Etalon Investments - Investors Page

Q2 2010

The second quarter of 2010 was characterized by the second correction of the year, which was deeper than the first. The lowest point of the year was right around the end of June; the major averages lost around 12% during these three months. The Classic portfolio continued to outperform the market for the sixth quarter in a row, this time by 2 percentage points. For the year, Classic is down 3%, compared to 7% loss for the averages. The Discovery portfolio, however, fared considerably worse and lost 28%. While disappointing, that result is not too surprising, as by its charter, Discovery is very aggressive and tends to exaggerate market moves both on the downside and on the upside (in market speak, it has a high beta). As you recall, in 2009, Discovery gained 121% compared to 23% for S&P 500.

Listening and reading recent reports of mainstream media outlets could make one wonder if a new meltdown of the financial system is at hand. Headlines about double-dip recession, plummeting housing starts and consumer sentiment dominate the news. To be sure, latest batch of overall economic reports has not been stellar. Yesterday, markets dived after Fed Chairman Ben Bernanke said that the outlook for the economy was "unusually uncertain". Really? Has it ever been unusually certain?

Right now, the earnings season is in full swing and company reports so far contradict doom and gloom. After many bellwether companies, such as Intel, Apple, Alcoa, Morgan Stanley, Caterpillar and others not only beat estimates, but offered higher guidance going forward, investors are finally beginning to take notice. Ultimately, it is only the earnings that drive the stock prices.

I would like to close with a quote from one of 20 golden rules by Peter Lynch, that I think is particularly applicable to today's environment:

"Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you are interested".

Q1 2010

The markets were able to recover from the January correction and to build up respectable gains on top of that. All major indices increased by 4%-5% this quarter. The Classic portfolio continued to outperform the market, rising by 7.7%. This result was somewhat dampened by certain protective positions I put in place. The Discovery portfolio, however, declined by 5.3% in value. Because of its aggressive charter (or its beta being greater than 1, in analyst speak), one would assume that it should outperform rising markets, as it did last year. On top of that, Discovery does not have protective positions such as Classic portfolio, but nevertheless it lagged it by significant margin this quarter. I didn't make any major changes to strategy or composition of the portfolio. I think that such discrepancy of performance can only illustrate the fact that I am sure you heard from me many times -- namely, that short-term performance of any stock, portfolio, or an index can be arbitrary. In any event, some consolidation in Discovery portfolio should not be surprising -- after all, it rose 121% last year (compared to 64% for Classic).

With the exception of news coming from the Euro zone regarding Greek and now possibly Portuguese debt problems, the economic environment this quarter continued to be quite benign. We had generally positive reports on retail sales, housing market, and consumer spending, while the unemployment remains high. Some analysts talk about "tortoise market", referring to the fact that the since the end of January correction, markets moved very slowly but very steadily upwards. The infamous VIX index, also known as the fear gauge, which measures market volatility, has been consistently trending down and now is at the level of mid-2007. It appears that there is some complacency in the market, which in itself should warrant caution. On the other hand, many still view this rally and recovery with considerable skepticism, and fund managers have cash available to invest, which is a positive sign. While my outlook for the rest of this year remains positive, I would not be surprised to see another correction similar to the one experienced in January.

Ultimately, stock prices are driven by earnings, and so far they have been better than expected. The earnings season that is coming up will provide more clarity on the state of this recovery. Until then, I don't foresee any need to change market exposure and downside protection currently in place.

Q4 2009

This year turned out to be a best ever in Fund history: Classic portfolio rose 63.7% and Discovery more than doubled at 121.4%. This compares quite favorably with major market indices: Dow Jones is up 18%, S&P 500 rose 23%, and Nasdaq advanced 43%. In the last quarter of 2009, Classic is ahead 10.7%, Discovery is up 21.7% which again is in front of indices which rose 5-7% this quarter. Of course, stellar 2009 comes on heels of abysmal 2008, and, as a result, we are still short of 2007 highs (which is true of overall market as well), although Discovery portfolio made huge progress this year and is now very close to its 2007 ending value.

