Daily Bullets …………..For April 30, 2014

·         1Q GDP surprisingly weak……First quarter real GDP growth came in at an anemic 0.1%. This was primarily a reflection of severe weather which affected many areas of the economy. Consumer spending was relatively healthy at 3%. What’s the point?  1Q GDP is not a reflection of the economy’s future growth potential. Most of the recent economic indicators for March and April are reflecting an acceleration in economic activity. We expect this to continue, which has positive implications for corporate earnings. Link: http://www.cnbc.com/id/101627906

 

·         April job growth strong……More recent indicators of economy are strong, reflected in today’s April private sector new jobs report, which at 220,000 was stronger than expected. What’s the point? With March’s private sector jobs number revised up to 209,000, it appears the economy is accelerating, as we have anticipated. We think the stock market is already discounting to some degree, an acceleration in the economy. The positive case we see going forward is improvement in GDP growth to a moderate, sustainable pace, with moderate inflation, which is a positive scenario for stocks. Link: http://www.cnbc.com/id/101627638

 

·         Fed expected to further cut stimulus…The Federal Reserve is holding its FOMC meeting today and is again expected to continue the tapering of its quantitative easing (QE) program. What’s the point? This move will come as no surprise to the market, particularly given the recent spate of stronger economic data. One major concern for investors is that reduced QE could negatively impact stock prices due to lower liquidity sloshing around the financial system. It is a risk,  however, with an improving outlook for the economy, and continued strong corporate earnings and cash flow, we believe over time, the positive fundamentals and improving valuations can offset the gradual reduction on QE. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140430&id=17570511

 

·         Economists see improving outlook……Economists are expecting an acceleration in growth in the U.S. economy driven by improvement in business investment and job growth as the year progresses. What’s the point?  While we realize economists do not always have the best “crystal ball”, the current economist survey does support the work we do and outlook as we see it, that there is pent-up growth potential in the economy which will be driven by more people working and a gradual improvement in Europe. One potential "fly in the ointment" for global outlook: China. We are watching the slowdown in China, which does add an element of risk to global growth outlook. We think emerging market economies are more exposed to this risk, not so much the U.S. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140430&id=17570462

 

 

Daily Bullets......For April 29, 2014

·         PIMCO changing its tune on “new normal”……..We note that PIMCO, a large bond fund manager is now claiming the end of the “new normal”. Since 2009, PIMCO has been a loud proponent of the “new normal” thesis (meaning a period of sustained very low growth). PIMCO is now calling for a “new destination” economy, which means moving from sub-2% real GDP growth to above-2% growth. What’s the point? It was pretty clear months ago that conditions were coming together for an acceleration in the economy in 2014. Improving economic growth potential has positive implications for corporate earnings and also implies rising interest rates, which we expect. Link: http://www.bloomberg.com/news/2014-04-25/pimco-s-mather-sees-clear-departure-from-new-normal-economy.html

 

·         Low wage job growth still problematic….The article in link below points up one of the problems with the current economic recovery: a majority of the new jobs created in this recovery have been of the temporary and lower wage variety. What’s the point? The fact that much of the job creation in this recovery is lower wage has been a meaningful factor contributing to this unusually slow economic recovery. It is has contributed to below average consumer spending and low inflation so far in this recovery. Link: http://www.cnbc.com/id/101620663

 

·         Expansionary economy supports further market gains……In an interesting analysis out today, and an RBC strategist makes the case that the stock market should not see a serious correction until we enter a recession. What’s the point? We agree that 1) U.S. economy still has considerable room for further growth, perhaps several more years, and 2) there is further room for expansion in both earnings and stock valuations. We believe economic and earnings fundamentals support higher equity prices over the longer term. We would not be surprised to see the stock market up 10% both this year and next. Link: http://blogs.marketwatch.com/thetell/2014/04/28/bull-market-wont-die-until-a-recession-hits-rbc/

 

