Wednesday, July 30, 2014

Daily Bullets…..for July 30, 2014


·         GDP now a “concern”…..Commerce Dept this morning reported 2Q real GDP grew 4.0% which was stronger than expected. Consumer spending grew 2.5%, also ahead of expectations. Excluding inventory changes, GDP grew 2.3% vs. -0.9% in Q1. Core prices grew 2.0% vs. 1.2% in Q1. Domestic demand rose 2.8%, the strongest pace since 3Q-11 and up from 0.7% in Q1.
What’s the point? A stronger-than-expected GDP report today is causing consternation among investors that it may induce the Fed to raise interest rates sooner than expected. The “big guessing game” continues. The yield on the 10-yr. Treasury jumped 3% to 2.55%. No question, the report does reflect an improving economy. However, when excluding inventory changes that can be volatile from quarter to quarter, core growth was about 2.3%....OK, but certainly not booming. Employment growth in July, also reported this morning, was considerably below that of June. So is the economy on a new “boom path” for growth? We doubt it. Does it mean the Fed will dramatically accelerate its plans for raising interest rates? We doubt it. We think it portrays more of what we expected: continued gradual improvement in economic growth with moderate inflation. We doubt this will change the Fed’s longer-term view on its interest rate strategy, which we believe is more dependent on wage inflation and employment data. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140730&id=17816646

·         Importance of a financial plan….Good article in link below discusses mistakes many people make in long-term term retirement planning. A key point in the article is the importance of working with a financial planning and/or tax advisor to optimally position assets for retirement as well as post-mortem transfer.
What’s the point? The article, while short, provides a good summary of key mistakes people make in managing retirement assets: not having a disciplined savings plan, not properly managing/consolidating multiple retirement accounts, “raiding” retirement accounts to fund current expenses, and lack of estate planning. For many, if not most people, getting proper retirement and estate planning advice is critical. Good advice can significantly improve the likelihood of achieving one’s financial and life goals. Many people try to “go it alone” because they do not know that the benefits of financial planning can far outweigh the costs. Financial planning is a more complex process than people realize. Working with a competent advisor can pay for itself many times over in higher asset growth, fewer retirement planning mistakes, higher retirement income, and a larger estate, not to mention greater peace of mind and a more enjoyable retirement. Link: http://finance.yahoo.com/news/retirement-regrets--costly-mistakes-to-avoid-152725945.html

 

Tuesday, July 29, 2014

Daily Bullets …..For July 29, 2014


·         Slowing home prices a good thing……S&P Case Shiller 20-city home price index increased by “only” 9.3% in May, a slowdown from prior 4-5 months and considered worrisome by some.
What’s the point? There is a lot of news in the market today about the home price index. A 9% increase y/y is considered a “concern” because it’s a “slowdown”. Put in perspective, a 9% y/y increase is about 3x the long-term average for house price increases, which have run pretty close to inflation over the long term.  It should be no surprise why the housing recovery has been uneven: this economic recovery has been slower than any recovery in post WW2 era; wage growth has been restrained; and a younger demographic (millennials) has not been enamored with or financially able to buy a home.  A slowing in house price gains should be considered a good thing because it should help to improve housing affordability. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140729&id=17814629
 
·         Consumer confidence highest in seven y ears….Conference Board consumer confidence index rose again to a pretty strong 90.9 in July vs 86 in June. This is the third consecutive increase in the index.
What’s the point? Rising consumer confidence is a good leading and coincident indicator for the U.S. economy. We believe it reflects acceleration in job growth. This is further support for our belief that economic growth should accelerate and places the U.S. economy on a path for continued growth. This also has positive implications for many sectors of the economy and earnings for companies in those sectors. As corporate earnings are the primary driver of stock prices, this has further positive implications for stock prices. Despite the numerous technical indicators that are flashing warning signs, underlying economic fundamentals, at least in the U.S., continue to remain positive for stocks. One key risk would be a potential for economic growth to accelerate too fast, causing an unexpected rise in interest rates. The 10-year Treasury bill yield of 2.47% is still telling us that investors believe excessive growth and inflation are not yet a problem. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140729&id=17814365\

 

 

 

