Investment Insights Podcast – December 24, 2013

Investment Insights PodcastBill Miller, Chief Investment Officer

Last week, the Federal Reserve announced their new policy on tapering.  ISI Group calculates that if the Fed continues on this new track, they would buy $455 billion more of bonds in 2014 before the taper finishes.

  • Good news: New policy, gradual taper, means interest rates weren’t forced to spike
  • Bad news: Not likely of staying on track. Stronger employment data and economic growth early in 2014 would make the Fed taper at faster rate, driving interest rates up.
  • What we are doing about it: Product-specific, but tactics would include researching managers who perform well in a rising interest rate environment or utilizing inverse ETFs

Click the play icon below to launch the audio recording.

The views expressed above are those of Brinker Capital and are not intended as investment advice.

High Profit Margins Outlook in 2014

Miller, Bill 2Bill Miller, Chief Investment Officer

Throughout this year, we have been in the camp that profit margins would not mean-revert.  Better measures of labor and manufacturing productivity, technology improvements and cheaper imports have all helped profits.  As the chart below shows, that was the case in the third quarter.  In 2014, we expect margins to remain persistently high.

The big three—productivity, technology and cheap imports—should help again next year.  Plus, we do not see excesses in business investment, inventory or debt (personal or commercial) in 2014.

Persistently high profit margins should help equities in 2014.

S&P 500 Operating Margins (Quarterly)

Source: International Strategy & Investment (ISI) Group LLC

The views expressed above are those of Brinker Capital and are not intended as investment advice.

Federal Reserve: To Taper or Not To Taper

Miller, Bill 2Bill Miller, Chief Investment Officer

Today, Ben Bernanke, current Chairman of the Federal Reserve, is expected to announce a decision on whether to taper or not to taper.  There are good arguments to taper, namely good employment growth and a budget deal between the Republicans and the Democrats.  Likewise, there are good arguments to not taper, including low inflation and the possibility of higher interest rates.  A key consideration for the Fed, should they decide to taper, will be interest rates.  More specifically, the Fed does not want long-term interest rates to increase suddenly.  We estimate that a sharp 1% increase in the long-term Treasury bond could cause as much as a 10% correction in the stock market.

Yesterday morning (December 17), ISI Group reported that the Fed will likely announce that there will be $400 billion left to buy in their Quantitative Easing program. This strikes us as a clever compromise between the taper or not to taper decision. Most importantly, it is not sudden.  Both the stock and bond markets will have time, probably five months or more, to measure the impact of tapering. Thus, we hope to stay long stocks for normal seasonal strength in the first quarter of the new year.  On the other hand, if the Fed announces a more sudden tapering exit, adding shorts to hedge stock market risk is a likely approach.

Happy Holidays from Brinker Capital

Brinker Capital Executive Chairman, Chuck Widger, provides commentary on Brinker’s investment strategies in 2013, headwinds and tailwinds we will face in 2014, and his thoughts on the the current state of emerging and frontier economies.

Happy Holidays!

Monthly Market and Economic Outlook: December 2013

Amy MagnottaAmy Magnotta, CFA, Senior Investment Manager, Brinker Capital

U.S. equities continued to climb higher in November, with major indexes gaining between 2% and 4% for the month. Year to date through November, the S&P 500 Index has posted an impressive gain of 29.1%, while the small cap Russell 2000 Index has fared even better with a return of 36.1%. The last five years have proved to be a very good time to be invested in equity markets, with a cumulative return of 125% for the S&P 500 Index.

International developed equity markets posted small gains in November, and have failed to keep up with U.S. equity markets this year. In Japan, Prime Minister Abe’s policies have spurred risk taking, but the currency has also weakened. The European equity markets have benefited from economies and a financial system that are on the mend. Emerging markets continued to struggle in November and are negative year to date. Concerns over the impact of Fed tapering on emerging economies, as well as slower economic growth, have weighed on the asset class this year.

Interest rates have remained range-bound after the spike in the summer in response to Bernanke’s initial talk of tapering. The 10-year Treasury ended November at a level of 2.75%, just 10 basis points higher than where it began the month. Fixed income is still negative for the year-to-date period; the Barclays Aggregate was down -1.5% through November. However, high-yield credit has had a solid year so far, gaining close to 7%. We believe that the bias is for interest rates to move higher, but it will likely come in fits and starts.

12.13.13_Magnotta_MarketOutlook_2The Fed will again face the decision to taper asset purchases at their December meeting, and we expect volatility in risk assets and interest rates surrounding this decision, just as we experienced in the second quarter.  The recent economic data has surprised to the upside; however, inflation remains below the Fed’s target level. Despite their decision to reduce or end asset purchases, the Fed has signaled short-term rates will be on hold for some time. Rising longer-term interest rates in the context of stronger economic growth and low inflation is a satisfactory outcome.

We continue to approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds as we move into 2014, with a number of factors supporting the economy and markets.

