Perspectives from Above the Noise – Week of January 13, 2014

3 Stories in the global economy that should not go un-noticed

Last week began with several pieces of economic data pointing to signs of solid improvement. First came news that that the United States trade deficit had fallen to its lowest level in four years as strong domestic production reduced demand for energy imports. On Wednesday, payroll processor ADP reported that the private sector had added 238,000 jobs, topping the 200,000 forecast. This was the largest monthly increase in the ADP report since November 2012, however, Friday’s December nonfarm payrolls report reframed the unemployment numbers as the U.S. economy added only 74,000 jobs.

For the week, the S&P 500 gained 0.6%, the Dow fell 0.2%, and the MSCI EAFE (developed international) gained 0.63%.

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

Services in U.S. Expand at Slower Pace than Forecast

U.S. service activity fell to its lowest rate of growth in six months during December. The ISM Non-Manufacturing Index dropped to 53.0 from 53.9 in November (above 50 signals expansion). However, the decline in growth was likely weather-related and service activity continues to expand at a healthy pace. Solid gains occurred in construction and retail, while hotels and restaurants experienced a slowdown. European service activity also expanded in December, albeit at a slower pace than in the United States and below the level of growth that occurred in November.

Trade Gap Shrinks to Four-Year Low as U.S. Oil Imports Drop

The trade deficit in the United States declined 12.9 percent to $34.3 billion in November, smaller than the $40 billion Bloomberg consensus and represented the lowest monthly gap since October 2009. Exports increased 0.9 percent to $194.9 billion, reflecting significant gains in civilian aircraft and chemical sales which are being driven by improving economies in Europe and Asia.

Imports dropped 1.4 percent to $229.1 billion in November, as purchases of crude oil dropped to the lowest level in three years, reflecting both lower prices and volume. The figures used to calculate gross domestic product, which eliminate the influence of prices, showed the trade deficit narrowed to $44.6 billion in November, a five-month low. The fourth-quarter average so far is smaller than in the previous three months, indicating trade boosted gross domestic product.

Disruptive Technologies: Advances that Will Transform Life, Business, and the Global Economy

The relentless parade of new technologies is unfolding on many fronts. Almost every advance is billed as a breakthrough, and the list of “next big things” grows ever longer. Not every emerging technology will alter the business or social landscape, but some truly do have the potential to disrupt the status quo, alter the way people live and work, and rearrange value pools. This article from the McKinsey Global Institute cuts through the noise and identifies 12 technologies that could drive truly massive economic transformations and disruptions in the coming years.

3 examples include: 1) Advanced robotics—that is, increasingly capable robots or robotic tools, with enhanced “senses,” dexterity, and intelligence. 2) Next-generation genomics marries the science used for imaging nucleotide base pairs (the units that make up DNA) with rapidly advancing computational and analytic capabilities. As our understanding of the genomic makeup of humans increases, so does the ability to manipulate genes and improve health diagnostics and treatments. 3) And Energy-storage devices or physical systems store energy for later use. These technologies, such as lithium-ion batteries and fuel cells, already power electric and hybrid vehicles, along with billions of portable consumer electronics.

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

RETRO-Spectives from Above the Noise – 2013

The 3 Major Stories in the Global Economy for the Year

Now that 2013 is behind us, let's take a look at the events that shaped markets last year. 2013 was the year that investors finally became confident in the economic recovery and poured their enthusiasm into equities.

Despite significant continued volatility, stocks soared to new heights, giving the S&P 500 its best year since 1997. For the year, the S&P rose 29.6%, the Dow gained 26.5%, and the MSCI EAFE (developed international) advanced 19.4%.

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

When Diversification “Fails”…but why it still works

Devin Cassels from SEI Investments recent published a commentary discussing the over exuberance in the use of the S&P 500 as a yard stick. A unique aspect of the S&P 500 Index is that many investors consider it to be a barometer of financial market performance. This trend has emerged for two main reasons: (1) the ease of focusing on a single number, and (2) the media’s tendency to publicize the S&P 500 as a proxy for overall financial market performance. While these forces make this trend understandable, they can also create confusion for investors when portfolio returns deviate from those of U.S. large-cap stocks. In environments like 2013, a natural question tends to arise—if investors understand the S&P 500 Index and often compare their portfolios to that proxy, why don’t investment professionals simply provide their clients with portfolios that contain large allocations to U.S. stocks and track very closely to the well-known index?

