April 10, 2010

DEAR LADIES AND GENTLEMEN:

Our equity portfolios have performed in line with a broad stock market (we are behind just a tiny bit as compared to S&P 500); our bond portfolios are doing extremely well (look at the balances in your Vega Safety Program); Vega Inevitable has been slightly down in the first quarter—and that had to be expected after a large run up in the last two quarters of 2009 (after all, that's why you need diversification).

Of course, we all know that bear markets and recessions last 12 to 18 months, but economic expansions typically last three to four years. There is almost unanimous agreement that the recession ended sometime between June and August of 2009. If that's the case, we are only six, seven, or eight months into a new economic expansion (are not we?). Almost everybody agrees it is not going to be robust, but if it matches the average, we have several years of growth ahead of us.

We slightly reposition our equity portfolios to reflect this new economic reality. We have slightly increased our exposure to the large international financial institutions, kept our exposure to oil and oil-related stocks intact, increased exposure to the technology-oriented companies and to the health-care information processing.

And yet…Does something bother you in the widespread optimistic picture? Because it definitely bothers us. This is why we still keep our hedges: a small exposure to the volatility and to the inverse commercial real estate (in other words, we remain bearish on commercial real estate), and a few covered calls to hedge the large profits in several equity positions.

We continue to see opportunities elsewhere. In particular, we like Brazil. It has the fifth-largest population in the world, but historically it's had problems with its currency, inflation, and so forth. Now the currency is under control—actually, it's appreciating against the dollar—and inflation has been very, very modest over the past couple of years. The enormous natural resources there are unbelievable, and Brazil will probably have, in the not-too-distant future, the fifth-biggest GDP in the world. We also like India. Because of that we might take some exposure to these countries in the nearest future, probably via one of the ETF's .

We continue to be concerned by the amount of dollars issued into circulation, and the amount of other liabilities our government is building. While some of these amounts are totally unpredictable (the cost of the new health reform, just to give one example), and the others, such as the cost of Social Security Benefits, can be calculated with a high degree of precision, one thing is inevitable: the weakening of dollar, or rather the "debasement" of dollar. We are taking some protective measures, building the exposure to precious metals.

To summarize: yes, we are enjoying the recovery of the markets, and we would ride the train for now, but yes, we continue to be extremely careful in our equity portfolios, as we have described in our previous newsletter. Frankly, we do not believe we are completely out of the woods yet.

As far as our fixed income portfolios go: we are starting to sell some of the positions with longer duration. The coming increase in interest rates is eminent, and we are moving towards the shorter duration on the interest yield curve. In general, the new funds should not be added to fixed income programs. We would suggest either to sit on the sidelines, patiently waiting for the interest rates to go up and only then starting to acquire new positions, or temporarily reallocate the funds into other programs.

The asset allocation and active portfolio management is becoming more important than ever. Some of you have inquired if we are comfortable in making your portfolios more aggressive at this point. There is no generic answer. Feel free to call us to set up the appointment to discuss your objectives and to re-evaluate the asset allocation in your portfolio.

As usual, we would appreciate the referrals from our satisfied clients.

Vega Capital Group Team.