Texas Elite Advisory - Clients' and Friends' Newsletter - April 2017
Market Update
(all values as of 09.30.2020)

Stock Indices:

Dow Jones 27,781
S&P 500 3,363
Nasdaq 11,167

Bond Sector Yields:

2 Yr Treasury 0.13%
10 Yr Treasury 0.69%
10 Yr Municipal 0.84%
High Yield 5.77%

YTD Market Returns:

Dow Jones -2.65%
S&P 500 4.09%
Nasdaq 24.46%
MSCI-EAFE -8.92%
MSCI-Europe -10.53%
MSCI-Pacific -6.19%
MSCI-Emg Mkt -2.93%
 
US Agg Bond 6.79%
US Corp Bond 6.64%
US Gov’t Bond 8.04%

Commodity Prices:

Gold 1,892
Silver 23.37
Oil (WTI) 39.88

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.28
Yen / Dollar 105.60
Dollar / Canadian 0.74

Clients’ and Friends’ Updates and Account Reviews

Watch your email inbox for an invitation to one of our Clients’ and Friends’ dinner meetings coming soon to a venue near you.  We look forward to seeing you at an upcoming event.  And, don’t forget to invite a friend.

Frequently, clients request a one-on-one meeting to review their account, either before or after an event.  If you would like to schedule an account review, the first step in our process is to evaluate your current risk tolerance. We recently implemented a web based risk analysis  tool for this purpose.  You can access our risk analysis tool from the APPROACH page on our web site: www.texaseliteadvisory.com.  Just click the FREE RISK ANALYSIS button and follow the instructions.

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Macro Overview

Equity markets advanced during the first quarter as improving economic data supported gradually rising earnings. A steady and predictable path of anticipated rate increases this year by the Federal Reserve was well received by financial markets.

The Fed hiked short-term rates as expected in March, on track with two additional hikes in 2017 with improving economic data validating the Fed’s continuance of rate increases. The Fed has so far increased rates only three times in the past 16 months, one of its slowest paces ever. Fixed income analysts view the Fed’s decision to set two additional rate hikes in 2017 as a normalization of the interest rate environment, away from further accommodative policy producing low rates.

The Consumer Confidence Index, compiled by the Conference Board, and the Consumer Sentiment Index, prepared by the University of Michigan, both elevated to record levels. Since consumer expenditures make up nearly 70% of Gross Domestic Production (GDP), growing confidence among consumers is deemed optimistic by economists.

With tax season underway, estimates from the IRS show that over 140 million tax returns will be filed for the 2016 tax year with over $3.3 trillion in federal tax revenue. (Sources: Federal Reserve, Dept. of Commerce, Dow Jones, S&P)

 
All Three Major Equity Indices Were Positive For The 1st Qtr

Generous First Quarter – Domestic Equity Update

The first quarter saw all of the major equity indices end positive, with the Dow Jones Industrial Index ending up 4.6%, the S&P 500 Index returned 5.5%, and the Nasdaq ended the quarter with a 9.8% gain. The S&P 500 index peaked on March 1st, ending lower at quarter end yet still up for the quarter as its sixth straight positive quarter.

What was of interest regarding the positive outcome in the first quarter was that the market’s performance was not due to the Trump sector stocks that excelled following the election, which were actually lack luster during the 1st quarter. Technology underperformed after the election but had the single largest return of any of the sectors. The technology sector led the 1st quarter rally, producing the largest gain of any of the industry sectors.

On March 22nd, the Securities & Exchange Commission (SEC) adopted a rule to shorten the settlement period for securities from 3 business days to 2 business days. The SEC believes that a shorter settlement period will reduce certain credit, market, and liquidity risks. The new rule will take affect September 5, 2017. (Sources: SEC, Dow Jones, S&P)

Rates On Track To Rise Slowly – Fixed Income Overview

Rates retreated downward during the first quarter as growth prospects were alleviated even though the Federal Reserve raised rates in March. Treasury bond yields rose in early March in anticipation of accelerated Federal Reserve tightening and then fell following a sense that the Fed may proceed with cautioned rate hikes due to possible lackluster economic data. The Fed increased its target on short-term rates (Federal Funds Rate) to 0.75-1.0% and signaled two more anticipated hikes in 2017.

A jump in the Personal Consumption Expenditure (PCE) index to 2.1% has validated the Fed’s stance of continued rate hikes and an eventual winding down of its government and mortgage bond holdings on its $4.5 trillion balance sheet. (Sources: Federal Reserve, Reuters, Bloomberg)

Brexit Is Finally Underway – Euro Region Update

Ever since British voters decided to have Britain exit the European Union (EU) in June 2016, the process and timeline of the exit have been in question. This past month, British Prime Minister Theresa May triggered Article 50 which begins a two-year period of negotiations with the EU on exiting the union and establishing remediary trade arrangements with applicable countries. Should negotiations not be completed within the two-year period, then Britain would be required to follow World Trade Organization (WTO) rules on tariffs.

