Investment Management: Quarterly Review and Outlook, Second Quarter 2014

By John Mauldin
It’s time for our Quarterly Review & Outlook from Lacy Hunt of Hoisington Investment Management, who leads off this month with a helpful explanation of the relationship between the U.S. GDP growth rate and 30 year treasury yields. That’s an important relationship, because long term interest rates above nominal GDP growth (as they are now) tend to retard economic activity and vice versa.

The author adds that the average four quarter growth rate of real GDP during the present recovery is 1.8%, well below the 4.2% average in all of the previous post war expansions; and despite six years of federal deficits totaling $6.27 trillion and another $3.63 trillion in quantitative easing by the Fed, the growth rate of the economy continues to erode.

So what gives? We’re simply too indebted, says Lacy; and too much of the debt is nonproductive. (Total U.S. public and private debt rose to 349.3% of GDP in the first quarter, up from 343.7% in the third quarter of 2013.) And as Hyman Minsky and Charles Kindleberger showed us, higher levels of debt slow economic growth when the debt is unbalanced toward the type of borrowing that doesn’t create an income stream sufficient to repay principal and interest.

And it’s not just the US. Lacy notes that the world’s largest economies have a higher total debt to GDP ratio today than at the onset of the Great Recession in 2008, and foreign households are living farther above their means than they were six years ago.

Simply put, the developed (and much of the developing) world is fast approaching the end of a 60-year-long debt supercycle, as I (hope I) conclusively demonstrated in Endgame and reaffirmed in Code Red.
Hoisington Investment Management Company ( is a registered investment advisor specializing in fixed income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $5 billion under management and is the sub adviser of the Wasatch-Hoisington U.S. Treasury Fund (WHOSX).

Some readers may have noticed that there was no Thoughts from the Frontline in their inboxes this weekend. As has happened only once or twice in the last 14 years, I found myself in an intellectual cul-de-sac, and there was not enough time to back out. Knowing that I was going to be involved in a fascinating conference over the weekend, I had planned to do a rather simple analysis of a new book on how GDP is constructed. But as I got deeper into thinking about the topic and doing more research, I remembered something I read 20 years ago about the misleading nature of GDP, and I realized that a simple analysis just wouldn’t cut it.


Is This A Stealth Correction – Are We Too Optimistic

The second “stealth correction” of the year had been underway below the surface for a few weeks, with a broadening selection of B-list stocks tiring and investor risk appetites ebbing, and is now threatening to break into the open.

The task of playing for a more damaging break in the upward trend is complicated, though, by the fact that several such threats have proved empty in the recent past. And the sudden rush for safety amid shrill geopolitical news headlines Thursday is just the sort of hasty reflex action that has indicated decent Buy signals during this largely imperturbable bull run.

Yellen’s market call

One of the ironies of Federal Reserve Chair Janet Yellen’s singling out of small-cap, biotech and social media stocks as appearing overvalued is that these sectors have been under pressure for months.

These three market segments – as measured by exchange-traded funds tracking the iShares Russell 2000 (IWM), iShares Nasdaq Biotechnology (IBB) and Global X Social Media (SOCL) indexes – have lagged the blue-chip Standard & Poor’s 500 by between five and 15 percentage points in the past four months. Yellen was mostly voicing the conventional wisdom circa March 31 in commenting on isolated evidence of excessive investor confidence. As Yellen’s remarks were scrutinized, these pockets of the market saw selloffs.
Selloffs Post Yellen testimony.
Sliced up differently, the largest 500 stocks in the market as tracked by Russell were up more than 8% in 2014 before Thursday, and the smallest 500 down an average of 6% – a huge performance spread that shows a marked preference this year for stable, global companies over fast-moving, speculative ones. From July 1 through Wednesday, too, the largest 500 names were about flat even as the littlest 500 slid more than 5%, according to Pension Partners.

Before the S&P 500 on Thursday dropped 1.14%, breaking a 62-day streak without at least a 1% move, Canaccord Genuity strategist Tony Dwyer was citing other signs of ragged tape action and subtle weakness in reiterating his call for a 5%-plus market correction (which he feels should be bought for a powerful surge to his year-end S&P 500 target of 2,185, up more than 11% from Thursday’s close).

A time-proven gauge of internal market energy, the Lowry’s Buying Power index, has sagged to the lowest reading of the year. And despite the headline indexes being right up against all-time highs, fewer than one quarter of New York Stock Exchange names were within 2% of a 52-week high.

