Investing Insights: September 2014

Friday, September 19, 2014

Good News from the Fed

By Genia Turanova, Leeb's Market Forecast

The Federal Reserve Board’s decision this week was highly anticipated—but the language remained unchanged. The Fed indicated that it will not raise federal overnight lending rates (aka “fed funds rate") for a “considerable time”—sticking to the formula that served well in months prior.

Still, some changes are coming. The committee clearly has to take the improving economy into consideration. Next year, the rates are forecasted to move higher: the median estimate is 1.375 percent at the end of 2015. Overnight lending rates will reach 3.75 percent two years later, in late 2017, the Fed estimated. Still, the Fed remains flexible—and, indeed, wants to be seen as flexible as not to spook investors.

It worked. The Fed statement and forecasts buoyed stocks, which rose on Wednesday and again on Thursday. Also boosting investors' confidence in the markets was data showing that fewer Americans filed for new unemployment benefits in the week ended September 13; new applications fell by 36,000 to 280,000, according to the U.S. Department of Labor. Meanwhile the number of Americans collecting on preexisting unemployment claims fell to a seven-year low. The S&P 500 is striving to break decisively above the 2000 level, as it rose to above 2010 on Thursday; and the Dow Jones Industrial Average reached an all-time high.

Speaking of forecasts, the Fed estimates that the U.S. economy will grow at an annualized “central tendency” rate of 2 to 2.3 percent this year, somewhat slower than the 2.2 to 2.5 percent rate of growth the Fed predicted a year ago. Probably, the U.S. economy will not regain 2.5 percent annualized “central tendency” growth until the last quarter of 2017, when the Fed estimates that unemployment could fall to 4.9 percent to 5.3 percent. The Fed expects Gross Domestic Product (GDP) to rise somewhat faster, at 2.6 percent to 3 percent in next year and 2.6 percent to 2.9 percent in 2016.

What also makes the Fed flexible: the consumer price index (CPI) fell by 0.2 percent last month, its first decline since April 2013. This is by itself a reason enough for the Fed not to raise rates as soon as the hawks might want.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.77% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 15 September 2014). Year to date the portfolio is up 7.74%

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.

Tuesday, September 16, 2014

Municipal Bond Market Update

The municipal bond market has seemed like a roller coaster ride for investors in recent years. However, it is important to separate perception from reality. Over the past ten years, municipal bonds have generated tax-adjusted returns in line or better than comparably rated fixed income products and US equities, with significant lower volatility.

The gap between perception and reality created in 2013 represents an opportunity for long-term investors with a focus on after tax income. While valuations are attractive, the marker is not without risk. At times, the fragmented nature of the municipal market, along with a high degree of retail ownership, results in reduced liquidity and increased volatility. A professional municipal bond manager with the resources to construct and monitor a well-diversified portfolio can help you navigate the increasingly complex, but potentially rewarding municipal bond market. Rather than watching the market from the sidelines and trying to time the perfect moment to redeploy capital, we believe investors may want to consider getting invested now, while they can take advantage of current attractive valuations relative to other fixed income asset classes.

Source: Invesco Investment Insights

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Why the bull market isn't ending anytime soon

By Robert C. Doll, Chief Equity Strategist and Senior Portfolio Manager at Nuveen Asset Management.

The upcoming Federal Open Market Committee (FOMC) meeting has drawn quite a bit of attention amid increased speculation that the Federal Reserve may start signaling its long-awaited move to increase rates. Retail sales were quite strong in August and the positive reaction to Apple's upcoming product launches dominated corporate news. The geopolitical backdrop did not seem to affect the markets, with President Obama's statements about ISIS containing few surprises, tensions between Russia and Ukraine remaining on the back burner and reactions to the upcoming Scottish independence vote relatively muted.

SIGNALING A SHIFT

All eyes will be on this week's FOMC meeting, with many observers expecting the central bank to drop the phrase “considerable time” when discussing how long it intends to keep the fed funds rate anchored at zero. Should it do so, it would give the Fed more flexibility in its approach to monetary policy and would signal that rate increases would likely begin next year. Partially as a result of this speculation, and in part to due continuing evidence of economic strength, U.S. Treasury yields advanced last week, with the yield on the 10-year Treasury rising 17 basis points to 2.61%.

The U.S. economy continues to be stronger than other regions. The eurozone economy remains troubled, and the turmoil in Ukraine and related sanctions against Russia are holding back growth in that region. To be sure, recently announced easing measures by the European Central Bank (ECB) should be a positive for growth, but the near-term outlook remains uncertain. At the same time, Japan's economy is struggling. In comparison, we believe the United States is on solid footing. Employment growth is getting better, consumer and business confidence is improving and lower energy prices are acting as a tailwind.

