Rain and a Market Meltdown

I hope your July 4th weekend was enjoyable.  With it raining most days here in Seattle, I mean Atlanta, my wife and I had to get creative over the holiday weekend to keep our boys (and us as well) sane.  Twice we ended up putting on old clothes/rain gear and went on hikes as well as blackberry picking.  It was something different and we had a great time.

Ever since Fed Chairman Ben Bernanke began warning in mid-May that the Fed was working on a plan to taper their bond-buying program volatility has ramped up in the market and significant losses have occurred in a majority of asset classes.

If you look at the graphic below it is clear that recently there have not been many places to hide.  In fact, it is hard to remember a time when US Treasuries, Gold, US Stocks and Commodities have all sold off at the same time.The good news is that the sell off provided opportunities is several asset classes as the baby was once again thrown out with the bathwater. Higher volatility in the summertime  is nothing new and using that volatility to identify attractive investments is always the objective.

Description Symbol 1 Week 4 Weeks 13 Weeks 26 Weeks
US Stocks VTI -4.45% -4.9% 1.12% 11.08%
International Developed Stks EFA -5.98% 7.19% -2.71% 1.19%
Treasury Bills SHV -0.01% 0.0% 0.01% 0.01%
US High Yield Bonds JNK -4.02% -5.71% -4.19% -1.91%
Mortgage Back Bonds MBB -2.17% -2.72% -3.28% -3.16%
International REITs RWX -7.01% 11.25% -9.97% -6.55%
US Equity REITs VNQ -6.68% -11.99% -5.58% 0.88%
Total US Bonds BND -2.45% -3.36% -3.32% -3.55%
Commodities DBC -3.95% -2.99% -6.84% -7.69%
US Credit Bonds CFT -3.42% -5.21% -4.69% -5.01%
Intermediate Treasuries IEF -3.15% -4.23% -4.48% -4.59%
International Treasury Bonds BWX -4.98% -2.49% -3.72% -7.54%
Municipal Bonds MUB -5.29% -8.23% -7.16% -7.38%
Emerging Market Stks VWO -8.91% -14.79% -13.59% -15.65%
Emerging Mkt Bonds PCY -9.1% -12.91% -12.06% -15.7%
Gold GLD -7.36% -7.35% -20.17% -22.84%
Frontier Market Stks FRN -7.15% -12.86% -19.47% -22.7%

Source: Myplaniq.com     As of 6-24-2013

U.S. stocks have been the standout this year as Gold, Silver, Commodities, China, Brazil, Emerging Market Stocks & Bonds, Treasury Inflation-Protected Bonds, Long-Term Treasuries and Investment Grade Corporate Bonds have all suffered losses ranging from 2% – 37%.

Throughout this year we have continued to closely monitor the outlook for U.S. stocks. One of the indicators that we pay close attention to is the Cumulative Advance/Decline Line for the S&P 500.  When this line is trending higher it tells us that the stock market is being driven higher by a larger number of stocks, and thus is more sustainable. Typically as a longer-term rally nears its end the Advance/Decline line begins to break down as fewer and fewer stocks have the strength to move higher.

In the chart below the S&P 500 is rebounding from the recent 6.5% pullback while the Advance/Decline Line is hitting a new high.  This is a positive sign for stocks and is one of the important indicators we will keep an eye on.

breadth

On a personal note, I hope your July 4th weekend was enjoyable.  With it raining most days here in Seattle, I mean Atlanta, my wife and I had to get creative over the holiday weekend to keep our boys (and us as well) sane.  Twice we ended up putting on old clothes/rain gear and went on hikes as well as blackberry picking.  It was something different and we had a great time.

2nd Quarter down…

The 2nd quarter is now in the books and businessinsider.com has a nice chart summarizing the 2nd quarter returns for key asset classes.  After a first quarter with little volatility the 2nd quarter saw a significant increase due primarily to concerns over the Federal Reserve tapering it $85 billion/month stimulus plan.  Of note, 10-Year US Treasurys  were down 8% and Gold was down a monster 23%.

For more click here:
http://read.bi/19POWNq

The Many Faces of Risk

Today the market treated good news as…good news! Strong retail sales figures combined with lower unemployment claims spurred a gain of 180 points for the Dow. Recently good economic news has led to a sell off in the market as investors were concerned that good economic news would encourage the Fed to begin to taper their stimulus programs. Today certainly was a positive change, one we hope continues.

