Investment Insights Podcast – February 28, 2014

Bill Miller, Chief Investment Officer

On this week’s podcast (recorded February 27, 2014) we are back to the traditional format of what we like, what we don’t like, and what we’re doing about it:

• What we like: ISI Homebuilding Survey surged this week, increasing odds that the overall economy will improve as the cold weather improves

• What we don’t like: Investors don’t know if the recent slowdown is due to the cold weather or if there’s something greater at work beyond that

• What we are doing about it: No major changes; view remains that markets will grind upwards all year long

Click the play icon below to launch the audio recording.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

Investment Insights Podcast – December 24, 2013

Bill 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

Bill 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.

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

Bill 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.

Investment Insights Podcast

Mr. Miller comments on the U.S. Energy Renaissance, as reported by our friends at ISI (International Strategy & Investment Group LLC) in their Daily Economic Report as of October 31, 2013.

On this week’s podcast (recorded October 31, 2013):

• What We Like — U.S. energy production increased in September to an all-time high
• What We Don’t Like — Weaker survey data
• What We are Doing — Looking for good ideas in the energy service industry.

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.

News Out of Japan

Andrew 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.

Fed Likely to Remain Accommodative in the Near Term

@AmyLMagnotta, CFA, Brinker Capital

Equity market investors expressed concern last week after the release of the minutes from the latest FOMC meeting suggested that the Federal Reserve is considering slowing down the pace of the current quantitative easing (QE) program. The Fed is currently purchasing $85 billion of U.S. Treasury and Agency mortgage-backed securities per month.

The Fed has changed its stance on when policy would potentially move to a tightening bias, from emphasizing a calendar date to basing it on economic data. The Fed has stated that it would not raise short-term rates until the unemployment rate fell to 6.5% as long as inflation is not expected to rise above 2.5%. With inflation currently running well below their threshold and with the unemployment rate elevated at 7.9%, it is likely the Fed is more focused on bringing down the employment rate, potentially at the expense of higher inflation.

With short-term interest rates already at the zero bound, the asset purchases are attempting to promote the same result as additional cuts to the fed funds rate. Even if the Fed tapers off their asset purchases in the next few months, any QE is still easing. They would just be taking their foot off of the accelerator. We feel that economic growth should remain tepid in the first half of the year and not strong enough to bring down the unemployment rate significantly, so the Fed is likely to keep their accommodative stance. In addition, the key members of the FOMC – Bernanke, Yellen and Dudley – all lean to the dovish side with respect to monetary policy.

Before actual tightening occurs, the Fed will first have to end QE. When the Fed stops asset purchases, it would be in the context of an improving economy. An improving economy is typically a positive for asset prices. As ISI Group shows in the following charts, equity prices have eventually increased in past episodes of policy tightening.

The Fed raised interest rates from 1.00% to 5.25% from June 2004 to June 2006. After a modest correction, equity prices moved up substantially.

The Fed tightened in more aggressive increments during the 1994-1995 period. The equity markets moves sideways for a period of time, and then ultimately moved higher.