An End to Complacency

Joe PreisserJoe Preisser, Portfolio Specialist, Brinker Capital

Volatility abruptly made an entrance onto the global stage, shoving aside the complacency that has reigned over the world’s equity markets this year as they have marched steadily from record high to record high. Asset prices were driven sharply lower last week, as gathering concerns that the Federal Reserve Bank of the United States may be closer than anticipated to raising interest rates, combined with increasing worries about the possibility of deflation in the Eurozone, and a default by the nation of Argentina, to weigh heavily on investor sentiment. The selling seen across equity markets last Thursday was particularly emphatic, with declining stocks listed on the NYSE outpacing those advancing by a ratio of 10:1, and the Chicago Board Options Exchange Volatility Index (VIX), which measures expected market volatility, climbing 25% to its highest point in four months, all combining to erase the entirety of the gains in the Dow Jones Industrial Average for the year.

Preisser_Complacency_8.4.14The looming specter of the termination of the Federal Reserve’s bond-buying program, which is scheduled for October, is beginning to cast its shadow over the marketplace as this impending reality, coupled with fears that the Central Bank will be forced to raise interest rates earlier than expected, has served to raise concerns. Evidence of this could be found last Wednesday, where, on a day that saw a report of Gross Domestic Product in the United States that far exceeded expectations, growing last quarter at an annualized pace of 4%, vs. the 2.1% contraction seen during the first three months of the year, and a policy statement from the Federal Reserve which relayed that, “short-term rates will stay low for a considerable time after the asset purchase program ends” (Wall Street Journal) equity markets could only muster a tepid response. It was the dissenting voice of Philadelphia Fed President, Charles Plosser who opined that, “the guidance on interest rates wasn’t appropriate given the considerable economic progress officials had already witnessed” (Wall Street Journal), which seemed to resonate the loudest among investors, giving them pause that this may be a signal of deeper differences beginning to emerge within the Federal Open Market Committee. Concern was further heightened on Thursday morning of last week, when a report of the Employment Cost Index revealed an unexpected increase to 0.7% for the second quarter vs. a 0.3% rise for the first quarter (New York Times), which stoked nascent fears of inflation, bolstering the case for the possibility of a more rapid increase in rates.

Negative sentiment weighed heavily on equity markets outside of the U.S. as well last week, as the possibility of deflationary pressures taking hold across the nations of Europe’s Monetary Union, combined with ongoing concerns over the situation in Ukraine and the second default in thirteen years by Argentina on its debt to unsettle market participants. According to the Wall Street Journal, “Euro-zone inflation increased at an annual rate of just 0.4% in July, having risen by 0.5% the month before. In July 2013 the rate was 1.6%” While a fall in prices certainly can be beneficial to consumers, it is when a negative spiral occurs, as a result of a steep decline, to the point where consumption is constrained, that it becomes problematic. Once these forces begin to take hold, it can be quite difficult to reverse them, which explains the concern it is currently generating among investors. The continued uncertainty around the fallout from the latest round of sanctions imposed on Russia, as a result of the ongoing conflict in Ukraine, further undermined confidence in stocks listed across the Continent and contributed to the selling pressure.

ArgentinaInto this myriad of challenges facing the global marketplace came news of a default by Argentina, after the country missed a $539 interest payment, marking the second time in thirteen years they have failed to honor portions of their sovereign debt obligations. The head of research at Banctrust & Co. was quoted by Bloomberg News, “the full consequences of default are not predictable, but they certainly are not positive. The economy, already headed for its first annual contraction since 2002 with inflation estimated at 40 percent, will suffer in a default scenario as Argentines scrambling for dollars cause the peso to weaken and activity to slump.”

With all of the uncertainty currently swirling in these, “dog days of summer,” it is possible that the declines we have seen of late may be emblematic of an increase in volatility in the weeks to come as we move ever closer to the fall, and the terminus of the Fed’s asset purchases.

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

Safeguarding the Family Enterprise: Children and Wealth

Tom WilsonTom Wilson, Managing Director, Private Client Group &
Senior Investment Manager

A blog in a continuing series on the safeguarding of the family enterprise.

There is a Chinese proverb that goes, “Wealth does not pass three generations.”  This fits the notion that when significant wealth is created by the first generation of a family, the second generation gets to enjoy it, but the third generation, which was so far removed from the work ethic of the first generation, squanders it.

The conversation of wealth is often missed between parents and children.  For wealthy parents, discussing money with children can be a daunting task.  When is the best age to discuss the subject?  How much is too much information?  What if I want to give my money away to charity?  The stress surrounding these questions can often prevent these conversations from taking place.

Safguarding the Family EnterpriseWhile these questions, and others, are difficult to bring up, they are essential.  They will provide the context to determine the balance between providing enough money so that the children can pursue their dreams without a concern for their finances, and not providing so much of an inheritance that a feeling of entitlement or loss of self-purpose develops.  Warren Buffet said it best when he noted that he wanted to leave enough money for his heirs so they can do anything, but not so much money that they can do nothing.

A Wall Street Journal article on the subject gave several suggestions on how to speak with kids about generational wealth.  A favorite was the example of a pre-teen son who approached his mother and asked, “Are we rich?”  The mother replied, “Your father and I are. But you are not.”

A holistic approach to wealth management can go beyond asset allocation and financial planning.  Make sure you participate in the educating of children around family wealth.

Quagmire

Joe PreisserJoe Preisser, Portfolio Specialist, Brinker Capital

The drums of war, which resounded so strongly from our nation’s Capital during the past few weeks, have quickly been muffled by the possibility of a relinquishment of the Syrian government’s chemical weapons stockpile to an international force.  The hastily, cobbled-together diplomatic effort led by the Russian government is dangerously scant on detail, but has offered, as German Chancellor Angela Merkel observed on Wednesday, “a small glimmer of hope” that these weapons of mass destruction can be seized peacefully (New York Times). The delay, and possible aversion of a military strike by the United States, brought about by this development has temporarily allayed tensions around the world and added strength to the current rally that has brought equities in the United States back within sight of the historic heights reached earlier this year.