·         Sanctions not having much impact……The E.U. today followed the U.S. in imposing further sanctions on Russian officials and companies following recent Russian incursions into Ukraine. What’s the point? With the market up about 90 points today, investors do not seem to be overly concerned with either the new sanctions or their potential economic impact. It appears investors believe Ukraine is a fairly small factor in overall global economy and if Putin actually moved to annex Ukraine with force, there would not be significant longer-term economic fallout. Link: http://www.bloomberg.com/news/2014-04-28/u-s-aims-at-putin-s-inner-circle-with-latest-sanctions.html

 

 

 

Daily Bullets……….For April 28, 2014

·         Pending home sales turning………The rise in March pending homes sales is another indication the economy is improving following its winter-induced slowdown. Housing has also been impacted by higher mortgage rates and low inventory.

What’s the point? We think the slowdown in the U.S. housing market has probably bottomed and we expect housing sales and building activity should accelerate along with the overall economy. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140428&id=17543650

·         Asian Exports Slowing…….Wall Street Journal this morning offers an interesting analysis of export volumes out of Asian countries such as China, Japan, Korea and Taiwan. These volumes have slowed significantly over the past several years. The reasons? Sluggish global economic recovery, rising wages in these countries resulting in rising production costs. 

What’s the point? This trend has implications for secular growth for export-dependent Asian countries and further supports our concerns over growth in emerging market economies. We see the U.S. as fairly insulated from this due to the size and diversity of its economy and note that U.S. is experiencing a resurgence in domestic manufacturing. (no link)

·         Capital arbitrage rolls on……Barron’s magazine this weekend ran an interesting analysis of capital arbitrage that is still having significant impact on financial markets. What is this “arbitrage”? Low interest rates of the past several years have provided corporations and investors a low cost source of funding to make acquisitions, share buybacks and dividend increases; it is using debt to enhance shareholder returns (ROI).

       What’s the point?  Corporations believe they can achieve a better return for shareholders through capital arbitrage than through capital spending. We note that a similar “capital arbitrage” process occurred in the 1978-1985 period, which laid the foundation for a major secular bull market that began in 1982. We believe the similarities of today vs. 1978-85 are important and have positive implications for the stock market going forward. (no link)

 

Daily Bullets …………..For April 25, 2014

·         Ukraine pain……Market today took the situation in Ukraine a little more seriously following John Kerry’s more forceful comments and talk of increased sanctions placed on Russia by G7. So far, the market has taken the Ukraine situation pretty much in stride.

What’s the point?……..Geopolitical events have an impact on investor confidence and sentiment. Given the very mild impact reflected in today’s 0.8% decline, investors still generally believe the situation in Ukraine will not result in a more serious conflagration. We agree with this view. Link: http://www.bloomberg.com/news/2014-04-25/g-7-may-act-quickly-against-russia-as-accord-falters.html

 

·         Consumer expectations Improve….U.S. consumer sentiment data measured by the Thomson/Reuters-U.Michigan survey came in better than expected in March. The current conditions index rose to its highest level so far in this recovery, a very good sign for the economy. We have seen a pattern over the past several years in which these readings start strong then fade as the year progresses.

What’s the point?.......We think if employment growth remains good, the more positive sentiment should hold up. This should be positive for consumer discretionary stocks. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140425&id=17557688

  

·         U.S. manufacturers more competitive……In another encouraging sign for the U.S. economy, a new report shows U.S. manufacturers are continuing to become more competitive. This trend has been underway for some time but the BCG study of further confirmation is positive.

What’s the point?........Manufacturing is increasingly important for the long-term health of the U.S. economy especially when consumer spending may be restrained on a secular basis. Increased competitiveness of the U.S. manufacturing base means the companies will benefit from growth of both U.S. and foreign economies. This should translate into stronger earnings for these companies, and adds another buttress for U.S. economy and financial markets. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140425&id=17556412

 

 

Daily Bullets…….For April 24, 2014

·         Tech Bubble Redux…….Some pundits in the financial media are calling for another “tech bubble”. It makes for great copy and catches peoples’ attention. We’ve stated before that we think there are pockets of froth in areas like social media, but certainly not in “legacy” technology (i.e. storage, semiconductors, application software, etc).

