We made several changes to our portfolios today. This was not in response to the fiscal cliff situation. We believe that fiscal policy will continue to be a contentious issue throughout at least the first quarter. Any deal reached today or this week will only be a band aid that allows the two parties to continue negotiating a larger, more comprehensive solution. We don’t believe those negotiations will be easy or quick.

We have had a volatility hedge in place for some months using VXX which has produced a small loss for many of our clients. Volatility has only recently perked up but we felt it made sense, in light of other realized gains in our portfolios, to take some of the loss for tax purposes. We sold half the position. To maintain the risk profile of the portfolios we also reduced our overall equity exposure today. In our World Allocation portfolio we reduced our S&P 500 position from 10% to 8%. We chose to reduce large cap over small cap because we believe recent weakness in the dollar is temporary. Also in World Allocation, we reduced our position in emerging market bonds. The position has produced steady gains but we believe the monetary easing cycle in emerging markets is coming to an end. In Global Opportunities, we also sold half the VXX position and sold our position in BIIB. We had a fairly large gain in BIIB since we first purchased it in August of 2011 but based on expected earnings growth we now believe the stock is at least fairly valued and maybe slightly over valued. In addition, we have two other biotechs in the portfolio and wanted to reduce our exposure to the sector.

Much of what we did today was a response to sentiment changes. When we first put on the emerging market bond position the consensus was for continued robust growth. Several EM countries had eased monetary policy but consensus at the time was that it was only temporary. Obviously, that consensus proved incorrect and rates were cut several more times across most of the emerging market countries. As global growth faltered, income hungry investors seized on EM bonds as a source of yield that couldn’t be found in developed markets. It seems now that the EM bond bandwagon is quite crowded with investors unaccustomed to the normal volatility of these markets. If growth continues to recover, as we believe it will, EM central banks will likely begin a monetary tightening cycle that will negatively impact EM bond markets. With so many neophyte investors involved, if a sell off begins we believe it could be quite steep and rapid. We still have some exposure to these bonds but it has been reduced significantly.

Sentiment toward US equities has also entered a more ebullient phase with which we are becoming increasingly uncomfortable. The consensus seems to be that any deal that averts the short term issue of the fiscal cliff is automatically positive for the US economy and stock market. As stated above, we believe any short term deal will only mean continued negotiations well into the first quarter if not longer. In other words, the uncertainty surrounding fiscal policy will not be relieved soon. While we do believe that the US economy has a lot of potential long term positives, it appears to us that current enthusiasm based on a fiscal deal is unwarranted.