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.

8 Wealth Issues: Investment Strategies

Why Globally Diversified Portfolios have (& should have) Lagged the S&P 500

Those who have heard me speak about the media’s influence on investor’s decision-making know that I believe in a phenomenon I call “The Creation of Crisis”—whereby 24-hour news outlets fill airtime by making “vital” news stories out of non-stories. These crises can have impact on investor behavior, which in turn has potential impact on investor’ process. This can also work the other way, and is why I believe many investors have felt frustration with portfolio performance throughout 2014.

In this month’s 8 Wealth Issues blog entry, I thought it would be a good idea to look at why continuing to emphasize the institutional process of investing is still a better idea than benchmarking against the S&P 500.

Diversification is essential, yet it comes with trade-offs. Investors are repeatedly urged to allocate portfolio assets across a variety of investment classes. This is fundamental; market shocks and month-to-month volatility may bring big losses to portfolios weighted too heavily in one or two classes.

Just as there is a potential upside to diversification, there is also a potential downside. It can expose a percentage of the portfolio to underperforming sectors of the market. Last year, that kind of exposure affected the returns of some prudent investors.

The media insists on reporting on about 1.5 asset classes: The Dow Jones Industrial Average & S&P 500 are both Large Cap US-based indices, and NASDAQ is a US technology-based index which has many Large Cap companies in it. It is a POOR comparison to any risk-based managed investment strategy.

Sometimes diversification hinders overall performance. The stock market has performed well of late, but very few portfolios have 100% allocation to stocks for sensible reasons. At times investors take a quick glance at stock index performance and forget that their return reflects the performance of multiple market segments. While the S&P 500 rose +11.39% in 2014, other asset classes saw minor returns or losses last year.1

As an example, Morningstar assessed fixed-income managers for 2014 and found a median return of just +2.35% for domestic high yield strategies. The Barclays U.S. Aggregate Bond Index advanced +5.97% in 2014 (that encompasses coupon payments and capital appreciation), while the Citigroup Non-U.S. World Government Bond index lost -2.68%.1,2

Turning to some very conservative options, the 10-year Treasury had a +2.17% yield on December 31, 2014; & Bankrate found the annual percentage yield for a 1-year CD averaged +0.27% nationally, with the yields on 5-year CDs averaging +0.87%; last year’s average yields were similar.3,4

Oil’s poor 2014 affected numerous portfolios. Light sweet crude ended 2014 at just $53.27 on the NYMEX, going -45.42% on the year. (In 2008, prices peaked at $147 a barrel). Correspondingly, the Thomson Reuters/CRB Commodities Index, which tracks the 19 most watched commodity futures, dropped 17.9% in 2014 after slips of 5.0% in 2013, 3.4% in 2012 and 8.3% in 2011. At the end of last year, it was at the same level it had been at the end of 2008.5,6

The longstanding MSCI EAFE Index (an International index tracking Europe and the Asia Pacific region) lost -7.35% for 2014. At the end of last year, it had returned an average of +2.34% across 2010-2014. So on the whole, equity indices in the emerging markets and the eurozone have not performed exceptionally well last year or over the past few years.7

Why favor an Institutional Process? I sometimes get the question “Why wasn’t I allocated more” to the best performing asset class? Active investment management with an institutional risk-managed process is about both tilting portfolios TOWARD perceived opportunities and AWAY from too much risk—given the client’s comfort with a particular level of risk. For most people an over-allocation to the Large Cap Domestic asset class may have shown to be an unnecessary amount of risk. History tells us that a patient, well considered investment process tied to goals based in a financial plan gives us the best probability of long-term financial success. It also gives the investor a better, more consistent experience. The downside to employing this process is the myopic view: In a year like 2014 when the S&P 500 does well and everything else doesn’t, your diversified portfolio also doesn’t.

In most year’s I do not hear complaints about why managed portfolio’s didn’t beat the best performing asset class. But when the best performing asset class is the only index the media tracks, I understand why it could become a question.