What’s the Point? We do not believe there is a bubble in legacy technology. Our investments in technology are diversified quality holdings that we believe continue to offer value to our clients based on valuation and growth potential.

Link: http://finance.yahoo.com/blogs/breakout/david-einhorn-cries-tech-bubble-but-the-end-may-not-be-near-145245734.html

·         More positives for economy…….March durable goods orders were stronger than expected and well ahead of economists’ forecasts. “Core” capital goods orders (excluding defense and commercial aircraft orders) increased a robust 2.2% reflecting further broad-based expansion of the manufacturing sector following the weather-impacted Q1.

What’s the point? Manufacturing has been a key driver of the economic recovery. Given what we expect will be further restrained consumer spending, we believe growth of manufacturing will be important to sustaining the economic recovery.  Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140424&id=17548330

·         Economy at “inflection point”?…...One economist is stating today that the economy may be on verge of accelerating. He bases his opinion on recent strong earnings reports and outlooks provided by several large manufacturing companies. We agree that these earnings reports have positive implications for acceleration in the economy.

What’s the point? This information supports our earlier belief that the economy would continue to improve and, in fact, accelerate as we move through 2014. This also has positive fundamental implications for stocks, as it should help to sustain healthy earnings growth. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140424&id=17554648

 

·         Small investor returning to market?.......We noticed an article today that provided some data that small investors are stepping up their investment in stocks, or at least their activity in stocks. The article attributes this to increased confidence in the market on the part of retail investors.

What’s the point? Euphoria and high confidence levels on the part of small investors is generally viewed as a negative sign for contrarian investors. We don’t see this as a big problem now, however, it bears watching. Link: http://www.cnbc.com/id/101611794

Daily Bullets…….For April 23, 2014

·         Earnings beats…….We are in the heart of Q1 earnings reporting season and we note many large companies are reporting “better-than-expected” results. In most cases, companies are astute at playing the “earnings game” by guiding conservatively, then delivering upside results. Forward guidance therefore becomes more critical for investors and guidance remains conservative. The point? Earnings reports, while important, are not materially moving the market; it will be increased confidence in earnings expectations and economic data that we think will be more important in driving the market further upward, which by the way, we expect.

 

·         More Home Sales Data………New single family home sales dropped 15% in March, below economists expectations. Extreme winter weather had a significant effect on the housing market in Q1, which is  normally a seasonally softer quarter to begin with. We expect housing activity and data to improve moving into the spring. The point? All sectors of the economy ebb and flow in a recovery. We continue expect housing will be a significant driver of economic growth over the next several years. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140423&id=17548330

 

·         More China weakness…….An HSBC survey out earlier today indicates more weakness in the China manufacturing sector, reflecting both order and employment weakness. The point? We have been concerned about further slowing in the China economy. China has major global market significance. The hope is for an engineered “soft landing” in China. We believe China can achieve this but falling short of this would have negative repercussions for global financial markets. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140423&id=17546559

 

·         Europe strengthening……. A Markit PMI survey out this morning is showing business activity in the Eurozone running at a three-year high. This is encouraging and obviously a positive for the troubled Eurozone economy and has positive implications for U.S. export companies. The problem is the recovery continues to be very anemic and deflation continues to be a concern for Europe. The point? This should cause the ECB to continue its very accommodative monetary policy which could also limit a potential rise in interest rates globally. Accommodative monetary policy is generally positive for financial assets such as bonds and dividend-paying stocks. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140423&id=17546793

 

Daily Bullets……For April 22, 2014

·         Housing Bottoming………This morning, March existing home sales came in better than economists’ expectations. The housing market is beginning to accelerate following slowdown from the severe winter impact. The point? There has been too much made over the slowdown in housing which we view as temporary. We expect housing to be an important contributor to economic growth over the next several years. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140422&id=17543650