Such indicators “tell us the broad market is already in correction mode,” Dwyer says. “Many times, the correction shows up in the mega-cap stocks and major market indexes toward the tail end of a market correction.” Of course, in the springtime the damage never hit the headline large-stock benchmarks hard, as what I call an “immaculate rotation” shifted money from aggressive stocks to stable, bond-like shares instead.

The already-substantial pain in smaller-company stocks could even mean this trend of small-cap underperformance, something that often occurs later in a bull market, might not have quite as far to run in the immediate future as the growing consensus seems to believe.

Will Nasgovitz, portfolio manager of Heartland Select Value Fund (HRSVX), who hunts for inexpensive, out-of-favor stocks of all sizes, says, “It’s unfair to make a blanket statement about elevated [valuations] of small caps.” He says it’s mostly the lower-quality, more speculative subset of small stocks in the Russell 2000 index that are making the whole category appear overvalued. Indeed, the iShares Morningstar Small-Cap Value ETF (JKL) has handily outperformed its all-inclusive Russell 2000 counterpart during this choppy period.

Worrisome optimism

A nagging vulnerability of the market coming into the summer has been the pervasive optimism among active investors and traders. The proportion of investment-advisory newsletter writers tracked by Investors Intelligence who were bullish on stocks has been near historic highs since May, and the Bank of America Merrill Lynch global fund manager survey this month showed the second-highest tilt toward equities in 13 years.

Michael Hartnett, global strategist at Merrill and steward of that survey, has been firmly and correctly bullish on stocks and other riskier assets in recent years. Yet the fund manager ebullience – along with Merrill retail wealth management clients riding their highest equity allocation in at least nine years – prompted Hartnett to say Thursday that “an autumn correction is increasingly likely.”

As noted, of course, persistent predictions of a true, cleansing correction that pares stretched valuations and tempers investor expectations have failed to take hold since late 2012. The list of would-be or actual crises overseas that put a fleeting scare into the market includes the Cyprus insolvency episode, the Arab Spring, Syrian civil war, Iraq insurgency, Ukraine-Russia conflict and the current Israel-Hamas conflict.

If the current bout of unnerving foreign unrest proves a catalyst for a deeper and more inclusive Wall Street pullback, it will likely be more excuse than cause. The annals of major bull market tops and subsequent bear markets are generally free of pure military or geopolitical triggers.

The fact that the market conversation is now focused on whether or when a correction might arise – rather than whether a severe and prolonged market downturn is on the way – reflects the general sense that leading indicators of the economy are relatively encouraging.

Credit markets, while a bit softer lately, are far from signaling economic distress to come. Stocks are more expensive than the historical norm, but not dramatically so. Earnings have held up OK, even if they’re no longer growing rapidly. And corporate animal spirits, in the form of capital spending and mergers and acquisition activity, are on the rise yet haven’t tipped over to recklessness.

One sign that prior periods of news-driven market setbacks have run their course has been a spurt in trader anxiety, which has tended to well up forcefully with fairly shallow 2% or 3% index dips. There were some hints of this Thursday, with a rush for protective stock options driving the CBOE Volatility Index smartly higher – a jump well in excess of what would generally accompany a 1%-ish daily market drop. And the CNN/Money Fear and Greed Index sinking fast toward extreme fear.

One of these times, such familiar tactical signals for buying a dip won’t work and the market will break rather than bend. Are we there yet?

Stocks Slide With Portugal Bonds as Treasuries, Gold Gain

European stocks fell and Portuguese bonds dropped as concern deepened over missed debt payments by a company linked to the nation’s second-largest bank. Standard & Poor’s 500 Index futures signaled a selloff earlier this week will resume, while the yen, Treasuries and gold gained.

The Stoxx Europe 600 Index lost 1.3 percent at 8:35 a.m. in New York, led by a gauge of banks dropping to this year’s low. Financial bond risk increased in Europe for a fifth day. Standard & Poor’s 500 Index futures fell 0.9 percent. Portugal’s 10-year bond yield rose 11 basis points to 3.88 percent while Treasuries gained and the yen advanced against all but one of its 16 major peers. Indonesian stocks climbed to a one-year high as polls showed Jakarta’s Governor Joko Widodo won the presidency. West Texas Intermediate oil slid 0.3 percent to $101.62 a barrel while gold climbed 1.1 percent.

Bonds of Europe’s most-indebted nations declined as speculation resurfaced that the euro region remains vulnerable to shocks as it emerges from the sovereign debt crisis. The sell-off comes after minutes of the Federal Reserve latest meeting showed yesterday some policy makers were concerned investors may be growing too complacent. The value of global equities climbed to a record $66 trillion last week, data compiled by Bloomberg show.