Perspectives from Above the Noise – Week of February 25, 2015

A key macro event of the past week turned out to be last Wednesday’s Fed minutes, which revealed a more dovish sentiment than suggested by the January policy statement. The minutes, at least temporarily, sent the dollar lower and halted the sharp rise in Treasury yields. Several Fed participants expressed concern that sluggish wage growth could continue to hold back consumer spending. Fed officials also worried that market participants were becoming too calendar-focused, meaning investors were trying to guess the month of the first rate hike, and there was little evidence that the Fed was preparing to signal a mid-year move. More surprisingly, though, were concerns expressed about the dollar’s strength being a source of restraint on exports, one of the first direct indications of such concern.

Investors had been expecting Greece to receive an extension to its bailout program and were not disappointed as the country’s new leaders largely abandoned hopes for a large-scale reworking of its rescue package. Under the terms of the temporary deal, Greece will now submit proposals for reform measures to the European Commission, IMF and European Central Bank for review.

For the week, the S&P 500 rose +0.63%, the Dow Jones Industrial Average added +0.67%, and the MSCI EAFE (developed international) gained +1.55%.

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

U.S. Existing Home Sales at Nine-month Low, Supply Limited

Sales of existing homes declined by 4.9% in January and fell to their lowest level since last April, according to the National Association of Realtors. All four regions of the country experienced a decline in sales, even though the 30-year mortgage rate dropped to a 20 month low. Low housing inventories were the main culprit for the decline in home resales. The low supply of homes for sale is limiting the selection of homes to potential buyers and elevating home prices, which is keeping many potential first-time homebuyers out of the market.

Opinion: Six Differences Between Now and Last Time Nasdaq was at 5,000

The NASDAQ Composite currently sits at 4,960, less than 1% away from the 5,000 level it last hit at the top the Internet bubble in March 2000. Many bulls are quick to point out that today’s market is not nearly as expensive as it was 15 years ago. This view is supported by a variety of valuation metrics including P/E (based on trailing 12-month earnings), cyclically-adjusted P/E ratio (CAPE), Price/Sales, Price-to-Book, Dividend yield, and q-ratio, all of which are at significantly more reasonable levels today.

However, using the internet bubble as the standard for market valuation is problematic, as according to many valuation measures, that period’s market top represented the most extreme overvaluation in U.S. history. In fact, if you compare today’s market versus a broader historic sample, you find that the current market is more overvalued than the vast majority of the bull-market peaks of the last century.

Bove’s Mortgage Market Concern

In a recent commentary, the well-known and extremely opinionated banking analyst, Richard Bove, describes his concern that reported losses at Fannie Mae and Freddie Mac have the potential to severely disrupt the mortgage market. In Bove’s view, the private mortgage market has been impaired, potentially permanently, by rules put into place after the financial crisis.

As a result, Fannie and Freddie have continued to play an integral role in the mortgage market in recent years. However, if lawmakers move to limit the growth of Fannie and Freddie to reduce the risks of future losses, in Bove’s view, this would severely disrupt the housing recovery. It is an important issue that warrants close watching in the coming quarters.

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 January 26, 2015

The major macro economic event of the past week came on Thursday morning, when the European Central Bank (ECB) unveiled its much anticipated quantitative easing program. Starting in March, the ECB will buy roughly €60 billion a month in a mix of government and other bonds on the secondary market until at least September of 2016. The bond-buying may actually last longer if the ECB is unable to boost inflation expectations, which is a key goal of this initiative. The program includes buying European agencies and sovereign bonds, and it complements the current programs the ECB already has in place.

European stocks continued their advance on Friday while U.S. stocks turned moderately lower as earnings and economic data came back into focus.

For the week, the S&P 500 added +1.6%, the Dow Jones Industrial Average gained +0.92%, and the MSCI EAFE (developed international) moved +2.64%.

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

Goldman Sachs Says Stay Invested in U.S. Stocks

Despite the six-year run in U.S. equities and current valuations sitting at the high end of historic norms, Goldman Sachs private bank continues to recommend that U.S. clients invest 80 percent of their assets in U.S. investments. Sharmin Mossavar-Rahmani, chief investment officer for Goldman Sachs private bank, expects the Fed will begin raising rates by mid-2015, however this alone will not signal the end of the bull market, as the S&P 500 has historically peaked 18 months after the Fed starts raising rates.