The simple answer is that, while U.S. large-cap stocks do act as an important allocation, they are also subject to fluctuations in performance just like other asset classes. For this reason, it is important that portfolios contain other exposures that can moderate the investment experience—with an aim on consistency, rather than out-performance.

US Government Shutdown & Continued Divided Government

Political gridlock in Washington was another source of market volatility in 2013. After resolving the Fiscal Cliff on New Year’s Day, legislators were still unable to agree on a deficit-reduction plan. This forced the federal government to the “sequestration” budget cuts designed to significantly reduce the budget over the next 10 years.

This was followed much later in the year with a disagreement over the federal budget which ultimately caused a 16-day shutdown. Generally, investors stayed calm and markets rose sharply in the period immediately following the budget deal. Some estimates put the cost of the shutdown at $2 billion in lost productivity plus the cost of ripple effects across the economy.

Fortunately, a bipartisan budget deal reached in December promises to alleviate a new round of sequestration cuts and stabilizing government funding through late 2015.

The Economist published a recent article commenting that “insurgent” political parties are on the rise in Europe—in addition to the “tea party” in the US—noting that they could carry more power than “at any time since the second world war.” Though US politicians will still have to tackle raising the Treasury debt ceiling in early 2014, we expect to avoid another showdown. Political division could be seen and heard in other parts of the world—with the effects felt in the global economy.

The Federal Reserve: Inflation, Taper, & Interest Rates

The Bureau of Labor Statistics published their calculation of consumer price index (seen by many as a general measure of inflation) through the end of November at 1.2% for the previous 12 months. This is much lower than historical inflation numbers—and it has been for about the last year. One of the main concerns over the Federal Reserve’s bond buying program (termed quantitative easing or QE) was that it could trigger higher inflation over time due to more currency being put into circulation. As the Fed begins to gradually wind down QE, the big questions is how will inflation react?

In balance with QE taper is the question of how the Fed will adjust interest rates going forward. With interest rates still at near 30-year lows, bond values could suffer as rates head upward.

Current Fed chairman Ben Bernanke will be stepping down at the end of January and the Senate has confirmed Janet Yellen, the current vice chair, as his successor. It is expected that she will continue many of his policies. A recent contribution in Forbes magazine comments however that Yellen believes in “printing money to drive down unemployment.” If this continues as the main economic ammo for the Fed, we may in fact see higher inflation on the horizon—which could also in turn influence how quickly interest rates rise.



Looking ahead, we're optimistic about 2014. Even if stocks slow their pace of growth, we think there's still upside potential if the U.S. economy continues to gain steam and Q4 corporate earnings reports are positive. While a pullback is always possible as investors consolidate their positions, 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!

Perspectives from Above the Noise – Week of December 23, 2013

3 Stories in the global economy that should not go un-noticed

Happy Holidays!

Stocks broke their losing streak and rallied on the long-awaited Fed taper and positive economic news. The Fed announced a modest taper of $10 billion, reducing the size of its monthly bond purchases to $75 billion. In order to make the tapering pill easier to swallow, the Fed pledged to keep rates near their current levels until the headline unemployment rate declines below 6.5%.

In Washington, the Senate approved the bipartisan budget deal, avoiding any last-minute brinksmanship. The bill guides government spending into 2015 and will avoid another government shutdown and will eliminate some sequestration cuts.

For the week, the S&P 500 gained 2.42%, the Dow surged 2.96%, and MSCI EAFE (developed international) added 2.58%.

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

Buyback Binge Is Back


Last quarter, U.S. companies bought back stock and paid dividends totaling $207 billion, the highest amount since the fourth quarter of 2007. Companies that represent this group have been rewarded as the S&P 500 Buyback Index, which measures the 100 stocks with the highest buyback ratios, has surged 45% this year, compared with a 28% rally for the S&P 500. The question now is whether companies are purchasing their stock at the wrong time, similar to what occurred in 2007 prior to the financial crisis. The concern is whether the market is due for long anticipated pullback.

