Perspectives from Above the Noise – Week of April 28, 2014

The U.S. market entered the heart of the earnings season this week with the busiest period for first-quarter results thus far. Over the past year, the market has shrugged off sluggish earnings results and downward revisions to future earnings to march steadily to new highs. The early portion of the current earnings season has been no exception to this trend. Stocks were poised to make another run at new all-time highs until the latest dust-up in the Russian-Ukrainian crisis dampened Friday’s trading. The bond market also continues to seemingly signal some caution, with Treasuries and investment-grade corporate bonds outperforming high-yield issues and the yield curve flattening (with the spread between 5- and 10-year Treasuries narrowing.).

Because of its taper strategy, the Federal Reserve has been buying fewer government and mortgage-backed bonds each month thus far in 2014. As a result, the yield on the 10- and 30-year Treasury bonds has actually fallen despite the partial exit of the market’s largest buyer – to the surprise of many experts.

For the week, the S&P 500 dropped -0.08%, the Dow lost -0.29%, and the MSCI EAFE (developed international) gained +0.30%.

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

Feeling Jittery? Read This

Investors have begun to feel jittery in recent weeks, mostly because of concerns over equity valuation, a perceived threat of rising inflation, the Ukraine crisis and Fed tapering. However, the biggest threat to the bull market, a recession, is unlikely in the near term according to a recent Wall Street Journal article.

No two recessions are exactly alike, but the last seven recessions were proceeded with warning signs in a few key economic indicators including an inverted yield curve, a sharp contraction in manufacturing, a spike in inflation, a severe downturn in housing starts, and a drop in average weekly hours. None of these indicators are currently “flashing red,” signaling the current bull market has a low probability of being derailed by a recession in the near term.

IMF Raises its Economic Growth Forecast for China

The International Monetary Fund (IMF) raised its growth forecast for China by 0.3 percent to 7.5 percent for 2014, which may reassure investors who worry that the world’s second-largest economy might be slowing too abruptly. The forecast is in line with the ruling Communist Party's official growth target for the year and would be the strongest for any major economy but is below the double-digit levels of the past decade and last year’s growth of 7.7 percent.

While 2014 growth was raised, the IMF warned of continued credit problems, noting recent defaults in trust products, or packages of credit card debt and other debt sold by banks to investors, as well as heavy debts owed by some local governments that borrowed to pay for roads and other projects.

Help Wanted Signs Are Popping up in U.S. Cities

A recent article from Businessweek provides a good summary of growing evidence that the U.S. labor market is tighter than generally believed, including regional evidence of labor shortages. The implications of a tighter-than-expected labor market would likely be rising wage pressures, which would likely lead to increased corporate revenues but also broad inflationary pressures which may eat into profit margins and could accelerate the Federal Reserve’s stimulus wind-down plan. The idea of a stronger-than-anticipated labor market is a theme that may receive growing attention in the coming months and has important market implications.

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

Perspectives from Above the Noise – Week of April 21, 2014

Last week’s holiday-shortened week came to a close with four consecutive positive sessions for the S&P 500 that erased most of the recent losses. It has certainly been a volatile April causing a 5% upswing in the S&P 500, which has now settled back above the 1850 level – a level that has served as both key technical resistance and now again support. The recovery last week forced many short-sellers to cover their positions in some of the most beaten-down former momentum favorites. The bulls will now try re-test the all-time highs set in early April around the 1900 mark on the S&P 500.

U.S. economic data again showed modest but solid improvement. Retail sales also jumped in March by the most since September 2012, including a pickup in vehicle sales, demonstrating pent-up demand from the winter weather. That being said, looking at the first quarter as a whole, retail sales lagged far behind the activity in the fourth quarter and will likely be a material drag on Q1 U.S. GDP.

For the week, the S&P 500 was up +1.73%, the Dow gained +1.47%, and the MSCI EAFE (developed international) rose +1.17%.

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

Risk of Stock Pullback Continues

With last week’s market rebound, talk of a major correction has faded. However, many money managers believe that the risk of a sharp pullback has been delayed, not eliminated. Equity markets have been so strong in recent years that major indexes haven’t dropped 10 percent or more since September 2011, which is twice as long as the typical once every 16 months.