Photographer: Dimas Ardian/Bloomberg
One-month rupiah forwards added 0.2 percent as unofficial counts showed Jakarta… Read More
“The concern of an event like this is always determining whether it’s occurring in isolation or whether it’s the first domino,” said Lawrence Creatura, a fund manager at Federated investors Inc. in Rochester, New York. His firm manages about $363.8 billion. “People will shoot first and ask questions later when news like this hits. It’s a classic flight to safety across the equity, commodities and bond markets. Portugal has been perceived as a weaker link so it’s not a particular surprise they’re encountering this kind of trouble now.”

Fewer Americans than forecast filed applications for unemployment benefits last week, a sign the labor market is strengthening, a government report showed today.

Peripheral Bonds

Portuguese bonds fell for a fourth day. The yield on 10-year Italian notes rose six basis points to 2.94 percent and Spain’s rate jumped six basis points to 2.82 percent. The Markit iTraxx Europe Senior Financial Index of credit-default swaps on 25 European banks and insurers rose two basis points to 71 basis points, the highest since June 4.

While Portugal’s central bank said Banco Espirito Santo SA, the nation’s second-largest lender, is protected after its parent missed debt payments, Moody’s Investors Service downgraded a company in the group citing a lack of transparency and links to other companies.

Banco Espirito Santo tumbled 17 percent before the Portuguese securities regulator said it stopped trading in the shares pending an announcement. Espirito Santo Financial Group SA, which owns 25 percent of the lender, fell 8.9 percent before the company suspended trading earlier in stocks and bonds, saying it’s “currently assessing the financial impact of its exposure” to Espirito Santo International, which has missed payments on short-term paper.

Fugro Tumbles

More than nine shares declined for every one that advanced in the Stoxx 600, with trading volumes 72 percent higher than the 30-day average, according to data compiled by Bloomberg. The gauge of banks tumbled 2.7 percent to the lowest since Dec. 18.

Banco Popular Espanol SA (POP) dropped 4.8 percent. The Spanish lender said it postponed a planned issue of the riskiest bank debt because of “heightened volatility” in credit markets.

Fugro NV (FUR) sank 20 percent, the most since November 2012, after the Dutch deepwater-oilfield surveyor forecast a drop in profit margin and writing off of as much as 350 million euros ($477 million). Skanska AB lost 2.5 percent after the Nordic region’s biggest construction company by global revenue said it will scale down operations in Latin America after booking 500 million kronor ($73.7 million) in project writedowns and restructuring costs.

Jobless Claims

The S&P 500 index (SPX) rebounded 0.5 percent yesterday following two days of losses.

Jobless claims declined by 11,000 to 304,000 in the week ended July 5, the fewest in more than a month, a Labor Department report showed today in Washington. The median forecast of 45 economists surveyed by Bloomberg called for 315,000.

Federal Reserve Bank of St. Louis President James Bullard said yesterday that a surprisingly fast decline in unemployment will fuel inflation and back the case for higher interest rates.

The Jakarta Composite Index added 1.4 percent to 5,095.20, heading for its highest close since May 2013. The rupiah gained 0.7 percent to 11,555 per dollar, according to prices from local banks, after touching the strongest level since May 22.

Both Widodo, known as Jokowi, and his opponent Prabowo Subianto claimed victory in yesterday’s presidential vote. Jokowi had about a five percentage point lead in the poll, according to unofficial counts from two survey companies that declared him the winner. Official results aren’t due for about two weeks. Bank Indonesia will probably hold its reference rate at 7.5 percent today, according to the median of 21 estimates from economists surveyed by Bloomberg.

The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong advanced 0.3 percent, after losing 1.6 percent yesterday, its biggest decline in two weeks. The Shanghai Composite Index slipped less than 0.1 percent, extending yesterday’s 1.2 percent retreat.

China Exports

China’s overseas shipments fell short of the 10.4 percent expansion that was the median of 47 economists’ estimates compiled by Bloomberg. Imports grew by 5.5 percent in June, less than the 6 percent increase projected. The trade surplus fell to $31.6 billion for June, from $35.92 in May. Data yesterday showed producer prices fell last month at the slowest pace in more than two years.

“Extreme cautiousness towards China’s economy has receded overall, with the government showing signs it will step in to support growth when needed,” said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc.

