Investment Insights Podcast – April 17, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded April 16, 2014):

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What we like: Strong stock market last year with $5.6 trillion added to shareholder wealth

4.17.14_chart

What we don’t like: Blowout tax-collection season as a result of this wealth creation; tax burden reaching into the middle class demographic

4.17.14_chart_3

What we are doing about it: Expect more demand for municipals

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Source: Strategas Research Partners, Policy Outlook, April 16, 2014

The views expressed are those of Brinker Capital and are not inteded as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Investment Insights Podcast – April 9, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded April 8, 2014):

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  • What we like: When companies buy shares, decreasing supply of stock in the market; Underlying fundamentals in economy are strong

Pages from JDT_APR2014-4

  • What we don’t like: When companies do too many initial public offerings, the supply in the marketplace dilutes the buying power of demand in the short-term setting the stage for a correction; IPO calendar is heavy

Pages from JDT_APR2014-3

  • What we are doing about it: Watching the IPO calendar carefully; intersection of the seasonal factors–slower summer months; Looking for a strong third and fourth quarter market

Pages from JDT_APR2014-2

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Charts Source: Strategas Research Partners, Investment Strategy Outlook, April 2014

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

Not Your Average Town

WilsonTom Wilson, CFA, Brinker Capital, Managing Director,
Institutional Investments and Private Client Group
& Senior Investment Manager

Midland, TX is not an average U.S. town. Midland is an oil town. Flying over the area, one will notice a landscape littered with oil pumps. Not surprisingly, the sizable impact of oil and natural gas continues to benefit the local economy.

As I ate lunch in town at a crowded restaurant on a Sunday afternoon, I witnessed a crew of “mudders” stop in to grab some food and then hastily jump back into their trucks, destined for the next oil pump.  The fact is, unemployment is not an issue in this town. Midland currently boasts a 3.1% unemployment rate, strikingly less than the U.S. average of 7.6% (U.S. Bureau of Labor Statistics).  In speaking with the locals, the demand for teachers, doctors, and construction workers is quite significant.  Everywhere I looked, it seemed like the town was flourishing.

According to Strategas Research Partners, the United States is the second largest producer of oil in the world today with a 12% market share. We narrowly trail the Middle-Eastern country of Saudi Arabia, who enjoys a 13% share. Surprised? The International Energy Agency projects that the United States could become the largest producer by 2017. One can’t help but wonder about the immense potential we harbor as a country in the field of energy. The impact it could have on our nation in terms of growth, defense, employment, and tax revenue is profound. Let’s hope that in the near future thriving economic towns, just like Midland, won’t be so hard to come by!

6.12.13_Wilson_Midland

A horsehead oil pump in Midland, TX as seen first hand by our very own, Tom Wilson.

Sequestration Begins

Magnotta@AmyMagnotta, CFA, Brinker Capital

Sequestration, the automatic spending cuts that were agreed to as part of the debt ceiling compromise in the summer of 2011, came into effect on Friday, March 1. The Budget Control Act of 2011 established the bi-partisan “super committee” to produce deficit reduction legislation. As incentive for the super committee to agree to deficit reduction legislation, if Congress failed to act than the across the board spending cuts (sequestration), totaling $1.2 trillion over 10 years, would come into effect on January 2, 2013. The start date was delayed two months as part of the fiscal cliff deal. The cuts are split 50/50 between defense (which was supposed to get the Republicans to act) and domestic discretionary spending (which was supposed to get the Democrats to act).

As expected, Congress and the Administration have not been able to agree on serious deficit reduction so we now face the automatic budget cuts. The public does not seem to be as focused on sequestration as they were on the fiscal cliff. In a recent poll from The Hill, only 36% of likely voters know what the sequester is. The spending cuts are broad based, as the chart below from Strategas Research Partners shows; however, it will take some time for the cuts to come into effect.

3.4.13_Magnotta_Sequestration

Source: Strategas Research Partners, LLC

The drag on GDP growth from the sequester is estimated to be around -0.5% this year. This is not enough drag to push us into a recession if consensus estimates for 2013 growth are correct at 2-2.5%, but the effect is not negligible. The largest hit to GDP growth will likely be in the second quarter once a majority of the spending cuts have begun to take effect. If and when voters begin to feel the impact, there may be pressure on Washington to delay or eliminate the cuts.

