The Big Regroup

In the last week of March, we trimmed back some of the gains of the first quarter and recommitted to the large cap value-oriented equity weighting that got us through 2011.  Our emerging markets sleeve had gotten way ahead of itself as had some of our core alpha-generating managers, so it was a nice time to prune.  We rode through quarter’s end being “miserably long” and the end of the quarter gave us the chance to lighten up a bit – even on the stuff that had been “acting well”.

The argument internally about whether or not to “let the winners run” was a simple one – commodities had been rolling over, Global PMI data was weak to neutral and seasonally, we’ve just seen the same movie twice in 2010 and 2011 – a frothy free-for-all into April followed by a rough summer of horrid headlines and data drifting lower.

Our core portfolios remain between 50 and 65% net long equities.  Although this is certainly not a wildly bullish posture, days like today and weeks like last week are certainly no fun.

We are concerned by the same things that everyone else is – the return of the “soft patch” meme being espoused in the media by those who told you to get long cyclical stocks last month is disturbing, as is the data itself.  Meanwhile, even the most dovish expectations for the Fed’s next move revolve around a decision/announcement in June, which leaves a pretty substantial gap in the calendar and a notable “air pocket” in the charts.

The second guessing of the bull case (self-sustaining recovery) has already begun, I’m hearing a lot of these two “explainers” this morning:

1.  Positive employment trend that began this year was just a game of catch-up and now it’s all caught-up

2.  The weather helped the economy this winter and no one realized it

Market-wise, the dip buyers will likely show up, and we will, just as likely, not be among them.  At least for now.

With Bernanke on hold for the moment, Q2 earnings can make or break the rally that began this past December.  As for the second derivative economic growth problem, it is too hard to tell how worried we should be just yet.  So like many others, we are taking a moment here to regroup.

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