The past five years I have met with thousands of individuals from companies throughout Atlanta through my association with FPFE.  These interactions, as well as those with my clients, have allowed me to see that when discussing risk investors immediately think of the potential for stock market losses.  There is no question that stock market losses are a significant risk, however often investors are so concerned about avoiding potential losses that they expose themselves to other kinds of risks.  Chuck Jaffe, from  marketwatch.com recently wrote a column that addresses this problem.  Among the risks he highlights are purchasing power risk, interest-rate risk, shortfall risk, timing risk, liquidity risk and societal risk.  
Why is it important to be aware of these risks?  Well the first step to meeting retirement goals is to complete a financial plan, one that can be a road map to meeting your goals. Once the plan is complete, it is then critical to insure that your assets are invested in such a way that you are not overly exposed to any of the risks Mr. Jaffe discusses.
From Mr. Jaffe:

“There is plenty to be gained by “avoiding loss,” and there are strategies for that. But there is nothing an investor can do to avoid risk altogether.  Oh, investment pros use the phrase “risk-free return” to refer to Treasury yields, but they know that there are risks inherent in every strategy. And while stuffing the money between the bed springs will avoid stock-market risk, it simply exposes that money to other risks.”

For more click here:  http://on.mktw.net/19whLgw

Sentiment Change??

An ugly day in the market today after mediocre economic reports and significant market declines overseas last evening. Over the past year mediocre/poor economic reports have sent markets higher as investors believed the Fed would not tighten without better economic news. That doesn’t seem the case today, will this sentiment change continue?

http://on.wsj.com/19Jhupc

Now on Facebook

We wanted to let you know about a new development here at Sentara Capital.  We now have a Facebook page.  We will be posting frequent economic/investment updates on the page and by “Liking” the page you will be able to see these updates.  This is in addition to the posts on this blog.  We have received tremendous feedback on the blog posts but many of you have asked for more frequent updates.

We hope you enjoy the updates. Click the link below to go to the page and once there click on “Like”.

Heating Up

With the temperatures rising there have been some interesting developments in the last week.  Utility Stocks, Bonds and Real Estate Investment Trusts(REITS) have run into trouble, pulling back anywhere from 3%-8%. The chief reason is concern from market participants that the improving U.S. economy may force the Federal Reserve to slowly reduce the financial stimulus programs that are in effect. It has been no secret that markets have jubilantly embraced the Fed’s intervention.  Even thoughts of a break-up has shaken certain assets in the past week.

We made investment adjustments in advance of the latest market concerns and will continue to monitor the markets closely.

One of the questions I often get asked is why hasn’t higher inflation become a reality with the significant money-printing the Federal Reserve has undertaken since 2009.  The biggest reason that inflation has not spiked is due to the fact that banks have kept the money in their vaults rather than lend it out.  The chart below shows the total amount of Excess Reserves currently sitting in the largest banks’ balance sheets.  Excess Reserves are bank reserves over and above the amount required to be held by regulators.  You will notice that each time the Fed has embarked on a Quant Easing(QE) program that the amount of Excess Reserves has quickly moved higher as banks have “stashed the cash”.  When the Fed has been on the sidelines Excess Reserves have fallen.

Unless the large banks begin to significantly increase lending to consumers, this extra money will not find its way into circulation and therefore will have a minimal impact on inflation. It is true at some point the Federal Reserve will need to tighten the money supply, but with a fragile economy they have been hesitant to do so.  If the economy does continue to improve the onus will be on the Fed to tighten and avoid creating a situation similar to 2001-2005 where the Fed’s easy money policies led to a host of troubles.

Source: St.Louis Federal Reserve

Margin debt hits record highs

This week we are excited to introduce video to our investment updates.  We intro the series and discuss plans for the future. For today, Will answers the question of what is margin debt and why we need to pay attention to it.

In past stock market peaks, margin debt has also peaked. This makes sense as high margin debt indicates extreme confidence from investors that they can earn higher returns from the market than the interest rate they are paying to borrow the funds. Typically this confidence comes after a significant stock market advance. Today, with the stock market at record highs, margin debt is once again hitting a record high. Does this mean the market is facing a sharp decline? One indicator alone can not tell us but certainly the high level of margin debt is something to keep a close eye on.

Dow 15,000!

Plenty of excitement today with the Dow Jones Industrial Average crossing over 15,000 intraday for the first time and the S&P 500 closing above 1600 for the first time, so let’s get to it…

The S&P 500 first hit 1500 back in March 2000.  As I just mentioned, today the S&P crossed over 1600 for the first time.  It was a long and adventurous road to go from 1500 to 1600.  Let’s hope the next 100 points come a bit easier.