Interestingly, Mossavar-Rahmani believes that Japanese and European equities are attractive tactical plays given their cheap valuations and the potential benefits from Bank of Japan and European Central Bank monetary stimulus. While this weekend’s Greek election raises a red flag, Mossavar-Rahmani doesn’t believe that Europe’s rising populist parties will lead governments for an extended period.

Greece Chooses Anti-Austerity Party in Major Shift

An article from The New York Times provides a good summary of the Greek election results on Sunday that saw the anti-austerity Syriza party win a decisive victory. Despite a potential showdown over the terms of Greece’s bailout package, market reaction to the election results has been muted with last week’s European Central Bank announcement of a large quantitative-easing program soothing investors’ concerns over risks of a renewed financial crisis.

There are two reasons the Syriza party victory in Greece is important for investors. First, its leader Alexis Tsipras has a clear mandate to negotiate an easing of austerity imposed by Brussels and the International Monetary Fund and to write off at least some of the country’s massive public sector debts. Second, the victory is significant since younger, anti-austerity parties are on the march all over Europe, with anti-austerity movements in Spain, Italy and Portugal also gaining traction.

If Syriza were to win its negotiations with the rest of the Eurozone, these other anti-austerity parties would look more credible to voters. So why aren’t investors in a state of frenzied panic? The most likely reason is that many believe reason will prevail and Berlin will sanction a write-off of Greece’s excessive debt. Here’s an important point: outside of Germany, it is almost impossible to find an economist or central banker who believed the previous reconstruction of Greece was ever going to work. Uncertainty over the future direction of the Eurozone is likely to remain a source of volatility for global asset markets in 2015 and beyond.

Yes, a Northeast Blizzard Can Slow U.S. Economic Growth

Severe winter weather can negatively impact economic growth, especially when snowstorms hit a heavily populated area with a lot of economic activity. New England is dealing with a blizzard this week and if economic activity is slowed for even a short period of time, the impact may be seen in first-quarter GDP data. Last year, unusually harsh winter conditions resulted in a 1.4 percent reduction from first quarter GDP growth, according to economists at Macroeconomic Advisors.

Payroll growth also slowed in the first quarter of 2014. Harsh winter conditions negatively impact the economy in the near term, but often result in an economic rebound when the weather improves, as seen last year. The U.S. economy grew by 4.6 percent annualized in the second quarter, following a sharp contraction in the first quarter, displaying that economic activity was delayed and not eliminated because of severe weather.

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.

RETRO-Spectives from Above the Noise – 2014

The 3 Major Stories in the Global Economy for the Year

I would like to wish all of our readers a happy and prosperous 2015! As we did last year, I wanted to take a moment to reflect on the previous year, and take a look at the events that shaped the economy last year, and potential impact on 2015. The bull continued to run in the US, but other economies and investment asset classes lagged behind.

Volatility continues to be the norm. For the year, the S&P rose +11.5%, the Dow gained +7.5%, and the MSCI EAFE (developed international) lost -8.1%.

Here are the 3 major stories from 2013 we believe will continue to impact 2014:

Oil Prices Fall Hard…Where to Next?

With crude oil briefly trading below $50 a barrel on Monday, many wonder if the commodity is oversold and due for a rebound. However, one prominent analyst, Citigroup’s Ed Morse, believes there is further downside. Last March, Morse correctly predicted $75 a barrel global oil prices, back when it was trading above $100. His team at Citigroup are now calling for global and U.S oil prices to average $63 and $55 a barrel this year, respectively. They believe that the 2014 price decline was supply driven, and that the oversupply condition will continue to drive prices even lower before recovering somewhat in the second half of 2015 and into next year.

For more thoughts on the price of oil, please see our last blog entry—a special perspective on oil.