Consumer Sentiment Up in December on Improved Economic Outlook 


U.S. consumer confidence rose to its highest level since July as the Thomson Reuters/University of Michigan Index of consumer sentiment increased to 82.5 in December, ahead of 75.1 in November. The results were encouraging and signal an improved outlook for consumer spending heading into 2014. The survey showed consumer sentiment improved from a more optimistic outlook on economic growth, improving job prospects, and rising household wealth.

China Money Rate Tumbles Most Since 2011 as PBOC Injects Cash 


A recent Bloomberg article details actions by China's central bank yesterday to ease on ongoing cash crunch which had driven up short-term borrowing costs and put downward pressure on Chinese equities. After the central bank injected funds for the first time in three weeks, China's benchmark money-market rate declined the most it has in a day since February 2011. The ongoing tight money conditions in China have many economists worried that growth may slow even further in 2014, which would have bearish implications for emerging market equities, and the country's money-market rate will be important to watch in early 2014 for evidence that policy makers are getting more aggressive about providing liquidity to the market.

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

Thoughts on Charitable Inclinations

With the end of 2013 approaching, many of our clients are thinking about what charitable gifts they want to make. Here are a few tips on giving effectively and maximizing the tax deductibility of your gifts.

Keep the Calendar in Mind

For tax purposes, donations made by check can usually be deducted if they are postmarked by December 31; however, if you are making a large donation, check with a tax advisor since industry practices often dictate that checks must be received by the charity and cashed before the end of the year. The IRS requires donations in excess of $250 to be documented more extensively, and you must provide the name of the organization, donation amount, and whether you received any goods or services from the charity in exchange for the donation.^[1] Online donations are processed instantly, and you may want to consider making last-minute donations by credit card instead of by check if you are concerned about this issue.

Avoid Giving Cash

In order to deduct charitable gifts on your taxes, all donations must be substantiated by a receipt, cancelled check, or written acknowledgement by the charity.^[2] If you frequently give cash to organizations that solicit in front of supermarkets, malls, or local stores, you may be losing out on a major deduction. Consider supporting these organizations by writing a single check or asking for a receipt for each cash donation.

Consider Alternative Sources of Gifts

Not all donations need to come from your checking account. If you are subject to Required Minimum Distributions from your IRA, you can still make qualified charitable donations (QCD), which will count towards your annual RMD amount and will also be excluded from your 2013 taxable income. IRA owners can distribute and exclude from their income up to $100,000 in direct donations to qualified charities - typically, those that meet IRS 501(c)(3) regulations. The QCD provision will expire at the end of 2013 unless Congress takes action to extend it.^[3] Another option for taxpayers is to give appreciated securities, which will qualify for tax deductions at their full fair market value.

Give Locally

One of the best ways that you can make an impact in your community is to donate to local organizations or community foundations. Community foundations focus on local needs and can help you identify areas of need and show you how to make the greatest impact with your gift. Even small contributions can make a big difference to charities like food banks, homeless shelters, and animal welfare groups. In addition, many community foundations now have donor-advised funds that can help simplify the donation process.

Research Charities Carefully

New charitable organizations open their doors every day, and it’s wise to scrutinize potential gift recipients carefully before making a donation. Online tools like CharityNavigator.org or GuideStar.com are a great way to check out the legitimacy of organizations and ensure that your donations will be used as promised. It’s usually wise to avoid donating to organizations that rely on paid fundraisers since those (for-profit) fundraising firms often receive a significant percentage of the funds donated. Here are a few best practices for charitable giving:

         Clarify your beliefs and donation objectives

         Research organizations carefully to ensure legitimacy and tax status

         Make sure their mission aligns with your values

         Give proactively (not necessarily in response to appeals)

         Avoid the middleman and make donations directly to the organization or foundation of your choice

         Trust your instincts

         Don’t give cash and always document your donations

         Consider developing a long-term relationship with charities that are a good fit for your values

If you have any questions about the information we’ve presented or would like more information about charitable giving, please give us a call, we’d be delighted to lend a hand.

