Monthly Archives: June 2014

Weekly Market Commentary

June 30, 2014

The Markets

Last week, the U.S. Department of Commerce delivered news that was about as welcome as a report of a great white shark sighting off a popular beach during the Fourth of July holiday. The Commerce Department’s third revision of its estimate for economic growth in the United States during the first quarter of 2014 was revised downward – by a lot. Instead of contracting by 1 percent, the economy shrank by 2.9 percent. It was the worst single-quarter contraction in five years.

According to Barron’s, “The number was so bad… it suggested that something more than the weather was to blame for the plunge in economic activity – and that a recession could be in the offing.” Other factors did contribute to the economy’s first-quarter reversal including a reduction in healthcare spending sparked by the Affordable Care Act and the end of emergency unemployment benefits in January.

However, experts warned against making too much of backward-looking data. ING economist James Knightley told The Guardian reaction to the news should be fairly muted as many economists expect second quarter numbers to show significant improvement. PNC Financial Services senior economist Gus Faucher, who was also quoted in the article, concurred:

“The contraction in the first quarter is old news, and things are looking much better for the rest of this year. Most importantly the labour market remains solid… Job gains are allowing households to increase their spending, with higher stock prices and home values also helping. Recent data have been solid, with big jumps in new and existing home sales in May, and consumer confidence recovering after it took a hit in the winter. An expanding global economy will help boost exports…”

Comments from St. Louis Federal Reserve President James Bullard reinforced the view that economic growth remains steady. Last Thursday, he predicted the Fed would raise interest rates early in 2015. Bloomberg.com reported Bullard expects the jobless rate to drop below 6 percent and inflation to close in on 2 percent by the end of 2014.

THE BULL MARKET IN BONDS HAS PERSISTED FOR MORE THAN 30 YEARS. It began when The Cosby Show was in its heyday, when the first Apple Macintosh computers arrived in homes, and when Clara Peller famously asked, “Where’s the beef?” in a popular television commercial. The bull market began late in 1981 when 30-year U.S. Treasury bond rates hit an all time high of 15.2 percent and 10-year Treasuries topped out at 15.8 percent. Thirty-three years later, in mid-2014, 30-year Treasuries and their 10-year brethren offered rates in the low single digits.

MarketWatch.com says the lengthy bull market in bonds has important implications:

“… Assuming the typical investor doesn’t seriously start thinking about investing until he is 25 or 30 years old, especially about investing in bonds, that means that anyone today not in, or very close to, retirement has only known a bond bull market. That’s an amazing historical and psychological fact, the significance of which cannot be overstated. It means that very few investors today have the long-term perspective with which to properly assess whether bonds are likely to suffer major declines in coming years.”

After 30-odd years of declining interest rates, some experts believe investors should prepare for a period of rising rates. Since there is an inverse relationship between bond prices and interest rates, higher rates could mean declining bond prices. How much could the price of a bond decline? It all depends on the bond’s duration. Duration is expressed as a number of years and measures the sensitivity of a bond to interest rate movements. The longer the duration of a bond, the more sensitive it is to changing rates, and vice-versa. Investopedia.com describes duration like this:

“The duration number is a complicated calculation involving present value, yield, coupon, final maturity, and call features. Fortunately, for investors, this indicator is a standard data point provided in the presentation of comprehensive bond and bond mutual fund information. The bigger the duration number, the greater the interest-rate risk or reward for bond prices.”

If rates move higher, a portfolio with long-term, long-duration bonds may experience a significant reduction in value.

Weekly Focus – Think About It

“Hard work spotlights the character of people: some turn up their sleeves, some turn up their noses, and some don’t turn up at all.”
                                                                                    –Sam Ewing, American baseball player

 

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
* Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Stock investing involves risk including loss of principal.
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Sources:
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
http://blogs.barrons.com/incomeinvesting/2014/06/25/bonds-gain-on-awful-gdp-data/ (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/06-30-14_Barrons-Bonds_Gain_On_Awful_GDP_Data-Footnote_2.pdf)
http://online.barrons.com/news/articles/SB50001424053111904544004579642472212243800?mod=BOL_hp_we_columns (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/06-30-14_Barrons-For_Stocks_Good_News_Beyond_GDP-Footnote_3.pdf)
http://www.theguardian.com/business/2014/jun/25/us-gdp-fall-what-economists-say-economy
http://www.bloomberg.com/news/2014-06-26/bullard-sees-fed-raising-rates-in-first-quarter-of-2015.html
http://mentalfloss.com/article/54350/30-things-turning-30-2014
http://www.marketwatch.com/story/what-a-bond-bear-market-really-looks-like-2014-02-25
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
http://www.investopedia.com/terms/d/duration.asp
http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/Bonds/P204318
http://www.brainyquote.com/quotes/quotes/s/samewing104937.html#ZzuQW1eV4glyQtKC.99

Weekly Market Commentary

June 23, 2014

The Markets

The Federal Open Market Committee (FOMC) press release wasn’t quite as catchy as España Cañí — the Spanish song played to rile crowds at events as varied as baseball games and bullfights — but it helped motivate investors as they pushed American stock markets higher last week.

