Commentary Archive 2012

Commentary Archive 2012 background

Commentary Archive 2012

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 2012

Fourth Quarter 2012

  • Hanseatic’s Large Cap product lost 2.10%, underperforming the Russell 1000 Growth benchmark by 0.77%.
  • The All Cap product gained 5.06%, outperforming the Russell 3000 benchmark by 4.81%.
  • The Growth & Income product gained 1.84%, outperforming the S&P 500 Total Return by 2.22%.

Hanseatic Market Commentary

Despite this year’s solid stock market gains, 2012 was yet another anxious and confidence debilitating year. First, the market path was difficult in that the market gains were front-loaded; almost all of the gains were reached by the end of March, and primarily in those stocks with a growth orientation. Second, there were two major whipsaws in 2012. The spring selloff was in response to worries about Europe, but as it progressed into May, there was concern the economy had fallen back into recession. The summer rally caught most investors by surprise, but by then the need to chase Performance extended the rally into September only to run headlong into renewed concerns of European recession, China slowing and predictions of domestic recession by some notable economic prognosticators. More recently, the maniacal fiscal cliff debate has come into play.

A notable result of the volatility in recent years is that many investors have been on the sidelines since the 2009 lows, or have sought refuge in the safety of bond funds. 2012 marks the third year in a row that investors have withdrawn more than $150 billion from U.S. stock market mutual funds and ETFs. The 2012 flash crash, the Facebook IPO, insider trading scandals and the prevalence of high frequency trading have done serious damage to the institutions that are collectively Wall Street. From a market practitioner standpoint, it is a quite bullish contrarian signal. At some point there will be a reversal of the exodus from equities.

As we survey the current landscape, we are reminded of something often observed over the year about the market: the bearish case always comes across as more intelligent and compelling than the bullish case. There is no shortage of things to worry about in the current economic climate. GDP growth is too slow, unemployment too high, earnings growth is slowing and profit margins unsustainably high. There is even a credible case to be made that we are in recession now. However, the market is a discounting mechanism that is often out of sync with the economic cycle.

From Hanseatic’s standpoint, the secular bull market that began in 2009 is becoming mature, but is still intact. The improvement in cyclical stocks, including Technology, and the strength in Industrial stocks in particular, is cause for optimism. China and the emerging markets in general have been in bear markets that began in April 2011, and emerging world economies have also been in a protracted slowdown; however, as of 12/31/2012, Hanseatic’s models of the China, India and emerging market ETFs have registered new monthly buy signals. Recent strength in the European ETFs, even Spain and Italy, stand in stark contrast to the grim economic conditions on the ground.

International equity markets seem to be discounting that economic conditions are improving. If so, it can have a significant positive impact on the 2013 U.S. economy. Hanseatic believes that a positive change in the current subdued expectations about growth and employment would have significant impact on equity market fund flows.

Third Quarter 2012

Third Quarter 2012

  • Hanseatic’s Large Cap product gained 6.83%, outperforming the Russell 1000 Growth benchmark by 0.72% and outperformed the S&P 500 Total Return Index by 0.48%.
  • The All Cap product gained 5.11%, underperforming the Russell 3000 benchmark by 1.12%.
  • The Growth & Income product gained 4.03%, underperforming the S&P 500 Total Return benchmark by 1.94%.

Hanseatic Market Commentary

As we begin fourth quarter 2012, we have an equity market that has surprised a mostly pessimistic Wall Street by its overall strength and persistence in the face of a rather impressive wall of worry. The backdrop included economic growth that appeared to be dangerously near stall speed and risk of recession. The labor market has been consistently weak and likely worse than reported. Europe seems to be a crisis without end, although recent steps by European policymakers to boost growth have been encouraging and the catalyst for massive rallies, short-covering though they may be, in European stock markets. By Hanseatic’s internal ranking, Spain is now the strongest equity market in the world.

While the 16% YTD gain is impressive, it has not been an easy market to navigate. The strength early in the year ended rather abruptly with a volatile second quarter correction in reaction to deteriorating conditions in the Eurozone and Spain in particular.

The quarter was also challenging because of the “risk on - risk off” environment that has pervaded the equity markets for the past couple of years or so. In the past year alone there have been four distinct tactical allocation shifts in and out of cyclical and defensive stocks. Going forward Hanseatic believes that this rotational market environment is more of a cyclical market characteristic than enduring market behavior.