West Texas Intermediate oil dropped to $102.01 a barrel. Gasoline inventories increased by 579,000 barrels last week as a measure of consumption slid, the Energy Information Administration said yesterday. Brent declined 0.2 percent to $108.10 a barrel, the ninth consecutive decline in the longest streak since May 2010. The crude closed at a two-month low yesterday amid signs that Libya, the holder of Africa’s largest crude reserves, will boost exports, while Iraqi production remains unaffected by an insurgency.

Treasury Sale

Gold for immediate delivery jumped to $1,342.23 an ounce, the highest since March 19. Palladium rose 0.3 percent to $876.25 an ounce, the 14th consecutive advance and the longest streak since June 2000. Cotton fell 0.4 percent to the lowest price since July 2012 on ample supplies.

The yield on 10-year Treasuries dropped five basis points to 2.50 percent. The rate on 30-year notes declined five basis points to 3.33 percent as the U.S. prepares to sell $13 billion of the debt.

Greece’s five-year note yield increased 11 basis points 4.33 percent. The government sold 1.5 billion euros of three-year notes via banks, priced to yield 3.5 percent. That’s higher than forecasts earlier this week for a rate of about 3 percent from HSBC Holdings Plc and Royal Bank of Scotland Group Plc.

The yen strengthened 0.3 percent to 101.36 per dollar and gained 0.3 percent to 138.31 per euro.

Australia’s dollar retreated from the highest in a week, falling against all of its 16 major counterparts after the nation’s jobless rate climbed. The Aussie weakened 0.4 percent at 93.74 U.S. cents.

Bill Gross : U.S. Still Faces Permanent Slump

When the Federal Reserve meets this week, the Wall Street Journal reports the most challenging question won’t be where to push interest rates in the near term, but where they belong years into the future. The WSJ indicates policy makers have believed the benchmark interest rate — known as the federal-funds rate — should be about 4% in a balanced economy, but officials are now debating whether interest rates need to remain below that threshold long after the economy returns to normal (i.e. once inflation is stable at 2% and unemployment around 5.5%).

Pimco, the world’s largest bond manager with close to $2 trillion in assets under management, believes the federal funds rate will remain well below the “neutral” policy rate of 4% once the economy returns to full health. The firm is predicting a “new neutral” rate of 2% (nominal), given the highly leveraged economy. In the video above, Pimco founder and CIO Bill Gross says the difference is “critical” as the neutral policy rate “basically determines the prices of all assets.”

He tells us the biggest investment theme for the next five years will be, “how far does the Fed go in terms of their tightening and their journey back up, as opposed to down,” as the central bank moves to get out of the business of buying treasury bonds and mortgage-backed securities, and begins to raise rates from near zero.

The head of the International Monetary Fund on Monday said the Fed should move rates up only gradually when it finally begins to lift borrowing costs, Reuters reports.

While tightening may be the next phase of the monetary policy story, what does Gross think about the impact of the Fed’s easy money policies and how successful they have been over the last five years — with rates held near zero and the balance sheet expanded by trillions of dollars?


He says, “so far, so good.” Gross credits the Fed for over five years of “beautiful deleveraging,” as hedge fund titan Ray Dalio calls it. Gross also sees success in other factors, including real economic growth of 2%, institutions being shored up, the stock market being close to record highs and employment growing at 200,000 a month. He says it remains a legitimate question what the central bank can do when it stops buying bonds and starts raising rates, though, conceding that things could get ugly.

And while 2% growth is less than stellar considering a historical norm of 3.5% to 4%, the lower growth is inline with what Pimco dubbed the “new normal” for the economy back in 2009. More recently, economists such as Larry Summers have advanced the idea that the U.S. may be facing secular stagnation — a permanent slump, with the economy hindered by structural issues such as demographics and the automation of jobs.

Related:  Has the U.S. Economy Entered a ‘Permanent Slump’?

In the video below, Gross says he agrees we are in a secular stagnation period and says it is difficult to get out of. He jokes that Summers “took our [new normal] idea and called it secular stagnation,” adding, “come on, Larry … give Pimco some credit!” Check out the bonus video for more.




Stock Markets Are ” Dangerous”

David Tepper, founder of $20 billion hedge-fund firm Appaloosa Management LP, said he’s nervous about markets as the U.S. economy isn’t growing fast enough amid complacency by the Federal Reserve.

“We have this term called coordinated complacency to describe the world’s central banks right now,” Tepper said yesterday at the SkyBridge Alternatives Conference in Las Vegas. “The market is kind of dangerous in a way.”

