It is highly likely that a new secular bull market began in emerging markets in late November 2008. This does not mean that we do not have to be on alert for signs of renewed weakness in developing markets.

At the same time, there are many economic problems central to the systematic structure of our global trading partnerships. These problems are so ingrained that any new uptrend lasting long term in developed stock markets seems remote at this point.

But some areas of opportunities might be showing signs of opening. Recently, the ratio from dividing crude oil futures by U.S. natural gas futures (NG) prices reached its widest margin ever at 24.5 to 1. This was the highest ratio since the Nymex gas contract began trading in April 1990. Historically, it has varied between 6.5 to 1 and 10 to 1. In 2009, natural gas demand is plummeting and new onshore gas production from shale rock is setting production records.

As a result of such factors, generally we are buying assets showing strong relative strength to broader indices -- like the PowerShares QQQ (Nasdaq: QQQQ) -- after adjusting our portfolio beta on June 8 back to a more neutral weighting. We also are buying more of the JP Morgan Alerian Energy MLP Fund (NYSEArca: AMJ) on weakness.

At some point, being long NG, NG utilities and MLPs such as AMJ makes sense.

Another market to keep an eye on is mortgages. Alan Boyce is a business partner with George Soros and an expert on the mortgage market. Recently, he informed me that mortgage re-workings and the absence of marking assets-to-market would mute reported bank losses resulting from a huge wave of pending mortgage resets that hit in May 2010.

In summary, the recovery is likely to be anemic and below trend in developed markets. And there's a big risk that the debt bubble might hit the wall again in 2010, which raises the risk of a double-dip recession. We are long both reasonable and undervalued assets with strong relative price strength. We're also long assets with scarcity-resource value, such as AMJ. We are also long foreign regions and domestic sectors, such as QQQQ (soon), which benefit from their respective export markets and low debt burdens.

The British Broadcasting Company recently reported that China reduced its holdings of U.S. Treasury debt (TSY) by 3 percent in June 2009, the largest margin in nearly nine years. This move reaffirms our earlier view that China is worried about the value of its TSY positions. Recall from our earlier columns that the Chinese and other central banks have been shortening their maturities to a risk-adverse inflation posture.

Portfolio Exposures & Convictions

Figure 1 is composed of a focused list of indexes and assets classes and corresponding ETFs. Returns are through July 31 and Aug. 31. The AI 75/50 portfolio weightings are labeled in the third column. Red highlights are for sectors that were shorted through 2x inverse ETFs (also red in Figure 2). Our long equity ETFs are either overweight (OW) or neutral weight (NW) relative to the Dow Jones Global Index. The bond allocation is managed opportunistically and to enforce our desired risk exposure without reference to a bond index.

AI Portfolio Performance (Objectives should be evaluated over 36-month periods)

Like the Hedge Fund Research Global Hedge Fund Index (HFRX), AI’s secondary objective is to provide an absolute return (consistently positive return). As of Aug. 31, hedge funds are down -18.8 percent while the AI 75-50 Portfolio is up 12.6 percent since the S&P 500’s peak in October 2007. The AI 75/50 model has outperformed its benchmark, the HFRX and the S&P 500 during all periods shown in Figure 3.

AI 75-50’s primary objective is to capture 75 percent of the S&P’s upside and 50 percent of its downside, which requires us to hedge beta nimbly while maintaining core beta (equity and bond exposures). The portfolio’s 13.6 annualized standard deviation (ASD) is higher than that of the HFRX, but much lower than that of the S&P’s volatility since the market peaked in October 2007.

Performance, Recent Trades, Open Orders and Current Positions

We were up 0.6 percent for the month in July 2009.

We were down -1.2 percent for the month in August 2009 with a net year-to- date (YTD) return of 14 percent.

In July 2009, we made six trades. In August 2009, there were ten trades.

Figure: Option Trades

On July 1, we bought 5 long S&P 500 puts (SPXSO) with a strike price at $875. On July 18, SPXSO expired with no value. On Aug. 22, 5 long S&P 500 (SPXTO) with a strike price at $875 expired worthless.

Figure: ETF & CEF Trades

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