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.
Starting in 2011 we envisioned more bi-directional trading along with increased volatility given the backdrop of rising oil prices. This prognostication came true when a spike of volatility hit the equity market as a result of the earthquake in Japan. Nevertheless, the spike was short-lived, and the resilience of the equity market allowed for only a brief respite before returning to prior highs. The result was one of the best quarters on record for stocks.
Long only strategies are still faring better than expected and finding alpha by looking to arbitrage relative values has proven difficult. The S&P 500 seem to be grossly overbought technically and not so cheap fundamentally, but the positive breadth and strength shown in the face of even nuclear misery indicates a continuation of a positive bias for at least the next 2 or 3 months. The second half of the year, on the other hand, could prove trickier as interest rates seem pointing higher. One reason is that QE2 ends in June. As a result insider selling is on the pick up.
The nuclear disaster in Japan, while heartbreaking from a human and emotional angle, might have improved the long term fundamentals of natural gas, LNG and coal. Many of the MLPs in our portfolio are actively engaged in those spaces and we are looking to increase our exposure to those specific names in an opportunistic way. On the subject of Master Limited Partnerships, their spread over the 10 year UST is now fairly narrow and makes this asset class a little less attractive in general. Corrections would be welcome and should be used to pick up better yields.
The unfortunate events in Japan not only changed the fundamentals of natural gas but we think they created the conditions for a long term bear market in the Yen. After the Kobe earthquake, the Yen spiked briefly and then embarked in a multi year correction. We think the current situation sets up some interesting investment opportunities. At the same time, we have also reduced our exposure to short duration TIPs which performed up to the present much better than long duration but now are showing signs of topping. And then there is gold…
The yellow metal did have a bout of volatility with a severe correction in the first few days of the year followed by a strong rally and now churning action. We feel that gold should continue to churn for the next few months as negative seasonality kicks in and the big gains of the second half of last year are digested. It is important to continue to monitor various central bankers around the world to get a sense of how real their determination to fight inflation is. I think words are cheap and actions are constrained by the reality they helped construct. After the seasonal pause, gold should resume it higher trend. In commodities, we also continue to like crude oil and are in the process to launching a CTA program similar to our strategy in gold to capture what we expect to be a persistent uptrend for the next few years.
--Davide Accomazzo, Managing Director
(Written March 31, 2011)
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