Lucky Seven…

December 8, 2014

Markets finished higher last week for their seventh weekly gain in a row. Investors pushed stocks higher following a slew of positive economic news – better-than-expected Purchasing Managers Index, positive Institute of Supply Management reports on manufacturing and non-manufacturing data, and a robust non-farm payrolls report that showed 321,000 jobs created in November (wage growth of 0.4% was an added bonus). Lower oil prices should help to keep the US recovery on a slow and steady path forward. Unfortunately, many economies outside the Untied States continue to struggle. Data out of the Eurozone, Japan and China point to anemic growth, at best. For now, it looks like the United States is the only game in town; however, international valuations are getting more attractive (so a diversified portfolio will serve most investors well as the rally in the U.S. gets overplayed …).

For the week, the Dow Jones Industrial Average finished at 17,959 to close up by 0.7%. The broader-based S&P 500 closed at 2,075 for a gain of 0.38% for the week. The Nasdaq Composite closed the week at 4,781 for a slight loss of 0.4%. International markets did not fare as well, and the Dow Jones Global (ex US) Index dropped 0.8% for the week. The 10-year Treasury closed the week at a yield of 2.31% as bond prices fell following the strong U.S. jobs report.

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 holiday season.

“Success is getting what you want. Happiness is wanting what you get.”  –  Dale Carnegie

Oil Plunge Creates Winners and Losers

December 1, 2014

What was supposed to be a “quiet” holiday-shortened week, ended in a flurry with OPEC’s decision to maintain its 30 million barrels per day output despite the 5 month fall in oil prices. Despite the S&P’s energy sector being off -6.4% on Friday alone, the S&P 500 and DJIA managed to finish higher by 0.2% & 0.1% respectively for the week. Consumer Discretionary (2.5%), Technology (2.1%), and Health Care (1.8%) provided ballast for the markets this past week. Globally, the MSCI EAFE was positive 0.48% on speculation of a sovereign QE program from the European Central Bank. Given the volatility and choppy trading sessions, yields on the 10-yr U.S. Treasury moved lower to 2.18%.

Despite the volatility, we see the U.S. markets continuing to plod along as we enter a month that is historically positive for equities. Economic news continues to be encouraging as the second revision to 3Q GDP surprised to the upside (3.9% vs consensus 3.2%) last week. In the week ahead, we will be on the look out for PMI & ISM Mfg., vehicle sales, and employment numbers.

“I dwell in possibility”  –  Emily Dickinson

“Happy Thanksgiving”

November 24, 2014

Last week U.S. equity markets continued their advance. On Friday, China announced a surprise cut in interest rates and European officials suggested that they would expand their bond buying program. This contributed to a stock rally on Friday that resulted in the DJIA and the S&P 500 ending up 1% and 1.2% respectively for the week.

This week economic news is fairly light with reports on new home sales, durable goods orders and the second revision to 3rd quarter GDP due to be reported.

Early forecasts by strategists for 2015 equity returns are modest averaging about 5%. Most strategists are not looking for P/Es to expand as U.S. stocks are already at the upper end of fair value and the Fed could start to raise interest rates at some point next year. Many international markets are now selling at half the valuation of U.S. stocks and could react positively next year to any good news either economically or Geo-politically.


“The only thing we know about the future is that it will be different.”Peter Drucker

Onward and Upward

November 17, 2014

The year-end rally continued for a fourth week, with the S&P 500 climbing 0.4% while the NASDAQ jumped 1.2%. This latest advance has produced double digit Year-to-Date returns of 10.4% for the 500 and 12.3% by the NASDAQ. Note that the small cap Russell 2000 has not participated this year, with a paltry 0.9% YTD return. Also of note, international markets have not fared so well as the Dow Jones Global Ex US is -3.2% YTD.

The week encompassed several significant developments: oil prices continue to decline, prompting HAL/BHI to merge; consumer confidence and retail stocks are both stronger; another multibillion mega-bank fine was announced [$3bil+ for forex “manipulation”] while a regional bank merger was announced [BBT/SUSQ]; strenuous monetary “stimulus” has driven the Japanese yen down to a seven year low [their equity markets are up, but any durable economic response is yet-to-be-determined]. Finally, Russian troops have reentered eastern Ukraine.

Meanwhile, the Obama administration has launched a concerted effort to regulate the internet service providers [ISPs] as common carriers [ie: treat them like an electric utility]. The bureaucrats call this “net neutrality”. The industry response has been prompt and pointed. Randall Stephenson, AT&T’s CEO has announced a halt in high-speed internet spending until web rules are resolved.

These many developments netted out positive last week, but future volatility will no doubt be in both directions.

“… keep your head when all about are … losing theirs” Rudyard Kipling

Not so “Blue” Chips Advance Again…

November 10, 2014

Markets finished higher last week with the third weekly gain in a row. Stocks moved lower earlier in the week on a slump in oil prices, but the results of mid-term elections pushed stocks to record levels by the end of the week. Investors were encouraged by solid earnings reports, positive economic news and dovish comments from the Fed. Of course, mid-term election results seemed to excite investors, but history shows that it really doesn’t matter who gets elected (although a Republican congress along with a Democrat President seems to be a good combination… more gridlock?).

For the week, the Dow Jones Industrial Average finished at 17,573 to close up by 1.1%. The broader-based S&P 500 closed at 2,032 for a gain of 0.69% for the week. The Nasdaq Composite closed the week at 4,633 to inch ahead by 0.04%. International markets did not fare as well, and the Dow Jones Global (ex US) Index dropped 1.4% for the week. The 10-year Treasury closed at a yield of 2.31% as bonds were relatively flat for the week.

Despite the volatility, we see the U.S. economy plodding along and doing reasonably well. If history is any guide, U.S. stocks ought to do reasonably well over the next six months or so. The average rally in the S&P 500 for the six month period following the last 13 mid-term elections was 16.5% (according to global trading firm BTIG). Perhaps the market’s move higher going into the mid-term elections had already discounted the results. Nonetheless, we like the odds that the markets stand a good chance of being higher six months from now. Just think what would happen if the children in Washington could actually get something done…

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 relative calm in the markets while it lasts.

“If you can dream it, you can do it.”  –  Walt Disney



November 4, 2014

So how have you been doing you ask? Well the results are in and the scoreboard should tell you most of what you want to know (thru nine months). By far the best performing group was the REITs, or real estate investment trusts up 13.4%. Yet they were down in the 3rd quarter 2.5% indicating a possible reversal. The index most quoted about equities, the S&P 500, a good reflection of large U.S. companies, is up 8.3%. After that came the bond index, a steadying influence up 4.1%. Emerging stock markets were up a modest 2.7%. Moving into indices that were negative through nine months, EFA, the broadest international index was down 1.0%. The Russell 2000 which adds in the smaller US companies was down 4.4% (which led the charge in 2013) and commodities were down 5.6% due the deflationary environment most recently.

We can easily see the advantage of diversification illustrated in the periodic chart below. Last year’s winners does not equate to 2014 and so on. Our conclusion, stick to an investment mix that you and your advisor are comfortable using. You can fine tune it based on fundamentals that are clear and as always avoid dramatic changes based on the most recent headlines.

Here again is the year to date performance best to worst:

REITs +13.4%
S&P 500 +8.3%
Bond Agg. +4.1%
Emerging +2.7%
EFA -1.0%
Russell 2000 -4.4%
Commodities -5.6%

This data should help you understand better what your portfolio has done this year. Here’s to a good fourth quarter!!


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