The Relationship Between Stocks & Interest Rates

We know the general inverse relationship between bond values and interest rates, but predicting equity trajectory during periods when interest rates rise is a little bit tougher. An article from the Wall Street Journal provides the history of S&P 500 returns when the U.S. Federal Reserve boosts rates. The author reviewed 14 periods during which the Fed was boosting short-term interest rates since the S&P 500 index was launched in 1957. He calculated the returns for the index in each period from the month when rates bottomed out through the month when rates peaked. The periods ranged in length from several months to more than four years. The average return for the S&P 500 during all four periods was 9.6%, including dividends. The S&P 500 fell in only two of the 14 periods, both in the early 1970s. Other researchers have pointed out similar conclusions although they point out that the stock market has tended to undergo increased volatility (an average decline of 8%) around the initial instance of rate hikes.

It might not matter. According to bond guru Bill Gross, it will be difficult for the Fed to raise rates in light of continued sluggish global growth and low inflation. He has a weak outlook for growth this year in both developed and emerging markets. Moreover, he feels the strengthening U.S. dollar and falling oil prices will also contribute to the Fed holding off on raising interest rates. The Federal Reserve has not raised short-term interest rates in nine years, but the consensus expectation is for a rate hike in mid-year.

Divided Government--Officially

The US government officially became divided, with Republicans seizing control of both houses of Congress. Expect a whole lot of nothing as President Obama does not have the votes from his party in either house, and the Republicans lack a super-majority to override any veto. There will likely be many “symbolic” legislation sent by Congress to the President’s desk, but the larger issues will likely be ignored.

Tax Reform is probably the single largest economic issue that needs to be addressed (but likely won’t). Not only does it affect the net income of every American by its arcane complexity, it also affects the long-term viability of social security, calculation of Medicare premium payments for retirees, business planning (e.g. hiring for growth), and much more. Again I do not expect any of this to be addressed by a fully divided executive and legislative branch.


Looking ahead, we're optimistic about 2015. We do expect US equities to slow their pace of growth. Corrections & bear markets are part of the normal investing and economic cycle, and statistically we are due for either. That said, there are still many prospects for growth and opportunities in other asset classes. Long term economic trends are still heading in the right direction. Although it's impossible to predict market trajectories with accuracy, we're always on the lookout for both dangers and opportunities for our clients, and we look forward to supporting you in the year ahead!

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.

8 Wealth Issues: Fiscal Fitness

A Look at Baseline Financial Health Ratios

In this month’s 8 Wealth Issues blog, I thought I would address the concept of what our practice refers to as “Fiscal Fitness.” New clients to our practice sometimes do not understand what I am referring to, but this is the foundation for sound financial planning. This involves capturing an accurate picture of your current financial condition—documenting what all of your assets are worth, less any liabilities; as well as building a cash-flow model that is true to your income and spending habits.

Fiscal fitness goes beyond this as well. It includes being organized with financial documents, and managing your wealth so that you can feel confident making future financial decisions. Often helping clients make financial decisions comes in “stress-testing” the impact of those decisions within your current financial plan.

Baseline financial health, however, can be brought back to 4 ratios. These are:

Monthly Surplus/Monthly Income

After you pay all of your monthly obligations, how much money do you have left? This is your monthly surplus and if you divide this amount by your total monthly income, you’ll get an idea of how well you manage your finances and also, an ideal percentage of that income you can put away for savings. When calculating your monthly obligations, be sure to include everything — all of your bills, credit card bills, your house payment, groceries, and even your magazine subscriptions.

It is important to note that you should add back in any 401k contributions into your monthly income, as this is periodic savings mechanism and that is exactly the ratio we are looking to measure here. This ratio can identify whether or not you could be putting more toward tax advantaged retirement savings.

Cash and Liquid Assets/Monthly Expenses

For this ratio, you want to add in all of your cash assets, like cash on hand, cash in the bank, money market account balances, and money you have in CDs (do not include cash in retirement accounts). If you divide that total by the total amount of all of your monthly expenses, you’ll get an idea of how long you can sustain your household in the event of an emergency situation, like illness or job loss. For self employed people or single income households, this can be a crucial ratio to be mindful of.

Of all the items I look at when assessing a clients Fiscal Fitness, it is the presence of an adequate emergency fund that is most often missing. Not having this ratio in good health could cause you to have to invade retirement savings in the event of loss of income—which in turn may cause tax headaches and penalties.