Tepper, 56, who started his Short Hills, New Jersey-based firm in 1993, said he’s more worried about deflation than inflation and that this is the time to preserve money. The fund manager, who is worth $7.9 billion according to the Bloomberg Billionaires Index, said that while investors can be optimistic on markets, they should hold some cash.

“I think it’s nervous time” he said, adding that markets may “grind higher” in the near term.

Fed Chair Janet Yellen last week said the world’s biggest economy still requires a strong dose of stimulus. U.S. stocks slumped today with the Standard & Poor’s 500 Index sliding 1.2 percent at 11:20 a.m. in New York. Equities had reached all-time highs this week after three rounds of monetary stimulus helped fuel economic growth, sending the S&P 500 Index (SPX) surging as much as 180 percent from its 2009 low.

‘Freakin’ Long’

Tepper said he wasn’t recommending that investors bet against assets. They shouldn’t be too optimistic about rising markets either.

Don’t be too “freakin’ long,” he said.

The money manager has curbed his bullishness since last year after U.S. growth failed to be more robust than it is. Tepper said he would be “comfortable” if the nation posts economic growth of 4 percent in the second half of the year.

“We should be moving faster,” he said.

Tepper said in November that stock markets aren’t inflated and that while he was optimistic about U.S. equities, they may fall 5 percent to 10 percent when the Fed curbs its monthly stimulus program.

Tepper was last year’s top-earning hedge-fund manager as he made $3.5 billion, according to Institutional Investor’s Alpha 2014 Rich List. He joins other money managers, former politicians and celebrities including actor Kevin Spacey and basketball Hall of Famer Earvin “Magic” Johnson among the conference speakers this week at SALT, which is in its sixth year. The event continues today with David Rubenstein of Carlyle Group LP and “The Black Swan” author Nassim Taleb among the scheduled speakers.

Behind Curve

He said yesterday that the European Central Bank is “really far behind the curve” and that it should boost its stimulus program in June.

The euro-area grew 0.2 percent last quarter, half as much as economists had forecast, according to Eurostat data released today, adding pressure on the ECB to deliver stimulus measures next month.

Markets may react negatively to inaction by the central bank, Tepper said.

ECB President Mario Draghi said at the institution’s policy meeting in Brussels last week that he’s “comfortable” with the idea of boosting stimulus at the June gathering, and that a strong euro currency “in the context of low inflation is cause for serious concern.”

Should the ECB decide to act, it might deploy multiple tools rather than just cutting interest rates. At 0.7 percent in April, inflation was less than half of the ECB’s goal of just under 2 percent. The rate has been below 1 percent since October.

Tepper, who described global markets as “tough,” said that he has moved his investments around and that his fund is exposed to the markets to the extent that it can either boost or cut holdings easily.

The Millionaire Forecasts and Survey

Where the rich invest

Tuesday, 6 May 2014 | 7:51 AM ET

CNBC’s Robert Frank reveals the results of CNBC’s Millionaire Survey, which shows how the wealthy feel about the markets and where they are putting their money to work.

American millionaires are betting that stocks finish the year up 5 percent to 10 percent, and most plan to put new cash into tech and financial stocks.Jack A. Bass and Associates predicts a 30 % return for their clients in the same period.

The first-ever CNBC Millionaire’s Survey, which polled 514 people with investable assets of $1 million or more (which represents the top 8 percent of American households), found that millionaires plan to put nearly half their new investment dollars into equities this year and only 14 percent in cash. Since the top 10 percent of Americans own more than 80 percent of stocks, the positive mood of millionaire investors could bode well for the market.

The online survey was conducted in March by SpectremGroup on behalf of CNBC. It polled wealthy individuals from across the country that were split between Democrats, Republicans and Independents.

Talitha_it | iStock | Getty Images

Yet the millionaires also project that interest rates will end higher, and more than half believe the U.S. economy will be the same or weaker at the end of the year.

The survey also found that wealthier investors (those with $5 million or more in investable assets) are slightly more bullish on stocks and the economy and more likely to invest in tech stocks.

When asked where the S&P 500 Index would end the year, 54 percent said it would be up 5 percent to 10 percent. Only 16 percent said it would be up more than 15 percent, and 16 percent said it would end flat. Only 7 percent said it would end the year down 5 percent to 10 percent.

Millionaires are putting their money where their mood is. When asked where they would invest new money this year, the largest number (46 percent) said equities, followed by fixed income (21 percent) and then short-term cash instruments (14 percent).

