News Out of Japan

Andy RosenbergerAndrew Rosenberger, CFA, Senior Investment Manager, Brinker Capital

The recent sell-off in Japan has many investors concerned that “Abenomics” may be little more than smoke and mirrors than the start of a cyclical, or even more importantly secular, rally. While the Japanese equity market can be volatile, especially given the monstrous 80%+ rally since November of last year, continuing macroeconomic evidence does suggest that the economy is improving. ISI Research has done a nice job tracking the macro data out of Japan. In one of their recent pieces, they make the argument that during the last week of May, 14 out of 17 data points showed signs of the economy improving. See chart below.

Signs of Strength Signs of Weakness
1. Construction Orders 1. DPI Per Household
2. Employment 2. Household Expenditures
3. Housing Starts 3. Dept. Store Sales
4. Industrial Production
5. Insured Employees
6. Job Ratio
7. Job Offers Ratio
8. Mffg PMI
9. Public Works Starts
10. Retail Sales
11. Retail Stores
12. Small Business Confidence
13. Vehicle Exports
14. Vehicle Production  Source: ISI Research

Moreover, their proprietary Economic Diffusion Index has climbed to record territory. The recent pullback in the market can be a hard pill to swallow for those just waking up to the Japanese story. Yet, we must also consider that a 15% pullback in the context of a nearly 85% run in the equity market still leaves markets up 57% from where it was just six months ago.

In Case You Missed It

Wallens, JordanJordan Wallens, Regional Director, Retirement Plan Services

By now you’ve no doubt heard all about the latest dreadful returns from our nation’s stock market. The first five months of 2013 have been historically galling for most American investors. Wait, what? Am I talking about the same roaring stock market you’re talking about? Yes! And, no.

Yes, clearly the U.S. Equity market has exhibited one of its vintage thoroughbred rallies this year. But no, sadly, it turns out the average American saver largely missed it. How can this be?

Now, throughout this banner season for equities, the largest holding in the majority of Americans’ overall asset allocation has been Cash—which is earning zero. Now lest one dismiss this truth as some other generation’s problem, to be clear: this misbegotten tail-chasing ‘bet on cash’ situation pervades across ALL age groups, right through Generation Y.

It’s like we’re our own worst enemy, because when it comes to investing, most of us are.
The problem is that savers tend to move in backward-looking, frightened herds. Which is wise…if you’re the prey.

But we invest not for short-term survival. We invest to advance long-term purchasing power.

Relax, it’s not life, just money. Money you’re not even using. That and, though it takes awhile to adjust, as a species we haven’t been hunted by predators in some time. (Pray that multi-millennial ‘food chain’ rally knows no end.)

5.30.13_Wallens_InCaseYouMissedItWhen it comes to our money, we largely still don’t get it. It’s why even Warren Buffett and Bill Gates get advice. If investors were a baseball team, they would position all eight of their fielders in the spot where the previous opposing batter’s hit had landed in preparation for the new batter at the plate. Helps to explain why an Institutional fund investor captures 90%+ of the upside in a given mutual fund, while the Retail investor deprives himself via bad behavior of fully 75% of all the long-term gains suffered in the very same mutual fund.

In spite of the adage, the average investor left to his own devices will systematically buy high and sell low every time. And why? Foremost among them, we fear present losses many, many times worse than we covet future gains. This asymmetrical analytically unsound ‘loss aversion’ leads to frenzied investor behavior, which rarely works out well. Ergo, this glorious pan-rally is the worst news in awhile, for those damaged capitalist souls who needed the help the most.

5.30.13_Wallens_InCaseYouMissedIt_2Meanwhile the S&P 500 inconspicuously peels past the thousands like a freight train. Forceful, if not fast. It’s working out great for the professionals, and those who stuck to good advice, those who stuck to their plans, timetables, discipline, and personalized their benchmarks. They never left, and as you have probably observed, historically the majority of the market’s best days/quarters strike closely behind the worst. Miss those best 10 or 20 days, and you forgo a significant chunk of your long-term returns.

Fortunately, with each passing day, more and more investors succumb to longer-term logic and get back with the program—their program. Which is a good thing, as long as you orient your benchmarks around your tested personal risk tolerance and remember your time frames. Then, most important of all, stick to your plan.