Cash and Liquid Assets/Net Worth

Your net worth is the difference between your assets and your debt. To calculate your net worth, add up the value of all of your assets. This includes everything, ranging from the value of your home, to the estimated value of your furniture, to all of your cash and cash assets. Subtract your debts (your credit card balances, mortgage, etc.) from this amount. There are also some online net worth calculators you can use to walk you through the process.

Once you’ve determine your net worth, divide your net worth by all of your cash and liquid assets (your bank account balances, CDs, money market accounts, etc.). This will give you the percentage portion of your net worth that is held in liquid form. Too high of a ratio means you could have too much cash at hand and therefore your money is likely not working for you adequately. Conversely, a common mistake I see is people reaching for growth by putting short term money in risk-based investments. Be mindful of time horizon.

Monthly Debt/Monthly Income

This is your debt to income ratio and it helps determine how much of a lending risk you are. Banks use this ratio as a baseline for determining loan approvals & mortgages. The lower your debt-to-income ratio, the better chance you have of receiving credit from lenders in most cases. Ideally, 36 percent is the highest debt-to-income percentage you should have. You can calculate this ratio on your own by dividing your total monthly debt (credit card payments, student loans, mortgage payment, etc.) by your monthly income.

These ratios can help you set a good baseline for financial health and making sound financial decisions. Please be sure to contact our practice if you would like help in looking at all the aspects of Fiscal Fitness or any of the other 8 Wealth Issues we help with tackling. The beginning of a new year is a great time to turn over a new financial leaf.

Happy Holidays.

Citations.
Personal Finance Cheat Sheet – “How Financially Healthy Are You? Find Out Using 4 Ratios”

This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Perspectives from Above the Noise – Week of December 15, 2014

Last week was volatile for global equities, ending with the Dow Jones Industrial Average falling 315 points on Friday to bring its weekly loss to 3.8%. This was the worst weekly loss for the Dow on a percentage basis since September of 2011 and was driven by a continued meltdown in the energy sector. Fears of a sharp global slowdown continue to be fed by the steep drop in oil prices, which many investors believe is at least in part attributable to a weakening economic outlook.

However, some positive domestic data came from Thursday’s retail sales data, which indicated that the plunge in oil prices over the past three months is generating a boost to consumer spending heading into the holiday shopping season. Retail sales (minus gasoline) surged 6% in November on a year-over-year basis, the most in nearly three years.

For the week, the S&P 500 dropped -3.52%, the Dow Jones Industrial Average fell -3.78%, and the MSCI EAFE (developed international) lost -3.54%.

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

Why Russia's Monster Rate Hike Spells Trouble Ahead

Early Tuesday, the Central Bank of Russia (CBR) hiked its key interest rate by 650 basis points to 17%, the sixth rate increase this year. The impact was immediately reflected in the Russian ruble which plunged about 12%, bringing its loss against the dollar to nearly 50% this year.

The rate hike and falling currency will further threaten financial stability in the troubled economy which has faced the double whammy of collapsing oil prices and the specter of new U.S. sanctions. Ordinary Russians are feeling the squeeze as consumer price inflation is forecast to reach 10% by the end of the year.

Similarities and Differences Between Now and 1998 Emerging-Market Crisis

In recent weeks, there has been a flight of foreign capital fleeing emerging markets creating fears of a full-blown currency crisis and a resulting financial market contagion similar to what happened in 1998. A recent Bloomberg article provides a nice summary of the similarities and differences between now and 1998. Despite some concerning similarities, the article details a few important differences which suggests the odds favor a somewhat less severe outcome than the 1998 experience.

These key differences include many emerging countries holding much larger foreign reserves than in the 1990's, as well as now issuing most debt in local currency rather than U.S. dollars. These changes should increase the odds that most countries will weather the current currency volatility and capital outflows, without experiencing a crisis on the scale of 1998.

One Hundred Years of Bond History Means Bears Destined to Lose

A Bloomberg article offers some longer-term perspective on bond yields suggesting the era of high inflation and interest rates that occurred in the 1970's and 1980's was an aberration. With the longest-dated U.S. Treasury bonds now yielding less than half the 6.8% average over the past five decades, it’s not hard to see why forecasters say they're bound to rise as the Federal Reserve prepares to raise interest rates following the most aggressive stimulus measures in its 100-year history. Yet, compared with levels that prevailed in the half-century before that, yields are in line with the norm.