Diverging monetary policies have been pushing the value of the U.S. dollar higher. At this point, most observers assume the Fed will begin increasing rates next year as the economy continues to improve. Across the Atlantic, the ECB is still ramping up its easing policies and we anticipate that the Bank of Japan will engage in additional easing measures as well. These differing stances are a main reason the U.S. dollar has experienced notable appreciation over the last few months.

We believe U.S. Treasury yields will continue to rise over the coming months. The jump in yields last week was not an outlier. We have been forecasting that bond markets will catch up to the reality that U.S. economic growth is accelerating. At this point, we expect the yield on the 10-year Treasury to be at 3% or higher by the end of the year.

ECONOMY, BULL MARKET HAVE ROOM TO RUN

The current U.S. economic expansion and equity bull market have been underway for five years now, but we do not believe either is approaching an endpoint. Typically, economic expansions and bull markets come to an end when inflation pressures are building, which cause the Fed to begin tightening monetary policy in an effort to curb growth. We are expecting the central bank to begin gradually tightening next year, but this move would not come as a result of higher inflation, but rather as an acknowledgement of improved growth. By that basis, the expansion and bull run are far from the endgame.

We do expect to see episodes of volatility and periodic equity market setbacks, but the underlying fundamental backdrop remains supportive of economic and earnings growth, which should lead to rising equity prices.

Since the current cycle began, U.S. growth has been better than that seen in other regions and U.S. stocks have outperformed other developed markets. We do not see that changing any time soon. For the last few years, investors who have been overweighting U.S. stocks have done well, and we believe this strategy continues to make sense going forward.

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Friday, September 12, 2014

The Virtues of Inactive Investing

By John Kimelman, Barron's

I suspect that some of you haven't been tending to your investments enough lately.

Don't feel too bad. First off, late summer is best spent being outdoors, not poring over statements. And investing is one of those rare human endeavors where effort doesn't necessarily pay off anyway. Taking a hiatus on trading one's account may actually be helpful to a portfolio's returns.

An interesting piece on the DailyFinance site makes the case for sloth, to a degree.

"I am fascinated by an anecdote related recently by James O'Shaughnessy of O'Shaughnessy Asset Management," writes Daniel Solin, a wealth advisor who penned the article. "An employee who recently joined his firm told him that Fidelity had studied which customer investing accounts performed the best: They were the ones held by people who had forgotten they even had Fidelity accounts, and so did no buying or selling from them.

"When O'Shaughnessy told that tale on Bloomberg Radio to Barry Ritholtz of Ritholtz Wealth Management, Ritholtz responded that he'd noticed something similar with families fighting over inherited assets. Because of extended court battles, in some cases, the accounts couldn't be touched for 10 or 20 years: No buying new investments or selling old ones. Those families subsequently found that the period of inactivity was the time when their investments performed best."

Solin writes that a number of studies support a strategy based on inactivity. The one he found most compelling analyzed 80,000 yearly observations of institutional investment assets, accounts and returns from 1984 through 2007.

"As you can imagine, there was a lot of buying and selling over this period," he writes. "But the study concluded that portfolios of products to which money was allocated underperformed compared to the products from which assets were withdrawn. Translation: They bought losers and sold winners. The authors of the study estimated these decisions cost the plans more than $170 billion in value."

But don't toss those unopened financial statements in the trash just yet. Solin points out that neglect can only be taken so far before it gets dangerous. "Unless you periodically rebalance your portfolio by selling asset classes that have increased in value and buying those that have decreased, you will either be taking too much or too little risk. Over time, this can have serious consequences."

He concludes: "The real takeaway from the data extolling the virtues of neglect, or even abandonment, of your portfolio is that efforts to time the market, select mispriced stocks or identify the next "hot" mutual fund manager are likely to do more harm than good."

My takeaway is that there's a big difference being leaving an account alone -- that is trading less -- and ignoring that account outright. Best to never do the latter while taking a mindful approach to the former.

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Stocks Ripe for Correction?

By Scott Chan, Leeb's Market Forecast

U.S. stocks declined over several days this week after the S&P 500 last week set an all-time high. Concerns that the Federal Reserve may hike interest rates sooner than expected are to blame. A research letter published by the San Francisco Federal Reserve Bank states that investors may be under-appreciating the “extent to which short-term interest rates may vary with future news about the economy.” Specifically, the piece suggests that the public may be expecting more accommodative policy than do Fed decision makers.

We have long argued that we think Janet Yellen and company will hold off from raising rates until at least mid-2015 and we have not seen anything to convince us otherwise. The Fed Chair has repeatedly reiterated that slack remains in the labor market and that inflation expectations remain stable, basically making the case for keeping rates at their current rock-bottom levels.

