|
Major Highlights of the Second Quarter
This was a difficult quarter. The dollar-weighted performance in our equity accounts was -2.05% (net of all fees!).1 We are still positive for the year, and continue to outperform all major indices YTD with the exception of Dow Jones Industrial Average.
| 2nd Quarter
2006 | Year
2006 | Year
2005 | Year
2004 | Year
2003 | Annualized
Since Inception * |
|---|
| Vega Equity+™ | -2.05% | +4.40% | +7.70% | +12.00% | +40.00% | +19.10 |
| Vega Equity*™ | -1.84% | +5.40% | +8.90% | +17.60% | +42.70% | +22.30 |
| S&P 500 | -1.53% | +3.10% | +3.00% | +9.00% | +26.40% | +12.40 |
| NASDAQ | -7.54% | -4.00% | +1.40% | +8.60% | +50.00% | +15.20 |
| Dow Jones | +0.94% | +5.60% | -0.60% | +3.10% | +25.30% | +9.80 |
We have established the relationships with Schwab Institutional Group. This will allow us to provide better, more efficient service to those of our clients who have accounts at Schwab. Schwab Institutional Platform is designed to streamline our office operations, improve productivity and enhance client service. It would also allow us to reduce the trading expenses for most of the accounts at Schwab.
To our new clients—welcome to Vega's family—we are pleased to have you on board and wish you many years of robust market returns! Thank you for putting trust in our ability to manage your assets.
We have implemented the new Dynamic Portfolio Management and Tracking Software, developed by our software group, which allows for more efficient portfolio monitoring and rebalancing.
Our assets under management have grown 9% this quarter.
Geopolitical and economical pictures remain very unstable. We continue to see very unpleasant political developments in many regions of the world: the situation in the Middle East, Iraq, North Korea, and Iran—they all continue to be the source of commotions and have negative impact on the stability of the markets.
On economic front, we continue to get contradictory reports. What used to be a good sign for the markets is not helpful any more—the growth in company earnings might cause the Fed to overshoot in their policy to cool down the economy. The new Fed Chief, Dr. Bernanke, just keeps talking and talking. Maybe he should take some language classes from Dr. Greenspan. At least when Alan was talking, nobody could understand anything.
Our portfolio has gone through significant changes this quarter. In particular, we have significantly decreased the risk exposure to the markets in our portfolios. Our transactions this quarter included:
- Selling Gold Index (GLD)—we made approximately 36% profit in this trade;
- Selling an emerging markets index (ILF)—to avoid extreme volatility of this index;
- Buying puts for Energy and Financials indices to hedge our significant exposure to the energy sector, and to hedge our exposure to the market in general - financial index is a very good proxy of the overall health of the market;
- Buying defensive positions: Health Care Select Sector Fund, Consumer Staples Sector Spider (XLV, XLP);
- Selling Euro Currency Trust Fund (FXE); might buy it again later;
- Increasing the amount of cash in the portfolio to approximately 9%.
Expect a volatile summer, and while we plan to gradually start increasing our exposure to the markets, if we see signs of stability, we will do so at a very measured pace.
The most significant development in the fixed income markets is that some of the fixed income instruments are becoming more and more attractive. 17 (!) consecutive increases of the short term interest rates (from 1% to 5.25%) have finally started to impact longer term interest rates. In particular, the Auction Preferred Instruments (7-days and 28-days) are now paying upwards of 5%, and 1-year CD's of some banks are paying upward of 5.5%. Our clients will see the presence of these instruments in their fixed income portfolios. We still remain on the shorter end of the fixed income investments, as we expect interest rates to increase further.
Our view of the market has changed from cautiously bullish to neutral. This view is reflected in our cash position in the accounts, as well as strategic positioning of assets in more defensive securities (see the description of trades above). While we do not think a major market correction is coming, and the earning reports remain strong, many economic indicators are not bullish to put it mildly. In particular, there is a big uncertainty associated with Fed Policy, real estate markets, and geopolitical conditions. The overall behavior of the market remains very unstable. Here is the quote from the latest Business Week:
"U.S. Economy. It sure does look like a smoking gun. Up to now, an inflation problem was hard to pin down, except at the gas pump. The May consumer price index changed all that. It showed that inflation, even outside of energy and some quirky readings on housing costs, is picking up much faster than almost anyone had expected a few months ago. MOST IMPORTANT, THIS NEW EVIDENCE CHANGES THE OUTLOOK FOR Federal Reserve policy and heightens the risks for the economy."
We continue to exercise extreme caution in our equity portfolios, including a large percentage of cash- and cash-equivalent instruments, hedges, and very tight stops for more aggressive positions.
As always, we would appreciate the referrals from our loyal and satisfied clients.
1 Past performance is not a guarantee of future results.
|
