Equity Market Comment by Patrick Smith, Chief Investment Officer
Seasonal Tendencies & Unintended Consequences
November 18, 2014
We try annually to capitalize on the seasonal tendency of stocks to outperform in the six months following
Halloween (as compared to the six months prior). This year, despite our conviction that the secular bull market was
intact, we were a bit nervous to continue loading up with stocks following October’s volatility. Still, the start of
November brought new highs for large-cap U.S. stock indices, and the VIX (aka the “fear gauge”) fell back to its
more recent “normal” mid-teens reading from October’s anxious high of 26.25 (its highest level since 2011).
The rapid VIX retreat from “risk-off” rising fear to ho-hum “risk-on” complacency is worrying. It speaks to the
current manic-depressive investor mindset. It seems that everyone knows that the current low-rate environment
has encouraged excessive risk-taking by investors, professional and retail alike. Chasing performance and reaching
for yield has drawn too many investors far out on a limb of risk, where most don’t belong. Many feel they have no
choice in the matter. They need the income and there are no safer alternatives. These investors hope and presume
that the Fed will swoop in to support the markets should a crisis arise. Perhaps even more worrisome is the broadbased assumption that the Fed can support the markets if a new crisis unfolded. Isn’t there a possibility that the
Fed could fail to manage market volatility?
The accident waiting to happen will likely come from unintended consequences of the so-called “Volcker Rule”
within the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule is meant to protect bank
customers (and tax-payers) from systemic bank failures by drastically limiting proprietary trading and speculation
by banks. Good intentions aside, the rule has greatly diminished and limited market-making on Wall Street to the
point that liquidity in some markets is quite poor and would probably be non-existent in a crisis. This situation
could put price discovery in the hands of panicky investors, who have a knack for buying at extreme highs and
selling at extreme lows. Any exogenous shock could start dominoes falling across global markets. While this may
create opportunities for those with cash and fortitude, it is likely to be a bumpy ride for everyone else.
To close on a positive note, we are nervous but still believe the secular bull market in U.S. stocks will continue, at
least for as long as the U.S. economy continues to grow. Non-U.S. equity markets are another story, as growth in
China, Japan, and the Eurozone seems to be weak, at best, and the “D” word (deflation) keeps popping up. Because
of this, we are inclined to keep the majority of our equity exposure in U.S. markets while maintaining a state of
heightened vigilance. The sectors we favor most are healthcare, biotech, and information technology. Utilities and
financials are still displaying relative strength, but have lost some momentum over the past few weeks, probably due
to increased concern over if and how the Fed may tighten next, now that QE is history.
25 Deforest Avenue, Suite 308, Summit, New Jersey 07901
(212) 935-0755
www.granite-springs.com
Equity Market Comment by Patrick Smith, Chief Investment Officer
Patrick L. Smith (Chief Investment Officer) founded Granite Springs Asset Management in 2009. Previously, Mr.
Smith was a Principal and Managing Director at Williams, Jones & Associates (WJA) for over ten years. As a portfolio
manager and investment committee member at WJA, Mr. Smith helped manage more than $3.5 billion in private
client and institutional investor assets. He also held senior level positions in fixed income trading at J.J. Kenny & Co.,
Euro-Brokers/Maxcor Inc., and Greenwich Partners, Inc., where he also began his career in finance as a municipal
credit analyst. Mr. Smith holds a BBA in Finance from Iona College, as well as FINRA Series 63 and 65 licenses. Mr.
Smith is a member of the National Federation of Municipal Analysts, the Municipal Analysts Group of New York and
the Municipal Bond Club of New York.
Granite Springs Asset Management, LLC is a privately held SEC registered investment advisor that specializes in
fixed income portfolio management and tactical asset allocation investment strategies for private clients, family offices,
financial advisers, insurance companies, pension plans, and other institutional investors. The investment philosophy at
Granite Springs is based on two principal beliefs; that asset allocation is the most important investment decision and;
that disciplined risk management leads to superior returns over time.
Granite Springs Asset Management LLC is a Registered Investment Adviser with the U.S. Securities and Exchange
Commission and qualified to do business in various state jurisdictions where required. Nothing in this article shall
constitute investment advice. This article is for informational purposes only and the opinions expressed are the
author’s own.
Disclaimer
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any
product. The opinions expressed are those of the Granite Springs Asset Management LLC Investment Team. The
opinions referenced are as of the date of publication and are subject to change due to changes in the market or
economic conditions. Material presented has been derived from sources considered to be reliable, but the accuracy
and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation recommendation or
an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. This
material is for educational purposes only. Granite Springs Asset Management LLC is an investment adviser
registered with the US Securities and Exchange. Registration does not imply a certain level of skill or training. More
information about Granite Springs Asset Management LLC can be found in its Form ADV which is available upon
request.
25 Deforest Avenue, Suite 308, Summit, New Jersey 07901
(212) 935-0755
www.granite-springs.com