2009 marks the end of the decade, and I say Good Riddance! The Naughts, as some people call it, turned out to be the absolutely worst decade in stock market history, with S&P 500 losing 3.3% on average every year. Compare that to the 30's: during that decade, the market rose 1.8% annually! Clearly, as bad as the Great Recession has been, it still can't even begin to compare in economic terms to the Great Depression. The main reason for the poor market performance during the last 10 years is that stock prices rose very fast in the 80's and 90's. By the way, those 20 years followed poor 70's; 30's were also followed by a decades-long stretch of market gains. By this historical perspective, next major move should be up (despite that good 2009).

My sentiment about last quarter of 2009 remains very similar to that of a couple previous quarters. The economy continues to exhibit more and more signs of clear recovery, in GDP growth, improving housing market, stabilizing unemployment, strong corporate earnings, low interest rates, and even consumer sentiment. The sentiment of market advisors, however, remains decidedly guarded since the gains occurred much quicker than anybody could have anticipated. Many believe that this is still a bear market rally. Indeed, can the market really go higher having already risen so much and so fast since March? The short answer is -- yes, it can. It was unimaginable to think that it could drop even further from the levels of one year ago -- and yet it did.

I am sure you realize that I am not actually making a prediction here; I never do. The future is unknown and my guess is as good as yours. While a correction will not be surprising at this point, there is a very good possibility that the market will continue its climb of the wall of worry. To that end, I am not making major changes to the portfolio strategy, and I am continuing to hold both aggressive positions to profit from continued upside, as well as defensive ones that give protection in case a significant correction does occur.

Q3 2009

The third quarter of 2009 turned out to be remarkably similar to the second quarter both in terms of performance and general market environment. First, the performance. Similarly to the last quarter, all major indexes registered solid gains, this time from 15% to 16%. Our portfolios were again able to achieve even better results, with Classic up 20.5% and aggressive Discovery up 28.7%. For the year, Dow Jones is ahead by 10.7%, S&P 500 is up 17%, and Nasdaq rose 34.5%. Year-to-date results for our portfolios: Classic is up 47.9% and Discovery is 82% ahead. What a difference a year makes! Barring a major calamity in Q4, 2009 shapes out to be the best year for the Fund. Of course, this isn't saying too much -- I remain humbled by "the year that can't be named" and there is still a lot of work to do to reclaim 2007 valuations. Nevertheless, the progress we made is encouraging.

The overall market sentiment now is also very similar to that of the previous quarter. There is still plenty of skepticism around, driven by uncertainty of this recovery and the very fact that market gains happened so extraordinarily quickly. We are still climbing the wall of worry, with many investors remaining on the sidelines convinced that we are in the bear market rally (which from the contrarian point of view is the ideal market condition). Similarly to the last quarter, the coming earnings season is going to be hugely important. Q2 (as well as Q1) results exceeded expectations, and of course the markets are driven by the earnings. If this trend continues, so will this rally.

There are also important differences between current and previous quarters. Major economic indicators improved significantly. For example, then the economy was still contracting (although at a lower rate of decline) and housing prices were falling. Now it is a virtual certainty that GDP rose in Q3 and the housing market is stabilizing. Not everything is roses, of course. Just a few days ago, manufacturing, consumer confidence, and unemployment reports were worse than expected. This recovery, as any other, will have its hurdles and the markets could get bumpy. I am monitoring the situation closely, and in terms of portfolio management, I am adding both defensive positions to protect from possible downturn as well as aggressive ones to profit from the upside.

The market action over the last two years confirmed my long-held belief that market timing is impossible and that one has to stay invested to participate in sharp upward moves. Chances are, someone who sold on the way down is still on the sidelines waiting for a good market. And they often buy after the market has already been good. I thank you for holding on through these difficult times and for your continued confidence and I look forward to better times ahead.