9.13.13_Pressier_Quagmire_2The long march of the United States back toward armed conflict in yet another nation in the Middle East began with Secretary of State, John Kerry’s emphatic denunciation of the heinous chemical weapons attack perpetrated by the Syrian Government on August 21, which killed an estimated 1,429 people including at least 426 children (New York Times).  Mr. Kerry was quoted as saying, “the indiscriminate slaughter of civilians, the killing of women and children and innocent bystanders by chemical weapons is a moral obscenity…And there is a reason why no matter what you believe about Syria, all peoples and all nations who believe in the cause of our common humanity must stand up to assure that there is accountability for the use of chemical weapons so that it never happens again” (Wall Street Journal). The possibility of American intervention sparked a precipitous decline in stocks listed around the world, with those in the emerging markets having been sold particularly aggressively, as fears of a spillover into a broader regional conflict containing the potential to disrupt the price of crude oil, weighed on investors.

The unprecedented vote by the British Parliament on August 29 to decline the government’s request for an authorization of military force (Telegraph U.K.), began a tentative rebound in global equities, which was furthered by President Obama’s decision on August 31 to seek Congressional approval before embarking on an attack, as both decisions led to the ebbing of worries about any immediate action.  The recent emergence of the potential diplomatic solution to the crisis in Syria, brokered by Russia, has provided further fuel to the reversal in indices around the globe, as concerns of the unintended negative consequences which surround any military conflict have, for the time being, abated.

Chart representing MSCI Emerging Markets Index.

Chart representing MSCI Emerging Markets Index.

Though the President has requested that Congress delay any vote related to the authorization of force until this avenue of diplomacy is fully explored, the potential for United States military action lurks in the shadows and may have in fact been strengthened by this development.  Democratic Whip, Steny Hoyer of Maryland commented on the potential failure of Russia’s endeavor to Bloomberg News, “People would say, well, he went the extra mile…He took the diplomatic course that people had been urging him to take—and it didn’t work.  And therefore under those circumstances, the only option available to us to preclude the further use of chemical weapons and to try to deter and degrade Syria’s ability to use them is to act.”

The suffering in Syria, where the United Nations estimates the death toll to be in excess of 100,000 lives, with half of those lost being civilians and an untold number of injured and displaced, is a tragedy of unfathomable depth.  The fact that it has taken the use of some of the most hideous weapons on Earth to spur the international community to action in an effort to stop the slaughter is deeply regrettable, however it has brought with it the promise of an end to the conflict now in its third year.  Although a diplomatic solution is certainly preferable to military action, if the current negotiations fail to bring Bashar al-Assad’s store of chemical weapons, which is the largest active stockpile in the world, (Wall Street Journal), under international control, the use of force will be a necessary recourse, as the killing of innocents must be stopped.

9.13.13_Pressier_Quagmire_3It’s easy … to say that we really have no interests in who lives in this or that valley in Bosnia, or who owns a strip of brushland in the Horn of Africa, or some piece of parched earth by the Jordan River. But the true measure of our interests lies not in how small or distant these places are, or in whether we have trouble pronouncing their names. The question we must ask is, what are the consequences to our security of letting conflicts fester and spread. We cannot, indeed, we should not, do everything or be everywhere. But where our values and our interests are at stake, and where we can make a difference, we must be prepared to do so.” –William Jefferson Clinton

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

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).

Bet on Success

  People are motivated by a lot of things, but money usually ranks somewhere near the top of the list.  Goals with associated financial incentives or disincentives are more often met than those without; at least that is the thinking behind a new wave of software services and mobile applications.

 New technology is giving life to creative ways to use money to incentivize success.  Take DietBet, for example.  DietBet calls itself a social dieting game.  It “supplies the motivation, support network and game structure[1]” to help users achieve their weight loss goals.  Users can challenge friends, family and co-workers to a 28-day competition to lose weight.  They can wager real money, or just bragging rights.

 Similarly, HealthyWage designs and organizes weight loss challenges and contests in which participants can win money for losing weight.  It offers challenges such as the 10% challenge wherein users who pay a $100 fee and lose 10% of their body weight in six months, win $200. 

 With GymPact, users commit to exercising a specific number of days per week.  They promise to pay at least $5 per day of the agreed-upon total that is missed.  If goals are met, there is a slight monetary reward.

 These health and wellness motivational companies have done what educators have been trying to do for years.  They’ve made something that is generally resisted into a game.  They’ve made a chore fun, and they use a motivator that works for many—money. 

 If it works for diet and exercises, would it work for another chore like budgeting or saving for a life goal?  Stickk.com is currently testing that theory.

 Stickk users can elect to pay a financial penalty if they fall short of their goals.  In the June 15 article,“The New Money Apps”, the Wall Street Journal reported on a Stickk user with the goal of paying down half of her $10,000 credit-card debt.  Any week that she doesn’t meet her desired $180 weekly goal, the system automatically transfers $20 from her account to that of a friend.[2]

 The user profiled in the WSJ isn’t the only one leveraging Stickk’s functionality.  The article goes on to state that 30% of the Stickk’s 150,000 user base elect to pay financial penalties for underperformance on goals. 

 While it may seem outlandish to suggest clients bet on their ability to meet financial goals, it is helpful to know that these tools exist, and plenty of people are using them with success.

 


[2] Anne Tergesen and Joe Light. “The New Money Apps.” The Wall Street Journal June 15, 2012