The markets’ optimistic surge was a bit difficult to understand. Since April, the U.S. economy has offered mixed signals. As it turns out, the economy actually suffered a contraction — not a slight expansion, as was originally thought — during the first quarter of 2014. Unemployment has been relatively steady with employers adding about 200,000 jobs in each of the last four months.  However, inflation numbers have some pundits concerned.

The Bureau of Labor Statistics’ Consumer Price Index Summary (CPI) showed the CPI increased by 0.4 percent in May, but that doesn’t really tell the whole story. The price of food was rising faster (0.7 percent) than the CPI and in May, the food index posted its largest increase since August 2011. In addition, the cost of electricity and gasoline rose 0.9 percent.  When questioned about the discrepancy, Chairwoman Janet Yellen indicated the numbers around inflation could be just ‘noise.’  The Fed’s attitude toward inflation had The Guardian accusing it of magical thinking.

“…Consumers are surrounded by rising prices on all sides – paying higher bills, paying more money at the market, paying more just to get to work. At the same time we’re shelling out more for these necessities, our incomes are stagnant. No more money is coming in. Yet the Fed, which just wrapped a two-day meeting to diagnose the economy, is dismissing these real-world costs as a trick of the charts – a mere math problem rather than a real snapshot of the challenges facing Americans.”

If economic signals are mixed, why were markets so optimistic? Reuters suggested investors’ confidence had a lot to do with the markets’ resilience during 2014 to-date (in the face of events in Ukraine and the Middle East, among others), as well as economic improvement, earnings growth, and the availability of cheap credit.

DECIMATE IS A VERY INTERESTING WORD…In the early 1500s, according to OxfordDictionaries.com, decimation (an earlier version of decimate) referred to tithing—paying a tenth of your income to an organization that was usually religious in nature. By the end of the 1600s, “An English Dictionary defined [decimate] as both ‘to tythe or take the [tenth]’ and ‘also punishing every tenth man.’”  More recently, decimate has been defined as destroying a large portion of something or drastically reducing the strength or effectiveness of something.

When it comes to retirement, the great decimator could be healthcare costs. The Employee Benefits Research Institute (EBRI) estimated that, in 2013, men needed $65,000 and women needed $86,000 to have a fifty-fifty chance of covering healthcare expenses during retirement. At least, that’s how much they needed to pay for Medigap premiums, Medicare Part B premiums, Medicare Part D premiums, and out-of-pocket expenses.

Of course, if they wanted better odds, people had to save more. Let’s say a person wanted a 90 percent chance of having enough money to pay the healthcare costs listed above. In that case, a man needed $122,000 and a woman $139,000. A married couple (both with drug expenses in the 90th percentile) needed $360,000 in savings. EBRI Notes said, “Individuals can expect to pay a greater share of their costs out-of-pocket in the future because of the combination of the financial condition of the Medicare program and cutbacks to employment-based retiree health programs.”

Of course, it’s important to note that these targets don’t include any expenses associated with early retirement or long-term care costs. A new study estimates that a couple retiring at age 62 will pay about $17,000 in out-of-pocket expenses each year until they become eligible for Medicare.  No matter when they retire, 70 percent of Americans eventually need long-term care services and support, according to LongTermCare.gov.  The cost of long-term care depends on the services required, but it is not insignificant. One survey estimated that the average cost of care for one year in a private nursing facility was about $96,000 in 2014.

Putting sound financial strategies in place can help prevent healthcare expenses from decimating your retirement.

Weekly Focus – Think About It
“People who think they know everything are a great annoyance to those of us who do.”
                                                      — Isaac Asimov, American author and biochemistry professor

 

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Stock investing involves risk including loss of principal.

Sources:
[1]
http://www.marketwatch.com/story/stocks-rise-as-witching-may-spark-volatility-volume-2014-06-20?link=MW_latest_news
[2] http://www.usnews.com/news/articles/2014/06/18/no-surprise-fomc-keeps-tapering-gives-no-detail-about-timing-of-rate-hike
[3] http://www.bls.gov/news.release/cpi.nr0.htm
[4] http://www.businessinsider.com/inflation-wall-street-vs-the-fed-2014-6
[5] http://www.theguardian.com/commentisfree/2014/jun/18/fed-janet-yellen-economy-inflation
[6] http://www.reuters.com/article/2014/06/21/us-usa-markets-fed-analysis-idUSKBN0EV0CH20140621
[7] http://blog.oxforddictionaries.com/2012/09/does-decimate-mean-destroy-one-tenth/
[8] http://www.oxforddictionaries.com/definition/english/decimate
[9] http://www.ebri.org/publications/notes/index.cfm?fa=notesDisp&content_id=5281
[10] http://www.kiplinger.com/article/retirement/T027-C022-S003-reality-check-health-care-costs-early-retirees.html
[11] http://longtermcare.gov/the-basics/who-needs-care/
[12] http://www.newyorklife.com/products/long-term-care-cost
[13] http://www.brainyquote.com/quotes/topics/topic_funny.html#edvxCeEr43ZcWsGU

Weekly Market Commentary

June 16, 2014

The Markets

Investors remain oddly complacent even in the face of unexpected events that have the potential to disrupt global markets.

