Commentary Archive 2011

Commentary Archive 2011 background

Commentary Archive 2011

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.

Fourth Quarter 2011

Fourth Quarter 2011

  • Hanseatic’s Large Cap product has gained 8.79%, underperforming the Russell 1000 Growth benchmark by 1.81% and underperforming the S&P 500 Total Return Index by 3.02%.
  • The All Cap product has gained 7.55%, underperforming the Russell 3000 benchmark by 4.58%.
  • The Growth & Income product has gained 8.84%, underperforming the S&P 500 Total Return Index benchmark by 2.97%.

    Relative underPerformance in the fourth quarter was entirely accounted for by the portfolio’s underweight positions in Energy, Materials, and Industrials during the month of October. The portfolio had been positioned a little more conservatively as a result of the market turmoil in prior months. In October the market transitioned away from the defense sectors toward these "risk-on" sectors in quite volatile fashion.

    Looking out to 2012, we first remind ourselves of our long-held belief that economic forecasting in general, stock market prognostications in particular, is folly. That is not to say that one cannot observe the financial and economic landscape and conclude some general probabilities, with the support of Hanseatic models, about market prospects.

    It is difficult to even casually scan the current formidable financial terrain and not be reminded of the adage that the most important thing in investing is "the return OF one’s money, not the return ON your money". Starting with Europe, of course, where the currency and sovereign debt problems seem almost intractable, and are compounded by the cultural and political divisions that exist among member countries, particularly between the North and South of Europe. Domestically, we may not have the crisis atmosphere of 2008, but many of the same problems seem to persist, most notably high unemployment and fiscal debt issues.

    Nevertheless, against this backdrop, we believe the equity markets will most likely have a surprisingly favorable 2012. One reason is the history of the VIX. The VIX is a measure of the implied volatility of S&P 500 options, but is often referred to as a fear index. In August 2011 the VIX posted a reading above 45 indicating investors perceived market risk to be extremely high. But we also believe the VIX has utility as a contrarian indicator. Previous high VIX readings were seen in 1997, 1998, 2001, 2002 and 2008, all favorable investment points at least for the intermediate term with the exception of 2001.

    Hanseatic also continues to believe a recession is not likely on the horizon, and that relative and absolute strength in industrial stocks may be a harbinger of a stronger than expected cyclical economic recovery. Home builder equity price strength may also be discounting a nascent recovery in the housing sector. Faced with a likely contentious election cycle on the horizon, some caution would seem warranted because of the policy uncertainties. 1980 was a similarly fractious election year that delivered an exceptional return, around 18%.

    Third Quarter 2011

    Third Quarter 2011

    • Hanseatic’s Large Cap product has lost 11.17% outperforming the Russell 1000 Growth benchmark by 1.97% and outperforming the S&P 500 Total Return Index by 2.70%.
    • The All Cap product has lost 20.52%, underperforming the Russell 3000 benchmark by 5.19%.
    • The Growth & Income product has lost 4.01%, outperforming the S&P 500 Total Return Index benchmark by 9.86%.

      The third quarter was a painful and volatile period in the equity markets, featuring a 17% decline in the S&P 500 over a mere 10 trading days, and multiple 5% intraday trading swings. This is an environment dominated by news and speculation about the European sovereign debt crisis and reminiscent of the panic in 2008.

      It has become evident recently that the consensus economic viewpoint is that the U.S. economy is already in recession or destined for it near term. The ECRI organization added its voice to the inevitability of recession just last week. In Hanseatic’s view the economy is clearly in a soft patch which may develop into a recession, or may be a rather scary, but temporary lapse in an ongoing recovery. Just last summer, the equity markets discounted the widely held view that the economy was headed toward a double-dip recession, which did not materialize.

      We remind ourselves that markets are a discounting mechanism, and that some economic distress has already been discounted by both stock and commodity prices. If the current economic environment is not going to parallel 2008, and Hanseatic is highly skeptical that it is, then the non-defensive market sectors should have much better Performance this quarter.

      Second Quarter 2011

      Second Quarter 2011

      • Hanseatic’s Large Cap product has lost 1.87%, underperforming the Russell 1000 Growth benchmark by 2.63% and underperforming the S&P 500 Total Return Index by 1.97%.
      • The All Cap product has gained 0.06%, outperforming the Russell 3000 benchmark by 0.08%.
      • The Growth & Income product has gained 0.58%, outperforming the S&P 500 Total Return Index benchmark by 0.48%.

        Large Cap underperformance in the second quarter was due largely to the reversal downward of those sectors and stocks associated with the so-called risk trade. The market has been discounting the perception of slower economic growth, a prolonged slump in housing and the ongoing turmoil in Europe. The effect was an abrupt capital flight away from Energy, Materials and some Industrial stocks and into defensive Consumer Staples and Healthcare issues. While the portfolio had representation in all ten sectors, it was relatively overweight the sectors which turned weak in the second quarter.

        First Quarter 2011

        First Quarter 2011

        • Hanseatic’s Large Cap product has gained 7.84%, outperforming the Russell 1000 Growth benchmark by 1.81% and outperforming the S&P 500 Total Return Index by 1.93%.
        • The All Cap product has gained 15.04%, outperforming the Russell 3000 benchmark by 8.66%.
        • The Growth & Income product has gained 1.64%, underperforming the S&P 500 Total Return Index benchmark by 4.28%.

          Performance during the first quarter was due primarily to the positive behavior of individual Energy and Materials stocks. These two sectors are also overweighted in the portfolios. Consumer Discretionary and Telecom stocks also contributed to relative portfolio performance. The only notable drawback to performance was the relative declines in some large cap technology stocks.