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The Midway Market Neutral Fund returned an estimated 2.15% in March, 7.41% YTD

Friday, April 09, 2010
Opalesque Industry Update - The Midway Market Neutral Fund returned an estimated 2.15%, net, in March, which brings our year-to-date net return to 7.41%, with minimal leverage. Midway’s rolling 12 month net return is 64.7%.

The prevailing environment requires careful study of potential policy changes. This is as essential for effective risk and portfolio management as is the study of individual mortgagor behavior. We believe that attentive study and selection will continue to yield interesting opportunities.

Market Commentary
The state of the housing remains largely unchanged. The Freddie Mac survey rate of 30 year fixed rate mortgages averaged 4.97% in March. The Case-Shiller index of housing prices declined 0.4% month over month for January. Housing prices may have appeared to have reached a local bottom in the past two months. Existing homes sales have declined from their high “tax rebate levels” in the Fall of 2009 and are again at recession levels (4.37 mil. annualized). They are expected to pick up again in April due to the extension of the tax rebate. Signs of the pick up can be seen in the February pending sales figures which increased 8.2% over January. Pending sales that are completed are reported as existing sales one or two months later.

The Obama Administration announced significant changes to its Home Affordable Modification Program (HAMP) in March. To date the number of permanent modifications resulting from the program has been modest (170K), although the program has picked up steam in recent months, and the number of trial modifications is now at 835K. The Treasury Dept. estimates that at least 3-4 million homeowners are in need of assistance. Some of the key changes to the program include 1) temporary assistance for unemployed homeowners while they search for employment, 2) a requirement that servicers consider principal write downs, 3) improvements to reach more borrowers with HAMP modifications, and 4) increased incentives to provide homeowners with foreclosure alternatives, such as deeds in lieu and short sales. The Administration has consistently stated that their goal is to offer assistance to 3-4 million homeowners by the end of 2012; their actions give every indication that they will do so.

The Federal Reserve’s $1.25 trillion mortgage-backed securities purchase program ended in late March. The program was started in November 2008 after the spread between 10 year Treasury’s and 30 year fixed rate mortgages doubled to nearly 250 basis points. The basis has widened only slightly since the program ended, reflecting the strength of the market for mortgage backed securities. We fully expect the Fed to continue executing an orderly strategy as it withdraws from the market.

Economic Commentary
This past month’s economic indicators continue to signal recovery. While the unemployment rate remained unchanged at 9.7%, nonfarm payroll employment increased a respectable 162K in March. Industrial production showed modest y/y growth for the second consecutive month (+1.7%). Economic activity in the services sector, as measured by the ISM non-manufacturing composite index, was at its highest level since June 2007 (Mar.2010 Index = 55.4). Inflation remains under control, with virtually no change in the CPI from January to February.

With a broad spectrum of economic indicators suggesting that a recovery is underway, a key question remains unanswered. How long will it take for the economy to reach full employment? The March non-farm payroll employment change was an important step in the right direction, but it was a very modest step. A total of 8.2 million jobs were lost from January 2008 through March 2010. Unless the pace of employment growth picks up dramatically over the next year, it will take 3 or 4 years for the employment to return to the level of January 2008.- KM Corporate website: Source

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