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

Climbing The Wall of Worry

April 28, 2015

With the equity markets touching new highs last week (NASDAQ surpassing its March 2000 Tech Bubble peak and S&P 500 with a new closing high), and the uncertainty caused by international tensions, it would seem natural for investors to feel jumpy. Recent economic data certainly adds to the queasiness, as last week, March’s Durable Goods Orders were misleadingly positive. The 4% m/m move was lifted by temporary factors – including a 31% jump in civilian airline purchases and 42% boost in defense. Yet we see a number of factors which are more sanguine. Oil is down 43% from one year ago, which is good for global growth. Foreign governments are aggressively easing monetary policies … pushing down yields there to extraordinarily low numbers. As a result, the “low” yields here in the U.S. are actually higher than abroad, easing any pressure to sell bonds. This has strengthened the Dollar against foreign currencies, as money flows into our markets from abroad.

In terms of action in the daily issues affecting our local economy, we are thrilled to learn that the R.I. unemployment rate has dropped below that in Connecticut for the second consecutive month (RI is now 10th highest nationally). We give tentative applause to Governor Raimondo whose proposed jobs package should continue to emphasize job growth and economic development.

The calendar flips over to May on Friday, and undoubtedly you will soon hear or read the phrase “sell in May and go away”. Despite the noise, we are more sanguine that the six year bull market in equities should continue. We again reiterate the need for good research and a disciplined approach. Know your investments and remember the three basic rules of investing – patience, patience and patience. Avoid the quick buck mentality and think long term.

“A good leader takes a little more than his share of the blame, a little less than his share of the credit.”  – Arnold H. Glasow

Greece is the Word

April 20, 2015

Markets were off to a good start last week only to be derailed on Friday (DJIA down 279 points) by Greek default fears. Greece’s creditors are losing patience in Greece’s ability to make good on upcoming bond interest payments. A possible Greek default will, no doubt, raise concerns of a Greek exit from the Eurozone. It is likely that Greece will establish an emergency financing agreement, but how long can this Greek drama continue before seriously hurting European banks and impacting confidence in global growth?

U.S. economic data released last week were fairly disappointing: tepid retail sales, disappointing producer prices, weaker-than-expected Empire manufacturing numbers, poor housing starts, and jobless claims that missed consensus. Earnings releases during the week were mostly positive although a few bellwether companies reported lackluster results.

For the week, the Dow Jones Industrial Average finished at 17,826 to close down 1.26%. The broader-based S&P 500 closed at 2,081 for a loss of 0.98% for the week. The Nasdaq Composite closed the week at 4,931 for a drop of 1.28%. International markets fared better as the Dow Jones Global (ex US) Index inched ahead 0.18% for the week. The 10-year Treasury closed the week at a yield of 1.87% (down from 1.95% the prior week) as bond prices rose due to strong demand from Asian investors as well as poor economic reports.

The week ahead will see quarterly results from 144 S&P 500 companies along with economic releases for March Existing and New Home Sales and March Durable Goods Orders. Buckle-up …

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 gift of each day.

“There is nothing permanent except change.”Heraclitus

Weekly Commentary – 4/13/15

April 13, 2015

Last week, U.S. equities continued their advance with the DJIA and the S&P 500 both up 1.7% for the week.  International stocks continued their YTD outperformance as developed markets measured by MSCI EAFE were up 1.7% while emerging markets measured by the MSCI EM increased 4.24%.  On the negative side, bonds slipped slightly as the yield on the 10 year U.S. Treasury note rose to 1.96% from 1.92%.

In the news last week, we started to see some signs of life in the housing sector.  Weekly mortgage applications increased 7% for purchases after being mostly flat earlier in the year.  Strength in the labor force and in household formations should boost housing this year, as well as better weather.

This week, look for stronger retail sales numbers on Tuesday, also helped by better weather.  Analysts are estimating March retails sales to increase by 1.1%.  Earnings season begins in earnest this week with major banks reporting as well as General Electric, Intel, and Johnson & Johnson.  Overall, quarterly earnings may be disappointing as analysts are estimating that S&P 500 earnings will decline 2.9% and revenues to also decline 2.9%.  The stronger dollar and lower oil prices continue to play out.

“Most people have never learned that one of the main aims in life is to enjoy it.” – Samuel Butler

Bad News Equals Good News?

April 6, 2015

The markets shrugged off what was mostly disappointing economic news to finish slightly higher for the week. Headlining the negative news were weak employment and manufacturing numbers while geopolitical tensions continue to persist despite a tentative agreement with Iran on their nuclear program. Details from last week’s Labor Department report showed nonfarm payroll jobs grew only 126,000 in March (far fewer than expected which marked the smallest gain since Dec. 2013), a continued dip in workforce participation, and unemployment steady at 5.5%. ISM Manufacturing and factory orders were also reported last week showing a slowing pace of growth in the manufacturing sector … consistent with other indicators from the past few weeks (Durable Goods Orders). All of this seemingly negative news will likely push out the next Fed rate hike (good news for equity investors).

