Weekly Commentary April 27th, 2015

The Markets

Remember the dot-com bubble?

If so, you’ll appreciate this week’s notable event: The NASDAQ Composite Index, which includes a fair number of technology stocks, transcended its previous high (set in March 2000). Share values in the tech sector gained 4 percent last week, according to Barron’s, as major players in the space delivered better-than-expected earnings results.

The performance of technology stocks has some wondering whether this tech boom will be like the last one. In the go-go 90s, technology start-ups attracted hundreds of millions in venture capital funding. Some, like not-very-memorable fashion retailer Boo.com, burned through $135 million of venture capital and went belly up the year after it launched. Others, like TheGlobe.com, a social network service with no earnings, went public in 1998 with a target share price of $9. Investors paid as much as $97 a share during the first day of trading. By the end of 2000, the stock price was worth less than a dollar a share.

Things are different this time around, according to Financial Times, largely because a lot more economic activity takes place online today. About $50 billion is spent on online advertising in the United States (compared to $8 billion 15 years ago) to reach an audience of three billion people (compared to 400 million in 2000). The business paradigm has changed, too, according to Financial Times:

“This time around, many [companies] are being built to be sold to one of a handful of cash-rich acquirers… in the consumer internet markets, or… in enterprise software. In fast growing fields such as artificial intelligence, backers of more mature start-ups complain about the excess of early-stage venture capital flooding in, from investors hoping to sell out quickly to one of the giants.”

The Dow Jones Industrial Average and the Standard & Poor’s 500 Indices showed gains last week, too.

how do you define investment success?  The Natixis 2014 Global Survey
of Individual Investors offered some interesting insight into the mindsets of investors in Asia, Europe, Latin America, the Middle East, the United Kingdom, and the United States who participated in the study. There was some good news and some bad news. First, the bad news:

“Investors around the world say they’ll need average returns of 9 percent a year, above inflation, to meet their financial goals, a figure well above the average annual return of the markets over most rolling periods during the past century.”

This is a remarkable expectation. Second, it’s not achievable without taking considerable risk and the vast majority of investors surveyed said, if they had to choose, they would opt for safety of principal over performance potential. In other words, they wouldn’t take the risk necessary to earn such a high potential return. It’s important to set realistic expectations for portfolio returns; expectations that reflect risk tolerance and long-term financial goals.

The good news, at least for U.S. investors, was found when participants were asked to describe the way they defined investment success. Answers overlapped in many regions but only the highest percentage of any region is shown for each statement below:

·         Outperforming my friends/family/colleagues     9 percent        Middle East

·         Achieving my short-term investment goals     21 percent     Latin America

·         Outperforming the market                                  22 percent     Asia

·         Being on track to achieving my long-term

investment goals                                                    37 percent     United States

·         Not losing principal                                               30 percent     Europe

·         Only making gains and no losses                        30 percent     Europe

 

U.S. investors were more likely to have financial plans than investors in other regions. However, slightly more than one-half of Americans said they had clear financial goals.

 

Weekly Focus – Think About It

“There is nothing worse than a sharp image of a fuzzy concept.”

--Ansel Adams, American photographer

First Quarter 2015 Economic Review

The beginning of April has kicked off the 2015 baseball season, as well as the release of economic data for first quarter 2015. So far this season, games have shown a nearly record low number of runs. While the start of the season may have disappointed fans of the long ball, we have to keep in mind that the season is very young. What happens in April isn’t always an indication of how the season will go. Similarly, it may be tempting to look at individual pieces of economic data—many of them affected by weather, the West Coast port strike, and the stronger U.S. dollar—and have concerns about the state of the economy.

We prefer to look at the bigger picture and take a longer-term view. Many of us were discouraged by the March jobs report. However, when we consider other indicators, we are encouraged by the overall health of the economy. For example, initial filings for jobless claims remain near the lows of the ongoing economic expansion. In addition, in the 12 months prior to the weather-impacted March report (ending in February 2015), the U.S. economy had created an average of nearly 275,000 jobs per month, exceeding 200,000 in each of those months—the longest streak in 20 years.

It is also encouraging that the Beige Book, the Federal Reserve’s qualitative assessment of economic, business, and banking conditions on Main Street, continues to indicate solid, mid-cycle economic growth. The recent report indicates that the weak economic data in the past few months likely overstated the weakness in the U.S. economy at the start of 2015. That weakness is likely to get plenty of attention in late April, when the initial estimate of first quarter 2015 gross domestic product (GDP) is likely to confirm tepid growth during the quarter.