Q2 2009

In my summary of Q1 performance, I mentioned that continuation of the rally that started in mid-March will depend on first quarter earnings. These earnings and future outlooks turned out to be better than expected, and that, together with generally positive (or at least less negative) economic news proved to be catalysts for one of the best quarters for the market. Dow Jones rose over 10%, S&P 500 increased by 15%, and Nasdaq advanced by 20%. Our portfolios also had a banner quarter: Classic rose 18.9% and aggressive Discovery, helped by certain derivatives and emerging markets holdings, jumped 36.5%. For the year, Classic portfolio is up 22.7% and Discovery is ahead by 41.4%. This compares favorably to market indices: Dow Jones is still in negative territory for the year (-3.7%), S&P 500 is barely positive with 1.8% gain, and Nasdaq is up 15.7%.

While I am encouraged by the performance so far this year, this is no time to declare victory. We made good progress towards erasing 2008 losses, but much more work lies ahead. That is also true for the overall market: even after the rally off the March lows, S&P 500 is still over 40% below its peak in 2007; it is now at the levels of 1997, twelve years ago! In fact, the ten year period from 1999 through 2008 is the worst decade in market history, returning compounded annual average of negative 1.38%. The second worst decade was 1929-1938, returning -0.89% and this period of course included the Great Depression. Early 1930's were a great time to get into the market for long-term investors, and I believe that is the case today as well. History doesn't necessarily repeat itself, but it does rhyme.

While I am optimistic long-term, short-term outlook still remains as cloudy as ever. Relatively benign economic reports and company earnings convinced majority of the economists that the worst of the crisis has passed; recovery is expected later this year or in 2010. These reports and expectations are most likely already reflected in stock market prices, however. While the rate of decline has slowed, at present the economy is still contracting, and housing prices are still falling. In order for the rally to continue, we will need to see actual evidence of positive GDP growth. Just like last quarter, coming earning reports in July and August should provide some clarity. In the meantime, there is a good chance that markets could consolidate or be indecisive and move sideways for a few months. To that end, I am eliminating certain aggressive positions and entering into protective and market-neutral derivative contracts.

Q1 2009

The first quarter of 2009 marked the sixth consecutive quarter of declines for all of the major stock indices. Dow Jones dropped 13%, S&P was down 12% and Nasdaq declined 3%. Both of our portfolios, however, were able to put a stop to the red ink and posted modest advances of 3% for Classic and 4% for Discovery. An outperformance of a major index by 16-17 percentage points is a significant achievement in a normal market environment. However, this last quarter continued to be anything but normal.

In the beginning of the year, the Dow started its decline towards its 13-year low, dropping by 27% in the process. The last three weeks, however, it climbed by 21% -- so, by traditional definitions, this quarter contained its own bear and bull markets. Either one usually takes more than a year to play out. In March, we saw a few faint hints of good economic news, and that was enough to propel the market from its March 9 multi-year low. The approaching earnings season that starts in mid-April should provide some insight into short-term market direction. If major companies show signs of earnings stabilization, this rally may well continue. On the other hand, poor or no outlooks could be catalysts for retesting March lows.

The only thing that is now clear is the lack of clarity. But this lack of clarity is short-term. No one can predict whether the next 1000 point move on the Dow will be up or down. However, the next 7000 point move will definitely be up. If you are in the market for years and not months, then now is the time to look for value and bargains and to take advantage of the most difficult environment in more than 70 years.

I would encourage you to check by blog at http://blog.etalonfund.com, which I try to update with recent market and company news at least a couple times a week. I wish you the best for the remainder of the year.