Monday, July 28, 2014

Daily Bullets….For July 28, 2014


·         “Cook Cumulative Tick” Flashing Red….A proprietary indicator invented and used by a highly successful investor, Mark Cook, is flashing a bear market signal for the stock market. This indicator, dubbed the “cumulative tick”, provided advance warnings prior to the 1987, 2000, and 2007 market declines.  It also helped indicate the beginning of the bull market in April 2009.
What’s the point? We are not a “technical shop”, but rather make our investment decisions for clients based on fundamentals, so we normally would not pay a lot of attention to a technical indicator, such as “cumulative tick”. The reason we mention this is because a) it is interesting, and b) it jibes with our recent decision to reduce U.S. equity exposure due to valuation that we believe has become “moderately high”. We have also become concerned about increased investor confidence and complacency which are a reflection of market conditions via sentiment. Another concern is the fact that the market has not had a true “correction” in almost three years, over two times the average interval between corrections. That said, we think the earnings and economic fundamentals remain positive, and as the article notes, there is no way to call the “timing” of the next correction. Our investment strategy is focused on diversification across multiple asset classes and is intended to reduce portfolio volatility and provide protection against declines in any one market, such as stocks. Link: http://www.marketwatch.com/story/stock-trader-who-called-three-crashes-sees-20-collapse-2014-07-28/print?guid=A7AFE6E4-1366-11E4-A7DB-00212803FAD6
 

·         5,844 M&A transactions valued at $1.04 trillion YTD…...Wow! M&A activity has been picking up significantly. The year-to-date total of $1.04 trillion marks the first time this activity has exceeded $1 trillion since 2007.
What’s the point? We have been forecasting for some time that the high M&A activity environment would continue this year, and recent data confirms this. This is similar to what happened in the late 1970s and early 1980s and is being driven by the same factors: low cash flow valuations and companies seeking to improve shareholder return through acquiring businesses that are undervalued based on cash flow. The article notes increasing M&A activity could be a “problem” because of low economic growth however, we don’t see it that way. We see it more as a result of institutional investors remaining cautious, which is contributing to the undervaluation of many companies based on sustainable cash flow and low interest rates. We believe the high M&A activity will continue as long as interest rates remain low. Link: http://www.marketwatch.com/story/what-the-ma-surge-says-about-the-stock-market-2014-07-27?dist=countdown

 

 

Friday, July 25, 2014

Daily Bullets…..For July 25, 2014


·         IMF forecast has interesting implications…In a new report issued earlier this week, the International Monetary Fund reduced its full year forecast for U.S. GDP growth to 1.7%, but maintained its forecast for a significant pickup in growth in 2H-14. It also forecasts that there is a high probability that the Federal Reserve will keep the Fed funds rate at zero beyond the middle of 2015.
What’s the point? First off, realize that the forecasting record of “high powered” economists (include the IMF) is pretty dismal. That said, if the IMF is correct in its long-term forecast for well below average U.S. economic growth and low interest rates, this has important implications for investment strategy, at least in the near term. The yield on the 10-year Treasury bill at under 2.5% is sending the signal that investors do not expect much in the way of significant acceleration in U.S. economic growth. We believe this implies more of the same with respect to stocks: more money coming out of bonds into stocks, and primarily into companies that generate high free cash flow. In this scenario, we believe the market could very well bid valuations for these kinds of stocks higher than they are currently, which would support a rising U.S. market over the next year or two. Aside from an exogenous shock, what could change this scenario might be a surprise spike in inflation or dramatic acceleration or deceleration of global economic growth. Right now, we think the odds of any of these occurring are fairly low. Link: http://www.reuters.com/article/2014/07/23/us-imf-usa-idUSKBN0FS1P520140723

·         Good report on June capital goods …….This morning, the Commerce Department reported July capital goods orders and shipments. Good news: “core” capital goods orders rose 1.4% following a 1.2% gain in June. Core capital goods shipments declined for the third month in a row.
What’s the point? The industrial sector is now a key driver for the U.S. economy. The fact that core capital goods orders are growing again after a soft (weather impacted) first quarter, is good news for the economy and future growth. Economists are concerned that core capital goods shipments are down for three months in a row. Offsetting this is rising backlog, which has positive implications for future shipments. We think the concern over shipments is misplaced and could very well reflect temporary perturbations in production due to ramping additional capacity, potential shortages of skilled labor in certain sectors, and some hesitancy on part of manufacturers to ramp capacity too fast. Overall, we’d view this as a positive report, supporting our view that U.S. economic growth should accelerate in 2H-14. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140725&id=17806424

