2Q 2010 Letter

07/02/10 -

• The R2000 declined -9.9% in 2Q10 and modestly outperformed the S&P 500's -11.4% decline by 150 bps.  Small-caps, however, underperformed in the quarter’s final month, June, by 250 bps.  The quarter’s 9.9% decline masked a more severe 18.3% decline from the R2000’s April 26^th high.  Small-caps rose 32 days in the quarter and declined in 31 days. After the April 26th high 60% of the days were down. YTD the R2000 is down 2.0% and the S&P 500 6.7%.
• After the R2000 has posted a 10% or worse return in a quarter, it has posted positive returns in the next quarter on 9 of 10 occasions.  The R2000 has posted negative first-half returns in five years since 1984, not including the current year.  It not post more than a +6% second-half return in any of those years.
• State budget cuts, Obama administration anti-business rhetoric and actions and the fear of ‘11’s higher taxes are trumping ample Fed liquidity and destroying confidence.  The Fed remains accommodative to fend off deflation but the end of Quantitative Easing affected markets and psychology.  Cash-rich firms are wary of new regulation, higher taxes and increasing health care costs and are not hiring.  Housing remains moribund.  Lumber fell -32% in the quarter and new and existing home sales floundered after the first-time home buyers' tax credit expiration despite record low mortgage rates driven lower by the recent flight to safety in U.S. Treasuries.
• Our 20-page note is full of interesting and unexpected details and not to be missed.