	Home \| E-mail us

\|HOME\|COMPANY\|NEWS\|INVESTORS\|ABOUT\|BLOG\|

Investment Documents Financial Statements Letters to Partners	Investment Documents Listed below are the documents required for investment in Etalon Fund. Please study them carefully before investing. All documents listed on this page require a username and a password. For access, please contact us. Private Placement Memorandum This document describes investment goals and strategy of the Fund, fund expenses, including management fees, and talks at length about risk factors of investment in the Fund. Limited Partnership Agreement The Fund is structured as a Limited Partnership, where limited partners (or investors) authorize the General Partner to manage money on their behalf. This document describes organization, structure, and operating principles of the partnership. Investor Questionnaire The goal of this questionnaire is to determine whether investment in the Fund is suitable for a prospective investor, by virtue of having a certain level of income or net worth or of having significant experience in equity markets. Subscription Agreement This form is used for investor contact information and tax ID. Please return all documents to Etalon Investments, L.P. attn. Leon A. Shirman 870 Seminole Way Redwood City, CA 94062 For questions, please call: 650-391-5223 or email to: info@etalonfund.com Financial Statements 2009 Year-end Financial Statements 2008 Year-end Financial Statements 2007 Year-end Financial Statements 2006 Year-end Financial Statements 2005 Year-end Financial Statements 2004 Year-end Financial Statements 2003 Year-end Financial Statements Letters to Partners Q2 2010 The second quarter of 2010 was characterized by the second correction of the year, which was deeper than the first. The lowest point of the year was right around the end of June; the major averages lost around 12% during these three months. The Classic portfolio continued to outperform the market for the sixth quarter in a row, this time by 2 percentage points. For the year, Classic is down 3%, compared to 7% loss for the averages. The Discovery portfolio, however, fared considerably worse and lost 28%. While disappointing, that result is not too surprising, as by its charter, Discovery is very aggressive and tends to exaggerate market moves both on the downside and on the upside (in market speak, it has a high beta). As you recall, in 2009, Discovery gained 121% compared to 23% for S&P 500. Listening and reading recent reports of mainstream media outlets could make one wonder if a new meltdown of the financial system is at hand. Headlines about double-dip recession, plummeting housing starts and consumer sentiment dominate the news. To be sure, latest batch of overall economic reports has not been stellar. Yesterday, markets dived after Fed Chairman Ben Bernanke said that the outlook for the economy was "unusually uncertain". Really? Has it ever been unusually certain? Right now, the earnings season is in full swing and company reports so far contradict doom and gloom. After many bellwether companies, such as Intel, Apple, Alcoa, Morgan Stanley, Caterpillar and others not only beat estimates, but offered higher guidance going forward, investors are finally beginning to take notice. Ultimately, it is only the earnings that drive the stock prices. I would like to close with a quote from one of 20 golden rules by Peter Lynch, that I think is particularly applicable to today's environment: "Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you are interested". Q1 2010 The markets were able to recover from the January correction and to build up respectable gains on top of that. All major indices increased by 4%-5% this quarter. The Classic portfolio continued to outperform the market, rising by 7.7%. This result was somewhat dampened by certain protective positions I put in place. The Discovery portfolio, however, declined by 5.3% in value. Because of its aggressive charter (or its beta being greater than 1, in analyst speak), one would assume that it should outperform rising markets, as it did last year. On top of that, Discovery does not have protective positions such as Classic portfolio, but nevertheless it lagged it by significant margin this quarter. I didn't make any major changes to strategy or composition of the portfolio. I think that such discrepancy of performance can only illustrate the fact that I am sure you heard from me many times -- namely, that short-term performance of any stock, portfolio, or an index can be arbitrary. In any event, some consolidation in Discovery portfolio should not be surprising -- after all, it rose 121% last year (compared to 64% for Classic). With the exception of news coming from the Euro zone regarding Greek and now possibly Portuguese debt problems, the economic environment this quarter continued to be quite benign. We had generally positive reports on retail sales, housing market, and consumer spending, while the unemployment remains high. Some analysts talk about "tortoise market", referring to the fact that the since the end of January correction, markets moved very slowly but very steadily upwards. The infamous VIX index, also known as the fear gauge, which measures market volatility, has been consistently trending down and now is at the level of mid-2007. It appears that there is some complacency in the