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 December 8, 2014

Contrasting several recent data points that provided evidence of slowing domestic growth, the past week included a couple of important economic releases that indicated U.S. economic momentum remained solid in November. Wednesday’s release of the ISM Non-manufacturing Index for November showed an improvement to 59.3, the second-highest level since August 2005 and well ahead of consensus expectations. 

Globally, the focus was on the European Central Bank’s (ECB) latest meeting on Thursday, when it substantially lowered its forecasts for both inflation and growth. ECB President Mario Draghi seemed to, at least initially, disappoint investors by failing to commit to additional stimulus measures to offset those drags, explaining in rather vague terms that officials are still evaluating whether the ECB is already doing enough. Needless to say, European equity markets reversed lower and the euro currency rallied sharply in the wake of his comments.

For the week, the S&P 500 rose +0.38%, the Dow Jones Industrial Average added +0.73%, and the MSCI EAFE (developed international) dropped -0.40%.  Here are the 3 stories this week that rose above the noise:

Economists See Revved-Up U.S. Economy Next Year   

U.S. economic growth is expected to increase from 2.2 percent this year to 3.1 percent in 2015, according to the latest forecast from the National Association for Business Economics (NABE). The economists surveyed also expect the unemployment rate to drop to 5.4 percent, but anticipate that inflation will remain low.

They were not as optimistic about global growth in 2015 and nearly half of the economists surveyed feel that foreign developed economies will experience slower growth for an extended period of time. According to the survey, the economists anticipate that Europe and Japan will experience GDP growth of around 1 percent in 2015.

Dollar Surge Endangers Global Debt Edifice, Warns BIS   

As summarized in a recent article, the Bank for International Settlements recently identified a growing risk to global financial stability triggered by the strengthening U.S. dollar. Many companies in emerging markets expanded their issuance of U.S. dollar-denominated debt over the past decade in response to general dollar weakness. 

However, as the U.S. dollar rises in value the debt burden of companies in emerging markets which have issued dollar-denominated debt will also rise, potentially straining global credit markets and creating financial market volatility. This is one risk worth watching closely in 2015.

US Manufacturers Still Outpacing Rest of World  

U.S. manufacturers barely slowed down in November even as major competitors around the world continued to scale back production. The Institute for Supply Management said its U.S. manufacturing index edged down to 58.7% last month from 59% in October. Yet any number above 50% signals expansion, and the latest reading kept the ISM index near a three-year high. Fourteen of the 18 industries tracked by ISM said business increased in November while the closely watched new orders component hit a three-month high.

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 December 1, 2014

In last week’s holiday-shortened schedule, economic data was highlighted by Wednesday’s initial jobless claims and durable goods orders. Weekly initial jobless claims rose 21,000 to the highest level since September. However, the four-week average of claims remained below 300,000 for the eleventh straight week. This week’s claims data also included the continuing claims figure that will be used to calculate the unemployment rate for November and showed 71,000 fewer continuing claims than last month, suggesting the headline unemployment rate could fall further when reported this Friday.

Last week’s trading was notable for a sharp plunge in oil prices following OPEC’s surprise decision to maintain output despite falling prices and excessive global supplies. The weakness in oil, which has pushed West Texas Intermediate crude near its lowest level since July 2009, has been exacerbated by signs of slowing global growth. The S&P GSCI Crude Oil commodity index is down more than 32% year to date.

For the week, the S&P 500 rose +0.20%, the Dow Jones Industrial Average added +0.10%, and the MSCI EAFE (developed international) increased +0.48%.

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

Black Friday Fatigue? Thanksgiving Weekend Sales Slide 11%

Spending over the four-day Thanksgiving weekend declined by an estimated 11% compared to last year, according to the National Retail Federation. Many analysts predicted strong growth in Black Friday sales this year because of rising consumer confidence and labor growth, falling energy costs, and the increase in retailers open on Thanksgiving. But it’s still possible for overall holiday season spending to increase compared to 2013.