Among sectors, technology is the favorite new investment for 2014, followed by financials, energy and health care.

The wealthier investors (those worth $5 million or more) are even more bullish on technology, with 22 percent listing it as their top sector for 2014. They’re also far more bullish than lesser millionaires on health care, with 15 percent listing it as their top sector.

To align your portfolio email or call Jack direct at 604-858-3202 Pacific time Monday – Friday 9;00- 5:00

Nobel Prize Economist Warns of U.S. Stock Market Bubble

An American who won this year’s Nobel Prize for economics believes sharp rises in equity and property prices could lead to a dangerous financial bubble and may end badly, he told a German magazine.

Robert Shiller, who won the esteemed award with two other Americans for research into market prices and asset bubbles, pinpointed the U.S. stock market and Brazilian property market as areas of concern.

“I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets,” Shiller told Sunday’s Der Spiegel magazine. “That could end badly,” he said.

“I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable,” he said, describing the financial and technology sectors as overvalued.

He had also looked at “drastically” higher house prices in Rio de Janeiro and Sao Paulo in Brazil in the last five years.

“There, I felt a bit like in the United States of 2004,” he said, adding he was hearing arguments about investment opportunities and a growing middle class that he had heard in the United States around the year 2000.

The collapse of the U.S. housing market helped trigger the 2008-2009 global financial crisis.

“Bubbles look like this. And the world is still very vulnerable to a bubble,” he said.

Bubbles are created when investors do not recognize when rising asset prices get detached from underlying fundamentals.

Related Stories

Who Will Replace Bernanke At The Fed ?

  • Larry Summers, the man suspected to become the next Federal Reserve chairman, withdrew his name from the running last night. “I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interests of the nation’s ongoing economic recovery,” Summers wrote to the president.
  • The dollar immediately weakened on the news that Summers was out. Emerging markets, on the other hand, rallied. Market-watchers are pointing to the fact that Summers was perceived as more hawkish — meaning less likely to use monetary policy to juice the economy —than his main rival and current frontrunner Janet Yellen.
  • Many are now predicting (and for some, hoping) that Fed Vice Chair Janet Yellen will win the nomination. Writes our Josh Barro: “She’s a key architect and proponent of the Fed’s appropriately accommodative monetary policies. Her selection would reassure financial markets that easing would continue as appropriate. And she doesn’t have Summers’ track record of undermining his initiatives by unnecessarily alienating people.” Other names being floated are Jack A. Bass, former Fed Vice Chairmans Don Kohn and Roger Ferguson. Former Treasury Secretary Tim Geithner has held steady that he does not want the job.

Today In the Market

    • This morning at 9:15 A.M. we’ll get U.S. industrial production figures. Economists are expecting a 0.5% increase in August after July’s 0% print.
    • Later this week, the Federal Reserve will hold its two-day FOMC meeting. Economists are expecting the Fed to “taper” its $85 billion a month purchasing plan of Treasury notes and mortgage-backed bonds. On weaker economic news, many on Wall Street are predicting a “taper lite” – a reduction in bond purchases of $10 billion per month, bringing the total monthly purchase down to $75 billion (as opposed to the previous market consensus of $70 billion).
  • Stocks & bonds rally, dollar dips as Summers quits Fed race
    1 hour ago – Reuters
    Stocks & bonds rally, dollar dips as Summers quits Fed raceBy Ryan Vlastelica

    NEW YORK (Reuters) – U.S. stocks and Treasuries rallied on Monday as investors saw the withdrawal of Lawrence Summers from the running to head the Federal Reserve as making a more gradual approach to monetary tightening more likely.

    Further boosting risk assets around the world, and weighing on the U.S. dollar, were signs of progress in Syria following a Russian-brokered deal aimed at averting U.S. military action, all of which helped propel world shares <.MIWD00000PUS> to a five-year high.

    Summers’ surprise decision came just before the U.S. Federal Reserve meets on Tuesday and Wednesday to decide when, and by how much, to scale back its asset purchases from the current pace of $85 billion a month.

    Investors wagered that U.S. monetary policy would stay easier for longer should the other leading candidate for Fed chair, Janet Yellen, get the job.

    The Dow Jones industrial average <.DJI> was up 142.01 points, or 0.92 percent, at 15,518.07. The Standard & Poor’s 500 Index <.SPX> was up 13.20 points, or 0.78 percent, at 1,701.19. The Nasdaq Composite Index <.IXIC> was up 16.20 points, or 0.44 percent, at 3,738.39. Gains in the Nasdaq were limited by a 1.7 percent decline in Apple Inc <AAPL.O> shares.

