Market Commentary

There were simply few places to hide. For the most part, the Dow held in a range of 10,600 to 11,500 in the latter half of the period, with the past few weeks seeing it stays nearer the low end of that range. In all, that 30-stock index, which lost 241 points on the final day of the period, fell more than 200 points on 18 separate occasions in the quarter. It was dramatic and incredibly volatile three months in every respect-to say the least. All groups suffered, with the financial stocks and some cyclicals, notably the aluminums and the steels, taking a major drubbing on earnings concerns.

Barclay’s Intermediate Term Corporate Bond ETF returned 0.21% for the quarter ~ this was a rough period for fixed income and equity alike (The Barclays Intermediate Term Bond ETF had started May with a value at approximately the same levels it began July). During the quarter the Acadia Principal Conservation Fund was a blend of 67% negotiated bank money market deposit accounts and 33% investment grade corporate bonds with a 30 day SEC yield of 1.45% for the quarter. The bond component provides an incremental improvement to the yield but also brings some volatility: 30 day SEC yield for APCF in July -.36%, in August 1.54% and in September 2.98%. Since the Funds inception August 24, 2010 in a period fraught with investment uncertainty, its 30 day SEC yield is 1.22%.

As we focused on in our last quarter’s letter, the further unfolding Greek tragedy, and the other distressed euro-zone members, notably Italy and Spain continued to cause upheaval in international markets. There are also fears of slower growth in Japan and elsewhere in Asia, with worries of a possible hard landing in China making the rounds, as that emerging giant is seeing a slowdown in manufacturing. Finally, there are recession worries in this country as Congress and the White House continue to negotiate a fiscal stimulus that can stimulate aggregate demand in the economy.

In the immediate future, market concerns continue to revolve around the continuing concerns regarding Europe, Asia (principally China as manufacturing fell for a third month in a row for the first time since 2009), and economic and profit uncertainties in our country. A big question may be whether or not such unknowns are discounted-and to what degree-in the current low level of equity prices. How much of the economic and profit shortfall risk is baked into the market will go a long way toward gauging the future susceptibility of stock prices to disappointing news-which is almost certain to be seen at times during the fourth quarter. Credit markets will continue to march to the beat of a drummer that can’t help but favor US Treasuries and discount US Corporate debt in step, to some degree, with equity markets.

In fact, we sense that a good portion of these concerns-especially the mixed outlook for third-quarter earnings is already factored into the market. If that is, indeed, the case, the high level of pessimism now in place could be providing a buying opportunity for intrepid investors. We believe that fixed income investors in particular will be rewarded for wading into markets at this time, with equity investors seeing a continuation of a sideways trade until at the least the new year.

On the portion of APCF’s portfolio in money market deposit account, we have reduced the level of investment in any one bank so that it is fully protected by the Federal Deposit Insurance Corporation, meaning two thirds of the Fund is insured. We are also working to reduce the volatility on the bond component by selection of the market sectors we are invested in while maintaining investment grade securities at attractive rates.

We encourage all of our investors to reach out to us with questions as we close the curtain on 2011.