With the impressive rally the stock market experienced in the first quarter, we have been watching closely for signs of a pullback much like the market has experienced the last three springs.  By and large most of the key indicators have continued to paint a bright picture for the markets.  The Labor Department’s jobs report was strong today with a gain of 276k, including upward revisions to February and March.  The market loves the current conditions. The economic data is good but not great, which means the Federal Reserve has no reason to slow down their stimulus efforts.  This has been the recipe that has been so successful in the last couple years.  Of course market conditions can change on a dime and there is no shortage of economic struggles across the globe, which could come to the forefront at any time.
Speaking of indicators, J.C. Parets at AllStarCharts.com is pointing out the current rally has been broad-based, with a high majority of stocks in a technical uptrend.  From J.C.:
“This chart shows the percentage of S&P 500 stocks that are trading above their 200-day moving averages. It is very difficult for the market to have any kind of sustainable decline when a high percentage of stocks are trading above their 200-day, and therefore in uptrends.”

The chart shows the percentage of stocks in the S&P 500 that are trading above their 200 day moving average, with the S&P 500 itself below.  You can see that the last two market pullbacks have occurred when the percentage of stocks above their moving average have plummeted.  Today, this indicator is showing the market rally has broad support with over 88% of stocks in the S&P 500 over their 200 day moving average.

For more from J.C. click here: http://bit.ly/17CmYQF
5-3-13 perc of stocks above 200

Gold and commodities, oh my.

With The Final Four and The Masters here in Georgia and only a week apart there has been no shortage of excitement for sports fans here.

Speaking of excitement, this week the markets have provided it in spades.  The Dow Jones dropped 265 points on Monday, rallied 157 points on Tuesday and then fell 138 points on Wednesday.  Commodities have had an even tougher time with Silver falling by over 12% on Monday alone, while Gold fell 8.7%.  As I said in my last update, the first quarter of 2013 was very similar to the first quarter in 2012 with the stock market rallying while experiencing very little volatility.  But April was a turning point in 2012 and in previous years with market volatility increasing and stocks falling. We are certainly keeping a close eye on recent developments to see if the volatility experienced this week continues or is just a blip in the market’s march higher.   
 
The Wall Street Journal posted an article that addresses the recent decline in Gold, while also pointing out that the unprecedented amount of financial stimulus by governments across the globe is currently the single biggest driver of the markets.  We agree with this conclusion and I encourage you to check out this short article. 
 
From the Wall Street Journal:

“Investing in a Fed-supported market is difficult, and so far, thoughtful investors may have over-thought things. They have underestimated the Fed’s power.

That leaves investors with two things to watch for: serious, nearby economic problems or an end to Fed support. Neither seems to happening yet. Although the world economy still is not able to function without massive government aid, it is getting plenty of that and is not currently in a crisis. That may be the single most important fact about financial markets now.”

Click to read more: http://on.wsj.com/ZplO8w

March Madness

In my family, March Madness is our favorite time of the year. My wife typically makes a delicious basketball cake in early March for me and the boys. Both of my boys completed a bracket this year and are faring better than I am, something my youngest is reminding me of on a daily basis.
In the spirit of March Madness, here is a graphic that depicts how the stock/bond markets are impacted by different variables:
stocks sweet sixteen
 

The first quarter was very strong for the stock market with healthy gains and low volatility, almost a carbon copy of the first quarter last year.  The S&P 500 and the Dow led the way while bonds and gold struggled.  In 2010, 2011 and 2012, the US stock market peaked during one of the four weeks of April.  In each case economic momentum slowed down, fears from Europe resumed and a stock market correction of between 10 and 19% ensued. That being said, 2013 is a different year and the massive amount of money being printed by central banks across the globe could help keep any market pullbacks shallow.

In recent weeks I have repeatedly been asked if investors in the United States should be concerned about the economic unrest in Cyprus. If you have not been paying attention here are two articles that discuss the situation in Cyprus:
 
 
 
Cyprus is a tiny country, but in this particular case the response from the European Central Bank to Cyprus’ request for bailout funds is why an investor needs to pay attention to what is going on.  In the recent past, banks in Greece, Spain, France, Portugal have called upon the European Central Bank(ECB) for bailout funds.  But for the first time the ECB has demanded a one-time tax on individual bank deposits in return for the bailout money Cyprus requsted.  Up until this point bank deposits in Europe have been insured, much like FDIC insurance here in the United States.  
 
Now that the ECB has put seizing individuals bank deposits on the table as a prerequisite for bailout money the question is will the public’s trust in the banking system in countries like Italy, Spain and France begin to decline.  If so, the public could begin to withdraw their funds from local banks en masse and the European crisis could come back into focus. I am not predicting what will happen, and if history is any indication the ECB may come up with another temporary “solution” (shorter-term stopgap) that tries to contain any fall-out from the Cyprus debacle.  We will continue to monitor this situation very carefully.