Commentary Archive 2010

Commentary Archive 2010 background

Commentary Archive 2010

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 2010 Summary

Year to Date

The Large Cap has gained 23.55% and leads the Russell 1000 Growth benchmark by 6.84% and the S&P 500 Total Return Index by 8.49%.

For the fourth quarter of 2010, Hanseatic’s Large Cap product gained 12.89% outperforming the Russell 1000 Growth benchmark by 1.06% and outperforming the S&P 500 Total Return Index by 2.13%.

Hanseatic’s Large Cap product gained 5.16% in the month of December, underperforming the Russell 1000 Growth benchmark by 0.35% and the S&P 500 Total Return Index by 1.52%.

While Hanseatic considers the ritual of annual forecasts as more entertainment than investment wisdom, it is nevertheless important to try to understand the investment backdrop and the potential catalysts for change, both positive and negative.

Currently, interest rates remain in a secular decline despite the recent uptick. Inflation also remains benign despite the recent advances in commodity prices, particularly food, and energy costs. The Fed is widely expected to raise rates at the end of its quantitative easing program, and perhaps it will do so sooner than the market expects. Even so, this does not likely translate to a monetary policy that is inimical to growth; it will likely be a long time before an interest rate policy will hinder growth.

Fears of a double dip recession have moderated considerably since last summer, but concerns persist amid a stubbornly high though incrementally improving employment picture. Fiscal issues loom large not only in Europe but increasingly domestically with municipalities and states.

Growth stocks have outperformed value and other themes in the U.S. equity market, particularly over the past four months, with small and mid-cap stocks outperforming their large cap brethren. This is a significant deviation from 2010 forecast wisdom.

Hanseatic believes the most significant potential catalysts for the U.S. equity markets are positive, at least for the intermediate term. One catalyst that has emerged is the funds flow out of other asset classes, particularly fixed income and income-oriented equities into common stocks. The rush into these defensive strategies was mostly the result of the extreme fear that developed over the course of the 2008 economic contagion. In contrast with recent years, U.S. markets are now among the strongest international equity markets and may be the beneficiary of fund flows in that arena. And finally and perhaps most importantly, Hanseatic believes the economy is likely to do better than most expect which will improve investor and consumer confidence, a crucial element that has been sorely lacking for some time. The healthiest equity markets have two fundamental characteristics - reasonable valuations and rising multiples. The first is in place, the second can develop with increasing confidence. Let’s hope.

November 2010 Summary

Year to Date

The Large Cap has gained 17.43% and leads the Russell 1000 Growth benchmark by 6.81% and the S&P 500 Total Return Index by 9.57%.

Hanseatic’s Large Cap product gained 2.01% in the month of November, outperforming the Russell 1000 Growth benchmark by 0.85% and the S&P 500 Total Return Index by 2.00%.

The Large Cap portfolio outperformed the benchmarks in seven of ten market sectors. Relative underPerformance in the Consumer Discretionary sector hindered Performance but was offset by robust gains in Technology and Industrials in particular.

October 2010 Summary

Year to Date

The Large Cap has gained 15.48% and leads the Russell 1000 Growth benchmark by 6.13% and the S&P 500 Total Return Index by 7.64%.

Hanseatic’s Large Cap product gained 5.21% in the month of October, outperforming the Russell 1000 Growth benchmark by 0.43% and the S&P 500 Total Return Index by 1.40%.

The Large Cap portfolio was also hurt by the phenomena of companies reporting good quarterly financial Performance but then offering next-quarter guidance that is less than market or analyst expectations in some form.

Equity markets have followed the first more positive course, and with it a significant change in leadership away from the defensive consumer staples/utility stocks in favor of more growth oriented stocks, primarily technology.

September 2010 Summary

Year to Date

The Large Cap has gained 9.45% and leads the Russell 1000 Growth benchmark by 5.09% and the S&P 500 Total Return Index by 5.56%.

For the third quarter of 2010

Hanseatic’s Large Cap product gained 13.14% outperforming the Russell 1000 Growth benchmark by 0.15% and outperforming the S&P 500 Total Return Index by 1.84%.

Hanseatic’s Large Cap product gained 10.38% in the month of September, underperforming the Russell 1000 Growth benchmark by 0.26% and outperforming the S&P 500 Total Return Index by 1.46%.

The equity market environment has improved significantly over the last three months. In our second quarter commentary we noted that the markets were close to an important boundary point, a departure point for two divergent paths. The first a contrarian, opportunistic accumulation point after a weak and volatile first half year; the second a period of sideways movement or a more directed negative environment.

Equity markets have followed the first more positive course, and with it a significant change in leadership away from the defensive consumer staples/utility stocks in favor of more growth oriented stocks, primarily technology.

There has been some attention in the financial media of the past month’s return being the best September since 1939, and one of the five largest monthly S&P 500 returns in the past 20 years. None of this holds any consequence or predictive value in our view. Clearly the large monthly return in March 2000 at the onset of a bear market was at a different place in overall market structure than the gains in March 2000 or December 1991, which occurred at an early stage in cyclical bull market environments. Our studies conclude that the current environment, while clearly not without risk, has a predominance of favorable characteristics.

It should be noted that Hanseatic has restated the September 2010 Large Cap Performance. The Large Cap did not outperform for the month of September as was previously stated. The revision was made during the quarterly Performance examination. All calculations have been corrected that were affected by the adjustment.

August 2010 Summary

Year to Date

The Large Cap has lost 0.82% and leads the Russell 1000 Growth benchmark by 4.86% and the S&P 500 Total Return Index by 3.80%.

Hanseatic’s Large Cap product lost 3.13% in the month of August, outperforming the Russell 1000 Growth benchmark by 1.56% and outperforming the S&P 500 Total Return Index by 1.29%.

