THE FOLLOWING ARTICLE DOES NOT CONSTITUTE A SOLICITATION TO INVEST IN ANY PROGRAM OF CERVINO CAPITAL MANAGEMENT LLC. AN INVESTMENT MAY ONLY BE MADE AT THE TIME A QUALIFIED INVESTOR RECEIVES CERVINO CAPITAL'S DISCLOSURE DOCUMENT FOR ITS COMMODITY TRADING ADVISOR PROGRAM OR DISCLOSURE BROCHURE FOR ITS REGISTERED INVESTMENT ADVISER PROGRAMS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Written October 7th, 2010
The 2007 scenario we envisioned a few months ago continues to play out with large trading ranges in the equity market and a Euro that is gaining speed into the end of the year, a period seasonally strong for the common currency.
The recent hint by the Fed of a possible new round of Quantitative Easing set off a rally in commodities, gold and in most currencies versus the US Dollar. Equities and bonds have also benefited equally even though based on two diametrically opposed theories: the bond market perceives QE as a desperate response to unstoppable deflationary forces and the equity market perceives the additional injection of liquidity as the fuel for future growth and inflated P/E ratios. In a global economic system, Fed actions have international ramifications and a currency war seems to be starting among most economies: last month Japan intervened to sell Yen against the Dollar (even though their primary target would be the Renmimbi) and it announced its own QE program. Brazil and most other emerging markets are finding their currencies overheating and it will not take much before a global agreement is worked out or more protectionist policies will be adopted.
This state of affairs continues to make our strategies a valid solution for asset allocation: inflation protected securities and gold would seem to continue benefiting even though a temporary correction seems rather probable. As far as equities, if the bond market is right and the economic slowdown ends up being much more significant than anticipated, this asset class is indeed a bit overvalued; however, when compared to US Treasuries, equities don’t seem so scary.
Master Limited Partnerships have done extremely well this year handily beating broad market indexes; in absolute terms they seem expensive but in relative terms – measured by the spread of their distribution versus the yield on the 10 year UST – they still represent good value. MLP are now paying about 370 basis points over Treasuries, well above the 320 average spread and much above the 250 spread which has in the past indicated sector overvaluation.
Looking at the final stretch of this 2010, we cannot forget the upcoming November elections which may affect market direction. Overall, performance anxiety may stat to dictate market posture either way; in other words, I would expect buyers above and sellers below the recent range.
Corporate bonds which have performed very well since the 2008 lows are beginning to seem a bit pricey and a trimming of the exposure is in order.
--Davide Accomazzo, Managing Director
(This article was written on October 7, 2010)
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