 

Tuesday, July 22, 2014

Daily Bullets……for July 22, 2014


·         Dividend stocks aren’t boring……The author of this article points out that low dividends (or low dividend payouts) don’t necessarily lead to higher dividends at a later time, and that strong companies that pay a high dividend (dividend payout) are more disciplined in their capital decisions, which leads to higher returns.
What’s the point: This is a timely article for a number of reasons. First, it appears that the outperformance of small cap stocks is giving way to large caps and dividend stocks. We believe there are several reasons for this. One is investor anticipation of the Fed raising interest rates in 2015 This would theoretically reduce financial system liquidity which is a negative for small caps. Also, we believe investors have embraced the idea of a sustained “slow growth” environment (GDP growth of 2-3%), with low inflationary pressures and low wage growth. The yield on the 10-year Treasury bond at 2.47% is one manifestation of this view.  In this environment, we believe a paramount factor for investors is free cash flow, ability to grow free cash flow, and convert this into dividends ( and/or rising dividends). This is one of the reasons why we continue to favor large cap stocks and recently reduced our exposure to developing (smaller cap) equities. It is also a factor that is driving the current high level of M&A activity, which is another form of support for equities. An increase in interest rates by the Federal Reserve will have little if any impact on all this, in our opinion, as long as economic growth and inflation remain moderate, which we expect.  Link: http://seekingalpha.com/article/2327925-why-dividend-payers-arent-boring?ifp=0
 
·         Existing Home Sales Accelerating…..U.S. home resales in June rose to their highest pace in eight months, up 2.6% and above analysts’ expectation.
What’s the point? This is another positive for the economy. Housing is a major element of the economy with a significant multiplier effect. While housing data can be “choppy” from month to month, we think the trends in the data point to gradual improvement in the housing sector. This has positive implications for sustaining economic growth and corporate earnings, which is the key driver for stocks. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140722&id=17795033

 

 

 

Monday, July 21, 2014

Daily Bullets……for July 21, 2014


·         Fed wage gauge impacted by demographics….New Bloomberg News article makes the case that shifts in demographics are rendering traditional wage growth analysis less useful as an indicator of inflation or labor market pressures.
What’s the point? The Federal Reserve has historically closely followed wage growth as an early indicator of inflation. The article makes the case that the combination of more baby boomers working for lower pay and millennials working for entry-level pay is keeping wage pressures contained. It is an interesting analysis, but the ultimate reality is not changed: wage growth (for a variety of reasons) appears to remain subdued. Is it still a valid indicator for the Fed? We’d say yes.  This also has long-term implications for growth in consumer discretionary spending, which we believe will remain below previous cycles. The analysis also supports thesis that pockets of labor shortages in specialized areas could exert some inflationary impact over time. However, as of now there appear to be too many offsetting factors for this to turn into sustained, broad based inflation. Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140721&id=17790854

·         NABE Survey looking strong….National Association of Business Economist July survey results indicate improving sales outlook, steady employment outlook, and strong Q3 outlook.
What’s the point? Strength of the July NABE survey is good leading indicator for business and earnings looking into the third quarter. It supports our view that the pace of economic growth should accelerate in 2H-14, and along with that, corporate earnings. This is also another factor that should support higher stock prices, although we remain concerned about market sentiment and certain technical indicators that we believe have increased the risk of a market correction. We remain positive on the longer-term outlook for stocks. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140721&id=17789487

 

 

 

Wednesday, July 16, 2014

Daily Bullets……….For July 16, 2014


·         Factory output accelerating…..Federal Reserve out this morning providing June data on factory production which accelerated at its fastest rate in more than two years. Economists see this data as further evidence that U.S. manufacturing sector is strengthening and will drive economic growth in Q3.
What’s the point? Manufacturing sector, export growth, and housing are now among the three most important drivers of the U.S. economy. Reports in recent months indicate that manufacturing is leading the economic recovery, and business capital investment is expected to grow at over twice the rate of the overall economy. There are investment implications for this which implies a greater weighting in portfolios towards industrial and technology sectors, and somewhat lower emphasis on consumer discretionary, at least over the next year or so. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140716&ID=17779446&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