The latest data supports the Yellen’s stance—and our opinion, too. Last Friday, the Bureau of Labor Statistics reported a disappointing payrolls increase of 142,000 for August. It was the worst monthly performance in 2014, ending a 7-month streak of gains of 200,000 or more. Meanwhile, the latest reading from the Personal Consumption Expenditures—the Fed’s preferred inflation gauge—is only 1.56 percent, well below the Fed’s 2-percent target. The Core PCE index, which excludes food and energy, actually declined slightly to 1.47 percent.

But with the market hovering around its all-time high and valuations stretched, it doesn’t necessarily need a big reason to undergo a modest correction. Trading at 16.7 times projected forward-year earnings, the S&P’s highest valuation in nearly 5 years. It’s also been a remarkable smooth ride: Before the streak ended this week, there had been no upward or downward moves of more than 0.5 percent for the blue chip index in 14 consecutive days, the longest such stretch since 1969, according to data compiled by Bloomberg.

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Thursday, September 4, 2014

Dividend Dogs Are an Income Hunter’s Best Friend

By David Fabian, FMD Capital Management

The ALPS Sector Dividend Dogs (SDOG) exchange traded fund was introduced just over two years ago and has since amassed over $800 million in total assets.

This ETF takes a unique approach by selecting five holdings from each of the ten sectors within the S&P 500 Index with the highest dividend yields. Each holding is then equal weighted so that every company has a similar pull on the total return of the fund. The end result is a portfolio of 50 large-cap stocks that includes a high degree of diversification among every S&P sector.

Often times dividend funds are skewed towards specific area of the market such as utilities, consumer staples, or energy companies. However, SDOG is provides you with the opportunity to own equal segments of the economy in one single package. In addition, because they select from some of the largest and most liquid stocks in the world, the holdings are generally high quality companies. This includes well-known dividend payers such as: Intel Corp (INTC), Lorillard Inc (LO), and AT&T (T).

SDOG has a current 30-day SEC yield of 3.32%, and has returned nearly 25% over the last 52-weeks with dividends factored back in.

This outperformance in SDOG is likely due to larger exposure to technology, healthcare, and telecommunications sectors, which have performed strongly over that time frame.

Nevertheless, SDOG should certainly be on your watch list of dividend paying funds that include a reasonable expense ratio, higher than average yield, and unique index construction methodology. This fund can certainly be used as a core holding within the context of a conservative income portfolio to gain market correlation and yield.

The original Dogs of the Dow Theory focuses on selecting 10 of the highest dividend paying stocks in the Dow Jones Industrial Average on an annual basis. SDOG does an admirable job of taking that one step farther to include a more diversified and balanced subset of companies.

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The ALPS Sector Dividend Dogs (SDOG) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current yield on the portfolio is 5.35% and year to date the portfolio is up 12.37% (as of 3 September 2014).

Disclosure: I own the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

Wednesday, September 3, 2014

September Swoon Ahead?

By Russ Koesterich, CFA, Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist

Strong economic data, continued mergers and acquisitions activity and stubbornly low long-term rates helped stocks advance again last week, with U.S. and global equities both finishing August significantly higher.

But despite stocks’ strong recent performance, investors may want to exercise a bit of caution going into the fall, as I write in my new weekly commentary “Two Notes of Caution as Fall Arrives.”

Here are two reasons why.

September is historically the weakest month of the year. Generally, I put little faith in seasonal biases, as most turn out to be just statistical noise. September, however, appears to be different.

Looking back at more than 100 years of U.S. market data, September stands out as the one month with a statistically significant bias, in this case a negative one. What is interesting is that this negative bias is evident in markets as far afield as Germany, the U.K. and even Japan.

Market volatility is likely to be marginally higher. While volatility fell over the course of August, the the daily volatility average for last month was approximately 15% higher than its average over the previous three months.

To the extent strong economic data continues, one side effect is likely to be a heightened focus on an initial rate hike by the Federal Reserve (Fed). Marginally tighter monetary conditions, and market expectations of Fed policy tightening, are likely to support the trend toward somewhat higher volatility.

And another factor that may contribute to higher volatility: Investors are increasingly turning a blind eye to the escalating conflict in Ukraine. To the extent the situation there continues to deteriorate, investors are likely to pay more attention, leading to bumpier markets in the process.

To be sure, I still expect stocks to advance in 2014. A strengthening economy, low inflation and moribund yields suggest that equities can, and probably should, move higher by year end. But in the near term, negative seasonality and complacency over growing geopolitical risks suggest that investors exercise a bit of caution as the summer draws to a close.

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