Consumers might not be as enticed by Black Friday bargains as in years past because retailers now provide deep discounts on prices throughout the entire holiday season and also provide special online discounts.

Lower Gas Prices: How Big a Boost for the Economy?

A blog posting from The Wall Street Journal provides a nice summary of what impact lower oil prices are likely to have on the U.S. economy. The benefits that most businesses and consumers receive from falling energy prices are partially offset by headwinds potentially created from reduced investments by the domestic energy industry. However, as the energy industry still represents a relatively small percentage of employment, the net impact of lower oil prices is likely to be a 0.2 to 0.3 boost to economic growth in 2015 if the price of oil remains near current levels.

US Manufacturers Still Outpacing Rest of World

U.S. manufacturers barely slowed down in November even as major competitors around the world continued to scale back production. The Institute for Supply Management said its U.S. manufacturing index edged down to 58.7% last month from 59% in October. Yet any number above 50% signals expansion, and the latest reading kept the ISM index near a three-year high. Fourteen of the 18 industries tracked by ISM said business increased in November while the closely watched new orders component hit a three-month high.

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 November 10, 2014

U.S. markets continued their recent surge in the past week, with the S&P 500 closing at a series of all-time highs. Tuesday’s mid-term elections turned out to be a big night for the Republicans, with the GOP taking control of the Senate and adding to its majority in the House. Despite the strong gains the GOP registered, it remains far from the two-thirds majority necessary to override a presidential veto, making continued gridlock on many issues a pretty likely scenario.

With the economic calendar somewhat light and earnings season passing its peak, the coming week may present an opportunity for the market to take a breather after the wild ride of recent weeks.  Expectations for the Fed’s first rate hike have been pushed out to the second half of 2015 following the market volatility of October and the comments of these officials will be scrutinized for any indications of a possible shift in the Fed’s thinking.

For the week, the S&P 500 rose +0.69%, the Dow Jones Industrial Average added +1.05%, and the MSCI EAFE (developed international) dropped -1.01%.

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

Budget Blues Fade as U.S. Fiscal Drag Ends After Election

Last week’s election results – which saw Republicans gain control of the Senate – paradoxically also may lead to a little extra spending from Washington. While the party opposes much federal spending as wasteful, it’s been more open to expanding military support. Moreover, states and cities are taking advantage of low interest rates to borrow money for roads, bridges and other infrastructure projects. Last year’s budget restraint was the strongest since the recession ended in June 2009, as Congress eliminated a payroll tax cut, raised income taxes on the wealthy and reined in spending.

The upshot is that the combined budgets of cities, states and the federal government will add 0.4 percent to annual growth in the fourth quarter of this year, after reducing it by 0.9 percent in the year-ago period, according to St. Louis based Macroeconomic Advisers. Over the next two years, state and municipal governments are expected to add about 300,000 jobs to payrolls, more than offsetting a probable 50,000 cut in the federal workforce, primarily from attrition in jobs not filled.

The Rise of Invisible Unemployment

While headline employment data has been generally solid throughout 2014, one troubling weakness that continued to show up in last week’s nonfarm payrolls report has been anemic wage growth. This article from The Atlantic provides a good summary of possible explanations for the weakness in wages, with the relative lack of improvement in the number of individuals working part-time for economic reasons an important indicator to watch in 2015.

The lack of wage growth has been a key factor in preventing concerns about an aggressive Fed tightening cycle from impacting investor sentiment and this article provides some evidence that wage growth may remain soft for the foreseeable future.

Full Housing Recovery May Not Happen Until 2018

The housing recovery still has a long way to go according to the most recent Zillow survey of 100 real estate professionals and economists. The consensus view is that home values might not reach their prerecession peak until 2018. The panelists place most of the blame for the slower-than-expected recovery on changing demographics and cash-strapped potential first-time homebuyers.

High student loan debt, rising rents, and strict lending standards are all cited as reasons why the housing market remains challenging for potential first-time homebuyers. The panelists predict that home values will finish this year 4.8 percent above 2013 levels and gain an average of 3.7 percent annually between 2015 and 2019.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

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.