 

·         Housing in danger of “overheating”……Zillow’s economist is out this morning claiming the housing market is in danger of “overheating” in selected markets. There are pockets of excessive strength in certain metropolitan areas in which the economy has shown above average strength. The point? While there will be disparities among local markets, we don’t see these disparities curtailing the recovery in housing. Link: http://finance.yahoo.com/blogs/talking-numbers/why-ubs-predicts-a-spring-fling-for-the-housing-market-214030586.html

 

·         Investors still fearful of stocks…….Bankrate.com is out with a new study today showing about 75% of 1,010 people surveyed say they are no more likely to invest in stocks than they were one year ago or two years ago. Is it a bullish sign? Yes because it indicates individual investor sentiment is nowhere near the bullish extremes associated with secular market tops. The point? We think the current bull market has further to run; there will always be periodic corrections.  Link: http://www.cnbc.com/id/101599140

 

Daily Bullets…..For April 21, 2014

·         Nasdaq a little toppy?....There is some discussion in the financial press, notably Barron’s, that Nasdaq may be in the process of a correction. The Nasdaq is up 27% in the past year compared to 19% for the S&P500. There has been notable speculative froth in certain pockets of the market, namely social media, biotech and IPOs, most of which is centered on the Nasdaq. A “cooling off” of the Nasdaq “froth” should be viewed as healthy, but we note a full-blown correction in the Nasdaq could result in heightened market volatility in other sectors of the market. Link: http://online.barrons.com/news/articles/SB50001424053111904703704579501592502883378

 

·         Conference Board survey up again….Conference Board economist survey shows its leading indicators for the economy rose a healthy 0.8% in March. Survey indicates both hiring and consumer confidence improved. This is more in a string of recent data showing the U.S. economy is accelerating following the weather-induced slowdown in the first quarter. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140421&id=17539650

 

·         Some concern over earnings…….There is buzz in financial media this morning that some investors are concerned about pace of first quarter earnings. With only 15-20 companies having reported so far, it is way too few to be statistically significant. While Q1 earnings may have been impacted by the winter weather, we think accelerating economy should support stronger earnings later this year, which is positive for stocks. Link: http://money.msn.com/top-stocks/post--take-the-long-view-in-weak-earnings-season

 

·         Margin pressure? ……..National Association of Business Economics survey out this morning with report that businesses are seeing some increased pressure on material costs and labor input costs. The increase does not appear to be dramatic. It would be normal to see some upward pressure in these costs as the economic recovery matures. We are not overly concerned about margin pressures as we believe big companies still have multiple options for controlling costs, particularly technology investments and overseas sourcing. So far this cycle, increases in labor input costs have been mild, running around 1%. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140421&id=17538461

 

Daily Bullets……For April 17, 2014

·         Banks ramping up lending….In a very encouraging sign for the economy, the Wall Street Journal reports this morning that large U.S. banks increased commercial loans outstanding by a healthy 8.3% in the first quarter, suggesting both borrowers and lenders are becoming more confident about the economy. This is a significant positive for the economy in part because tight credit has been one of factors contributing to the slow economic recovery we’ve experienced. This is another factor that supports our outlook for acceleration in GDP growth this year (no link for this comment).

·         Pension problems….A large hedge fund, Bridgewater, stated on CNBC this morning that 85% of public pensions could fail in 35 years. It is a hypothetical and controversial view. It points up the serious problems with significantly underfunded public pensions, which is not new news. However, we expect the problem could lead to pension reform and potentially reduced secular economic growth. Link: http://www.cnbc.com/id/101575849?__source=yahoo%7Cfinance%7Cheadline%7Cheadline%7Cstory&par=yahoo&doc=101575849%7COutlook%20for%20pensions%20is%20p