Looking ahead, it’s important to note that some of the factors that depressed economic activity in the first quarter have already reversed. The weather has improved, the port strike has been settled, and the oil and gas industry has made significant progress adjusting to the new lower oil price environment. As a result, like last year’s second quarter, which sprang back sharply from a weather-driven decline in first quarter GDP, we may see growth rebound in the current quarter. We are already seeing some encouraging signs; for example, housing starts bounced back in March after a sharp weather-driven decline in February.

Just like even the best hitters have an off night, or even an off week, there will always be some economic reports that are less encouraging than others. In today’s 24-hour media world, we have constant access to economic data. It’s important not to get distracted by any individual report that might seem discouraging. Instead, we are keeping our eyes on the bigger picture and larger trends.

Weekly Commentary April 13th, 2015

The Markets

How much is one trillion?

·         If you waited one trillion seconds, it would take 31,688 years.

·         If you had a trillion dollars, and spent $10 million a day, it would take 273 years to go broke.

·         If you taped $100 bills end-to-end, you could wrap the earth 41 times with $1 trillion dollars.

·         Alternatively, you could paper over Delaware in $100 bills – twice.

Last week, the value of global equities surpassed – not $1 trillion – but $70 trillion, according to BloombergBusiness, which credited central banks’ stimulus programs for soaring stock values. Of the 24 national stock indices covered by Barron’s, 10 have delivered double-digit returns year-to-date. These include Australia, Japan, Hong Kong, China, and Philippines in the Asia Pacific region, and France, Germany, Italy, Spain, and Sweden in Europe. The Standard & Poor’s 500, NASDAQ, and Dow Jones Industrial indices all remained in single-digit territory. Barron’s reported:

“The market could bounce higher if first-quarter results come in above reduced targets. So far, 20 of the 24 companies releasing earnings have topped expectations, FactSet reports. The Dow Jones industrials were propelled above 18,000 again last week, and the S&P 500 climbed north of 2100.

But those who look beyond the first quarter see a number of head winds facing U.S. equities. The Federal Reserve appears ready to start raising interest rates, for one. The strong dollar looks to be a drag on trade and earnings, and profit margins could be about to peak. Add to this widespread investor optimism and above-average earnings multiples and the market could be vulnerable.”

 
Experts are uncertain about the direction of stock markets and so are investors. Last week’s AAII (American Association of Individual Investors) Investor Sentiment Survey showed both bullish and bearish sentiments were below long-term averages (and lower than the previous week) while neutral sentiment is relatively high (and was up 14.5 percent over the previous week).

it’s a millennial thing.  Sure, you know China surpassed the United States to become the world’s largest economy, but did you know the millennial generation surpassed the baby boomers to become the largest generation here in America? According to Pew Research, there were about 75.3 million millennials (born from 1981 to 1997) at the end of 2014 and about 74.9 million baby boomers (born from 1946 to 1964).

It’s no secret baby boomers have had a profound effect on the American economy. History.com reported:

“Baby boomers bought mouse-ear hats to wear while they watched “The Mickey Mouse Club” and coonskin caps to wear while they watched Walt Disney’s TV specials about Davy Crockett. They bought rock and roll records, danced along with “American Bandstand,” and swooned over Elvis Presley. They collected hula hoops, Frisbees, and Barbie dolls. A 1958 story in Life magazine declared “kids” were a “built-in recession cure.”

As they retire, the baby boomers are expected to have a profound influence on health and wellness providers, pharmaceutical companies, and others in markets that serve the needs of retired Americans.

The boomer generation has been the focus of investors for so many years it can be easy to forget about the influence of millennials. They’ve come of age during the Great Recession which curbed their appetite for consumption. Millennials’ preference for access rather than ownership sparked the ‘sharing economy,’ which includes online companies that facilitate the sharing of unused goods. The New York Times reported, “Millions of people are using social media sites, redistribution networks, rentals, and cooperatives to share not only cars but also homes, clothes, tools, toys, and other items at low or near zero marginal cost. The sharing economy had projected revenues of $3.5 billion in 2013.”

It’s a good idea to keep an eye on demographic change. It can have a profound impact on economies, industries, and companies.

 

Weekly Focus – Think About It

“When your mother asks 'Do you want a piece of advice?' it is a mere formality. It doesn't matter if you answer yes or no. You're going to get it anyway.”

--Erma Bombeck, Advice columnist

Weekly Commentary April 6th, 2015

The Markets

The global economy performed a bit like a Rube Goldberg contraption during the first quarter of 2015, although it’s doubtful many countries found humor as economic, financial, and political events triggered other economic, financial, and political events across the world.