Last week, news media reported civil war in Syria has boiled over into Iraq, and ISIS (Islamic State of Iraq and Syria), a Sunni extremist group, has seized control of hundreds of square miles. According to CNN.com, the group’s ambition is to create an Islamic state that encompasses the Sunni regions of both Iraq and Syria. The Economist pointed out the potential for volatility in world energy prices is enormous because significant portions of the world’s energy reserves are controlled by Middle Eastern nations (factor in Russia and Venezuela, too).

Governor of the Bank of England, Mark Carney, let markets know the United Kingdom’s central bank may raise rates sooner than expected to help turn the country’s recovery into a durable expansion. His speech sparked speculation about the timing of rate hikes in the United States. President of the Federal Reserve Bank of St. Louis, James Bullard, told The Wall Street Journal the Fed is likely to raise rates sooner than expected if the U.S. economy meets performance expectations during 2014.

Russian politicians are encouraging a de-dollarization of their economy, and leaders of several Russian banks have indicated they are bypassing the U.S. dollar in their international transactions. China and Brazil are settling some of their trade with their currencies, the renminbi and the real (respectively). According to Barron’s, “The world is actively seeking an alternative to the greenback. Major nations don’t want to pay the virtual toll in the cost of acquiring dollars to conduct trade. The maturation of their own financial markets increasingly allows them to bypass the dollar-centric financial system.”

U.S. stock markets largely finished the week lower; however, the CBOE Volatility Index (VIX) (the so-called fear gauge) remained at levels suggesting investors remain relatively unruffled.

PAUL, THE GERMAN OCTOPUS ORACLE, DID PRETTY WELL PREDICTING outcomes of 2010 World Cup matches. Paul’s approach wasn’t too scientific and, now that he is gone, a lot of folks are turning to animal prognosticators. China has a team of baby pandas and Germany has put Nelly the elephant on the task.

In case you’re not a soccer aficionado, The World Cup – soccer’s version of the Super Bowl, World Series, Stanley Cup, etc., etc. – began last weekend. SBNation.com’s soccer glossary describes the event like this:

“The World Cup is the most important soccer tournament on the planet. It is contested over 64 games by 32 national teams every four years and tends to be watched by a significant fraction of the global population… Long story short: it’s the most important trophy in the world’s most popular sport.”

The World Cup also provides a lesson on sentiment-driven markets. Market sentiment reflects the optimism or pessimism of investors on the whole – crowd attitude – and it can send markets higher or lower. It can affect markets even when there’s no change in underlying fundamentals.

So, how does it work? Goldman Sachs publishes a 67-page report, complete with a dream team line-up and interviews, titled The World Cup and Economics. It could be a program brochure for the event. Regardless, the report includes data about the performance of countries’ stock markets following a victory or defeat in the finals.

Stock markets in winning countries tend to outperform by about 3.5 percent for the first month after the win but gains fade by the three-month mark, and markets tend to underperform the following year. When you remove significant outliers, runner-up countries’ markets typically underperform during the three months following the loss. It seems nobody is too pleased about coming in second.

Weekly Focus – Think About It

“Some people think football [soccer] is a matter of life and death. I assure you, it’s much more serious than that.”

–Bill Shankly, Scottish footballer and manager of Liverpool Football Club

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Past performance does not guarantee future results. Investing involves risk, including loss of principal.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

* Stock investing involves risk including loss of principal.

Sources:

http://www.cnn.com/2014/06/12/world/meast/who-is-the-isis/

http://www.economist.com/blogs/buttonwood/2014/06/geopolitical-risk-and-markets?zid=308&ah=e21d923f9b263c5548d5615da3d30f4d

http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech736.pdf (Pages 3-4)

http://blogs.wsj.com/economics/2014/06/09/feds-james-bullard-fed-is-much-closer-to-its-policy-goals/ (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/06-16-14_WSJ-Feds_Bullard_Says_Central_Bank_May_Raise_Rates-Footnote_4.pdf)

http://america.aljazeera.com/articles/2014/6/9/russia-banks-currency.html

http://online.barrons.com/news/articles/SB50001424053111903583804579614252099387332?mod=BOL_hp_we_columns (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/06-16-14_Barrons-Surprise-Side_Economics-Footnote_6.pdf)

http://www.nbcnews.com/storyline/world-cup/wholl-succeed-paul-octopus-world-cup-oracle-its-anyones-bet-n124971

http://www.sbnation.com/soccer/2014/6/12/5802424/soccer-glossary-2014-world-cup#worldcup_worldcup

http://www.investopedia.com/terms/m/marketsentiment.asp

http://www.goldmansachs.com/our-thinking/outlook/world-cup-sections/world-cup-book-2014-equity-markets.html?cid=PS_01_84_07_00_00_01_01

http://www.brainyquote.com/quotes/quotes/b/billshankl312046.html