·         Homebuilder confidence surges….NAHB homebuilder confidence index increased substantially in June, reflecting increased confidence by homebuilders in the outlook for home purchases and construction, and that the housing sector may be regaining its footing and economists see significant pent-up demand for housing.
What’s the point? Housing is an important driver of the overall economy. The slowdown in housing over the past 18 months was due to combination of factors, including weather, job growth and higher mortgage rates, that held back the recovery. The fact that housing may now be poised to re-accelerate has positive implications for the overall economy. Economists predict the housing sector should grow at 2-3 times the rate of the overall economy in next two years. This adds further support to our continued belief that economic growth should accelerate in 2H-14 to a “moderate” pace of 2.5-3%. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140716&id=17780172

 
·         Fed policy to remain accommodative….In its bi-annual Senate Banking Committee hearings, Federal Reserve Chairwoman Janet Yellen provided insight into the Fed’s current thinking about the economy and interest rates. The comments reflect no significant change in either tapering of quantitative easing or ultra low interest rate regime. Yellen stated that while the economy is improving, there are still significant headwinds and areas of continuing problems that she believes warrant continued accomodative monetary policy.
What’s the point? Yellen’s comments were pretty much in line with expectations. Her comments regarding the economy continue to reflect the concerns the Fed has over long-term unemployment, consumer confidence, and the housing sector. Yellen intimated that the Fed would continue to be transparent about its policies and its views towards how changes in the economy will affect policy. This is more open than the Fed has even been, and we believe it is good thing as it helps to reduce market speculation and confusion over Fed policy, which can increase market volatility. So, it looks like “more of the same” of, in a word, “moderate”: moderate economic growth, moderate inflation, moderation in Fed policy, and continued gradual money flows out of bonds into stocks seeking higher return. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140715&id=17776187

 
·         June retail sales reflect improvement……Commerce Department reported that retail sales for June looked solid again, with “core” sales (ex autos) rising a solid 0.4% after  increasing by the same amount in May.
What’s the point? The June retail sales report reflects a consumer spending environment that is OK, certainly not booming. It does support the Fed’s view that the economy is improving albeit at a moderate pace. In her testimony today, Fed Chair Janet Yellen stressed that one of the Fed’s larger concerns is the low level of consumer confidence pertaining to job prospects and wage growth. Despite this, it appears consumer spending growth should remain “moderate” (2-2.5%) and should contribute to what we expect will be further moderate economic growth (2.5-3% range). Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140715&id=17775352

 

 

Monday, July 14, 2014

Daily Bullets……For July 14, 2014


·         Market entering “exuberance” stage: Berinyi…Interesting article out today from Bloomberg News that states that individuals are pouring money into the stock market based on increased “confidence” in stocks. Also, long-time market strategist Lazslo Berinyi of Berinyi, recently stated that the stock market is entering the fourth and final “exuberance” stage of the bull market.
·         What’s the point? “Contrarian” market lore claims that individual investors get back in to the market near the top, when their confidence has increased and they get tired of watching the market rise without benefitting personally; in other words, they start to react emotionally (in this case, greed).  Unfortunately, the “lore” has some validity (it also works in reverse at or near the bottom of a bear market).  This was one of the factors that led us to slightly reduce our equity exposure in Q3. Truth is, no one knows what the stock market will do, particularly in the near term. We believe the best way to manage wealth through the ups and downs of the stock market is through a disciplined approach that downplays the emotional aspect of investing, reduces the temptation to “time” the market, and focuses on appropriate portfolio diversification and fundamentally-based decision making. Studies show that properly diversified portfolios provide superior risk-adjusted returns over the long term compared with overly concentrated portfolios.   Link: http://finance.yahoo.com/news/individuals-pile-stocks-pros-bull-083111149.html

 

 

 

 