Europe heads into deflation

“The whiff of deflation is everywhere,” reported The Economist early in 2015:

“Even in America, Britain, and Canada – all growing at more than 2 percent – inflation is well below target. Prices are cooling in the east with Chinese inflation a meager 0.8 percent. Japan’s 2.4 percent rate is set to evaporate as it slips back into deflation; Thailand is already there. But it is the euro zone that is most striking. Its inflationary past – price rises averaged 11 percent a year in Italy and 20 percent in Greece in the 1980s – is a distant memory. Today, 15 of the area’s 19 members are in deflation; the highest inflation rate, in Austria, is just 1 percent.”

Low energy prices contributed to persistently low levels of inflation in many countries, although oil prices were slightly higher toward the end of the first quarter.

The Swiss take pre-emptive action

In mid-January, anticipating the European Central Bank (ECB) was about to try to head off deflation with a round of quantitative easing (QE) that would reduce the value of the euro, the Swiss National Bank (SNB) announced it would no longer cap the value of the Swiss franc at 1.2 per euro. The response was exceptional and unexpected. Experts speculated the SNB planned for the franc to lose value against the euro. Instead, it gained more than 30 percent. The Swiss market lost about 10 percent of its value on the news, and U.S. markets slumped, too.

The ECB commits to a new round of QE

The SNB may have miscalculated the effect of de-capping its currency, but it was correct about the ECB and QE. After months of dithering and debate, the ECB announced it was committed to a new round of QE and would spend about $70 billion a month through September 2016. Global markets cheered. Stock markets in Europe ascended to a seven-year high. The euro descended to an 11-year low.

Disparate central bank policies trigger currency issues

Divergent monetary policy – the Federal Reserve ended a round of QE just before the Bank of Japan and the ECB introduced new rounds of QE – proved to be a pressure cooker for currencies. With the dollar rising and the euro falling, countries with currency pegs were forced to follow suit. U.S. dollar-linked countries generally tightened monetary policy, even if it might hurt their economies, and euro-linked countries pursued looser monetary policy. The Economist reported that, “Denmark has had to cut interest rates three times, further and further into negative territory, in order to discourage capital inflows that were threatening its peg against the euro.”

Interest rates fall lower and lower and lower

Thanks to quantitative easing, lots of banks in the United States and Europe have a lot of cash tucked away in their central banks’ coffers. The Economist reported:

“…negative interest rates have arrived in several countries, in response to the growing threat of deflation… Banks, in effect, must pay for the privilege of depositing their cash with the central bank. Some, in turn, are making customers pay to deposit cash with them. Central banks’ intention is to spur banks to use “idle” cash balances, boosting lending, as well as to weaken the local currency by making it unattractive to hold. Both effects, they hope, will raise growth and inflation.”

In the Euro area, Germany, Denmark, Sweden, Switzerland, the Netherlands, France, Belgium, Finland, and Austria have issued bonds with negative yields. Why would anyone be willing to pay to invest in bonds? The Wall Street Journal suggested one possibility: Investors think yields have further to fall.

healthcare? revolution? Really? We may be taking part in a revolution and not even realize it! The way healthcare is provided in the United States has been changing. In the past, Americans participated in fee-for-service healthcare. You might think of it as healthcare a la carte. Hospitals and doctors were reimbursed for each test and treatment, which created incentives to do more rather than less, and may have caused the system to perform less efficiently.

The Economist recently reported, as a result of the Affordable Care Act, hospitals and doctors are being paid by results. Instead of getting a fee for each service, they receive a flat fee for all services performed:

“There are also incentives for providers which meet cost or performance targets, and new requirements for hospitals to disclose their prices which can vary drastically for no clear reason… The upshot is there are growing numbers of consumers seeking better treatment for less money. Existing health-care providers will have to adapt or lose business. All sorts of other businesses, old and new, are seeking either to take market share from the conventional providers or to provide the software and other tools that help hospitals, doctors, insurers, and patients make the most of this new world.”

A key to making the transition from fee-for-service to alternative healthcare payment models will be providing doctors with support and guidance as they adopt new systems. A Rand study evaluated episode-based and bundled payments, shared savings, pay-for-performance, fees/taxes, and retainer-based practices as well as accountable care organizations and medical homes. The study found, “There was general agreement among physicians that the transition to alternative payment models has encouraged the development of collaborative team-based care to prevent the progression of disease.”

 

Weekly Focus – Think About It

“The trouble with having an open mind, of course, is that people will insist on coming along and trying to put things in it.”

--Terry Pratchett, English author