What has kept Britain from formally moving forward with its decision to exit the EU has been the delay in executing Article 50, which was never signed by the prior prime minister, David Cameron, and delayed by British courts on its applicability.

The execution of Article 50 comes at a time when other EU member countries are having elections with EU membership as a notable topic.

Here in the United States, triggering Article 50 is akin to having a U.S. state secede from the nation. (Sources: EuroStat, Europa.eu)

 

 
The PCE Index Hit 2.1%......The Fed's Target Rate For Inflation

Auto Sales May Have Peaked – Industry Overview

Low interest rates and aggressive leasing programs have made some fairly expensive cars affordable. Rather than struggling to get approved for a new home loan or refinance, Americans have instead financed cars, where getting a loan approval has been easier. The abundance of attractive loans has helped elevate auto sales throughout the country over the past few years. Recent auto sales have been slowing across the country as dealer incentives have become less effective.

The end of 2016 saw auto loans outstanding reach $1.1 trillion, propelled by continued low interest rates. Federal Reserve data revealed that the average rate on a typical 4 year auto loan was 4.45% in the 4th quarter of 2016. The same auto loan in February 1982 was 17.05%.

As expensive as some automobiles have become for consumers, an auto loan is the only method of actually affording the pricey cars of today. Over the years, several automobile companies have established their own financing thus allowing buyers to buy and borrow directly from them.

A growing concern among analysts are the number of auto loans that have been securitized over the past few years. The ultra low rate environment has created incredible affordability for consumers as well as attractive high yielding securities for risk seeking investors. An increase in rates may lead to an increase in auto loan defaults as payments become less affordable. (Source: Federal Reserve)

Inflation On Track For Fed Rate Hikes – Monetary Policy

A primary determinant for the Fed’s decision to raise rates is inflation. As part of its monetary policy objectives, the Fed had set a 2% target for consumer inflation as a trigger for sustained rate increases.

A closely followed indicator of inflation and what consumers pay for goods and services is the Personal Consumption Expenditures Index (PCE), which is compiled and released by the Commerce Department each month. The most recent data released shows that consumer inflation edged up 2.1% over the past year, marking its largest annual gain since March 2012.

A rising PCE is indicative of rising prices for consumers throughout the economy, in other words inflation. One of the Fed’s mandates is to thwart inflationary pressures with gradual increases in short-term rates. This monetary policy tool has been used for decades as it stems inflation and slows consumers down from spending too much before it evolves into inflation. (Sources: Commerce Dept., Fed.)

 

 
Warren Buffet and the Superinvestors

Investor Education

This last page has been reserved for those who want to learn more about investing.  The following was reproduced with the authors permission:

Warren Buffet and the Superinvestors

The term “Superinvestor” comes from Warren Buffet’s public response to the growing beliefs about efficient markets. In 1984, Columbia University hosted a celebration of the 50th anniversary of Graham and Dodd’s text Security Analysis. The highlight came in a debate between Buffet and Professor Michael Jensen of Rochester University, a supporter of the capital asset pricing model and originator of the performance metric “Jensons’s Alpha”. Many of the efficient market supporters claim that even Buffet’s phenomenal long-term success as an investor is completely attributable to luck – of millions of investors, one is bound to do so well, even if just flipping coins.

Buffet agrees with the math but suggests that if these “lucky” investors just happen to have certain common characteristics – if they all just happened to live in Omaha – then one may want to examine those details before drawing conclusions. Buffet affectionately calls this place, where such investors live, Graham–and-Doddsville, and humbly states, “I think the group we have identified by a common intellectual home is worthy of study.”

Thankfully, Buffet submitted the argument as an article to Columbia’s business school magazine, Hermes. Do yourself a service and read it in its entirety, available free online. Buffet goes over the investment performance of several cohorts of his at Columbia who were also students and employees of Graham and Dodd. Despite having a variety of investment practices, they generated superior investment performance over many years. While only a dozen pages, I find his argument passionately compelling.

For our benefit, the Superinvestors have shared their experiences in many interviews, articles, and books. If active investing appeals to you, I believe it worth your time to read them pervasively. I am particularly fond of The Little Book of Value Investing by Christopher Browne, which is widely available in an audio format as well.    Source: (Daniel Dower, “Understanding Investments A Few Minutes At A Time”)

 

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