Friday, July 11, 2014

Daily Bullets….for July 11, 2014


·         Reduction in growth estimates for U.S economy……National Association of Business Economists (NABE) latest consensus forecast has downgraded their estimates for growth of U.S. economy for the second quarter from 3.5% to 3%. One of the factors cited for the slowdown is slower than expected consumer spending, which is forecast to grow about 2% vs. prior estimates of about 3%. Growth in exports in Q2 is also expected to be slower than expected at about 2.5% vs. previous estimates of 3%.
What’s the point? We continue to believe economic growth will accelerate in 2H-14. What is interesting is the downgrade in forecast for consumer spending. We think this is part and parcel of what has been dubbed “the new normal” economy, a euphemism for a slow growth economy led by a secular decline in growth rate of consumer spending. Aside from what you want to call it, we believe the “new normal” for consumer spending is real due to demographic changes, slower job  and wage growth, slower growth in government spending. Areas of the economy that should continue to grow at a stronger pace are productivity investments, technology spending, and business and industrial capital spending, all of which we think can grow at or over twice the pace of the overall economy. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140711&id=17767636

·         Fed closer to raising rates?.....Philly Fed President Charles Plosser stated this morning that the Federal Reserve may be closer to raising rates than people think given firmer economic and inflation data.
What’s the point? There has been much debate over when the Fed would begin raising (Fed funds) rate. The question is when, not if, and the financial markets are expecting the increase sometime in 2015. The Fed looks at the same data you and I do, for the most part, and financial markets will react to economic data long before the Fed makes a move (this has been the case for decades). No one can forecast the future. While the probability is the economy will strengthen, there are still many cross-currents that could hold growth and inflation to moderate levels, which would take some pressure off the Fed to raise rates. As we’ve said before, we think the Fed will be very transparent and communicate clearly, if not in advance, its goals for interest rates. This should reduce the potential for destabilization of the financial markets from unexpected Fed actions. The destabilizing forces would more likely be surprises in economic data. Link: http://www.reuters.com/article/2014/07/11/usa-fed-plosser-idUSL2N0PM1B220140711

 

 

 

 

 

Thursday, July 10, 2014

Daily Bullets for…………July 10, 2014


·         Job market improving……Weekly applications for jobless benefits fell to another of the lowest levels since 2007. In addition, layoffs in May fell to levels not seen since prior to the 2007/08 recession.
What’s the point? There is no question that the health of the job market in the U.S. is improving significantly. This improvement is a “two-edged sword” for the financial markets. The “good news” is it supports the outlook for an improving economy which, in turn, is positive for corporate profit growth. Corporate profit growth is the primary driver of stock prices. The “bad news” for the financial markets is that a stronger economy a) increases inflation potential and b) may force the Fed to act more quickly to raise interest rates.  These factors would most likely be viewed negatively by the financial markets and place further near-term pressure on stocks. There is good news though: a) even if inflation does pick up a bit, we don’t expect it to be severe or damaging-style inflation that was experienced in the 1970s; and b) in the majority of rising (interest) rate cycles over the past 50 years, stocks have risen due to rising corporate profits. The one exception to this was the 1970s “stagflation” period, in which the combination of super high inflation and rising rates overwhelmed stock valuations. So it is important to remember rising interest rates should not end the bull market as long as investors believe inflation remains moderate. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140710&id=17764577

·         Employment picking up in advanced economies……An analysis released today by the Conference Board indicates that employment growth is improving in just about all the European countries.
What’s the point? This is good news for the global economy,  particularly the fact that improvement in employment is not just limited to the U.S. This trend, if it continues, would support the idea of a synchronized global economic recovery, which we believe would be viewed positively by global stock markets. One key question though is how much of this is already discounted by the stock market? We think some of it is already discounted and the next big “hurdle” for the markets will be determining to what extent the economy can grow without inciting significant inflation. We are of the belief that economic growth can accelerate somewhat without inciting significant or damaging inflation. In fact we believe the Federal Reserve would be happy to see some uptick in inflation because it most likely would reflect a stronger economy. Link: http://money.msn.com/business-news/article.aspx?feed=PR&Date=20140710&ID=17765170&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

 