Additionally, the markets appear strained as the number of stocks trading at record highs is off significantly and volatility is on the rise. Positively, while valuation is becoming more extended we are not at levels seen during prior peaks.

Companies Are Beating Earnings Estimates—but Don’t Be Fooled

Alex Rosenberg summarizes the results of earnings season thus far on cnbc.com. As detailed in the article, although it remains early in earnings season with less than 20 percent of companies having reported first-quarter results, those that have reported are beating estimates for earnings and revenues at a lower rate than has been typical over the past four years.

At this point, it looks like S&P 500 companies will report a year-over-year earnings decline for the first time since 2012 and overall revenue numbers have also been below expectations in aggregate. Nonetheless, investors appear to be looking past first-quarter earnings, which in some cases may have been impacted by severe weather, and continue to price in a rebound in earnings growth for the remainder of the year.

Economists Expect U.S. to Shake off Winter Slowdown

According to the latest National Association for Business Economics survey, economists are more upbeat about the economy now that we have escaped the brutally cold winter that negatively impacted economic activity during the first three months of the year.

Recent data ranging from retail sales to industrial production has pointed toward a rebound in economic growth. Overall, 72 percent of economists polled in the survey feel that U.S. GDP will grow by 2 percent to 3 percent in 2014, ahead of 1.9 percent GDP growth in 2013. Additionally, 80 percent of survey respondents expect the Federal Reserve to end its quantitative easing program by year end.

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

Perspectives from Above the Noise – Week of April 14, 2014

A volatile week of whipsaw market action pushed all the major U.S. equity indices back into the red on a year-to-date basis. The S&P 500 sunk to a two-month low after making new all-time highs only a month ago. Market leadership has been undergoing a profound shift away from U.S. growth to defensive value and non-U.S. assets. Momentum has also been waning among last year’s standout small-cap issues, often an indication of a tired market.

In fact, equity investors have been aggressively selling previous winners for the last couple of weeks, shedding high momentum leaders in areas like biotechnology, social media and homebuilders. They have opted instead for defensive and value names in the staples, utilities, telecom and energy sectors while also rotating into unloved emerging-market stocks and bonds. After several years of underperformance and subsequent capital outflows, emerging markets have become increasingly under-owned by professional investors. However, money has been flowing back to emerging markets as investors search for valuation bargains in this beaten-down asset class. 

For the week, the S&P 500 dropped -2.65%, the Dow lost -2.35%, and the MSCI EAFE (developed international) fell -1.79%. 

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

The Tide Is Turning for Greece – and the Eurozone 

While unrest in the Ukraine has caused volatility in global markets, steady improvement in the Eurozone’s sovereign debt crisis may have gone unnoticed. An article from The Wall Street Journal, points out that Greece returned to the bond markets last week, which was a symbolically important moment for the euro crisis. 

For the country at the center of the crisis to draw €20 billion ($27.77 billion) of foreign demand for a five-year bond yielding under 5% shows that the market now believes Greece will stay in the Eurozone. It also indicates the market thinks Greece won’t collapse into chaos and that any further debt relief will be provided by official rather than private lenders. A year ago, there were few takers for that bet. The tide of money flowing into the crisis-country assets comes amid growing evidence that Southern Europe has turned the corner. 

Here's the One Trend to Watch in Earnings Season 

The first-quarter earnings season has begun and consensus analyst expectation is for 3% revenue growth and a 0.13% decline in earnings for S&P 500 firms. The bar is low for first-quarter revenue and earnings growth, but revenue among S&P 500 firms is expected to increase by 4% this year, ahead of 1.1% revenue growth in 2013. 

It’s an encouraging sign that revenue growth is expected to increase and also exceed the growth rate of earnings, which signals that consumer demand is beginning to have a larger impact on corporate profits, following several quarters of corporate austerity. Additionally, revenue growth will be a lot more important in the coming quarters as corporations may not be able to access large levels of cheap debt to fund large-scale buyback programs to boost stock prices if interest rates increase as the Fed winds down its QE program. 

Value Is the New Momentum, in Three Charts 

Large-cap value stocks, as measured by the Russell 1000 Value Index, rose 2.2% in March, easilyoutperforming the Russell 1000 Growth index, which was down 1.1%. The performance reverses a trend seen in the second half of 2013 and the first two months of 2014. 

