July 6, 2015

Last week, equity markets declined as uncertainty over Greece and a mixed U.S. jobs report rattled markets.  For the week, the S&P 500 declined -1.16%, small caps were off -2.67%, international stocks as measured by the MSCI EAFE index were down -2.76% while bonds were flat.  However, for the first half of 2015, the S&P 500 rose 1.23% while international equities fared better.  In fixed income, the US Barclays Aggregate is slightly negative year-to-date as interest rates have risen since the first of the year.  The difference in returns so far this year reminds us again of the importance of diversification.

Last Thursday’s jobs report continued the recent string of strong increases in job growth while it was somewhat disappointing that wage growth was stagnant and labor participation declined.  This continued underlying weakness in wage growth could keep the Federal Reserve to only one small interest-rate increase later this year.

The “no” vote in Greece this weekend only adds to the uncertainty of whether or not Greece will remain in the Eurozone.  We expect continued volatility in markets for the near term as investors evaluate the ramifications of a possible Greek exit.  Despite the short-term noise, we are still constructive on global equities moving forward. Enjoy the summer!

“Blessed are those who give without remembering and take without forgetting.” – Elizabeth Bibesco

The Greek Story Continues

June 29, 2015

US equity markets declined last week while international equity markets were slightly positive.  The National Association of Realtors reported on Monday that existing home sales increased 5.1% in May (from April).  The seasonally adjusted annual rate is now at 5.35 million, the strongest pace since 2009.  First-time home buyers are finally participating in the housing recovery as they represented 32% of all sales.  On Wednesday, the U.S. Department of Commerce released its third reading of 1st Quarter GDP, which showed that the economy contracted only (0.2%), much better than the previous reading of (0.7%) last month.  Despite the 1st Quarter contraction, GDP is broadly expected to pick up in the second quarter.  On Thursday, The Commerce Department reported personal income in May increased 0.5%, what was positive out of the report was personal spending which increased 0.9%, the highest reading since August 2009.

For the week, the broader-based S&P 500 closed at 2101 to finish down (0.37%).  The Dow Jones Industrial Average finished at 17947 which was down (0.34%) for the week.  International markets finished slightly ahead as the MSCI EAFE was up 0.91% for the week, while the MSCI EM was up 0.85%.  Yields continued to move upward in advance of fed rate hikes as the 10YR US Treasury closed at a yield of 2.49%.

Investors should continue to expect volatility as the Greek debt issue continues to make headline news.  Without an agreement that would trigger more bailout funds, Greece is almost certain to default on its 1.55 billion in loans it owes on Tuesday to the International Monetary Fund (IMF).  Despite the noise, we see the global economic expansion continuing.

“Weakness of attitude becomes weakness of character.” – Albert Einstein


June 22, 2015

A common theme since the 2009 stock market bottom has been our “Goldilocks economy” – it’s not too hot and not too cold.  This specifically refers to investors’ sense of the U.S. economy and interest rate levels.  Translation: GDP growth is mediocre, thus the Fed is reluctant to raise interest rates. We still have not seen the long-promised first rate increase.  Moreover, even when it does occur, subsequent rate increases will be gradual.  U.S. and foreign stock markets like this scenario.

Currently, the S&P 500 index is up about 3% YTD, which is a reflection of the uncertainty about where the economy and interest rates are heading.  Economic growth is emerging from its winter slumber and corporate earnings should pick up for the balance of the year.  Job growth is improving gradually, and the number of initial unemployment claims has fallen quite nicely.  Meanwhile current inflation numbers are still relatively benign – result: the “Goldilocks economy”.

Jobless claims


The strongest markets this year have been international, with the MSCI EAFE up 8.13%.  In the US, the NASDAQ is up 8.63%, sparked by health care and select tech names.  With uncertainty still extant, the markets seem comfortable with the current overall picture.

“The only place success comes before work is in the dictionary.”  –  Vince Lombardi


Greece is STILL the Word

June 15, 2015

The market ended the week slightly higher as stronger economic numbers offset some disappointing news out of Greece.  On Tuesday, the National Federation of Independent Business (NFIB) reported its latest small business optimism index rose to 98.3 in May, while also commenting 80% of small businesses trying to hire workers reported few or no applicants (tighter job market = rising wages = consumer spending).  On Thursday, the Department of Commerce reported retail sales for May increased 1.2% m/m (beating estimates of 1.1% gain), while the World Bank reduced its outlook for global economic growth this year by 0.2 percentage points, down to 2.8%.  This deceleration was due to a slowdown in emerging markets and lower than expected output from the U.S. due to a strong dollar.  On Friday, negative headline news about the failure of Greece and its European creditors to put together a debt pact weighed heavily on the markets.