Monthly Market and Economic Outlook – May 2013

Magnotta@AmyMagnotta, CFA, Brinker Capital

Risk assets continued their run in April, despite a small 3% pull-back mid-month. The easy monetary policies pursued by central banks in developed economies have forced investors out of cash and into higher yielding fixed income and equity strategies.  On May 3 the S&P 500 pushed above 1600 to an all-time high.  International equity markets outperformed U.S. equity markets in April, helped by continued strong performance from the Japanese equity markets, but U.S. markets continue to lead year to date. Even with stronger equity markets, the fixed income markets also rallied in April as interest rates moved lower and credit spreads tightened further.

After a near 20% move in the U.S. equity markets since November of last year, we may be susceptible to a pull-back in the near term; however, our longer-term view remains constructive. The market remains in a stronger fundamental position that at the 2007 high.

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 through the second quarter. A number of factors should continue to support the economy and markets for the remainder of the year:

  • 5.6.13_Magnotta_MonthlyNewsletter_3Global Monetary Policy Accommodation: The Fed continues with their quantitative easing program, the ECB has pledged to support the euro, and now the Bank of Japan is embracing an aggressive monetary easing program in an attempt to boost growth and inflation. The markets remain awash in liquidity.
  • Housing Market Improvement: Home prices are increasing, helped by tight supply. Sales activity is picking up, and affordability remains at high levels. An improvement in housing, typically a consumer’s largest asset, is a boost to consumer confidence.
  • 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. Borrowing costs remain very low. Corporate profits remain at high levels and margins have been resilient.
  • Equity Fund Flows Turn Positive: After experiencing years of significant outflows, investors have begun to reallocate to equity mutual funds. Positive flows could provide a tailwind to the global equity markets.

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

  • 5.6.13_Magnotta_MonthlyNewsletter_2Europe: The ECB programs have bought time, but cannot solve the underlying problems in Europe. Austerity measures are serving only to weaken growth further and cause higher unemployment and social unrest. After how it dealt with Cyprus, there is risk of policy error in Europe once again.
  • U.S. Fiscal Policy: The automatic spending cuts will start to negatively impact growth in the second quarter, shaving an estimated 0.5% from GDP. In addition, the debt ceiling will need to be addressed again later this year.

Because of massive government intervention in the global financial markets, we will continue to be susceptible to event risk. Instead of taking a strong position on the direction of the markets, we continue to seek high conviction opportunities and strategies within asset classes. Some areas of opportunity currently include:

  • Domestic Equity: dividend growers, housing-related plays
  • International Equity: Japan, small and micro-cap emerging markets, frontier markets
  • Fixed Income: non-Agency mortgage backed securities, corporate credit, short duration strategies
  • Real Assets: REIT Preferreds, Master Limited Partnerships
  • Absolute Return: relative value, long/short credit
  • Private Equity: company specific opportunities
Annualized for periods greater than one year. Past performance is no guarantee of future results. Source: FactSet, Red Rocks Capital.

Annualized for periods greater than one year. Past performance is no guarantee of future results. Source: FactSet, Red Rocks Capital.

 

 

 

The views expressed by Brinker Capital are for informational purposes only. Brinker Capital, Inc. a Registered Investment Advisor.

Your Personal Iceberg: There is More to Measuring Success Than What Lies on the Surface

Wallens, JordanJordan Wallens, Regional Director, Retirement Plan Services

This is part one of a two-part blog series.

As a financial professional, I’m often asked what equity markets will do next. My response never changes: “It will fluctuate”. This truth they do not relish.

A wise man once declared that the beauty of an iceberg lies in the fact that it is 8/9 submerged. Yet when it comes to our investments, we too often make ill-advised decisions driven by passing metrics, subjective outlooks, weather, inputs, and theories that concern only the 1/9 of our personal iceberg showing above the water’s surface. The true tale of the tape for all of us will ultimately be measured not by those investment results, but by our own investor behavior, which accounts for the 8/9 of the iceberg that wise man spoke of. We fret and posture over raindrops when we should in fact, focus on our vessel and navigating the ocean beneath us.