Although there has been much uncertainty on the economic and fiscal fronts, monetary policy has been steadfast and remarkably consistent. To some uncertain extent, it accounts for the robust market Performance this year. Whether it will achieve its goals of reflating the economy, inducing demand and creating jobs, we can only hope. The potential unintended consequences and inflation risk in particular are of course worrisome. But at least for the intermediate term Hanseatic believes the Fed’s extraordinarily aggressive policy has positive consequences for the market.

One of the most significant secular dynamics in recent years has been the large withdrawal of investor funds out of equity markets into the relative safe haven of funds that invest in bonds, even as the return potential is near zero. That suggests to Hanseatic that in the aftermath of the economic crisis of 2008-09, the fear of capital loss and motivation to preserve capital is an important part of today’s investor psyche. Understandable, but with the bond bull market now thirty years on, the timing may be questionable.

Second Quarter 2012

Second Quarter 2012

  • Hanseatic’s Large Cap product lost 3.69%, outperforming the Russell 1000 Growth benchmark by 0.33% and underperformed the S&P 500 Total Return Index by 0.94%.
  • The All Cap product lost 2.15%, outperforming the Russell 3000 benchmark by 1.00%.
  • The Growth & Income product lost 0.16%, outperforming the S&P 500 Total Return benchmark by 2.59%.

Hanseatic Market Commentary

In surveying the economic landscape, it is sometimes difficult not to be overwhelmed by the all-encompassing worries and array of negative outcomes which vary only in degree. Starting with the U.S., economic growth has begun to slow for the third summer in a row. In the past two summers the market staged strong cyclical rallies following market declines which did not degenerate into the most feared outcomes. The bottoming process in both cases was quite volatile. In the current environment, the markets have largely been captive to events in Europe, but the volatility has been moderate relative to the European chaos.

The Euro accord last Thursday prompted a strong rally in global equity markets. It would seem that this latest move merely kicks the can down the road, only a little further than expected this time. The core problems of insolvent banks in Spain and Italy, high sovereign debt and no tenable economic growth solutions, are unresolved.

China’s slowdown is real, and depending on its degree poses a serious risk to the global economy. A sudden, sharp slowdown in Chinese growth would almost certainly tip the rest of the world’s economies into recession.

Taken together, any composite measure of global economic risk is elevated. The most tangible beneficiary has been the U.S. Treasury market, which is being used not as a normal investment class but rather as a safe haven and an insurance policy against a breakdown in Europe and/or a hard landing in China and the negative equity market outcomes that would surely accompany these events. The actual yield on Treasuries is of no consequence in the current environment.

Back to the U.S., is there anything on the positive side of the ledger? Believe it or not, in Hanseatic’s view, the answer is affirmative. The housing sector is no longer just a drag on the U.S. economy, but a positive factor. Also, bank lending has improved steadily during the past year, albeit excluding the largest banks. The transition of these two factors in the economy (housing/lending) from negative forces to functionality should help economic growth and provide the economy with more stability.

The U.S. equity markets are the strongest in the world. There are cyclical views about valuations and earnings growth prospects for domestic companies. What is absent is the degree of uncertainty confronting European companies and the seemingly hopeless milieu that is Europe. Major U.S. financial institutions, corporations and banks have varying degrees of healthy balance sheets, good liquidity and in the latter case are depositor-funded. Also, importantly, we are likely in the early stages of transforming the U.S. energy industry and its supply-demand equation; if this is correct, the ramifications will be positive and far-reaching

Does this put the U.S. on an economic island immune from recession in Europe and negative economic growth in the developed world. Of course not. But it does provide stability in the relative sense and the opportunity in the absolute.

First Quarter 2012

First Quarter 2012

  • Hanseatic’s Large Cap product gained 11.81% underperforming the Russell 1000 Growth benchmark by 2.88% and underperforming the S&P 500 Total Return Index by 0.77%.
  • The All Cap product gained 12.29%, underperforming the Russell 3000 benchmark by 0.57%.
  • The Growth & Income product gained 3.71%, underperforming the S&P 500 Total Return benchmark by 8.88%.

The underperformance during the first quarter is attributable to the month of January. The first month of the quarter turned out to have been the best performing January for the equity markets since January 2001. The significant underperformance across portfolios in January was due to the lack of exposure to the strongest performing individual stocks within several sectors, primarily Financials, Materials, Industrials and Technology. Most of these stocks were mired in cyclical, and in many cases, secular declines prior to the beginning of the year.