For the week, the broader-based S&P 500 closed at 2094 to finish up 0.12%.  The Dow Jones Industrial Average finished at 17899 which was up 0.32% for the week.  International markets finished the week mixed as the MSCI EAFE was up 1.39% while the MSCI EM was down -0.22%.  Oil prices ended the week up, the dollar weakened slightly against the euro, and treasury yields were flat with the U.S. 10 Year Treasury closing as a yield of 2.39%.

Volatility is here to stay with Greece troubles and pending rate hikes here in the U.S. sure to provide extra talking points for everyone’s favorite news outlet this week.  As always, we encourage everyone to ignore the noise and enjoy life’s gifts each and everyday.

“We cannot solve our problems with the same thinking we used when we created them.”Albert Einstein

The Calm before the Storm

June 9, 2015

Equity markets mostly declined for a second consecutive week on lackluster volume. The Dow and the S&P fell ~0.8%, while the Russell 2000 managed a 1.2% advance.

The ongoing negotiations between Greece and its creditors provided much of the week’s headline risk: Monday started with debt settlement rumors [which were quickly scuttled], and the week ended with the Eurozone claiming that a Greek exit from the union would produce minimal disruption [a negotiating ploy?]. This ongoing dance can still move markets, but its power is slowly waning.

The International Monetary Fund made more significant headlines Wednesday morning, when IMF Director Christine Lagarde urged the Fed to delay its first rate hike to the first half of 2016. The IMF simultaneously lowered its 2015 GDP forecast to 2.5% [down from 3.1%], which is consensus. The trouble is that the Fed may be already “behind the curve”, suggesting that the eventual free-market price-discovery may be quite abrupt [Roubini calls it a “time bomb”]. Let’s hope that Ms. Lagarde is not successful.

“In a time of universal deceit, telling the truth is a revolutionary act” – George Orwell

This Summer’s Dance: The Shake & Shiller

June 1, 2015

With U.S. equity markets up slightly year-to-date and the equity bull market now rolling into its 6th year, economists, analysts, billionaire hedge fund managers, and investor know-it-alls will be continually asked the same question: Are stocks overvalued? … or better yet: When is the next correction? Yes, stocks are slightly overvalued, and corrections are inherently difficult to predict with any consistency. Goldman Sachs recently published a report proposing those same questions to economists Robert Shiller and Jeremy Siegel. Robert Shiller, well known for the Shiller PE Ratio which bares his name, considers the market overvalued (current Shiller P/E at 27X). We will have more on valuations in our 2nd Quarter newsletter…

Equities were fairly volatile last week as Federal Reserve action and U.S. growth concerns surfaced (another tough winter …?). On the economic front, the U.S. Census Bureau reported on Tuesday that non-durable goods orders in April decreased 0.5% (vs. expected 0.3% decline) while Core Capex (Nondefense Capital Goods excluding aircrafts) improved by 1.0%, which was above consensus of 0.3%. On Friday, the Commerce Department released its second (revised) estimate of 1st Qtr. GDP, which showed the economy contracted 0.7% (vs. 1.0% expected decline). Economist expectations are for growth to pick up in 2nd quarter as an improving job market, preliminary signs of wage acceleration, and still-low gasoline prices at the pump push consumer spending higher.

For the week, the broader-based S&P 500 closed at 2107 to finish down -0.86%. The Dow Jones Industrial Average finished at 18011 which was done -1.18% for the week. International markets finished even worse as the MSCI EAFE closed lower by -1.82% and while the MSCI EM was down -3.18% for the week. Oil prices ended the week relatively flat, the dollar strengthened slightly against the Euro, and Treasury yields were lower with the U.S. 10 Year Treasury closing as a yield of 2.12%.

Given that we are within percentage points from another market all-time high, one might be tempted to time a potential correction, but we would advise against such strategies. In fact, we would recommend the same thing we always do: That is buy and hold, buy and hold, and buy and hold some more … astute readers know where we are going with this. Now is a time that active management, diversification, and security selection will start to earn its keep. We suggest that one should ride out any volatility and maintain a pro-growth investment approach in-line with one’s risk tolerance and objectives. And don’t forget – buy and hold some more.

“Obstacles are those frightful things you see when you take your eyes off your goal.” – Henry Ford

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