Greece & a Potential Grexit: A Special Market Commentary – June 30, 2015

Greece's LONG debt crisis has intensified over the last couple of weeks. It is hard to believe the back and forth between the European Union and the Greek government has been going on for over 5 years.

Greece has closed its banks until July 6 and put capital controls in place after the government announced a July 5 referendum on the latest bailout plan extended by euro-area finance ministers and said it would recommend rejecting the deal. This amounts to the Greek government putting the choice to stay with the Euro currency up to a popular vote. Greece’s first set of debt obligations that may go into default are due to the International Monetary Fund on June 30. Note that the referendum is not set until the Sunday following.

Will Greece Leave the Euro?

If the referendum goes ahead and the Greek people accept the terms of the bailout (recent opinion polls point to this as a likely outcome), the Greek government has said it will abide by the wishes of voters. Given the austerity being asked for by Europe, it is difficult to see how the government can carry on in these circumstances. Greece’s creditors have already stated that they would have no confidence in the government’s ability to implement the required reforms.

Is it really a worst case scenario for Greece to exit the Eurozone?

It may actually be the best solution for both Greece and the rest of Europe in the long run. Greece would likely suffer from high inflation, a weakened currency, and a rattled financial system at first. However, once its currency stabilized and it started its own form of quantitative easing, all without the strict bailout rules currently in place, it could slowly put its economic and financial system back together.

While most of Greece’s external debt is held by the International Monetary Fund and the European Central Bank, very little is held by the private sector, all of which should be manageable in the case of a Greek default. The peripheral countries are in much better shape than they were several years ago, mitigating any signs of potential contagion.

In conclusion 

The rest of the periphery is likely to come under slight pressure, but the region has the tools—in the form of the European Stability Mechanism (ESM), ECB quantitative easing (QE) and Outright Monetary Transactions (OMTs)—to prevent volatility from spiraling out of control.

At our recent client update event, Scott Kubie, Chief Strategist with CLS Investments, likened a potential Greek default’s impact on the euro-zone to that of the city of Detroit’s bankruptcy impact on the total US economy. While he did note the relationship is not an exact corollary, he mentioned that the key would be for Europe to contain any possible contagion. And while he would expect some market volatility in Europe, he would also view this as a short-term buying opportunity.

Please be sure to reach out to us with any questions or concerns you may have, or if you believe an adjustment to your financial plan is warranted.

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Alliance Bernstein: “Greek Moves Test ECB Resolve on Europe” 

CLS Investments Weekly Market Review June 23, 2014

Perspectives from Above the Noise – Week of June 22, 2015

U.S. stocks gained last week, sending the NASDAQ Composite to 5,133 on Thursday, a fresh high surpassing even its highest intra-day record set back in March 2000. The S&P 500 ended the week within 20-points (0.1%) of its 2,130 all-time high set May 21, 2015. The week was noted by mixed economic data amid uncertainty over credit negotiations between Greece and its international creditors.

Economic highlights include a robust June housing market report that matched last September as the strongest reading of the recovery. Meanwhile, last Wednesday, the Federal Reserve showed it was in no hurry to raise interest rates and is waiting for more solid signs of growth before acting on its vowed lift-off of rate hikes by year-end. Notably, Fed policy makers issued their new quarterly forecasts, trimming this year's GDP outlook to 1.8%-2% from a March view for 2.3%-2.7%. Quite comforting to Wall Street, Fed Chair Janet Yellen said that no matter when the eventual rate normalization actually begins, it will be gradual.

For the week, including the effect of dividends, the Dow Industrials rose +0.66%, the S&P 500 gained +0.78%, and EAFE (Developed International) fell -0.40%.

Here are the 3 stories this week that rose above the noise:

Run on Greek Banks --National Post

"Greece’s banks suffered a €4.2 billion ($5.8 billion) run last week ahead of an emergency European Union summit called for Monday in Brussels on the country’s deepening debt crisis and the continuing standoff between Athens and its foreign creditors.

How much longer the country’s banking system can sustain such withdrawals before strict capital controls are imposed is one of many daunting questions facing Greeks. At stake is the country’s future in the euro, membership in the EU and the most painful question of all: whether the cradle of democracy might soon end up as a failed state."

When Will it Be? Forecasting the First Rate Hike -- The Wall Street Journal

"Goldman Sachs Group Inc. says the Fed won’t act until December.

The investment bank now sees the Federal Reserve raising interest rates for the first time in nine years at its final meeting of 2015, a revision from its earlier prediction that the long-awaited rate liftoff would come in September.

Prior to Wednesday, 72% of economists surveyed by The Wall Street Journal were calling for a rate increase in September, like Goldman.

The Fed’s so-called dot plot released Wednesday alongside its policy statement signals that the central bank expects rates to be lower for longer than it previously thought."

Second Quarter Earnings Outlook -- Zaks.com

"We are still more than a week away from the end of the June quarter, but the 2015 Q2 earnings season has already gotten underway. We have seen results from 7 S&P 500 members already and the tally will have reached 20 by the time Alcoa (AA) reports Q2 result on July 8th.