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^[1] http://www.irs.gov/uac/Eight-Tips-for-Deducting-Charitable-Contributions

^[2] http://www.irs.gov/uac/Eight-Tips-for-Deducting-Charitable-Contributions

^[3] http://www.irs.gov/Retirement-Plans/Charitable-Donations-from-IRAs-for-2012-and-2013

Perspectives from Above the Noise – Week of December 16, 2013

3 Stories in the global economy that should not go un-noticed

Stocks experienced another down week, driven largely by low volume, anticipation of a budget deal, and investor caution before the Federal Open Market Committee (FOMC) meeting. The House passed a breakthrough budget deal that will avoid a government shutdown in January and blunts the next round of automatic sequestration cuts. The Fed’s FOMC meeting will be in focus this week as investors wait to see whether the central bank will send out 2013 with a bang or a whimper.

For the week, the S&P 500 lost 1.65%, the Dow fell 1.65%, and the MSCI EAFE (developed international) lost 1.57%.

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

U.S. Crude Oil Output to Climb Toward Record by 2016

Based on projections, U.S. crude oil production will approach a record by 2016, climbing to the highest level in 46 years as rising output from shale formations lifts domestic supplies, reducing the nation’s need for foreign oil. The surging production is having a positive impact on the country’s persistent trade deficit as consensus expectations now expect the trade deficit to narrow to only 2.4 percent of GDP compared to 5.8 percent in 2006. Domestic output will grow annually by about 800,000 barrels per day to 9.5 million barrels per day by 2016, nearing the record level of 1970.

Production Gain Shows U.S. Factories to Spur Growth: Economy

Strength in manufacturing continues to provide support for continued U.S. economic health in 2014. A report released today by the Federal Reserve showed factory production grew 0.6 percent in November, which followed a 0.5 percent gain in October. Production is up 1.5 percent over the past five months, three times more than the 0.5 percent gain in the first six months of the year.

The automobile space has been one of the underlying driving sectors as auto assemblies climbed last month to an 11.6 million annual rate, the most since June 2006. Capacity utilization and productivity are also at multi-year highs supporting the U.S. manufacturing story.

Companies Turning Again to Stock Buybacks to Reward Shareholders

A Washington Post article examines the recent surge in companies repurchasing shares of their stock in the open market. As detailed in the article, total share buybacks are approaching the record high level reached in 2007. We have mixed feelings on share buybacks for many of the reasons noted in the article. Generally, steady repurchase programs done from free cash flow have the potential to create lasting shareholder value in our view.

However, broadly speaking, companies have had a tendency to aggressively repurchase shares only when times are good and profits very high, for example in 2007. This in many cases had led to ill-timed repurchases and with the valuation of U.S. stocks arguably becoming stretched the surging buybacks may prove to be neutral at best for long-term shareholder value.

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

Perspectives from Above the Noise – Week of December 9, 2013

3 Stories in the global economy that should not go un-noticed

Economic data dominated most of last week’s action as investors waited for the latest news on job creation, economic growth, and manufacturing. Stocks ended their winning streak, preoccupied by the Friday jobs report, but quickly regained steam after data revealed a rosy jobs picture.

For the week, the S&P 500 lost 0.04% (though it jumped 1.1% on Friday), the Dow lost 0.41%, and the MSCI EAFE (developed international) fell 2.16%.

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

After Detroit, Who Will Cut City Pensions Next?

Detroit has the ability to reduce municipal employee pensions, potentially by a significant amount, to 23,500 retired city workers following a Federal bankruptcy court ruling last week that granted Detroit the capacity to restructure $18 billion in long-term debt.

The ruling sent a strong message to several states and major cities throughout the country that have poorly funded pension systems. For example, nine states have pension systems that are 60 percent underfunded and the 61 cities with the most underfunded pension systems have a combined $217 billion shortfall between what they have promised in pension benefits and what they have saved to fund their pension systems.

Government pension reform will be a major topic over the next decade. Last week, for instance, Illinois passed legislation that will reduce state employee retirement benefits in order to lessen the growing impact on the state budget and close the gap on Illinois’ significantly underfunded pension system.

Fed’s Bullard Sees Higher QE Taper Odds as Labor Market Improves

Citing recent improvement in jobs data, Federal Reserve Bank of St. Louis President James Bullard expressed his opinion yesterday that the odds have increased for the Fed to soon begin reducing its asset purchases, also known as quantitative easing (QE).

