CPAG Market Commentary

February 2011

It is interesting how time passes. It doesn’t seem like a month has passed since the beginning of the year. One reason is that the equity markets have been in a consistent climb while the gold and bond markets have been in a consistent decline. All diversified portfolios are still up for the month since the equity rise has outpaced the bond and gold decline.

There doesn’t seem to be much consensus on why the market keeps rising, but why complain. Unemployment numbers out today showed a very small monthly increase in jobs (36,000) yet the unemployment rate dropped from 9.4% in December to 9.00% in January. This only makes sense if we look further into the statistics. The unemployment rate dropped because many unemployed (162,000) have left the job market and are thus dropped from the data. One explanation to the lack of job growth comes from the rise in commodity prices which impacts manufacturing. Higher product costs strips margins needed for additional hiring. Fed Chairman Bernanke rejects the commodity inflation claims that may be hurting global manufacturing but also higher food prices worldwide, one of the many catalysts for the Egyptian crisis. The Fed’s Quantitative Easing program appears to be having many unintended consequences.

The equity markets were not fooled by the statistical indifference and turned down most of the day but ended the day up 0.25%. With the potential geopolitical problems in Egypt, we are amazed the equity markets haven’t turned down into the 5%-10% correction that everyone expects. Of course this may still happen since February has always been a volatile month. We believe any decline will be short lived, a consolidation like the November decline that gave back about 4.5% of the October advance. We took no defensive position then and won’t take any now unless something more serious occurs that will change the dynamic of the equity markets.

Although gold has retreated since November, we have held on to the metal in most accounts as a hedge against inflation and any geopolitical surprise. During the Egyptian crisis gold has advanced.

Gold has declined about 4% since November. Some bonds are down even more since November as well. Stocks are up significantly in the same time period, but when you put it all together, most portfolios are not up as much as the stock market. How can that be? Investors concentrate on stock returns but not the other parts of the portfolio that over time protects their assets, but in short time periods detracts from performance. If anyone is interested in changing their risk/return profile, please let us know.

Bonds have struggled but the convertible bonds have done well. Our bond managed accounts have regained their price decline of January in spite of the decline in US Treasuries and corporate bonds.