We also face the expiration of the continuing resolution that funds the government on March 27, which, if not addressed, could result in a government shutdown. This could be a catalyst for another short-term fix. As typical in politics, whichever party is shouldering the most blame will be more likely to compromise to get a deal done.

The idea of real tax and entitlement reform that promotes growth and puts us on a long-term, sustainable fiscal path seems highly unlikely in this environment. Our elected leaders appear to lack the tenacity to make tough decisions. Sadly, kicking the can down the road is the path of least resistance and often the one that leads to reelection.

Bottom line: Fiscal policy in the U.S. will remain a risk throughout 2013. The spending cuts from the sequester alone are not enough to derail the economic recovery. However, tepid growth is likely to persist, especially in the first half of the year, as disposable incomes have fallen due to the expiration of the payroll tax cut. An accommodative Fed and an improving housing market are positives for growth.

U.S. Policy Update: Key Dates Ahead

Magnotta @AmyLMagnotta, CFA, Brinker Capital

I recently attended Strategas Research Partners’ public policy conference in Washington, D.C. It was hard to not come away with the feeling that our government will remain dysfunctional for the foreseeable future. But there is still hope. If we could just put politics aside, there are many smart, reasonable people on both sides of the aisle that could come together to devise an acceptable solution for our fiscal problems that does not stifle economic growth.

In the near term, policy uncertainty remains. The deal to avoid the fiscal cliff dealt primarily on the tax side, making the lower rates permanent except for those in the top tax bracket. However, they continued to kick the can down the road on the spending side. While Congress has agreed on a short-term extension of the debt ceiling, the issue will return mid-year. Washington will continue to be a focus for markets this year.

Below are some key items to watch for on the policy front:

  • The sequester, which consists $1.2 trillion of mandatory spending cuts over 10 years, half of which coming from the defense budget, is set to go into effect on March 1. At this point there is a high probability the cuts will happen. This will result in immediate negative headlines, but the impact of these spending cuts will not be felt for a few more months. Sequestration will also put some pressure on state and local governments as $37 billion of federal aid will be cut. A couple of months of cuts may force President Obama into a deal with the Republicans that would include some entitlement reform.
  • The continuing resolution that currently funds the government expires on March 27. No resolution could result in a complete or partial shutdown of the federal government.
  • The debt ceiling was extended until May 19, but the Treasury could stretch it out until July or August with extraordinary measures. Also included in the legislation is a requirement that both the House and the Senate produce a budget in April or their pay will be withheld.
  • The CBO will release their outlook on February 4.
  • Momentum is building for tax reform as Chairmen of the House Ways and Means Committee (Camp-R) and the Senate Finance Committee (Baucus-D) have hired dedicated staff. However, there is a lack of consensus on why we should do tax reform.
  • Ratings agencies are looking for a plan to stabilize our debt to GDP ratio at 70%. To do this we would need spending cuts closer to $2 trillion over ten years.

Looking Past the Fiscal Cliff

MagnottaAmy Magnotta, CFA, Brinker Capital

It looks like there will be some deal on the fiscal cliff that emerges from Washington before the end of the year—either (1) a large deal that includes a compromise on higher revenues, spending cuts and entitlement reforms, or (2) a smaller deal that results in a larger fiscal drag than consensus currently anticipates. Time is running out, and the market will likely be disappointed if Congress leaves for the Christmas holiday without a more specific plan in place.

In his research report today, Don Rismiller, Chief Economist at Strategas Research Partners, encouraged investors to look through the fiscal cliff and to take notice of the number of good things that are happening in the U.S. economy. Rismiller provided a dozen reasons for optimism after the fiscal cliff is resolved.

The Other Side

Positives on the Other Side of the Fiscal Cliff:

  1. The Fed has followed through on “QE4.”
  2. Additional global easing is expected (e.g., Abe & BoJ, Carney & BoE).
  3. The bond market has digested additional U.S. debt well (10-yr @ 1.8%).
  4. The U.S. dollar has held value (meaning there’s room for policy to operate).
  5. Housing has bottomed in the U.S.
  6. There’s pent-up demand for household formation (buy or rent).
  7. There’s pent-up demand being created for capex (which has already fallen).
  8. There’s likely some pent-up demand for autos (hurricane replacement).
  9. While small, nonresidential construction could increase with hurricane rebuilding.
  10. Domestic energy production continues to ramp up.
  11. Equity valuations look attractive.
  12. Equity multiples bottom before earnings, which is likely an early 2013 story.