As has been the trend over the last couple of years, estimates for Q2 came down in the run up to this earnings season. This has prompted many in the market to hope that the negative revisions trend may have gone a bit too far, making it easy for companies to jump through. But judging from the market’s reaction to the admittedly small sample of reports, expectations may not be low enough. That said, it is way too early a stage to analyze the Q2 results."



Articles chosen and summarized by the Tower Square Investment Management team. Tower Square Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Tower Square Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. 
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of June 15, 2015

In 2015, retail sales data has been surprisingly soft given the boost consumers were expected to receive from lower gasoline prices. After five straight months of coming in below expectations, last Thursday's report on retail sales for May finally provided some encouraging evidence that the widely-anticipated second quarter rebound in economic activity might be taking hold. May retail sales rose by 1.2% and the prior two months were revised up by a net 0.6%. Sales excluding autos, gasoline and food rose a still healthy 0.8% on the month. After the upward revisions, retail sales in the three months including May rose at an annualized 5.1% rate versus the prior three months, indicating some solid if not spectacular momentum in consumer spending.

Events in the Greek bailout drama appear likely to dominate headlines in the coming week with news this weekend that negotiations appear to have broken down over the Greek government's demands for debt forgiveness. Although Greece represents a tiny portion of global GDP, a potential exit from euro could create extreme market volatility with somewhat unknowable consequences. Beyond short-term volatility, the most concerning development would be a sharp tightening of financial conditions in Europe which could severely erode the optimism that has surrounded the ECB's quantitative easing program and signs of increased bank lending.

Here are the 3 stories this week that rose above the noise:

The Fed Won't Ruin Bond Markets --Bloomberg

"With the Federal Reserve poised to unleash its first interest rate increase in almost a decade there's a debate among investors about whether the past is any guide to how markets will react to a monetary tightening.

Quantitative easing has seen the Fed's balance sheet more than quadruple in the past seven years to $4.5 trillion; the bond-buying program also means Treasury yields have been driven to record lows. Moreover, with the Fed Funds Target Rate stuck at 0.25 percent since the end of 2008, the market is full of fresh-faced traders with zero experience of buying and selling securities when rates were anywhere other than close to zero."

The retreat of 'peak oil' --Washington Post

"The recent OPEC meeting provides an opportunity to understand the mysteries of the global oil market. As expected, OPEC decided not to cut its oil production. Barring unanticipated developments, prices will drop, says oil analyst Larry Goldstein. Potential oil supply, including drawdowns from bloated inventories, exceeds demand. Goldstein rightly cautions, however, that no one knows where prices will settle.

First, oil demand is what economists call price inelastic. Slight changes in supply and demand can produce large price swings. People and businesses need fuel. If oil is scarce, they still need fuel and will pay dearly to get it. If oil is plentiful, they don’t need much more fuel and, therefore, require huge price discounts before buying more. This is what’s happened. Supply and demand have unexpectedly expanded the global surplus, reducing prices."

Putin's Risky Game of Chicken  --The New York Times

"As tensions between the West and Moscow sharpen over Ukraine, NATO countries have seen a dramatic spike in provocative actions that risk a harrowing accident or devastating miscalculation. A NATO-Russia military-to-military dialogue would reduce these risks — if President Vladimir Putin and the Kremlin allow it.

NATO has ratcheted down its political dialogue with Moscow in protest over Russia’s illegal seizure of Crimea and involvement in the conflict in eastern Ukraine. But the alliance should seek to engage Russia on a professional military level to minimize the danger of missteps or misunderstandings when their forces operate in close proximity or near each other’s territory."

1-Week Market Watch

DJIA       +0.28%
S&P 500 +0.06%
MSCI EAFE (developed International) +1.39%

Articles chosen and summarized by the Tower Square Investment Management team. Tower Square Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Tower Square Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of June 8, 2015

The past week saw some volatility in global asset markets highlighted by another sharp leg higher in bond yields. Last Wednesday's press conference with European Central Bank (ECB) President Mario Draghi was relatively uneventful but still managed to contribute to renewed volatility in global bond markets. Draghi dovishly reiterated that the ECB remains committed to completing its quantitative easing program and has yet to even discuss an exit strategy.

March and April's somewhat weak job creation was revised higher by a total of 32,000 net jobs and total payrolls are now up 2.21% year-over-year, the fifth best gain since the 1990s. The solid jobs data added to the longest stretch of job gains in the modern economic history of the U.S. - a streak which does not appear at risk of ending in the near-term. The solid jobs report contributed to a surge in 10-year Treasury yields, which ended the week at the highest level since September.

For the week, the S&P 500 lost -0.69%, the Dow Jones Industrial Average fell -0.90%, and the MSCI EAFE (developed international) dropped -1.71%.

Here are the 3 stories this week that rose above the noise:

Surge in Jobs Gives Fed Clearer Path to Raise Rates This Year

The likelihood of a Federal Reserve interest-rate hike this fall increased following an impressive rise in payrolls in May, providing evidence the U.S. labor market is re-accelerating following a weak first quarter. The U.S. economy added 288,000 jobs in May and wage growth increased. Federal Reserve Bank of New York President William C. Dudley is encouraged by the improving labor market, stating, “it is likely that conditions will be appropriate to begin monetary policy normalization later this year.”