market, which in itself should warrant caution. On the other hand, many still view this rally and recovery with considerable skepticism, and fund managers have cash available to invest, which is a positive sign. While my outlook for the rest of this year remains positive, I would not be surprised to see another correction similar to the one experienced in January. Ultimately, stock prices are driven by earnings, and so far they have been better than expected. The earnings season that is coming up will provide more clarity on the state of this recovery. Until then, I don't foresee any need to change market exposure and downside protection currently in place. Q4 2009 This year turned out to be a best ever in Fund history: Classic portfolio rose 63.7% and Discovery more than doubled at 121.4%. This compares quite favorably with major market indices: Dow Jones is up 18%, S&P 500 rose 23%, and Nasdaq advanced 43%. In the last quarter of 2009, Classic is ahead 10.7%, Discovery is up 21.7% which again is in front of indices which rose 5-7% this quarter. Of course, stellar 2009 comes on heels of abysmal 2008, and, as a result, we are still short of 2007 highs (which is true of overall market as well), although Discovery portfolio made huge progress this year and is now very close to its 2007 ending value. 2009 marks the end of the decade, and I say Good Riddance! The Naughts, as some people call it, turned out to be the absolutely worst decade in stock market history, with S&P 500 losing 3.3% on average every year. Compare that to the 30's: during that decade, the market rose 1.8% annually! Clearly, as bad as the Great Recession has been, it still can't even begin to compare in economic terms to the Great Depression. The main reason for the poor market performance during the last 10 years is that stock prices rose very fast in the 80's and 90's. By the way, those 20 years followed poor 70's; 30's were also followed by a decades-long stretch of market gains. By this historical perspective, next major move should be up (despite that good 2009). My sentiment about last quarter of 2009 remains very similar to that of a couple previous quarters. The economy continues to exhibit more and more signs of clear recovery, in GDP growth, improving housing market, stabilizing unemployment, strong corporate earnings, low interest rates, and even consumer sentiment. The sentiment of market advisors, however, remains decidedly guarded since the gains occurred much quicker than anybody could have anticipated. Many believe that this is still a bear market rally. Indeed, can the market really go higher having already risen so much and so fast since March? The short answer is -- yes, it can. It was unimaginable to think that it could drop even further from the levels of one year ago -- and yet it did. I am sure you realize that I am not actually making a prediction here; I never do. The future is unknown and my guess is as good as yours. While a correction will not be surprising at this point, there is a very good possibility that the market will continue its climb of the wall of worry. To that end, I am not making major changes to the portfolio strategy, and I am continuing to hold both aggressive positions to profit from continued upside, as well as defensive ones that give protection in case a significant correction does occur. Q3 2009 The third quarter of 2009 turned out to be remarkably similar to the second quarter both in terms of performance and general market environment. First, the performance. Similarly to the last quarter, all major indexes registered solid gains, this time from 15% to 16%. Our portfolios were again able to achieve even better results, with Classic up 20.5% and aggressive Discovery up 28.7%. For the year, Dow Jones is ahead by 10.7%, S&P 500 is up 17%, and Nasdaq rose 34.5%. Year-to-date results for our portfolios: Classic is up 47.9% and Discovery is 82% ahead. What a difference a year makes! Barring a major calamity in Q4, 2009 shapes out to be the best year for the Fund. Of course, this isn't saying too much -- I remain humbled by "the year that can't be named" and there is still a lot of work to do to reclaim 2007 valuations. Nevertheless, the progress we made is encouraging. The overall market sentiment now is also very similar to that of the previous quarter. There is still plenty of skepticism around, driven by uncertainty of this recovery and the very fact that market gains happened so extraordinarily quickly. We are still climbing the wall of worry, with many investors remaining on the sidelines convinced that we are in the bear market rally (which from the contrarian point of view is the ideal market condition). Similarly to the last quarter, the coming earnings season is going to be hugely important. Q2 (as well as Q1) results exceeded expectations, and of course the markets are driven by the earnings. If this trend continues, so will this rally. There are also important differences between current and previous quarters. Major economic indicators improved significantly. For example, then the economy was still contracting (although at a lower rate of decline) and housing prices were falling. Now it is a virtual certainty that GDP rose in Q3 and the housing market is stabilizing. Not everything is roses, of course. Just a few days ago, manufacturing, consumer confidence, and unemployment reports