Third Quarter Performance and Outlook

This quarter marked my re-entry into the market, apart from one small position I've had for over 5 years. The positions were entered during the quarter, and thus each is a relatively short-term position of less than a month. The following is a summary of performance:

Positives (> 2% growth in quarter)
SOLR - $8.37, +3.76% change from purchase, 4.3% of portfolio
PALL - $56.38, +6.85%, 4.8%
JEF - $22.69, +7.78% change during Q, 2.8% (LT position)

Neutral (> neg 2%, < 2%)
HUN - $11.56, -0.43% change from purchase, 3.9% of portfolio
DBA - $27.48, -0.39%, 9.3%
Cash - 60.7% of portfolio

Negatives (< neg 2%)
TBT - $31.25, -5.66% change from purchase, 13.3% of portfolio
VXX - $17.29, -4.03%, 3.7%


Q3 Change in Portfolio Balance, net expenses - Negative 31 bps.

Potential Trades
The one position I am looking to change is VXX, which I expect to exit during a period of volatility in the next month. Otherwise I expect to be 90+% invested by year-end.

Macro Outlook
As worries about a double dip fade into the background, I believe investors appetite for risk may increase during the fourth quarter. The Federal Reserve likely lets the large growth in money supply continue to slosh around the world economies, encouraging inflation and bubbles in asset prices. Should equity markets begin to rally on the Fed's inflationary efforts, investors may increasingly shift funds away from bonds. The 13% position in TBT is designed to take full advantage of this anticipated swing. TBT has worked against me so far, but I remain confident it will ultimately prove profitable.

As rising inflation allays deflationary fears and creates the feeling of improving economies, I expect commodities and companies deep in the supply chain to rise first. The positions in PALL, SOLR, and HUN are designed to take advantage of this anticipated trend. Weaved into these positions are also high exposures to U.S. exporters and an effort to gain exposure to anticipated high growth industries, such as solar energy. A weakening dollar and health in developing economies are expected to aid exporters. I expect to put in additional equity positions on an opportunistic basis designed to take advantage of these trends.

Playing on rising inflation and improving developing economies is the DBA position, which should also diversify the portfolio somewhat into commodities not related to technology and industry. The VXX position is designed to take advantage of any near-term volatility in equity markets. I expect to be out of this position in a couple weeks, either because it worked or didn't.

Quick Company Outlooks
SOLR - FY11 (Mar) EPS guidance of $0.90-$1.00, FY12 EPS estimate of $0.89. FY12 appears quite conservative given SOLR's largest customer recently received new financing arrangements to make capital purchases. A P/E of 9x FY12 would appear to expect a slowdown in earnings, so any EPS increases should enjoy multiple expansion.

HUN - C10 EPS estimate of $0.45, C11 EPS estimate of $0.88. Analysts expect a robust bounce next year in earnings, although growth is skewed somewhat by a large special charge in 1Q10. A return to a more normal demand environment likely returns the EPS to well above $1. Estimates may prove aggressive in 2011 but with a 3+% dividend yield there should be support for stock. If estimates prove fair, stock should perform quite well with multiple expansion.