The U.S. economy contracted by 0.7 percent in the first quarter, but the weakness is widely considered temporary and a result of harsh winter weather and the labor dispute at West Coast ports. Recent economic data has been supportive of faster economic growth in the second quarter, including better-than-expected growth in housing, construction, auto sales, employment, and manufacturing.

Why Fed Watchers May be Overestimating the Pace of Rate Increases

An article from the Wall Street Journal sheds light on the inner workings of the U.S. Federal Reserve and the power structure behind interest-rate decision-making. It points out that the Fed’s smaller Board of Governors (BOG), five of its Federal Open Market Committee’s (FOMC) 10 members, will control the rate paid on bank’s reserves held at the Fed. Since open market operations are no longer sufficient to drive the cost of borrowing in the federal funds market to the FOMC target, the BOG will be able to essentially set overnight rates. So, while improving economic data may increase the probability of an initial rate increase in the fall of 2015, since the BOG is considerably more dovish than the FOMC, Fed watchers may be overestimating the pace of rate increases because they are focusing on the wrong committee.

Involuntary Part-Time Work: Here to Stay? 

A research piece from the Federal Reserve Bank of San Francisco looks at one element that continues to suggest significant slack remains in the labor market, which is the prevalence of involuntary part-time work. The research attempts to separate involuntary part-time work into cyclical factors, which are likely to reverse as the economy strengthens, and structural forces which are likely to persist even when the economy is at full employment. The conclusion is that both cyclical and structural factors are at work, but importantly, it appears that cyclical involuntary part-time work remains very elevated relative to pre-recession levels. The implication of this finding is that slack remains in the labor market despite strong recent job gains. This slack is one reason to believe the Fed will pursue a very gradual path of interest-rate increases once it begins its tightening cycle.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of June 1, 2015

Recent signs of strength in the housing sector are one reason for some optimism even as U.S. manufacturing and retail sales data continue to disappoint. Last Thursday's report on pending home sales for April showed a 3.4% increase in contract signings, the fourth straight gain and the highest level of pending sales in 9 years.

The coming week will provide further evidence of whether the U.S. economy finally started to experience its long-awaited second quarter rebound during May. Key monthly data set to be released in the coming week includes the ISM Manufacturing Index and construction spending on Monday, factory orders on Tuesday, the Fed's Beige Book on Wednesday, and nonfarm payrolls on Friday. A number of key global events could also contribute to market volatility in the coming week. Several closely-watched central bank meetings are on tap, including India and the ECB. A highly anticipated OPEC meeting is also underway which could have a significant impact on oil prices and the first major debt payment deadline is approaching for Greece on Friday.

For the week, the S&P 500 lost -0.88%, the Dow Jones Industrial Average fell -1.21%, and the MSCI EAFE (developed international) dropped -1.82%.

Here are the 3 stories this week that rose above the noise:

Chinese Authorities Influencing Rise in its Stock Market

The spectacular rise in China's equity market has been a major story in international markets over the past 12 months. Along with evidence of excessive speculation that includes a troubling jump in the number of new trading accounts opened and the total amount of margin debt, there has been growing speculation that the Chinese government has played a role in encouraging the market boom.

A recent article on Quartz details some of the reasons why the Chinese authorities may be encouraging the rise in stocks, including the potential for heavily-indebted state-owned firms to swap debt for equity and to provide an offset to a stagnating real estate market. Recent government attempts to rein in the growth in margin trading has thus far, not had much impact on speculative activity and the potential major correction in China's frothy equity market is a risk in the second half of 2015. "

Don't Sweat the Fed: A U.S. Rate Increase Won't Unsettle Markets

The Federal Reserve is expected to raise interest rates by year end and the shift in monetary policy will not unsettle markets according to the Wall Street Journal Real Time Economics blog. The pace of monetary tightening is expected to be slow enough to not rattle markets.

The Federal Reserve is unlikely to implement an aggressive monetary tightening policy with a backdrop of mild economic growth, low inflation, and a soaring dollar. In Frederic Neumann's view, a bigger threat to global markets is an unexpected shift in monetary policy from either Japan or Europe. Neumann feels that is unlikely, but any mention of taper from the European Central Bank or Bank of Japan in the near term would shock global markets.

S&P 500 Valuations Still Lofty Per Sales, Earnings, and PE Multiples

With the S&P trading near all-time highs, many articles have focused on stock market valuation metrics being at levels above historic norms. A piece on See It Market takes a slightly different angle by examining corporate earnings rather than PE multiples.

Over the last ten years, S&P 500 returns have easily exceeded gains in both corporate earnings and sales. If earnings margins decline from today's lofty levels, top-line revenue will have to pick up the slack in order to maintain overall bottom-line earnings. Q1 2015 sales per share for the S&P 500 are on pace to come in $25 less than the prior quarter, despite a 45 bps increase in quarterly operating margins. Health Care and Financials are the two sectors responsible for the overall recent margin

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.