  • Monetary policy remains accommodative: The Fed remains accommodative (even with the eventual end of asset purchases, short-term interest rates will remain near-zero until 2015), the European Central Bank has provided additional support through a rate cut, and the Bank of Japan has embraced an aggressive monetary easing program in an attempt to boost growth and inflation.
  • Global growth strengthening: U.S. economic growth has been steady and recently showing signs of picking up. The manufacturing and service PMIs remain solidly in expansion territory. Outside of the U.S., growth has not been very robust, but it is positive.
  • Labor market progress: The recovery in the labor market has been slow, but stable. Monthly payroll gains have averaged more than 200,000 and the unemployment rate has declined.
  • Inflation tame: With the CPI increasing only +1% over the last 12 months, inflation in the U.S. has been running below the Fed’s target level.
  • Increase in household net worth: Household net worth rose to a new high in the third quarter, helped by both financial and real estate assets. Rising net worth is a positive for consumer confidence and future consumption.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are flush with cash that could be reinvested or returned to shareholders. Corporate profits remain at high levels and margins have been resilient.
  • Equity fund flows turn positive: Equity mutual funds have experienced inflows over the last two months while fixed income funds have experienced significant outflows, a reversal of the patter of the last five years. Continued inflows would provide further support to the equity markets.
  • Some Movement on Fiscal Policy: After serving as a major uncertainty over the last few years, there seems to be some movement in Washington. Fiscal drag will not have a major impact on growth next year. It looks like Congress may sign a two-year budget agreement, averting another government shutdown in January. However, the debt ceiling still needs to be addressed.

However, risks facing the economy and markets remain, including:

  • Fed Tapering: The markets are anxiously awaiting the Fed’s decision on tapering asset purchases, prompting further volatility in asset prices and interest rates. Risk assets have historically reacted negatively when monetary stimulus has been withdrawn; however, the economy appears to be on more solid footing.
  • Significantly higher interest rates: Rates moving significantly higher from current levels could stifle the economic recovery. Should mortgage rates move higher, it could jeopardize the recovery in the housing market.
  • Sentiment elevated: Investor sentiment is elevated, which typically serves as a contrarian signal. The market has not experienced a correction in some time.

Risk assets should continue to perform if real growth continues to recover even in a higher interest rate environment; however, we expect continued volatility in the near term as we await the Fed’s decision on the fate of quantitative easing. Despite the strong run, valuations for large cap U.S. equities still look reasonable on a historical basis by a number of measures. Valuations in international developed markets look relatively attractive as well, while emerging markets are more mixed. Momentum remains strong; the S&P 500 Index has spent the entire year above its 200-day moving average. However, investor sentiment is elevated, which could provide ammunition for a short-term pull-back surrounding the Fed’s tapering decision.


Our portfolios are positioned to take advantage of continued strength in risk assets, and we continue to emphasize high-conviction opportunities within asset classes, as well as strategies that can exploit market inefficiencies.

Asset Class Returns:12.13.13_Magnotta_MarketOutlook

Investment Insights Podcast – December 6, 2013

Miller_PodcastBill Miller, Chief Investment Officer

We are entering into a period where good news is bad news.On this week’s podcast (recorded December 5, 2013):

  • Good news: U.S. economy is better with many positive indicators (employment, housing starts).
  • Bad news: Markets are not reacting to the good news, drawing into question Fed policy.
  • What we are doing about it: Remaining bullish for 2014, keeping an eye on interest rates and Fed tapering.

Click the play icon below to launch the audio recording.

12 Holiday Card Musts

Sue BerginSue Bergin, @smbergin

You probably covered holiday cards in Client Communication 101. The holidays provide an opportunity to show clients you are thinking of them, and appreciate the role they play in your life. It’s important not to approach this as a “bah-humbug” type of task

Even though it may be a tedious task to undertake during the year-end crush, holiday cards are an important marketing and brand-building tool.

Here are a dozen things to consider when selecting your card:

  1. Display-worthy. Your holiday card is one of the most on-display items you’ll send to your client. After all, no matter how satisfying their investment performance, they won’t tape a recent statement to the wall. Yet, business owners hang the holiday cards in their lobbies. Company employees display them on their desks or in their cubicles. Retail clients put them along a mantelpiece, place them on bookshelves, and some even win a coveted spot on the refrigerator door. Keep the display aspect in mind when selecting your card. For example, horizontally-oriented cards tend to fall over more easily than their vertical counterparts. If it keeps falling down, it is a nuisance and will end up in the trash faster than a fruitcake.12.3.13_Bergin_HolidayCards
  2. New year, new card. Even if you have a stockpile of cards left from past years, fight the urge to use them. If you absolutely can’t resist, then only send last year’s card to new clients. Current clients just might remember, and reusing a card sends one of two messages: you are too cheap to buy new ones, or you are lazy.
  3. Awareness. Unless you know for certain of the religious holidays your clients celebrate, stick with a “Happy Holidays” or “Season’s Greetings” message.
  4. Quality. There are a tremendous number of low-cost, do-it-yourself options out there. Use them cautiously. Make sure the output reflects your professional standards.
  5. Test the system. If you are using an automated system, make sure it works. Build enough time into your process so that you can generate test cards to make sure the process works (quality check addresses, salutations, signatures, postage, etc.).
  6. Destination. In most instances, you’ll want to send the card to your clients’ homes. Exceptions can be made for centers of influence and corporate clients and contacts.
  7. Old-school charms. Modern conveniences like electronic signatures and address labels hint of a mass-mailing campaign. They may seem impersonal. Take the time to hand sign each card. For bonus points, write a personal sentiment.
  8. Respect the sanctity of the time. If your standard practice is to ask for referrals every time you communicate in writing with clients, consider taking a break on the holiday card. You don’t want to leave the impression that you’re simply trying to drum up business.
  9. Timing. The later the card, the more competition it has for your clients’ attention and display space. To stand out, start early.
  10. Spice it up. Anyone can pick up store-bought cards, or pull from the standard greetings in the online templates. The result is a forgettable and insincere greeting. Be creative and design something distinctive. Take the time to select a design and message that reflects your brand.
  11. Be inclusive. Forget about selectivity. Dive deep into your CRM. You don’t want to be on the receiving end of a game of card tag whereby you scramble to get a card in the mail for someone who has sent one to you.
  12. Get personal. This is an opportunity to connect with clients on a personal level. Give details about favorite holiday memories or the traditions you hold dear.