January 27, 2014


Last week equity markets were rattled by economic news out of China which indicated that the Chinese economy may be slowing even further. As a result on Friday U.S. markets had their largest daily decline in 7 months. The DJIA was down 3.5% for the week and the S&P 500 was off 2.6% for the week. 

Emerging market equities were hit even harder with most markets down 6% YTD as a slowdown in China lessens demand for commodities which are the main exports for many emerging countries. 

With question marks about the strength of global recovery we may be about to experience a more extensive correction than any that occurred in 2013.

“Nothing ever becomes real till it is experienced.”
-John Keats

The New Year and the Old Inflation Concern

January 21, 2014


The Market was mixed last week, with the DJIA advancing 0.1% while the S&P fell -0.2%. This continues the Year-to-Date pattern of flat to down markets, [only partially offset by advancing Nasdaq and Russell 2000].

One of the Market’s recurring concerns is Europe [in spite of its 2.0% YTD stock market performance]. The easy money crowd is focusing on the “low” 0.8% Euro inflation rate registered in December. In fact, The International Monetary Fund is now pressuring the European Central Bank to do something about the IMF’s deflation fears:

However, the IMF may be ignoring the difficulty of the ECB [which is not a single country central bank] instituting some form of Quantitative Easing. Moreover, individual countries occasionally need to endure falling prices in order to regain competitiveness. Finally, the Japan example does not really apply in this situation [perhaps more on that in future installments].

The market is off to a tentative start in 2014. Perhaps the 2013 market “borrowed” some performance from 2014, and we will no doubt see corrections this year, but the longer term trend is still higher.

“The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy. The true neighbor will risk his position, his prestige and even his life for the welfare of others.”
-Dr. Martin Luther King


Buckle-up – Let’s Make it a Good Year!

January 13, 2014


Equity markets were marginally higher last week on the heels of mixed economic news. Bonds rallied on a weaker-than-expected non-farm payroll report.

For the week, the Dow Jones Industrial Average finished at 16,437 to close slightly lower by -0.15%. The broader-based S&P 500 closed at 1,842 for a gain of 0.63% for the week. The Nasdaq Composite closed the week at 4,175 for an advance of 1.06%. International markets moved higher as the Dow Jones Global (ex US) Index gained 0.60% for the week. The 10-year Treasury rallied to close the week at a yield of 2.86% … down quite a bit from last week’s 3.00% yield.

 Most economic news released last week was fairly encouraging, including ISM Manufacturing, ADP employment data, and U.S. trade data. However, Friday’s nonfarm payrolls report was a big disappointment … expectations were for a gain of over 200,000 jobs, yet the reported gain was only 74,000. Of course, the bulls immediately declared the report an anomaly due to weather and holiday seasonality. Stocks sold-off a bit on the weak report, but bonds rallied on the hope that the Fed’s easing will be pushed out a few months.

Fourth quarter earnings season begins in earnest this week. Expectations for fourth quarter earnings point to 5% earnings growth and 3% revenue growth. We expect earnings to be more-or-less in-line with consensus.

Buckle-up … it’s a new year. As we state in our year-end newsletter, we expect increased equity market volatility (we’ve gone over 830 days without a 10% or more correction in the markets) as markets finish higher by year-end. Bonds should be less volatile this year as rates move gradually higher over the course of the year. Let’s make it a good year!

Ring out the old, ring in the new,
Ring, happy bells, across the snow:
The year is going, let him go;
Ring out the false, ring in the true.
~Alfred, Lord Tennyson, 1850

The Good News And The Good News

January 6, 2014


Who says we are only the bearers of bad new? Just about all the recent economic data has been encouraging. Factory orders are out today and they are up in November by 1.8%. This number was propelled (no pun) by huge aircraft orders, nevertheless, we’ll take it.  Consumer confidence jumped to 78.2 from 72.0. Their “expectations” number was the stronger of the two measures but the one disappointing area has been consumer spending. One thing to remember when the fourth quarter GDP comes out is that the third quarter was pushed unusually higher by a large buildup in inventories. Also the sixteen day Government shutdown is expected to knock off 0.6% from the GDP number. 

Now to our second favorite topic of the day-income investing.
Rules to remember- 

  • If the yield is extraordinarily high is that it’s probably too risky for you.
  • Be willing to accept lower dividend yields from companies that consistently raise their dividends-example GE and Proctor and Gamble.
  • Be wary of high fund management fees which eat into the yields.  
  • Diversify your sources of yield-use stocks, bonds, emerging markets, preferred stocks and MLPs
  • Don’t be obsessed with current yields to the detriment of overall portfolio structure.

“Ability is what you’re capable of doing.  Motivation determines what you do.  Attitude determines how well you do it.”
– Lou Holtz

Treasuries Hold Near Their Lows

December 23, 2013


After months of speculation in the press the Federal Reserve last week announced a very modest start to a tapering of its bond buying program. The Fed said it would reduce its monthly bond purchases by $10 billion per month from $85 billion to $75 billion. This modest reduction was well received by the stock market and with further positive economic news of 4.1% GDP growth in the 3rd quarter the S&P 500 advanced 2.4% for the week. So far, the S&P 500 is up 27% YTD and if it holds those gains till the end of  the year it will be the largest annual gain since 1997.

Bond price reaction was less enthusiastic with prices for the 10 year U.S. Treasury dropping slightly and the yield rising above 2.9%. Next year look for continued upward pressure on interest rates as economic growth and tapering continue. As for equities, most forecasters are looking for continued but more modest gains in 2014.

