Initial Market Strategy

I mentioned at the beginning of this blog that I wouldn't be going into any detail on individual positions. However, I think it makes a lot of sense to talk in more general terms about the market. We had one of our investment team pow-wows yesterday morning and we agreed unanimously that the market would probably go sideways for a while. I think we are going to see a range of 1400-1550 for the S&P for quite a long time, probably for more than half of 2008.

There is no real catalyst in the near term to move the market out of this range either way. On the downside, the specter of the credit crunch still weighs heavily, as does the likelihood that we are already in an economic recession. Most of that is already priced into stocks in many sectors. On the upside, there are many companies that are growing like gangbusters right now, but their access to capital is tightening more every day. That growth will inevitably slow in a more pronounced fashion because of the aforementioned pressures.

So we are starting out exactly market neutral. We have built the portfolio so that movement in equity prices should have little to know effect on portfolio value. Volatility remains high, however, and we should be able to do very well with our use of options. With portfolio risk essentially removed, the real risk now is simply opportunity cost, which we are more than willing to accept for the time being. The ability to crank out medium-sized (but consistently positive) returns for awhile is not a bad thing.