the fixed income arena, stocks wholly unrelated to the credit contagion became sources of liquidity and were sold indiscriminately. While a more normal supply-demand environment for equities is gradually being restored, it is clear that investor perceptions of risk and leverage in a number of asset classes and strategies have a new reality.

Technology stocks were the primary drivers of the Large Cap portfolio in August, with Healthcare and Materials stocks also modestly positive. Energy, Industrial and Telecom stocks were a net subtraction to portfolio Performance.

July 2007 Summary

Hanseatic’s Large Cap product lost 1.55% in the month of July, on par with the Russell 1000 Growth benchmark and outperforming the S&P 500 Total Return index by 1.55%.

Year to Date

The Large Cap has gained 9.29% and leads the Russell 1000 Growth benchmark by 2.84% and leads the S&P 500 Total Return index by 5.65%.

In what proved to be one of the most turbulent months in recent years, portfolio Performance was hurt most by the impact of the mortgage crisis on Consumer Discretionary, Finance and Industrial stocks. Only selected Materials, Technology and Healthcare stocks partially offset the sharp month-end selloff.

The reverberations from a potential credit crunch were felt more sharply in the small cap arena. Smaller Technology as well as Finance and Consumer Discretionary companies suffered the most, and were only modestly offset by gains in Materials and Telecom stocks.

June 2007 Summary

Year to Date

The Large Cap has gained 10.93% and leads the Russell 1000 Growth benchmark by 2.80%.

For the second quarter of 2007, Hanseatic’s Large Cap product gained 9.24% outperforming the Russell 1000 Growth benchmark by 2.38%.

Hanseatic’s Large Cap product lost 0.76% in the month of June, outperforming the Russell 1000 Growth benchmark by 0.73%.

All ten market sectors contributed positively to Large Cap Performance in the second quarter, with Technology,Materials and Energy performing the best. In general the adage that the market is a “market of stocks and not a stock market” applies to the current market environment. There is currently little consistent sector/industry group leadership beyond Energy and Materials.

May 2007 Summary

Hanseatic’s Large Cap product gained 5.38% in the month of May, outperforming the Russell 1000 Growth benchmark by 1.78%.

Year to Date

The Large Cap has gained 11.63% and leads the Russell 1000 Growth benchmark by 1.87%.

Performance was well-balanced as stocks from all ten market sectors contributed positively. Technology, Materials and Energy sector stocks were the most notable outperformers.

April 2007 Summary

Hanseatic’s Large Cap product gained 4.28% in the month of April, underperforming the Russell 1000 Growth benchmark by 0.43%.

Year to Date

The Large Cap has gained 5.88% and lags the Russell 1000 Growth benchmark by 0.07%.

The underPerformance in the Large Cap product was due primarily to relative weakness in Telecommunication stocks and absolute weakness in a few Technology stocks. Positive contributors to portfolio Performance included Healthcare and selected Technology stocks.

March 2007 Summary

Hanseatic’s Large Cap product gained 1.53% during the first quarter, outperforming the Russell 1000 Growth benchmark by 0.34%.

The modest outPerformance in the Large Cap product was primarily attributable to overweight positions in the Energy, Basic Materials, Utility and Telecom Sectors. Finance and Technology stocks generally penalized portfolio Performance.

February 2007 Summary

Hanseatic’s Large Cap product lost 2.49% in the month of February, underperforming the Russell 1000 Growth benchmark by 0.61%.

Year to Date

The Large Cap has gained 0.09% and lags the Russell 1000 Growth benchmark by 0.55%.

The underPerformance in the Large Cap product was due largely to weakness in several Finance and Consumer Discretionary stocks that was exacerbated by the extreme volatility in the last few days of the month.

As a general observation, market leadership is unusually fragmented and somewhat bifurcated in that while many stocks have participated in the secular bull market which began in early 2003, a significant portion of the market, notably the Technology sector, remain mired in cyclical or secular bear markets. Resolution of this imbalance should prove interesting.

January 2007 Summary

Hanseatic’s Large Cap product gained 2.66% in the month of January, outperforming the Russell 1000 Growth benchmark by 0.09%.

The modest outPerformance in the Large Cap product was due to exposure across a diversified group of stocks that have performed well. Market leadership currently resides in diverse industry groups that include the Gaming, Metals, Healthcare (ex-HMOs) and Computer Networking and Software. The portfolio also benefited from being underweight lagging areas of the market such as Energy and Semiconductors.

Looking back at 2006 and forward to ’07

Turning to the overall market, the 2006 domestic equity markets provided an unexpectedly positive Performance. However, the market’s path over the course of the year was volatile and notably difficult for money managers and market forecasters. Looking back, much of the complexity for market participants derived from the almost parabolic spikes in energy pricing in February and again in April 2006. In hindsight, this was the final throes of a 3-4 year secular rally in crude oil and its derivatives, and the Energy and Materials sectors of the equity markets, albeit in a much more uneven way.

Nevertheless, the moves to historic levels in energy engendered understandable anxiety about inflation, interest rates and the related impacts on housing and by extension consumer spending. Moreover, the stock market had bottomed in March 2003, or October 2002 depending on one’s measure, thus the cyclical bull market was already quite long in the tooth by historical measures. When energy peaked in May its subsequent decline, absent any other sector leadership, led the entire market into a mid-year selloff. At that point, the seasonality argument (“sell in May-buy in November”) that has gained increasing popularity as well as the four year cycle thesis added to a growing certainty that the markets were about to begin a new leg in the secular bear market which began in 2000. Then in late July 2006 the market, with a modestly negative return for the year, did what markets do best - fool the majority. In this case, the vast majority, as it began one of the best second-half rallies on record.

The equity market also changed character in the sense that the strongest indices in the last six months were the two narrowest indices, the Dow Industrials and the S&P 500. While a 500 stock index may not normally fit the definition of narrow, consider that because it is a capitalization weighted index, the 15 largest stocks make up 25% of the index. Many of these stocks were the strongest in the last half of the year; and it was this narrow market leadership that accounts for the large discrepancy in Performance between the S&P 500 and Russell 1000 large cap benchmarks.

Looking ahead to 2007, the consensus forecasts predict moderate economic growth, no recession and a benign interest rate environment. Housing has been a key engine of the U.S. economy in recent years. Now that the housing markets have slowed and in some areas are in recession, the impact on the consumer and the broad economy is a key question. It is our considered view that economic forecasting, in addition to necessarily hindering one’s ability to adapt to changing market environments, have much in common with weather forecasting. In each arena, the professionals are intelligent and well-trained, but the complexity of the underlying dynamics in each subject area is often underestimated.

About one week ago the meteorologists forecast a storm that would bring 1" of snow accumulation for the Albuquerque area. Forty-eight hours later, the storm passed leaving snow depths of 15-30"s depending on elevation. In both weather and economics, the value of forecasts can be short-lived.