“To be a consistent winner means preparing not just one day, one month or even one year – but for a lifetime.”
– Bill Rodgers

One More Time: the Fed and QE

December 16, 2013

The market was flat last week, no doubt cautiously anticipating this weeks Fed meeting. Wednesday will be Bernanke’s last post-meeting press conference, since Janet Yellen will be confirmed as the next Fed Chairman [perhaps by the end of the week]. The week is doubly poignant, since the Federal Reserve System is celebrating its 100th birthday. The three living chairmen each played a pivotal role: Volker slayed the 15%+ inflation dragon, Greenspan kept it in check, and Bernanke [after initially tightening excessively] steered us through the 2008-2009 financial crisis and prevented deflation.

However, Bernanke’s Fed has deployed some extraordinary methods in an effort to accomplish these ends. Most recently, this includes an enormous asset purchase program. He has been adding $85 Billion of long-duration assets to the Fed’s balance sheet every month! This Quantitative Easing, part 3 [QE3], has to end … the question is when.

An increasing minority of Fed-watchers are expecting near term “tapering” of QE3. Others point out that although economic indicators are strengthening, fiscal and regulatory drag continues. Moreover, over the eight policy cycles over the last 40 years [since the stagflation initiated by Nixon’s wage and price controls], no major change in direction has occurred in the fourth quarter. Perhaps because no one wants to spoil the Christmas holiday!

“Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.”
-Margaret Mead


The Myth of America’s Decline-Why the Declinists Are Wrong Again

December 9, 2013


Our thanks to Yahoo/Finance for presenting Josef Joffe, an Economist at Stanford, for exposing the myth of America’s decline. He points out that the so-called Asian tigers and dragons are slowing themselves-Japan to 0%, Korea to 4%, and China to perhaps 7% and despite the dysfunction in Washington many of our states are stepping up to stimulate growth. North Dakota is one of the clearest examples. 

One reason for optimism is that inventors are busy and entrepreneurs are stepping up. Investment in research and development as a share of output matched the previous record set during the space race of 2.9%. The stimulus from shale gas drilling is felt in a number of states. We have 17 of the 20 finest universities in the world, 34 of the top 50 as well. Joffe uses the term “Brute Dynamism” to describe America.

Certainly there are concerns to overcome. For example the slow growth in wage income and the problems in Washington getting anything done, but perhaps the stock market is reflecting the good things going on in the world outside the beltway.


I don’t have a lot of respect for talent. Talent is genetic. It’s what you do with it that counts.”

-Martin Ritt



Giving Thanks

December 3, 2013


Markets eked-out gains last week as investors settled-in to celebrate Thanksgiving.

For the week, the Dow Jones Industrial Average finished at 16,086 to close up by 0.2%. The broader-based S&P 500 closed at 1,806 for a gain of 0.1% for the week. The Nasdaq Composite closed the week at 4,060 for an advance of 1.7%. International markets fared slightly better than the broad U.S. market as the EAFE Index (Europe, Australia, Far East) gained 0.8%. Emerging markets advanced 0.9% for the week. The 10-year Treasury closed the week at a yield of 2.75% … unchanged for the week. Crude oil prices fell 2% for the week (every 1 cent decrease in the price of a gallon of gasoline saves Americans $3.65 million a day).

This week is full of important economic data releases – Purchasing Manager’s Index, ISM figures, light vehicle sales, ADP payrolls, the Fed beige book release, factory orders, and non-farm payrolls for Novembers (very closely watched)). Overseas data include China’s PMI and the European Central Bank rate decision.

We expect a bit of volatility as investors lock-in gains and/or take losses for tax purposes. Conflicting economic news may confuse investors and take the market averages down a bit, but any correction will likely be shallow (3-5%).

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. 

“Gratitude is not only the greatest of virtues, but the parent of all others.”


Equity Markets Continued Their Advance

November 25, 2013


Last week the equity markets continued their advance with the S&P 500 adding 0.4% for the week and closing above 1800 for the first time.  Earlier in the week the DJIA closed above 16,000 for the first time.  This was the 7th straight weekly gain for the DJIA the longest streak since January of 2011.  Money continued to flow into stocks with U.S. equity funds attracting $548 million in new cash for the week.

While some analysts say the stock market is overvalued and the PE ratio for the S&P500 has risen from 12.7 to 15.1 during the year that is still near the historic average.  While a correction at any time cannot be ruled out the fundamentals of earnings, inflation and Fed policy are still positive. Strategists are taking a cautious but positive outlook for next year predicting an average increase of 4.1% based on modest increases in earnings and revenues for 2014.

Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational objectives. It is the fuel that allows common people to attain uncommon results.

– Andrew Carnegie

“Bubble Trouble”

November 19, 2013


The market moved from strength to strength last week, with the indices advancing an average of ~1.5%. The action started slowly since Monday was Veterans Day [the bond market was closed]. The midweek highlight was Janet Yellen’s confirmation testimony. This seems to have convinced the markets that Fed asset purchases will continue indefinitely [although she conceded that QE cannot go on forever]. The S&P is now up 26% so far this year, with the smaller stock averages up in excess of 30%. This is the best year for the S&P since 2003.

Barron’s cover story over the weekend did a good job putting this year’s advance in context: the broad market advance includes several pockets of exuberant excess [cloud, 3D printing, etc.], yet stocks are still the most attractive broad asset class. Note that the level of margin debt, investor complacency [VIX index] and cash levels are some indicators which do require close monitoring.

Market veterans advise to “never short a dull market”, but that is exactly what some experts now seem to be advising. This includes [by implication] Barron’s headline scribe: “Bubble Trouble?” and several CNBC gurus. Corrections can occur at any time, but this Bull market still has room to run.

The anniversary of JFK’s untimely demise provides us with an opportunity recall one of his many memorable quotations:

We dare not tempt them with weakness. For only when our arms are sufficient beyond doubt can we be certain beyond doubt that they will never be employed.”
 –John Fitzgerald Kennedy’s Inaugural Address