were worse than expected. This recovery, as any other, will have its hurdles and the markets could get bumpy. I am monitoring the situation closely, and in terms of portfolio management, I am adding both defensive positions to protect from possible downturn as well as aggressive ones to profit from the upside. The market action over the last two years confirmed my long-held belief that market timing is impossible and that one has to stay invested to participate in sharp upward moves. Chances are, someone who sold on the way down is still on the sidelines waiting for a good market. And they often buy after the market has already been good. I thank you for holding on through these difficult times and for your continued confidence and I look forward to better times ahead. Q2 2009 In my summary of Q1 performance, I mentioned that continuation of the rally that started in mid-March will depend on first quarter earnings. These earnings and future outlooks turned out to be better than expected, and that, together with generally positive (or at least less negative) economic news proved to be catalysts for one of the best quarters for the market. Dow Jones rose over 10%, S&P 500 increased by 15%, and Nasdaq advanced by 20%. Our portfolios also had a banner quarter: Classic rose 18.9% and aggressive Discovery, helped by certain derivatives and emerging markets holdings, jumped 36.5%. For the year, Classic portfolio is up 22.7% and Discovery is ahead by 41.4%. This compares favorably to market indices: Dow Jones is still in negative territory for the year (-3.7%), S&P 500 is barely positive with 1.8% gain, and Nasdaq is up 15.7%. While I am encouraged by the performance so far this year, this is no time to declare victory. We made good progress towards erasing 2008 losses, but much more work lies ahead. That is also true for the overall market: even after the rally off the March lows, S&P 500 is still over 40% below its peak in 2007; it is now at the levels of 1997, twelve years ago! In fact, the ten year period from 1999 through 2008 is the worst decade in market history, returning compounded annual average of negative 1.38%. The second worst decade was 1929-1938, returning -0.89% and this period of course included the Great Depression. Early 1930's were a great time to get into the market for long-term investors, and I believe that is the case today as well. History doesn't necessarily repeat itself, but it does rhyme. While I am optimistic long-term, short-term outlook still remains as cloudy as ever. Relatively benign economic reports and company earnings convinced majority of the economists that the worst of the crisis has passed; recovery is expected later this year or in 2010. These reports and expectations are most likely already reflected in stock market prices, however. While the rate of decline has slowed, at present the economy is still contracting, and housing prices are still falling. In order for the rally to continue, we will need to see actual evidence of positive GDP growth. Just like last quarter, coming earning reports in July and August should provide some clarity. In the meantime, there is a good chance that markets could consolidate or be indecisive and move sideways for a few months. To that end, I am eliminating certain aggressive positions and entering into protective and market-neutral derivative contracts. Q1 2009 The first quarter of 2009 marked the sixth consecutive quarter of declines for all of the major stock indices. Dow Jones dropped 13%, S&P was down 12% and Nasdaq declined 3%. Both of our portfolios, however, were able to put a stop to the red ink and posted modest advances of 3% for Classic and 4% for Discovery. An outperformance of a major index by 16-17 percentage points is a significant achievement in a normal market environment. However, this last quarter continued to be anything but normal. In the beginning of the year, the Dow started its decline towards its 13-year low, dropping by 27% in the process. The last three weeks, however, it climbed by 21% -- so, by traditional definitions, this quarter contained its own bear and bull markets. Either one usually takes more than a year to play out. In March, we saw a few faint hints of good economic news, and that was enough to propel the market from its March 9 multi-year low. The approaching earnings season that starts in mid-April should provide some insight into short-term market direction. If major companies show signs of earnings stabilization, this rally may well continue. On the other hand, poor or no outlooks could be catalysts for retesting March lows. The only thing that is now clear is the lack of clarity. But this lack of clarity is short-term. No one can predict whether the next 1000 point move on the Dow will be up or down. However, the next 7000 point move will definitely be up. If you are in the market for years and not months, then now is the time to look for value and bargains and to take advantage of the most difficult environment in more than 70 years. I would encourage you to check by blog at http://blog.etalonfund.com, which I try to update with recent market and company news at least a couple times a week. I wish you the best for the remainder of the year.

Home \| Company \| News \| Investors \| About Copyright © 2007 Etalon Investments, LP

Investment Documents

Financial Statements

Letters to Partners