Archive for ND&S Updates

Memorial Day … Let Us Not Forget

May 26, 2015 

Another Memorial Day has come and gone. The official start of summer is here, and the charcoals from cookouts and barbecues are still warm.

But let us never forget the real meaning of Memorial Day – to honor those who have gone before us and paid the ultimate price to ensure our freedom and to secure the blessings of liberty. So we step back from the day-to-day noise of the markets and the mundane, and we say Thank You.

“We do not know one promise these men made, one pledge they gave, one word they spoke; but we do know they summed up and perfected, by one supreme act, the highest virtues of men and citizens. For love of country they accepted death. And thus resolved all doubts, and made immortal their patriotism and their virtue.”

James Garfield
May 30, 1868 Arlington National Cemetery


May 18, 2015 

While we constantly argue the three main rules of investing are patience, patience and patience, it is reassuring to know that what you are invested in should do well.  Along that line of thinking, we are encouraged that the current economic and market environments support the long-term thesis; returns for equities are better than fixed income while fixed income will do better than short-term investments.  To deviate from that understanding won’t be successful over the long-term.

There are many equity allocation decisions that can augment our basic philosophy.  The first basic decision is whether to invest more domestically or abroad.  Since most of us live here in the U.S., there tends to be more of a U.S. bias.  We encourage clients to think more globally while continuing to add to international equities.  Within equity sectors, health care and technology have been and should continue to be the most promising.  Additionally, banks and other financials should do well in a rising interest rate environment.  Sluggish economic data in the U.S. supports an increase in international investments while economic data from the Euro-zone continues to be positive.  This data also supports the belief that the somewhat higher market levels are not a major stumbling block. Of course there will always be bad news … here and around the world that affect the markets.

We come back to the main principals of investing stated above – patience, patience, and patience.  If you believe your strategy is sound, don’t be carried away by the current news of the day.

“The art of being wise is the art of knowing what to overlook.”William James

Improving Financials?

May 11, 2015 

Last week equity markets finished in the plus column thanks to a strong rally on Friday due to a monthly jobs report showing an increase of 223,000 in new jobs for the month of April. This news offset earlier news in the week that indicated that the trade deficit had increased to -$51.4 bn in the 1st quarter. The increase in the trade deficit resulted in economists reducing their forecasts for 1st quarter GDP growth from the previously announced 0.2% to as much as -0.4%. For the week the S&P 500 was up 0.44% and the DJIA was plus 0.97%. Growth continues to outperform value.

Interest rates rose for the week with the 10 year U.S. Treasury ending at a 2.16% up from 1.94% at quarter end. Financials were the best performing sector for the week rising 1.7%. Banks have turned from buying Treasuries to making more loans in March and April. The low yields on Treasuries has lowered banks’ net interest margins. As banks turn to higher yielding corporate loans their earnings are likely to improve.

“A day of worry is more exhausting than a day of work.”
John Lubbock


What goes up, must come down (or at least temporarily correct)

May 4, 2015 

A week ago in the early morning, the Bank of China considered local government financial assistance, which produced a 3% bounce in the Shanghai composite. However, the follow-on rally in the US was disappointingly brief, and our markets settled broadly lower. Consumer confidence, Iranian cargo ship capture, AAPL’s decline on good quarterly results, biotech second thoughts, Q1 GDP [0.2%A v 1.0%E] and disappointing social media results [YELP declined ~23%] all weighed on the market that day, and for the week [S&P -0.4%, Nasdaq -1.7%].

The only offset was the Fed action, which suggested that the token 0.25% FF rate increase will not take place in June [Sept or later]. Some even floated a trial balloon suggesting that target inflation should be higher than 2% [3% or 4% or??]! It is apparent that these “experts” know NOTHING about the 1970s [stagflation anyone?] and the subsequent hangover.

The extended period of zero interest rates [FF is at a nominal 0.25%] is producing the logical increase in debt. Corporate debt issuance is running at its fastest rate ever, following three years of record increases. Net corporate leverage is now 1.8x earnings, even higher than 2007’s 1.63x. Household debt is also rising, but is still 6.7% below its 2008 peak. Finally, stock margin debt is $476.4B, the highest level in at least 50 years..

Weekly Debt 5.4.15

It should be noted that corporate earnings are currently easily covering annual interest expense [11.02x v 9.43x], but of course this will last only as long as the Fed continues to distort the fixed-income markets.

Caveat emptor