Submitted by
Covestor
as part of our
contributors
program
The third quarter could be summed up in two words: "Big
Bazooka."
This was a quarter that saw unprecedented monetary stimulus from
the world's three most powerful central banks. European Central
Bank President Mario Draghi bought the Eurozone time to get its
house in order with his
announcement
of potentially unlimited "outright monetary transactions" to assist
any country in need, so long as that country agreed to austerity
conditions.
Shortly thereafter, Fed Chairman Ben Bernanke threw gasoline on
the fire by announcing "QE Infinity," in which he promised to
inject $40 billion in stimulus per month into the mortgage bond
market indefinitely, meaning as long as it took for him to see
improvement in the unemployment rate.
And almost as an afterthought, the Bank of Japan announced a
major expansion of its own quantitative easing program, boosting it
by 10 trillion yen.
As we enter the fourth quarter, this coordinated monetary attack
is the single biggest bullish factor in an otherwise shaky macro
environment.
U.S. investors appear content for now to ignore the elephant in
the room, the infamous fiscal cliff of tax hikes and budget cuts
that is slated to take effect at the beginning of 2013 barring
action by Congress and approval by the President. In a heated
election year, it's hard to see them coming to much in the way of
an agreement.
But the bigger worry in our view is the risk of the Eurozone
slipping back into crisis. It would appear that Germany is
doing everything in its power to undermine the major breakthroughs
of the third quarter. Having failed to stop Mario Draghi from
announcing his bond purchase plans, German Bundesbank President
Jens Weidman appears to be getting his revenge by leading a charge
against the plans for an EU banking union.
Meanwhile, German Finance Minister Wolfgang Shauble, along with
his counterparts from the Netherlands and Finland, have now
publicly opposed a bank bailout for Spain-months after a general
consensus was formed about removing the "vicious circle between
banks and sovereigns."
We find these developments deeply disturbing because they erode
the confidence that is so critical to a functioning capital market.
They risk undoing months of progress in resolving the sovereign
debt crisis, and each step backward makes the eventual
disintegration of the Eurozone all the more likely.
Still, the market appears to be climbing this rather steep wall
of worry, at least for now. And until we see signs of
weakness, Sizemore Capital continues to believe that it makes sense
to err on the side of bullishness. It is one thing to fight
the Fed, but quite another to simultaneously fight the Fed, the ECB
and the Bank of Japan.
For now, we remain aggressively invested. But given the
macro concerns we see, we stand ready to make significant changes
to our portfolios as conditions warrant.
We are pleased to say that all Sizemore Capital strategies saw
positive returns though the first three quarters of 2012.
Model Portfolio 1/1/2012 - 9/30/2012
Dividend Growth *5.3%%
Tactical ETF 6.9%%
Sizemore Investment Letter 13.6%%
Strategic Growth Allocation 11.1%%
*Model inception 3/29/2012
Dividend Growth: Since its inception on March 29, Sizemore
Capital's Dividend Growth Portfolio has performed as expected,
returning 5.3 percent vs. 2.7 percent for the S&P 500 Index
over the same period (the model was launched on 3/29/2012).
The portfolio is currently allocated approximately 30/30/30
between dividend paying stocks, equity real estate investment
trusts, and midstream oil and gas master limited partnerships, with
an additional 10% reserved for other income-producing sectors and
strategies.
In a secular bear market, stocks tend to move sideways for
years, interrupted by sharp rallies and sharp selloffs. In
this kind of market, an income-focused strategy is going to be the
best choice for reliable realized returns.
Sizemore Capital continues to recommend the Dividend Growth
Portfolio for investors who want a high and growing stream of
income in an environment where attractive yields can be hard to
come by.
Tactical ETF Portfolio
Through the first three quarters of 2012, Sizemore Capital's
Tactical ETF Portfolio returned 6.9 percent vs. 14.6 percent for
the S&P 500 Index.
The Tactical ETF Portfolio has underperformed the S&P 500 in
2012, much to our frustration. The portfolio's mixture of quality
dividend payers and selective tactical speculations in European,
emerging market, and technology shares is one that we believe will
do well for the remainder of the year. But our timing and
execution of this strategy throughout 2012 has been
disappointing.
Alas, we are not alone. 2012 has been a brutal year for most
global macro traders; the average hedge fund is up barely 3%. Macro
traders have found the Eurozone debt crisis particularly hard to
navigate, and unfortunately we have not proven to be an exception
in this portfolio.
Sizemore Investment Letter Portfolio
Through the first three quarters of 2012, the Sizemore
Investment Letter Portfolio returned 13.6 percent vs. 14.6 percent
for the S&P 500 Index.
In this environment, we are quite happy with these returns.
The SIL portfolio is heavily weighted in European shares via
our "Emerging Markets Lite" theme. Over time, we expect this
to outperform our benchmarks by a wide margin. But in a
see-saw year like 2012, we are happy to simply be keeping pace.
Overall, we are very satisfied with the way our investment
themes are working in this model. Our "vice" investments in
alcohol and tobacco have performed particularly well, as have many
of our demographic investments focusing on the rise of the Echo
Boomer generation. As I said above, our Emerging Markets Lite
strategy is also performing well despite its large allocation to
Europe.
The one area for mild concern is our "Glamour and Glitz" theme
of buying luxury goods companies with strong exposure to emerging
markets. Fears of a harder-than-expected Chinese slowdown
have weighed on the luxury sector, and the earnings releases over
the past three months have been mixed.
We believe that the bearishness in this sector is overdone and
still see a lot of value. But should conditions continue to
worsen, we will have to reevaluate this theme.
We are particularly excited about our exposure to African
markets going forward. We consider Africa to be the last investment
frontier, and we expect the continent to be a bright spot in an
otherwise lackluster global economy over the remainder of this
decade.
Strategic Growth Allocation
Through the first three quarters of 2012, the Strategic Growth
Allocation model returned 11.1 percent vs. 14.6 percent for the
S&P 500 Index.
The Strategic Growth Allocation has performed as expected,
generating consistent returns while avoiding some of the wild
swings in the S&P 500. The portfolio underperformed the S&P
500 over the period, but while taking less risk and suffering less
volatility.
Looking forward to a profitable finish to the year,
Disclosure: Performance discussed is net of advisory fees.
The index comparisons herein are provided for informational
purposes only and should not be used as the basis for making an
investment decision. There are significant differences between
client accounts and the indices referenced including, but not
limited to, risk profile, liquidity, volatility and asset
composition. The S&P 500 is an index of 500 stocks chosen for
market size, liquidity and industry, among other factor.
The investments discussed are held in client accounts as of
September 30, 2012. These investments may or may not be currently
held in client accounts.The reader should not assume that any
investments identified were or will be profitable or that any
investment recommendations or that investment decisions we make
in the future will be profitable.
Certain of the information contained in this presentation is
based upon forward-looking statements, information and opinions,
including descriptions of anticipated market changes and
expectations of future activity.
Covestor
believes that such statements, information, and opinions are
based upon reasonable estimates and assumptions. However,
forward-looking statements, information and opinions are
inherently uncertain and actual events or results may differ
materially from those reflected in the forward-looking
statements. Therefore, undue reliance should not be placed on
such forward-looking statements, information and opinions.
Covestor Ltd. is a registered investment advisor. Covestor
licenses investment strategies from its Model Managers to
establish investment models. The commentary here is provided as
general and impersonal information and should not be construed as
recommendations or advice. Information from Model Managers and
third-party sources deemed to be reliable but not guaranteed.
Past performance is no guarantee of future results. Transaction
histories for Covestor models available upon request. Additional
important disclosures available at
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