    European shares <.FTEU3> rose 0.5 percent while the MSCI all-country world equity index rose 1 percent. Markets had perceived Summers as less wedded to aggressive policies such as quantitative easing and more likely to scale stimulus back quickly than Yellen, who is second in command at the Fed.

    “His passing as a contender for the top role has left in its wake a significant risk-on rally,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.

    It was even possible a first Fed interest rate rise could be pushed out to 2016, rather than 2015 as currently expected, added Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. Going by Yellen’s past speeches, he said she would most

    probably prioritize reducing unemployment.

    “Yellen looks like the clear front-runner and seems to be the public’s popular choice,” he said. “The Fed will shoot to lower the unemployment rate to the full employment level, and this means the new target could be more 5.5 percent, not 6.5 percent.”


    The dollar <.DXY> slipped to a near four-week low against a basket of currencies, with the euro up more than half a U.S. cent at $1.3370 after hitting its highest in almost three weeks and sterling at an eight-month high. <GBP/>

    The greenback proved more resilient against the yen, which was hampered by its status as a safe haven and pared early losses to stand at 98.76. Liquidity was lacking, with Japanese markets closed for a holiday on Monday.

    In the latest U.S. data, industrial output rose 0.4 percent in August, as expected, while manufacturing output rose 0.7 percent, a slightly faster rate than had been forecast.

    MSCI’s broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> had gained 1.8 percent overnight as South Korean shares <.KS11> added 1 percent, Australia’s <.AXJO> rose 0.5 percent and Indonesian stocks climbed 3.4 percent <.JKSE>.


    Sentiment was underpinned by Saturday’s deal between Russia and the United States to demand that Syrian President Bashar al-Assad account for his chemical arsenal within a week and let international inspectors eliminate all the weapons by the middle of next year.

AMP Portfolio Overview : Higher Stock Prices Are Set In Place

The Apprentice Millionaire Portfolio ( available from sets three criteria in selecting investments :

In order

1) forecast for the economy THEN

2) select the sectors to benefit from that forecast And Finally

3) in your own and the Jack A. Bass Managed Accounts, select the stocks that will do best in the selected sectors.

So, first ascertain :

Where are the most important economies ( U.S. and China ) headed in the next 12 to 36 months ?

China’s economy showed fresh signs of resilience in August, with key trade data pointing to a sustained strengthening in global demand for goods from the country.

Exports continued to gather steam, rising 7.2% in August from a year earlier, according to data released Sunday by the General Administration of Customs. This was up from a 5.1% rise in July and a contraction of 3.1% in June. Imports rose 7.0% from a year earlier in August, down from 10.9% in July.

The overall picture was of a Chinese economy benefiting from progressive strengthening of demand in the U.S. and other key export markets. China is also continuing to stock up on raw materials for its industrial sector. “China’s back,” said Stephen Green of Standard Chartered Bank. “It won’t be a strong recovery but it’s increasingly clear we’ve bottomed.”

AND the reason is U.S. growth leading to increased demand for products from China.

One sector that benefits is shipping because that increase will be moved by ships.

AFP/Getty ImagesEnlarge Image

China’s trade surplus strengthens in August on strong exports driven by U.S. demand.

August’s trade numbers are the latest in a series of positive data releases, after overseas sales and factory output in July showed signs of improvement.

There are still some questions surrounding the sustainability of the current upswing.

Rising wages and a stronger currency dent the competitiveness of China’s exports. Beijing’s recent moves to slow lending growth — after years of credit-fueled economic expansion — could curtail investment and imports.

Still, two months of stronger data has increased optimism that the government will be able to hit its full-year target for gross domestic product growth, which stands at 7.5%. It also reduces the chances that leaders will introduce a major new stimulus policy.

Economists have responded to the signs of strengthening by edging up their growth forecasts. J.P. Morgan now expects 7.6% year-on-year growth in the third quarter, up

their growth forecasts. J.P. Morgan now expects 7.6% year-on-year growth in the third quarter, up from a previous forecast of 7.4%, which points to an acceleration from 7.5% growth in the second quarter.

China’s trade surplus widened, with the difference between exports and imports growing to $28.5 billion in August, up from $17.8 billion in July, marking its highest level since January.

Syria: War and Equity Returns

English: Brasilia - The president of the Syria...