·         More positive data points……..Closely watched initial unemployment claims came in a little better than expected, while Philly Fed Business Activity Index increased to its highest level in seven months. This data adds to a recent string of positive data that paints a picture of an improving economy, again in line with our previous expectations. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140417&ID=17529893&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

·         Hedge funds struggling……Interesting article out this morning on the continued struggles of hedge funds which, in general, have been badly underperforming. Why? Bifurcated and over-concentrated bets which, when wrong, have disastrous consequences. This is more support of Warren Buffett’s famous bet five years ago that the S&P500 index will beat hedge funds. So far he is correct by a long shot. Diversification works and is important in conservative and responsible wealth management. Link: http://www.cnbc.com/id/101592736?__source=msn|money|headline|headline|story|&par=msn

 

Daily Bullets…..For April 16, 2014

·         China GDP positive for market…….China reported its first quarter GDP rose 7.4% year-over-year compared with expected increase of 7.3%. Market response is positive and provides some relief over concerns of a significant slowing in China’s economy. Because of its enormous size, trends in Chinese economy have an outsized impact on the financial markets. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140416&id=17500759

·         Earnings beats today……A number of prominent companies, notably in legacy tech, reported better than expected earnings today. We also note several significant dividend increase announcements. Both are providing some lift for the market this morning. Dividend increases are an excellent indicator of company management’s confidence in the outlook for their businesses and cash flows. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140416&id=17528132

 

·         Industrial production improving……Federal Reserve reports this morning that industrial production rose 0.7% in March, better than expected. This adds to recent positive economic data such as retail sales, and indicates economic growth is accelerating from its weather-induced stall in 1Q, and supports our positive view for improving economy and corporate earnings growth this year….positive for stocks. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140416&id=17529893

 

·         Groundbreaking for new single-family homes….surged 6% in March, with multi-family declining 3%. Applications for new home purchases also rose significantly. There has been much talk of an emerging slowdown in the housing market but, as has been the case for this entire economic recovery, 1) housing will probably improve in an uneven pattern, and 2) there is a lot of pent up demand due to significant underbuilding in 2008-2013. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140416&id=17529893

 

·         Yellen comments having positive impact…..Federal Reserve Chief Janet Yellen made comments today that while economy is making progress on job creation there is still a long way to go. The implication is Fed policy will continue to remain accommodative and buttresses investor sentiment regarding Fed policy, which is positive for financial assets, such as stocks. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140416&id=17531322

 

Daily Bullets ………..For April 15, 2014 (Happy Tax Day)

·         Housing sentiment still flat……Homebuilder sentiment moved up slightly in March to 47, still in flattish pattern the past few months. Reason? Tighter credit, tight supply of buildable lots. Pent up demand for housing is increasing based on household formations and deep supply reductions of past several years. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140415&id=17526384

·         Shiller positive on housing…….Nobel economist and housing guru Robert Shiller said this morning he sees more momentum in housing market than the stock. While mortgage rates have moved up, affordability is still good. He believes it is possible home prices could rise 25% in next 3-4 years. Link: http://finance.yahoo.com/news/more-momentum-housing-stocks-shiller-141805700.html

·         10-20% correction: Stovall…… Sam Stovall, equity strategist for Standard & Poors, believes we could see a 10-20% market correction by the end of June. Why? Statistically speaking the market has not had a true correction (down 10-20%) in 2.5 years, way beyond the historic average of about every 18 months. His call is purely statistical in nature. Market corrections are normal and necessary to cleanse excesses and imbalances in the markets. Link: http://finance.yahoo.com/news/odds-favor-10-20-stock-195801126.html

·         Big banks need more capital: Yellen……Fed Chair Janet Yellen speaking at a bank conference this morning stated big banks rquire more capital to withstand periods of financial stress. One implication of this: perpetuates the “risk averse” mentality among bankers that could act as a drag on loan growth and, therefore, act as a drag on the economy. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140415&id=17525691