Morgan Stanley strategist Adam Parker notes that historically “value tends to continue its advantage over growth following strong value rallies.” Additionally, “following a strong value rally, on average, the market underperforms its historical average for the next 10 months.” Parker points out that energy and consumer-staples stocks typically lead in these environments, while technology and telecom stocks lag. 

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

Perspectives from Above the Noise – Week of April 7, 2014

The S&P 500 and Dow powered to fresh new all-time highs before selling off after last Friday’s jobs report. The bulls were comforted by an apparent growth revival as the U.S. economy awakens from its harsh winter slumber. Most of the March data released this week showed modest but consistent improvement from February’s lackluster numbers. That included improved ISM services and manufacturing data, vehicle sales and ADP employment report. European central banks left policy rates unchanged again, despite inflation measures in the euro area falling to the lowest levels in four years. And emerging market equities have been rallying since mid-March.

For the week, the S&P 500 added +0.40%, the Dow gained +0.55%, and the MSCI EAFE (developed international) was up +1.53%.

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

What the Jobs Report Means for Housing

Housing data has weakened over the last few months, but a recent The Wall Street Journal Real Time Economics article paints a brighter outlook for the housing recovery. The article indicates rising interest rates and rising home prices coupled with unseasonably cold weather put a pause in the housing recovery this winter. However, the latest employment data offers a few signs that things will improve.

First, employment for 25-34 year-olds, a key group for first-time home buyers, is steadily improving and approaching pre-crisis levels. Additionally, the unemployment rate for construction workers continues to fall and is at its lowest level since 2008. And residential construction employment is 30,800 workers higher than three months ago, signaling optimism within the industry for improved housing demand in the coming months.

IMF Says U.S. Drives Growth as Russia, Brazil Weaken

A Bloomberg article summarizes the latest International Monetary Fund (IMF) projections for global growth. Not surprisingly, the IMF expects the United States, Germany and the U.K. to be bright spots in the global economy for the remainder of the year and emerging markets to continue to exhibit disappointing growth.

The IMF’s reduced growth expectations for emerging-market economies reflects what are now widely held concerns, and the recently strong price action in emerging equities in spite of growing pessimism may suggest economists have become overly pessimistic in their outlook.

Quack Quack: Demand, Meet Supply

An article by columnist Josh Brown reviews the torrid IPO market since 2011, raising a cautionary flag as a white-hot IPO market coupled with sky-high valuations is often seen at market tops. 2013 was a banner year for IPOs, the best one since 2000. A total of 222 companies went public last year raising $55 billion. Fast forward to 2014 and, even before this week, the “ducks” have been exceptionally well fed.

The sixty-plus IPOs of Q1 2014 represented a 100 percent jump over what we saw in the first quarter of last year. Total dollars raised also jumped by 40 percent to $10.6 billion, and 70 percent of this quarter’s new issues were highly speculative companies losing money over the prior year. Given the rout of many recent IPOs, and many pricier technology and biotechnology shares over the past two weeks, signs have started to appear that indicate the “ducks” are close to satiated, if not fully stuffed.

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.

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

Perspectives from Above the Noise – Week of March 31, 2014

U.S. stocks have been stuck in a six-week trading range as investors struggle to digest the effects of changes in Federal Reserve policy and the drag of winter weather on the U.S. economy. While U.S. markets continued to struggle for direction, emerging markets rallied – an unfamiliar condition in recent years. Commodities, which are closely tied to emerging economies, also staged a rally. Emerging-markets strength continues to come from India, where hope that a new government will spur economic growth has pushed equities to record highs. It’s unclear, though, whether last week’s emerging-markets strength was simply an oversold rally or the early indications of a new “risk-on” phase in the global equity markets.

For the week, the S&P 500 dropped -0.48%, the Dow gained +0.12%, and the MSCI EAFE (developed international) rose +2.15%.

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

Here Comes $75 Oil

Gene Epstein of The Wall Street Journal details the case for a very prolonged bear market in oil prices driven by surging production from deep water, shale and oil sands. These relatively new sources are providing a huge boost to previously estimated reserves and, coupled with slowing demand growth, could set the stage for much lower oil prices in real terms over the next decade.