English: Brasilia – The president of the Syrian Arab Republic, Bashar Al-Assad during a visit to Congress Português do Brasil: Brasília – O presidente da República Árabe Síria, Bashar Al-Assad, em visita ao Congresso Nacional (Photo credit: Wikipedia)

The U.S. and its allies are under increasing pressure to take some action other than humanitarian aid ever since the chemical attack took place. However, overthrowing Syrian President Bashar al-Assad could create a vacuum that Al-Qaeda or some other hard line Islamist group would be happy to fill. Any military action could be a show of force to punish, rather than remove al-Assad. Nobody in the West wants the Syrian civil war to spill over into other countries, which could lead to a much larger conflict and cause oil prices to spike. This in turn would be a negative for the market and for corporate earnings.

Equity Returns Following Wars

I don’t mean to sound callous about any of this but my job is to look at it from an economic perspective. The historical performance of the market following the outbreak of both major and minor wars seems to indicate that, regardless of the actions taken by the U.S. or UN forces, there will likely not be a lasting effect on global equity markets.

For the moment, assume these recent developments drag the U.S. into the middle of another civil war in the region and ground forces are brought in to stop the killing of Syrian civilians. History teaches us that wars are not harbingers of bear markets. Certainly in the short run conflicts can cause the market to drop as people fear the worst and investors’ risk aversion tends to increase.

However, when you look at historical equity returns following the outbreak of a war, you’ll find the wars seem to have a slightly positive impact on the equity markets. There are many examples of this throughout history. One year after the start of WWI in 1914, the Dow Jones Industrial Average (the Dow) dropped 0.98%. Five years after the start of the war to end all wars, the Dow was up 25.54%. From the start of WWII on September 1, 1939, the Dow increased 11.95% after the first month and five years after the outbreak of WWII the Dow was up 8.81%.

These were the two biggest wars of the century and the market shrugged them off and continued higher, although at an annualized rate of appreciation that was lower than the historical average. If you look at some of the smaller wars, the return of the market following the start of fighting is more positive.

In a small conflict the increase in government spending likely helps push GDP growth and corporate earnings higher and is generally positive for the market.

After the start of the Korean War, which like the Vietnam War, was a proxy conflict between the United States and the U.S.S.R, the Dow was up 4.17% after 3 months, 7.36% after 6 months, 15.13% after one year and 110.30% after 5 years. The time period following the start of the Vietnam War in 1962 was not a particularly good time for stocks but not terrible either. Six months after it began, the Dow decreased by 17.56%, but after one year the market was down only 5.15%. Five years after the conflict began the Dow was up 20.11%.

Recent Conflicts

The results are similar for more recent wars. One year following the start of the first Gulf War on August 2, 1990, the Dow was up 4.95% and five years after the start it had increased 63.73%. One year after the start of the war in Afghanistan on October 8, 2001 the Dow had decreased 17.27%, but that had more to do with the tech-led bear market than the war. Five years after the start, it was up 30.77%. The start of the Iraq War in March, 2003 didn’t rattle the market at all as we were in the early stages of a five-year bull market. One year after the start, the Dow was up 23.24% and five years after the start it was up 43.46%.

Since a ground assault at this point seems unlikely, the most similar situation we can compare it to is the Yugoslavian Civil War. When I say similar, I am referring to the military action taken by the U.S., not the reason for the initial conflict. The Civil War started in 1991 but didn’t end until NATO forces ended the war with an air campaign designed to destroy the Yugoslav military infrastructure in 1999. If you’ll recall, 1999 was a great year to be invested in stocks with the Dow rising 25.22%. As I stated earlier, any military action taken against Syria will most likely be a targeted bombing campaign, and based on the historical data it appears that even when the conflict has the potential to drive oil prices higher as was the case in the Gulf Wars, the market does not necessarily perform poorly in the five years following the start of the conflict.

Putting it All Together

It is still unknown how world governments will respond to the tragedy happening in Syria. There is always the possibility that the conflict could lead to a large scale confrontation, with Russia and China intervening on behalf of their commercial ally Syria. Such an event would be a worst-case scenario and would cause the market to sell-off. I feel though that such a scenario is highly unlikely to occur as it is in no country’s best interest for the conflict to escalate. In the current globally interconnected world, no country benefits from the higher oil prices that result from instability in the Mid-East.

I do believe some form of military action will almost assuredly be taken against al-Assad’s regime. If the goal of such action is to punish Assad or just take out his chemical weapons facilities, it will most likely be a non-event as far as the stock market is concerned. I remain far more concerned about the lack of robust corporate earnings growth than the fallout from increased military actions in Syria.


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