·         Obamacare may help bonds…..Bloomberg News has an interesting analysis that supports the view that Obamacare may actually be favorable for bonds because it will reduce the rate of health care inflation. Lower inflation would be favorable for bond prices because interest rates would not rise as fast. The irony is longer term rates could rise even if inflation remains low because of credit demands for funding expanding federal deficits. Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140415&id=17526095

·         CPI picks up a bit…..Labor Department report this morning that CPI increased 0.2% in March, up from 0.1% in February. Core CPI was also up 0.2% in February and increased 1.7% for 12 months. This may raise concern that inflation is “accelerating”. We hardly view 1.7% as heated inflation and we believe inflation will remain relatively subdued. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140415&id=17525585

 

Daily Bullets………..For April 14, 2014

• Good news on retail sales!.... March retail sales up 1.1% were much better than expected. The strength was across the board, driven by strong demand for autos, furniture, clothing, building materials, etc.  The really positive aspect is the breadth and reflection that economy and consumer spending, are performing well, and perhaps better than many expected. This supports our long-held outlook for the economy in 2014, unfolding as we anticipated, which has positive implications for stocks. Article link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140414&id=17521612
• Another positive sign for U.S. economy…..Job outlook: Reuters reports this morning that U.S. consumers are growing more confident about the job market as the estimated chance of finding a new job increased to 49.0% up from 46.1% in February. This is another reflection of improving consumer sentiment generally and has positive implications for both economy and consumer spending. Article link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140414&ID=17522768&topic=TOPIC_ECONOMIC_INDICATORS&isub=3
• “It can’t be done with current information at hand”…. Jim Cramer has an interesting article out this morning questioning why certain sectors in the market are behaving the way they have been in this recent market pullback (today notwithstanding). His ultimate conclusion is: you can’t determine from available data (as to why sectors such as machinery have done well if investors are concerned about the economy). Hmmm….. Could it be that fundamental investors, or what we would refer to as “strong hands”,  are looking through the near-term noise and are focused on what continues to be pretty solid economic fundamentals, particularly for the U.S.? We think so. Article link: http://money.msn.com/top-stocks/post--why-is-this-market-so-hated-and-feared
• More easing ahead for ECB? ……We note over the weekend, it was reported that Eurozone banks will only pay back 6 billion (Eurodollar) of their crisis loans, which is below the 8 billion that was expected. The implication is Euro bank liquidity is not improving as rapidly as hoped for. Should this be any big surprise? We think not. It reflects more of the same for Europe: recovery will continue to be slow, ECB policy will remain highly accomodative. Article link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140414&ID=17522672&topic=TOPIC_ECONOMIC_INDICATORS&isub=3
• Lower federal deficits…..CBO this morning is reporting it expects U.S. federal budget deficits to be nearly $300 billion lower than previously expected. CBO now expects federal deficit to reach a low-point of $469 billion, or 2.6% of GDP in 2015, then gradually rise to over $1 trillion in 2024. This has positive implications for interest rates near term, as it indicates that marginal demand for credit by U.S. government should ease somewhat in next year or two. It has negative implications for the longer term as funding of increased Federal deficits could place upward pressure on interest rates and remains a long-term structural problem for the U.S. Fortunately, our economy is large and resilient enough to handle a lot of this future financial “pressure” but it is problematic nonetheless. Article link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140414&ID=17522837&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

 

 

 

Daily Bullets….April 11, 2014

As we review the daily news, we see articles that we believe have particular significance for the financial markets and our investment policy. We highlight some of these for you in this column. Our goal is to post daily on these items, but we know realistically there may be days where it is not feasible. Please let us know if you have comments or questions !