According to a recent nationwide advertising campaign conducted by a prominent global financial services firm, we, as investors, are surrounded on all sides and ever beset by a constantly changing system of confusing and complex variable equations. Whoa, really? Getting anxious? Good, that’s what they intended.

3.12.13_Wallens_PersonalBenchmarksDeep breath and relax. This is but a typical modern example of the financial industrial complex’s fundamental mistruth laid bare by author Michael Lewis, who pointed out that the reason financial types speak in such stilted esoteric jargon, is to constantly remind individual investors that they should never ever consider trying to do this stuff for themselves. They tout “custom strategic solutions” yet sow widespread tactical bewilderment.

And besides, nothing could be further from the truth. Though the eddies of Finance, Economics, and Mathematics may swirl around all of us, the one and only equation that does not change is the “you” part. Your personal benchmark isn’t the S&P500, unless you trade at a 14 P/E and aspire to be one of America’s 500 largest companies. No, your personal benchmarks, like progress toward retirement, college funding, security, vacation home, trip around the world, or whatever you aspire to, are far more static than media barkers would have you believe—which is a good thing (for you, not them).

Worse, this type of indiscrete industry mongering exerts a deleterious effect on individuals’ resolve to do something, anything, to embark upon preparing for retirement, or at least take proper control of their financial future. So what can be done? The good news is things are not nearly as complicated as industry “Chicken Littles” would have you fear. Salvation begins with divorcing the benchmark, and eliminating that pesky habit of gauging your progress by how any given index performs today, this month, this quarter.

Look for Part Two of this blog next week!

Balancing Act

Joe PreisserJoe Preisser, Brinker Capital

Concern lurched back into the market place last week, as the specter of an eventual withdrawal of the extraordinary measures the U.S. Central Bank has employed since the financial crisis, served to temporarily rattle markets around the globe. Although stocks rebounded smartly as the week drew to a close, from what had been the largest two-day selloff seen since November, the increase in volatility is noteworthy as it spread quickly across asset classes, highlighting the uncertainty that lingers below the surface.

Equities listed in the United States retreated from the five-year highs they had reached early last week following the release of the minutes of the most recent Federal Open Market Committee (FOMC) meeting as the voices of those expressing reservations about continuing the unprecedented efforts of the Central Bank to stimulate the U.S. economy grew louder. The concern of these members of the Committee stems from a fear that the current accommodative monetary policy may lead to “asset bubbles” (Bloomberg News) that would serve to undermine these programs. “A number of participants stated that an ongoing evaluation of the efficacy, costs and risks of asset purchases might well lead the committee to taper, or end, its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred. The minutes stated.” (Wall Street Journal).

Tangible evidence of the unease these words created in the marketplace could be found in the Chicago Board Options Exchange Volatility Index, or VIX, which measures expected market volatility, as it leapt 19% in the aftermath of this statement representing its largest single-day gain since November 2011 (Bloomberg News). The reaction of investors to the mere possibility of the Fed pulling back its historic efforts illustrates the continued dependence of the marketplace on this intervention and highlights the difficulties facing the Central Bank in not derailing the current rally in equities when it eventually pares back its involvement.

A measure of the uncertainty surrounding the timing of the Federal Reserve’s withdrawal of its unprecedented efforts to support the U.S. economy was dispelled by St. Louis Fed President, James Bullard, in an interview he gave late last week. Mr. Bullard, currently a voting member of the FOMC, was quoted by CNBC, “I think policy is much easier than it was last year because the outright purchases are a more potent tool than the ‘Twist’ program was…Fed policy is very easy and is going to stay easy for a long time.”

Reports of statements made by The Chairman of the Federal Reserve, Ben Bernanke, earlier this month, which downplayed the potential creation of dangerous asset bubbles through the Central Bank’s actions, released Friday, helped to further assuage the market’s concerns. “The Fed Chairman brushed off the risks of asset bubbles in response to a presentation on the subject…Among the concerns raised, according to this person, were rising farmland prices, and the growth of mortgage real estate investment trusts. Falling yields on speculative-grade bonds also were mentioned as a potential concern” (Bloomberg News). Although the rhetoric offered by these members of the Federal Reserve in the wake of the release of the minutes of the FOMC was offered to alleviate fears, the text of the meeting has served as a reminder to the marketplace that the asset purchases currently underway, which total $85 billion per month, will be reduced at some point in the future, and as such, has served as a de facto tightening of policy.