A recent Bloomberg article details the Bullard comments and similar recent comments from other Fed officials which suggest some members of the Federal Open Market Committee are ready to begin the QE tapering process. However, the majority of economists in a December 6 Bloomberg News survey still expect the Fed to wait until next year to begin winding down its asset purchases rather than at its upcoming December 17-18 meeting.

Bullard tempered his comments by noting that he remains concerned about too low inflation. Nonetheless, the article is worth reading for some insight into the thinking of Fed officials heading into next week’s highly anticipated policy meeting.

Solid Pace of Expansion Seen in China

Chinese economic observers will be keeping a keen eye on the annual Central Economic Work Conference which began in Beijing on Tuesday, as China’s top leaders are expected to map out the country’s economic policy agenda for the coming year.

Of particular interest is whether the official 2014 growth target will remain at 7.5 percent or trimmed closer to 7 percent. Recently reported economic data has been encouraging. Industrial output, retail sales, and investment in fixed assets came in with solid year-over-year gains. This data followed the Sunday release of November exports which came in well above analyst expectations.

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

Perspectives from Above the Noise – Week of December 2, 2013

3 Stories in the global economy that should not go un-noticed

Last week’s shortened Thanksgiving trading schedule did not slow the market’s continued advance, as the month came to a close. November was another strong month for the financial markets. The S&P 500, a benchmark of mostly larger companies, gained 3.05%-finishing the month with its eighth consecutive weekly gain, its longest such streak in nearly a decade.

International stocks meanwhile did not fare quite as well, with developed international markets up 0.17%. Emerging markets slipped last month, losing 1.45%. Bond prices also moved lower last month, as the overall bond market lost 0.37%. The 10-year Treasury yield finished the month at 2.75%.

For the week, the S&P 500 gained 0.06%, the Dow grew 0.13%, and the and MSCI EAFE (developed international) added 0.83%.

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

Kiplinger's Presents Economic Outlook for 2014

As 2014 rolls into sight, Kiplinger outlined its economic outlook for next year. It expects the U.S. economy to continue to slowly build momentum with GDP growth hitting 2.6% in 2014, compared to only 1.7% for all of 2013. U.S. unemployment is expected to fluctuate between 6.9% and 7.2% until mid-2014 although the U.S. economy should be able to reliably generate at least 200,000 jobs per month. Inflation is expected to tick up slightly to 2%. The housing recovery is expected to continue with existing and new home sales expected to rise 4% and 16% year-over-year, respectively. Business spending is projected to gain 4.5% and the U.S. trade deficit is anticipated to continue to narrow by about 5% due to reduced oil imports.

While the recovery from the punishing 2007-08 recession should remain the slowest since World War II, U.S. quarterly growth is expected to reach an annualized pace of 3% by mid-2014, making the economy more durable in the face of challenges that include policy uncertainty at home as well as soft growth among major trade partners.

Foreign Stocks for the Long Run

With U.S. equities outperforming foreign equities over the past year, we are often asked why include foreign stocks1 in a portfolio? A recent analyst’s article provides some statistical insight into the diversification benefits of owning foreign equity. "Although the returns of foreign stocks have not kept pace with U.S. stocks, and their risk was higher, a portfolio allocated to 70% in U.S. stocks and 30% in foreign stocks generated a higher risk-adjusted return than a portfolio of all U.S. stocks." The 70/30 U.S. to foreign stock ratio produces the highest risk-adjusted return from 1970 to Oct 2013.

Additionally, if there is a regression toward the historic mean, foreign stocks should do well in a relative sense. However, given the lack of predictability in knowing when foreign equities will outperform, inclusion of the asset class in a strategic asset allocation strategy seems a reasonable approach.

U.S. Manufacturing Sector Expands Much More than Expected in November

The Institute for Supply Management's (ISM) manufacturing index rose to 57.3 in November (above 50 signals expansion), ahead of 56.4 in October. U.S. manufacturing has increased six consecutive months and accelerated at its fastest pace since April 2011 in November. Moreover, the ISM new orders index and employment index increased at their fastest rate this year, which is a strong leading indicator for factory activity over the next four to six months. Global manufacturing is also expanding, but is lagging the strong acceleration that is occurring in the United States.

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