That August 2010 was a less than stellar month would be an understatement: The lowest August volume in over ten years and worst monthly Performance since 2001. The good news perhaps is that these dismal August statistics are no indication of what the remainder of the year holds with respect to liquidity or Performance. Going back to the early 1990s, the five negative Performances in the S&P 500 in August were followed by increases in market volume and positive returns over the last third of the calendar year. As would be expected given equity market returns this year and especially this month, market sentiment by any measure has become extremely negative.

OutPerformance in the large cap portfolio was due to exposure to selected technology stocks and the overweight positions in telecommunication and utility stocks. The portfolio also benefited from being underweight some of the weaker industry groups including integrated oil and oil and gas exploration stocks, and most financial stocks. Exposure to the largest cap technology stocks penalized Performance.

July 2010 Summary

Year to Date

The Large Cap has gained 2.42% and leads the Russell 1000 Growth benchmark by 3.48% and the S&P 500 Total Return Index by 2.53%.

Hanseatic’s Large Cap product gained 5.87% in the month of July, underperforming the Russell 1000 Growth benchmark by 1.26% and underperforming the S&P 500 Total Return Index by 1.14%.

The U.S. equity markets traded higher in July, although they remain mired in the trading range that has prevailed since early May. Meanwhile the lack of dispersion among stocks has reached extreme levels. There is a natural tendency to conclude that some new development(s) has changed the markets’ internal structure, in today’s case high frequency trading and the popularity of structured products. Rather, Hanseatic believes that it is a part of the normal ebb and flow of market behavior and psychology, and that as soon as the phenomenon becomes widely recognized the tendency is to revert to more normal conditions.

UnderPerformance in the Large Cap portfolio was primarily due to being relatively underweight industrial, energy and consumer discretionary stocks. A couple stocks adversely impacted by reactions to earnings/guidance also penalized the portfolio.

June 2010 Summary

Year to Date

The Large Cap has lost 3.23% and leads the Russell 1000 Growth benchmark by 4.41% and the S&P 500 Total Return Index by 3.42%.

For the second quarter of 2010, Hanseatic’s Large Cap product lost 8.98% outperforming the Russell 1000 Growth benchmark by 2.77% and outperforming the S&P 500 Total Return Index by 2.45%.

Hanseatic’s Large Cap product lost 5.83% in the month of June, underperforming the Russell 1000 Growth benchmark by 0.32% and the S&P 500 Total Return Index by 0.60%.

In the first half of 2010, the markets have undergone three distinct phases. First was a moderate correction into mid-February, followed by a broad and relatively sustained ten week rally into late April. The sharp correction over the past eight weeks has also been relatively broad and marked by very high volatility even by the standards of the past ten years, which have been extremely volatile compared to prior post-WWII history.

The correction has put the market close, in our view, to an important boundary point. One path suggests an opportunistic, contrarian accumulation point within an ongoing cyclical/secular bull market. A second alternative is that the market has changed character for an undetermined period; and whether in the form of a trading range or a more directed negative environment, a clearly different relative sector/group leadership will necessarily evolve.

May 2010 Summary

Hanseatic’s Large Cap portfolio lost 6.50% in the month of May, outperforming the Russell 1000 Growth benchmark by 1.13% and outperforming the S&P 500 Total Return Index by 1.49%.

The U.S. equity market delivered its worst May return since 1940; energy stocks were hit particularly hard amid the fear and uncertainty about the impacts of the Gulf oil spill disaster. All ten sectors performed negatively on an absolute basis.

The relative outPerformance in the Large Cap portfolio was due primarily to being underweight energy stocks in general and the oil exploration and drilling stocks in particular. Portfolio Performance and volatility profile was also enhanced by an early-May addition of selected counter-cyclical stocks including consumer staples and utilities.

April 2010 Summary

Hanseatic’s Large Cap portfolio gained 3.36% in the month of April, outperforming the Russell 1000 Growth benchmark by 2.24% and outperforming the S&P 500 Total Return Index by 1.78%.

The Large Cap portfolio performed well in April, particularly on a relative basis. Portfolio stocks outperformed benchmark stocks in eight of ten sectors. Technology, consumer discretionary and financial stocks were the most significant absolute and benchmark relative performers.

March 2010 Summary

Hanseatic’s Large Cap portfolio gained 7.31% in the month of March, outperforming the Russell 1000 Growth benchmark by 1.52% and outperforming the S&P 500 Total Return Index by 1.28%.

The Performance profile for the Large Cap portfolio in March was similar to the previous month in that stocks in seven of the ten market sectors were positive relative to the benchmark, and all ten market sectors were positive on an absolute basis. Consumer discretionary, material and financial stocks were the leaders on a relative basis, while consumer staple stocks modestly penalized portfolio Performance.

February 2010 Summary

Hanseatic’s Large Cap portfolio gained 5.37% in the month of February, outperforming the Russell 1000 Growth benchmark by 1.94% and outperforming the S&P 500 Total Return Index by 2.27%.

Performance for the Large Cap portfolio during February was well balanced as nine of the ten market sectors were positive relative to the benchmarks, and all ten market sectors were positive from an absolute standpoint. Materials, consumer discretionary, industrial and energy stocks were the primary contributors to the relative outPerformance.

January 2010 Summary

Hanseatic’s Large Cap portfolio lost 5.97% in the month of January, underperforming the Russell 1000 Growth benchmark by 1.61% and underperforming the S&P 500 Total Return Index by 2.37%.

UnderPerformance in the Large Cap relative to the benchmark was primarily due to the sharp selloff at the end of the month in a few technology stocks and overweight positions in the materials and consumer discretionary sectors. Consumer staples, financial and utility stocks were the defensive-oriented categories that outperformed the benchmark.