Archive for ND&S Updates

The End of QE?

October 27, 2014 

Last week, U.S. stocks posted their largest weekly gains in over a year. For the week, the S&P 500 rose 4.1%, the Nasdaq advanced 5.3%, and the DJIA was up 2.6% which were helped by strong company earnings. Through the end of last week, 200 S&P 500 companies had reported earnings for the 3rd quarter. At the current pace, it is on track for an advance in earnings of 5.6% which is ahead of expectations of 4.6%.

This week, the Federal Reserve concludes a two day meeting on Thursday and it is widely expected that they will end their bond purchasing program as previously announced. The 10 year U.S. Treasury yield rose to 2.27% last week as bond investors anticipate that the Fed will start to raise interest rates next year. However, given recent slowdowns in growth in China, Japan and Europe as well as a strengthening U.S. dollar, the Fed could delay rate increases beyond current expectations.

Dow Weekly

“Discipline is the bridge between goals and accomplishment”  – Jim Rohn

Volatility Continues

October 20, 2014 

The market [which by some measures has officially registered a “correction”] continued its downside volatility last week, with both the Dow and the S&P declining another 1%. The DJIA is now negative for the year, while the S&P is up a paltry 2.1% [and below its 200-day moving average].

The week was very volatile, with multiple intra-day reversals. The most significant occurred Thursday morning: the open was continuing Wednesday’s broad-based weakness [down another ~1% intra-day] until St Louis Fed President James Bullard suggested that the Fed should consider delaying the end of QE3 [scheduled to end at the next FOMC meeting]. Then the Minneapolis Fed President Kocherlakota amplified the dovish sentiment by claiming that there is more the Fed can do to maximize employment. The result was an immediate positive reversal such that the S&P closed flat for the day. The strength continued Friday with an additional 129 BP advance.

At the risk of being accused of “looking a gift horse in the mouth”, the following chart from IBD puts the Fed’s efforts since 2009 in perspective. The balance sheet may have more capacity, but it is currently ~5x historic levels, and no one wants the Fed to exceed its [admittedly indeterminate] maximum.

10.20.14 Fed Balance Sheet

“The prudence of the best heads is often defeated by the tenderness of the best hearts” – Henry Fielding

Pass the Dramamine…

October 14, 2014 

Markets fell for a third straight week as they continued their roller-coaster ride on news of a slowing worldwide economy (not to mention Ebola, geopolitical turmoil and other events …). Perhaps the markets were simply due for a set-back … regardless of the “reason” for the sell-off, investors are beginning to get a bit rattled by the increased volatility. The Dow has had triple-digit moves in 12 of the past 16 days. Pass the Dramamine.

For the week, the Dow Jones Industrial Average finished at 16,544 to close down by 2.7%. The broader-based S&P 500 closed at 1,906 for a loss of 3.1% for the week. The Nasdaq Composite closed the week at 4,276 for a decline of 4.5%. International markets did not fare much better as the Dow Jones Global (ex US) Index dropped 2.2% for the week. The 10-year Treasury closed the week at a yield of 2.30% as bonds rallied on a flight-to-safety into U.S. treasuries.

Despite the volatility (markets are only about 5% or so off there all-time highs …), we see the U.S. plodding along and doing reasonably well. International valuations have gotten cheaper, and we suspect the markets may find a bottom here within the next week or so. Third quarter earnings season begins this week, and we expect earnings to be reasonable. Vladimir Putin seems to be backing-off his ambitious plans in Ukraine, and oil prices and gas prices have fallen quite a bit (a relief for consumers and businesses).

As always, we urge investors not to get caught up in the day-to-day noise of the markets. Instead, focus on long-term goals and enjoy the beautiful foliage.

“I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.”

–  Jimmy Dean



October 7, 2014 

Given the abrupt and recent departure of Bill “The Bond King” Gross from Pimco, the topic of fixed income has dominated the front pages of every financial news outlet over the last week. In keeping with that theme, many investors have been lulled to sleep about the risks associated with fixed income securities due to the 30 year downward trend in rates (see chart below). When looking at a fixed income investment (i.e CD, Government Bond, T-Bill, Corporate Bond, to name a few…), investors need to be aware of two main risks; credit risk (default) and interest rate risk (rate fluctuations) which will be the focus of today’s commentary.

Duration is the most commonly used measure of interest rate risk on a bond or portfolio of bonds. Duration incorporates a bond’s yield, coupon, final maturity and any call provisions into a number expressed in years, which indicates how price-sensitive a bond or portfolio is to a fluctuation in interest rates. This relationship is pretty straightforward; the longer (shorter) the duration, the more (less) sensitive the bond or portfolio is to a shift in rates. For example, a portfolio with a duration of 3 years would be expected to lose 3% of principle if there was a 1% rise in interest rates, or gain 3% if interest rates were to decrease 1%.

Of course the most pressing question is where rates go from here. Inflation continues to be muted and shows no near term risk. Fed chair Yellen most recently mentioned she expects to keep rates down well into 2015. As Gross mentioned in this week’s Barron’s interview, rates are not only low in the U.S., but also around the world. Nevertheless, we recommend a diversified bond portfolio with an emphasis on short-to-intermediate duration and mostly higher quality credit. Be on the lookout for our 3rd quarter newsletter – The New Gulag

10.7.14 Rate Chart

“The main dangers in this life are the people who want to change everything… or nothing.” –  Nancy Astor