Though investors appeared to be appeased by the words of Mr. Bullard as well as those of Mr. Bernanke, the steep selloff that accompanied the mention of a pull back of the Central Bank’s efforts is a reminder of the high-wire act the Fed is facing when it does in fact need to extricate itself from the bond market.

Beginning of a ‘Great Rotation’?

Joe PreisserJoe Preisser, Brinker Capital

As the share prices of companies listed in the United States rose this week, to heights last seen in October of 2007, speculation has run rampant that a so called ‘Great Rotation’ from fixed income to equities may have commenced.

The continued easing of Europe’s sovereign debt crisis, combined with positive corporate earnings surprises and the temporary extension of our nation’s borrowing limit, has helped to quell a measure of the uncertainty that has plagued market participants during the course of the last few years. Tangible evidence of this phenomenon can be found in the marked decline of the Chicago Board Options Exchange Market Volatility Index (VIX), commonly referred to as the “fear gauge”, which is currently trading far below its historical average. The steep drop in expected market volatility suggests that investors believe to a large degree that many of the potential problems facing the global economy are already priced into current valuations, and as such have set expectations of the possibility of any external shocks to be quite low. This state of affairs has led directly to an increased appetite for risk within the market, which has culminated in strong inflows into equity funds. According to the Wall Street Journal, “For the week ended January 16, U.S. investors moved a net $3.8 billion into equity mutual funds. That followed the $7.5 billion inflows in the previous week, along with another $10.8 billion directed to exchange traded funds. Add it up and you’re looking at the biggest two-week inflow into stocks since April 2000” (January 24, 2013).

Although the movement of money into equities this year has been quite strong, whether or not this is the beginning of a significant reallocation from fixed income remains to be seen. Despite the flight of dollars into stocks, yields, which move inversely to price, on both U.S. Treasury and corporate debt have risen only moderately, and bond funds this year have not experienced the type of drawdowns that would be expected if investors were truly rotating from one asset class to another. In fact, what has transpired speaks to the contrary, as although inflows to the space have slowed from last year, they remain robust. According to an article in Barron’s published this week, “Bond funds, meanwhile, attracted $4.63 billion in net new cash. Bond mutual funds collected $4.21 billion of that sum, compared to the previous week’s inflows of $5.45 billion” (January 18, 2013). One possible explanation for the hesitation to exit the fixed income space is the lingering concern among investors over the looming fiscal fight in Washington D.C. and the potential damage to the global economy if common ground is not found. According to a recent Bloomberg News survey, “Global investors say the state of the U.S. government’s finances is the greatest risk to the world economy and almost half are curbing their investments in response to continuing budget battles” (January 22, 2013).

If begun in earnest, a rotation by investors from fixed income to equities would certainly present a powerful catalyst to carry share prices significantly higher; however caution is currently warranted in making such an assertion, as a potentially serious macro-economic risk continues inside the proverbial ‘beltway’. If the budget impasses in the United States is bridged in a responsible way, and the caustic partisanship currently gripping Washington broken, the full potential of the American economy may be realized and this reallocation truly undertaken. David Tepper, who runs the $15 billion dollar Apoloosa Management LP was quoted by Bloomberg News, “This country is on the verge of an explosion of greatness” (January 22, 2013).

An Update on Greece

With the recent headlines coming out of Greece this week, Brinker Capital’s Senior Investment Manager and International Strategist, Stuart Quint, shares a few quick points.

  • Greek elections on June 18 raise the risk of Greek default sooner rather than later, leading to some uncertainty. However, risks of Greece have been known for a while by the markets. The question is whether we see bank deposit runs out of other weaker European economies (Spain, Italy) and into stronger ones.
  • European Central Bank liquidity measures and hopeful, but inconsistent, fiscal progress in Ireland, Portugal, and Italy could cushion the downside and show commitment to keeping the Euro around in the near term.
  • Economic growth and European equities, primarily, are likely to take the pain until we get further clarity on the issues listed above. U.S. equities and other risk assets will also be affected in the near term due to concerns on slower global growth, although the U.S. is less affected by global growth than other markets.