The implications for this are likely positive for consumer spending and real economic growth, and extremely negative for countries such as Russia that are highly reliant on oil-and-gas revenues. While in the short-term oil prices may have some upward pressure from geopolitical concerns, longer-term the fundamentals seem to point to declining prices.

Yellen Assures Markets on Interest Rates

Janet Yellen, the new U.S. Federal Reserve Chairwoman, rattled markets less than two weeks ago by implying a sooner-than-expected rise in interest rates after a Fed policy meeting. However, yesterday, she made clear at a speech in Chicago that the Fed intends to keep interest rates low until the market is much stronger.

She said “while there has been steady progress, there is also no doubt that the economy and the job market are not back to normal health.” She went on to list five reasons that she sees continuing slack in the U.S. economy, including seven million part-time workers that would prefer to be in full-time jobs. Ms. Yellen’s quick re-messaging of her previous comments implies that she wants capital markets to continue to view the Fed as being unusually accommodative.

Emerging Markets Are Attractive

A recent article, based on a recent Merrill Lynch Fund Manager Survey, highlights a few interesting points on emerging market sentiment. Fund managers are currently extremely underweight emerging markets as seen by reporting of their largest underweight position in the asset class since the survey began in 2007.

Additionally, cash levels have increased and show a high correlation with the performance of the emerging markets equity. However, the asset class is starting to look extremely attractive from a long-term valuation standpoint with the overall MSCI Emerging Markets Index trading at 1.4 price to book value, and certain countries already trading close to or even below book value.

The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey. 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.

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

8 Wealth Issues: Estate Considerations

Going beyond “just the documents”

Did you know that dealing with California probate court can take at least eight months, and sometimes drag on for as long as several years? Additionally, the cost of probate can range from 3 to 7% of the total estate value. With proper estate document preparation through a reputable attorney, it is fairly simple to avoid the probate process for your heirs, but there are other estate considerations that are sometimes overlooked in the estate planning process.

In this month’s 8 Wealth Issues column, I wanted to spend some time discussing estate and legacy considerations. We will be covering some of these at our next client workshop as well.

Essential Documents. Most attorneys will prepare the essential estate documents in negotiated packaged pricing. These typically include a will & trust and springing durable powers of attorney for finance & healthcare. The power of attorney for finance is important for someone to have access to your accounts in the event of your incapacity (think about the ability of a spouse to access your retirement accounts).

Choosing an Executor/Successor Trustee. Selecting someone to administer your affairs after your passing is an important part of the process, but so is communicating this fact to that person. Simply naming someone in your will is not enough. We encourage clients to sit down with the person to be sure they understand your wishes, the resources they should turn to with regard to your assets, and how you would like your estate administered. Be sure you revisit this choice, for as life progresses, you may wish to re-name your designee for any number of reasons.

Taxes: Estate Tax & Income Tax Considerations. We all have an asset exemption for estate tax purposes. This exemption has changed considerably over the years based on the laws set forth by the Federal government. Some states also have estate taxes (currently California does not).

There are also income tax considerations for certain inherited assets. The most common surround tax-qualified retirement accounts and annuities. Your heirs may have options on the treatment of these distributions, and we encourage you to communicate that to them before it’s too late. For instance, Stretch/Beneficiary IRAs can be a great preservation strategy for an inherited retirement account. Oftentimes beneficiaries do not know about these options.

Conduct a Beneficiary Check. Certain types of assets pass outside of probate (and/or outside of your trust). We encourage clients to revisit who is named on retirement accounts, life insurance policies, and transfer on death designations. Often life events dictate a need to update your beneficiary (e.g., divorce).

Specific Bequests, and the Threats to Them. I have had clients tell me that they want to be sure that there is something specific left for someone specific—be it a family heirloom or an exact dollar amount. These bequests can be made as part of the trust, but sometimes the challenge can be in making sure that there is enough money left at the end of your life. As we plan for longer and longer retirements, people’s nest eggs need to last longer. Additionally the cost of a health event that would necessitate a care situation can be devastating to any planned legacies. Long term care insurance can sometimes help with covering these costs and ensuring legacy goals.

