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

Volatility Returns

September 29, 2014

Last week saw a return of volatility in equity prices as the DJIA ended a week with triple digit moves every day. For the week, the DJIA declined 1% and the S&P500 had a loss of 1.4%. Investors are increasingly concerned about the possibility of slowdowns in China and Europe, Middle East tensions and when the Fed will raise interest rates.

In economic news the third reading for 2nd quarter GDP came in at 4.6% and consumer spending rose 0.5% in August. Growth in the third quarter appears poised to come in at more than 3%. Growth will have exceeded 3% for three of the past four quarters if that happens. This week look for the monthly jobs report on Friday. Current estimates are for an increase of 215,000.


“Excuses change nothing but make everyone feel better.”
-Mason Cooley

A Feeding Frenzy

September 23, 2014

The 2014 Bull Market at least partially recovered its sea-legs last week, with the S&P rising 1.3% [producing an 8.8% year to date advance]. The Nasdaq recovered a more modest 0.3% [9.7% YTD], while the smaller-cap Russell 2000 declined a further 1.2% [-1.4% YTD].

Last week’s ND&S Update presented a list of potentially damaging upcoming events. So far at least, these developments have been collectively constructive. The Scottish independence campaign was rejected by 10%, which produced a collective sigh of relief. The Fed’s QE3 purchases were reduced to $15B/month [was $25B . . . and $85B two years ago] as promised, and the Fed continued to be vague about when the Fed Funds rate will be raised [this was better than recent pessimistic market speculation]. Note that the consumer prices report of a 0.2% monthly decline in consumer prices, “only” up 1.7% year/year, is consistent with the Fed’s stated game plan.

Finally, Alibaba came thru with the largest IPO of all time, raising $25B. This has produced a long list of wealthy early investors and many more private companies eager to take advantage of the wide-open IPO window.

Laissez les bons temps rouler.

The Fed, Scotland, ISIS, Russian Sanctions, and more … oh my!

September 16, 2014

Another volatile week as tensions around the world tempered investors’ appetite for risk.

All major market averages lost ground for the week – the first weekly loss in the last five weeks. For the week, the Dow Jones Industrial Average finished at 16,987.51 to close the week lower by 0.87%. The broader-based S&P 500 closed at 1,985.54 for a decrease of 1.10% for the week. The Nasdaq Composite dropped by 0.33% to close the week at 4,567.60. International markets could not fight the tide as the Dow Jones Global (ex US) Index gave back 1.75% for the week. After last week’s losses, market averages are still higher for the year-to-date period with the Dow Jones Industrial Average up 2.5% and the NASDAQ ahead by 9.4%. The S&P 500 is showing higher year-to-date gains as it is up 7.4%. The 10-year Treasury sold-off to close the week at a yield of 2.61% … nervousness around the end of QE (in October) and the upcoming Fed meeting prompted investors in bonds to take some profits.

Economic news released last week was mixed – stronger showings in the U.S. for consumer credit, retail sales and consumer sentiment were offset by disappointing data overseas. Geopolitical tensions and sanctions have, no doubt, impacted economic growth around the world.

The week ahead is sure to provide investors with a bit of excitement and anxiety (what’s new?). The Fed meets on Tuesday and Wednesday, and investors will anxiously await their comments (no doubt, in true Fed-speak) regarding future monetary policy. Scotland’s vote on independence will surely impact markets, and investors around the world await the results of the September 18th vote. Lastly, Alibaba’s IPO on Friday will create some excitement in the markets.

I’m William Wallace, and the rest of you will be spared. Go back to England and tell them… Scotland is free!
– William Wallace

QSS – Get Used to It!

September 8, 2014

To most investors the term QSS probably brings a major shrug, what is it?  Yet in recent years it has become a more closely followed economic indicator.  QSS is short for the Quarterly Services Survey and measures revenues for covered services industries.  QSS measures a surprisingly broad number of services- Utilities, Transportation, Information services, Finance and insurance, Real Estate, Administration and support, Education, Healthcare, Arts and entertainment, and Lodging.  A survey of approximately 18,000 services providers is taken.

QSS can have its calculation problems which impact the GDP report.  Government economists estimated a strong first quarter spending for healthcare based on Medicaid funding under the ACA.  After the QSS came out on June 11 the GDP had to be revised down to a – 2.9% contraction from a 1.0% drop.  It would seem the timing of the various reports could be better coordinated.   QSS is scheduled to be released 75 days following the end of each quarter.

It is anticipated that health care spending will show up as increasing in the second quarter, meaning that the GDP number might get a boost when the adjustment is made for QSS.  Stay tuned for further revisions in GDP.

“Yesterday is history, tomorrow is a mystery, today is God’s gift, that’s why we call it the present.”
-Joan Rivers

Mixed News

September 2, 2014

Last week U.S.  stock and bond markets continued their August advance. The DJIA rose 0.57% and the S&P 500 rose 0.75% for the week and 3.2% and 3.8% respectively for the month of August. The bond market also advanced with U.S. treasuries returning 1.06% for the month and the U.S. ten year treasury ending the month with a yield of 2.347% near a 14 month low.

In economic news, the 2nd quarter GDP revision was reported at 4.2%. Also, CPI numbers for the month of July were 0.1% and only up 1.6% from a year ago giving the Fed further breathing room on when they might have to consider raising short term interest rates. On the negative side consumer spending continues to be sluggish with consumer spending in July declining 0.1% from June. Consumer spending is about two-thirds of the U.S. economy.

Also, personal income only rose 0.2% in July. The smallest monthly increase this year. As a result some forecasters reduced their GDP growth estimates  to mid 2% rates for the 3rd quarter.

This week the major economic news will be the monthly jobs report on Friday which is again expected to be over 200,000 jobs for the month.

” The key to a winning season is focusing on one opponent at a time.  Winning one week at a time.  Never look back and never look ahead.”
-Chuck Noll

Advancing on a Wall of Worry

August 25, 2014

The stock market advanced ~1.6% last week, extending the advance that began August 7th.

Janet Yellen’s speech at the Fed’s annual conference asserted that the healthy drop in the unemployment rate was misleadingly positive [factoring in underemployment and the low participation rate]. It is true that motor vehicle production trends are temporarily depressing the number by ~15,000, but the big picture is that the Fed is still targeting mid-2015 for the first Fed Funds rate hike [internal dissention notwithstanding]. The markets did not significantly react to the speech [futures markets still expect an initial hike to 0.25% next June followed by 0.5% in Sept and ~0.75% by 12/15] , suggesting that the steady-as-she-goes stance is already built into the market.


On another front, the St. Louis Fed released its study on the experience of performance-chasing fund investors. As expected, following past returns result in asset-class purchases at their highs. This cost these fickle investors ~200 basis points over the first 12 years of the century. Buy-and-hold achieved a 5.6% return [thru 2012] while the return chasers could only get a 3.6% return.

Patience is its own reward.