For the week, the S&P500 finished up 0.58% closing at 2,067 while the DJIA was up 0.53% finishing at 17,763. Smaller US companies measured by the Russell 2000 finished up 1.99% which continues to be aided by a stronger US Dollar. International markets also had a positive week, with the MSCI EAFE finishing up slightly at 0.01% and MSCI EM up 3.20%. The yield on the 10yr Treasury finished lower this week at a yield of 1.92%.

This past Tuesday marked the end of the 1st quarter which means two things: 1) Our Investment Committee at ND&S is putting the finishing touches on our 2015 1st Qtr Newsletter.  2) The Azaleas will be in full bloom at Augusta National Golf Club as The Master’s begins this Thursday.

Happy Spring!

“You swing your best when you have the fewest things to think about.”Bobby Jones

Two steps forward, one step back

March 31, 2015

The market’s intermittent upward movement was temporarily interrupted by last week’s 2.2% S&P 500 decline. This resulted in a so far meager 0.1% YTD increase which has been softened by the 3.3% year-to-date increase in the Nasdaq. From a technical perspective, the S&P 500 is below its 50-day moving average, while the Nasdaq is holding above its 50-day line.

The markets are dealing with a number of uncertainties: Flight 9525’s tragic demise, Greek finances, Middle East turmoil which includes a Saudi Arabian coalition bombing rebels in Yemen [what happened to US diplomacy’s shining “success”?], and the ongoing scramble to reach a nuclear pact with Iran. This constantly changing potpourri will continue to foment market volatility.

Finally, the passing of Lee Kuan Yew deserves special mention. He seemingly willed his post-colonial city state from poverty to prominence. He did not embrace Western political principals, but combined autocracy with meritocracy, the rule of law, and intolerance for corruption. The result is an economic miracle: Singapore boasts the world’s second largest port, a celebrated airline with 15 million visitors a year and a per capita income of over $50,000 [the highest in Asia].


“Behind every successful man stands a surprised mother-in-law.”Voltaire

Dollar Strength

March 23, 2015

Last week, both stock and bond markets advanced. For the week, the S&P 500 was up 2.67% closing at 2,108, while the DJIA was up 2.18% finishing at 18,128. International markets fared a little better as the MSCI EAFE finished up 4.02%, while the MSCI EM was up 3.21% for the week. The 10 year U.S. Treasury closed the week at a yield of 1.93% which was down from 2.13% the week prior. The most important economic news this week came from Wednesday’s Fed Meeting. As expected, the Fed removed the word “patience” from its post-meeting statement while also lowering its longer term unemployment rate projection to 5.1%. While this might allow more leeway in delaying a Fed Funds rate hike, we still believe we will see a rate increase at some point in 2015.

The dollar has appreciated 12% against the euro so far this year and 5.3% against the WSJ Dollar Index (as shown in the chart below). The strength in the dollar is negatively affecting the earnings of U.S. companies that generate a large proportion of their earnings from overseas. As a result, analysts are starting to reduce profit forecasts for the S&P 500. Last September, analysts were projecting profits to increase by 9.5% in the first quarter and 11.6% for the full year. Now they are expecting first quarter profits to fall by 4.9% and only increase by 2.1% for the year.

Dollar Chart

“Develop success from failures. Discouragement and failure are two of the surest steppingstones to success.” – Dale Carnegie

March Madness …

March 16, 2015

March madness is upon us – excitement, victory, and heartbreak … not unlike the markets!

Markets were quite volatile last week as they dropped for the third week in a row as pallid economic data and declining oil prices rattled investors. A slew of less-than-expected economic data hit the markets last week: U.S. retail sales fell for the third straight month, the Produce Price Index (PPI) fell 0.5% in February against an expected gain of 0.3%, Consumer Sentiment came in at 91.2 against an expected reading of 95, mortgage applications fell in early March, and oil prices plummeted to a nearly 6-year low. Perhaps the weather impacted a number of these data points, but it is tough to be encouraged by the overall tone of announcements. But all is not lost … a few positives from the markets and economy last week include initial jobless claims of 289,000 in early March along with relatively strong earnings reports. Most S&P 500 companies have reported quarterly earnings, and 68% of companies have reported better-than-expected results.

For the week, the Dow Jones Industrial Average finished at 17,749 to close down 0.56%. The broader-based S&P 500 closed at 2,053 for a loss of 0.80% for the week. The Nasdaq Composite closed the week at 4,872 for a drop of 1.10%. International markets fared even worse as the Dow Jones Global (ex US) Index dropped 2.06% for the week. The 10-year Treasury closed the week at a yield of 2.13% (down from 2.24% the prior week) as bond prices rose due to falling oil prices, troubles in the Eurozone and abnormally low yields overseas.

Chart 3.16

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 gift of each day. Spring is almost here …

Happy St. Patrick’s Day!

“Failure to prepare is preparing to fail.”  –  John Wooden