Today we are drawing the curtains on an interesting week. The much expected return of volatility finally materialized and most financial markets experienced moves not seen since 2011.

The S&P 500 ended up the week down only 1% but at the lowest point losses were in the 5% range.  The bond market also had a wild ride, with yields on the 10 year US Treasuries below 2% at the climax of the equity crisis and a close of the week at 2.2%.  Crude oil continues to re-price and WTI briefly went below $80 per barrel. It closed the week at $83.  As we reported in previous writings, the break-even level for many US shale producers seem to be in the $70-$80 range and it looks like the Saudis may be pushing to test that level on the back of slowing demand.

Related to energy, we have seen much action in the MLP space; the Alerian index, (AMZ) had a majestic turn-around. At the low of the week, the index was down over 10%, found a floor and just as quickly as it went down, it recovered to close the week up 2%.  At the lows, the correction from the YTD peak was in the 20% range, a level that historically has sparked short covering and value hunting.  Additionally, as the selling intensified, the spread between MLPs and 10 year Treasuries widened again toward 400 basis points, a level that usually indicates forward 12 month outperformance by MLPs. For those accounts with cash in reserve and allocations to MLPs, we picked up some additional exposure in diversified names with strong balance sheets.  We expect volatility to continue and we should see a retest in the next couple of weeks; we plan to take advantage of more dislocations as we do not see changes in fundamentals that may be affecting the long term story of the biggest players in the sector.

Another sector of interest for most of our portfolios is REITS which did well – the VNQ was up 1.5% - as it continues to bounce back from its lows of September.

In our quarterly letters to investors, we warned that a revival of volatility was in the works; stocks were a little expensive by many measures and QE was drawing to an end.  Interestingly, what turned the market around was a comment from the president of the Federal Reserve Bank of Saint Louis, James Bullard, on possibly delaying the end of bond buying as the global economy slows and volatility in equities resurfaces.  This kind of tug-of-war between negative news from Europe, China and Russia and calming statements from Central Banks will continue for the foreseeable future and contribute to keep volatility high.

Overall, fundamentals are still very positive in the US where earnings are coming in better than expected, jobs numbers are also positive and interest rates are still very very accommodative.  In Europe, we may also start seeing better news going forward as the ECB is going to start its asset backed security purchase program, the softer Euro may help exporting countries such as Italy and Germany and lower energy prices should work as a significant tax cut.

This week’s action was a great reminder that investing is a long term affair which starts with solid planning and continues with well thought out tactical management.