Your Legacy: Estate Transition & Administration. What isn’t often talked about in the estate planning process is the value of communicating your plan with loved ones. I have spent time with many clients who had to piece through parent’s estates, and often discovered how certain assets “worked” from an inherited standpoint. Some people do not realize that their trust will need to file a tax return in the year that it distributes assets. This estate transition work and the actual administration of assets is a value-added service our practice provides. I can tell you that those who have had a family-oriented meeting before the inevitable tend to have a smoother path.

This information has been derived from sources believed to be accurate This article is for informational purposes only. It is intended to be accurate and authoritative in regard to the subject matter covered. It is presented with the understanding that we are not engaged in rendering legal or tax advice through this article. 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. IRS Circular 230 Disclosure: Any discussion pertaining to taxes in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Individuals should seek advice based on their own particular circumstances from an independent tax advisor.

Perspectives from Above the Noise – Week of March 24, 2014

Last week’s volatile trading serves a clear reminder to just how much sway U.S. monetary policy still holds over the world’s financial markets. As expected, the Fed announced an additional $10 billion reduction in its monthly quantitative easing (QE) asset-purchase program. Citing labor market improvement, the Fed also altered its forward guidance policy by replacing its 6.5% unemployment threshold for triggering the end of its zero-interest-rate policy with a more qualitative and holistic assessment of the labor market. By projecting rates to rise to 1% at the end of 2015 (from 0.75%) and 2.25% by the end of 2016 (from 1.75%), some interpreted the new forecast as a sign that the Federal Open Market Committee will begin tightening sooner and/or more aggressively than previously expected. Despite the Fed drama stealing most of the spotlight, there was also some noteworthy economic data that seemed to indicate that the soft patch in U.S. economic activity was primarily weather-related and is now starting to abate.

For the week, the S&P 500 was up +1.38%, the Dow gained +1.48%, and the MSCI EAFE (developed international) rose +0.13%.

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

Gas Boom Rejuvenates Manufacturing

An article from The Wall Street Journal highlights the resurrection of U.S. manufacturing that is occurring due to the shale gas drilling boom. In a dramatic about-face, petrochemical companies have returned to the U.S. and are making multibillion-dollar investments to profit from the abundant cheap natural gas pouring out of shale-rock formations across the country.

From 2010 to 2012, energy-intensive manufacturing sectors added more than 196,000 U.S. jobs and increased real sales by $124 billion in the nation's metro areas, according to the report. Steel plants across Indiana's Rust Belt and from Birmingham, Ala., to Knoxville, Tenn., to West Mifflin, Penn., have more orders for metal. And machinery-sector growth exploded between 2010 and 2012, with Houston leading the way, followed by Chicago, Detroit, Los Angeles and Milwaukee, the report said. "That means jobs," said Lansing, Mich., Mayor Virg Bernero. "There are still people who need jobs, and advanced manufacturing is the ticket."

Fear of Rising Rates Killing Bull Overblown?

A recent article from the USA Today has a nice summary of the historical evidence on how stocks perform during periods of rising interest rates, a concern which again came to the forefront of investors’ minds following last week’s U.S. Federal Reserve meeting. As detailed in the article, stocks have performed fairly well on average when interest rates are rising but still low. As this condition is typically associated with an improving economy, cyclical sectors have tended to perform best on average.

As noted in the article, once interest rates hit a high nominal level stocks have tended to struggle. We have also found that when the pace of the rise in interest rates is very sharp it has also tended to provide a headwind for stocks. Nonetheless, the article provides a good historical perspective that suggests stocks can perform well during a period of moderately increasing interest rates.

Pace of Home Price Gains Slow According to the S&P/Case-Shiller Home Price Indices

Today’s release of the S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that the 10-city and 20-city composites rose 13.5% and 13.2%, respectively year-over-year through January. The broader 20-city composite posted its third consecutive monthly decline of 0.1%, with 12 cities seeing their annual rates worsen.

As of January 2014, average home prices across the United States are now back to their mid-2004 levels. Separately, purchases of new homes in the U.S. fell in February to the lowest level in five months. Unusually frigid temperatures along with rising mortgage rates, higher property values and a lack of supply have dampened prospective buyer demand.

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