Tuesday, July 8, 2014

Daily Bullets….for July 8, 2014


·         “Stocks Retreat as NASDAQ Tumbles”…….Nasdaq is now off 2% from its recent cycle high of 4485. Euro 600 index is down 1.4%. Pressure on social media and biotech stocks today. Valuations considered “lofty” by some pundits.
What’s the point? We know the media loves sensationalist headlines for obvious reasons. A decline of 2% in two days is actually well within the long-term average interday volatility of about 0.97%. The market just completed one of the longest stretches of below average volatility in many years. One concern about this low volatility is this level of complacency may be reflecting a high level of both confidence and consensus thinking, which we think is problematic. As we mentioned in our recent quarterly investment meeting comments, we believe a number of factors point to an increasing risk of a market correction (defined as a pullback of 10% or more). Corrections are normal within bull markets and can be healthy for the market because they help to contain excesses. Despite increasing risk of a correction, the longer-term fundamentals remain decent reflected primarily in growing corporate earnings, moderately low inflation, and deliberate and highly transparent global central bank monetary policies. How can one best navigate uncertain markets? 1)Maintain a diversified investment portfolio that includes multiple asset classes (such as stocks, bonds, real estate, commodities, etc). Diversified portfolios such as this have shown to deliver superior risk-adjusted returns over the long haul. And 2) maintain a disciplined investment strategy in order to avoid the negative effects or temptation of trying to time the market. Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140708&id=17758067

 

 

Monday, July 7, 2014

Daily Bullets…..For July 7, 2014


·         New era for interest rates? …..L.A. Times article provides a good overview of current outlook for interest rates, summarizing many of the key arguments and factors. Their conclusion appears to be that despite ongoing concerns, interest rates will stay low for longer than many now believe.
What’s the point? There is raging debate currently about the secular outlook for interest rates: will they remain low or return to more normal levels of the past. As of now, we believe the preponderance of forces remain on the side of subdued inflation and low interest rates for an extended period. Why? To name a few reasons: global age demographics, global competition, technology advancements, restrained wage gains, restrained hiring of full-time employees, de-leveraging consumer leading to lower growth in consumer spending, tighter consumer credit, extended period of low monetary velocity. These are among many factors that the Fed monitors. Currently the Fed is not concerned about a return to damaging inflation and, we believe, would welcome a somewhat higher level of inflation presumably because it would reflect a strengthening economy. If rates do continue to remain low, as we expect, we believe this would support increased investor interest in high quality dividend-paying stocks which, in turn, would be positive for stocks in the longer term. Link: http://www.latimes.com/business/la-fi-interest-rates-20140706-story.html#page=2

 

 

 

Tuesday, July 1, 2014

Q3 Investment Strategy

We held our third quarter investment strategy meeting on June 27, 2014. The key issues now for the financial markets remain primarily Federal Reserve policy, the pace of global economic growth, concerns over slowing growth in China, and geopolitical factors (Ukraine, Iraq, etc.). It appears that both the U.S. economy and corporate profits are poised to accelerate in 2H-14, currently the “consensus” opinion. This is being viewed positively for stocks and is part of the reason why stocks are rising.

We are growing more concerned about the stock market’s ability to sustain its uptrend in the near term. We are more concerned about valuation and the growing consensus or unanimity of opinion that stocks are “the only game in town”. We view current valuation as “moderately high”, not enough to create a big problem by itself, but other factors are also somewhat unsettling. What are some of these factors?

We have not had a market correction (defined as a decline exceeding 10%) in almost three years, about twice the average duration between corrections. The extended condition of certain technical indicators may be signaling some near-term excess. The Fed is in the process reducing its bond purchase program thereby reducing a source of market liquidity. And while still low from an historical perspective, inflation appears to be accelerating a bit. While we believe the stock market remains in a secular bull trend, we slightly reduced our equity exposure as “risk management” against an increased potential for a correction.

Within our equity holdings, we maintained our strategy of focusing on large cap, quality dividend-paying stocks and further enhanced these holdings in your portfolio. We also maintained holdings in both health care and technology stocks as vehicles to capture sector growth and attractive valuation. We reduced exposure to developing U.S. equity in order to take advantage of attractive valuation opportunities in emerging market equities and European large cap stocks, to which exposure was increased.

Despite the recent strength in bonds, we continue to believe interest rates are in a secular uptrend. This means as interest rates rise, the current market value of bonds declines. The conundrum facing investors with bonds is achieving decent return and income while protecting against a decline in capital. We have been reducing the duration of our bond holdings as a way to reduce interest rate risk and we are not changing this policy. We did not change any of our fixed income holdings and our allocations to fixed income remained relatively stable, with a slight increase in emerging markets bond exposure as a way to increase overall yield.