 

·         Yesterday………….Dow down 267 yesterday. Why? Necessary and overdue adjustment to what was becoming a short term overbought condition reflected in speculative froth in pockets of the market such as biotech, social media, and stocks with nose-bleed valuations. Could this be the start of a bondfide “correction” (meaning 10-20% decline)? Possibly. But more likely it’s another in a steady series of periodic downward “adjustments” of 5-8%, of which there have been seven since March 2009 (or about every 6-7 months).  Article link:
http://finance.yahoo.com/blogs/breakout/market-nose-dive--major-indices-shed-recent-gains-200646218.html

·         And Today………….Today, through mid-day, market continuing its moderate pullback based on concerns over an earnings report from JP Morgan, follow through from yesterday’s declilne, and perhaps some concern over today’s PPI number. Article link: http://money.msn.com/business-ews/article.aspx?feed=OBR&date=20140411&id=17500759

 ·         Consumer sentiment improving……….The Thomson Reuters/U- Michigan's preliminary April consumer sentiment index came in at 82.6, the highest since July, and up from March final reading of 80.0. Both current conditions and expectations improved. This is in contrast to mixed retail sales readings we’ve seen lately  but is positive for the overall economy and supports the thesis for moderate but steady economic growth and consumer spending, the “goldilocks” environment favorable for stocks. Article link: http://www.bloomberg.com/news/2014-04-11/wholesale-prices-in-u-s-rise-more-than-forecast-on-services.html

·         U.S. Wholsale prices:   Wholesale prices in the U.S. rose in March. Excluding food and energy, the index increased 1.4% year to year following a 1.1 percent year-to-year gain in February. The 0.5% month-to-month advance in the WPI was the biggest since June. Despite what appears to be some acceleration in WPI, 1.4% continues to be very moderate inflation and well below the Federal Reserve’s target inflation of 2%. For a variety of reasons both cyclical and secular, we continue to see inflation remaining fairly subdued in 2014, which is favorable for financial assets. Article link: http://www.bloomberg.com/news/2014-04-11/wholesale-prices-in-u-s-rise-more-than-forecast-on-services.html

 

 

 

Q2 Investment Strategy Meeting Summary

We held our Q2 investment strategy meeting on March 28. The general investment landscape has not changed significantly since our December meeting. The outlook for U.S. equities remains positive. U.S.  economic and corporate earnings growth both remain healthy in 2014. After a weather-impacted Q1, we expect U.S. real GDP growth to accelerate to 2.5-3% by second half-2104. We see corporate earnings rising 8-10% and we expect inflation to remain subdued. While we expect the Federal Reserve will continue its taper of quantitative easing, we do not expect the process to be overly disruptive for financial markets.

There is some evidence of increased environmental risk reflected in recent pockets of speculative froth (particularly social media) and recent extremes in investor sentiment readings. There has also been considerable discussion recently in the media about the 5-year anniversary of the current bull market. The average bull market since 1945 has been about 4.5 years in duration. We acknowledge this “birthday” has significance, however, we continue to remain positive on underlying fundamentals that should support higher equity prices. Geopolitical factors, particularly Crimea and Ukraine, have also increased environmental risk somewhat. We are watching these developments, but as of now we do not expect a major impact on U.S. equities.

With respect to international investments, we continue to see a mixed picture. We think there is increasing risk of a further slowing in China’s economy that will have repercussions for global economic growth, particularly for emerging market economies. Europe has exited its long recession, however the growth outlook appears anemic and the recovery remains fragile.  For these reasons we continue to overweight U.S. equities in our investment strategy.

We still believe the secular bull market in bonds ended in July 2012 and that bond yields will most likely continue on a gradual upward path.  As we stated in our December commentary, the potential for rising interest rates renders bond investments less attractive. In order to reduce interest rate sensitivity in your portfolios we have focused on reducing durations by maintaining long and intermediate bond exposures at the minimal end of our allocation range.

With respect to changes in our investment models, within our U.S. holdings, we shifted more of our allocations towards value both in large and small cap equity exposure. We reduced weightings in our models to both international equities and REITs, and are now slightly underweight a normal allocation in those areas. Within natural resources, we added exposure to timber and forest products as we believe there is increasing potential for rising timber prices over the next couple of years. There were no significant changes in our fixed income weightings or holdings.