October 2016

Macro Overview

A tightening of presidential polls added to market ambivalence as uncertainty regarding what fiscal and regulatory policy changes might affect the economy and markets. The outcome of the U.S. elections is considered by many to be a primary determinant of how the rest of the year could evolve.

Fiscal policy is still a central concern as monetary policy, which is dictated by the Federal Reserve, has become less effective and predictable. A reduction in federal income tax rates could lead to higher deficit spending, yet may contribute to a rise in GDP and consumer spending.

During its September meeting, the Fed decided to leave rates unchanged but strongly implied that an increase was on the horizon. The Bank of Japan kept its key rate unchanged at negative .10% with a target for its 10-year government yield at zero, a stark contrast to U.S. government bond yields. Lagging retail sales and stagnant industrial production reports possibly encouraged the Fed to hold off on a rate rise during its September meeting. The Fed has two more meetings before the end of the year, one the week before the presidential election and another in December. Most market analysts believe that the Fed won’t raise rates in November, but is a possibility in December as it did in 2015.  We believe there is only a small chance the Fed will raise rates in December as Yellen referred to our economy as a “Pressured Economy”.presidential-positions

The Atlanta Federal Reserve said its forecast of third-quarter real consumer spending growth fell from 3.0 percent to 2.7 percent, influenced by stagnant personal income and spending data for August. U.S. consumer spending fell in August for the first time in seven months while inflation showed signs of accelerating, mixed signals that could also keep the Federal Reserve cautious about raising interest rates.

Anxiety over European banks has risen since the British voted to exit the EU. At first only smaller peripheral banks in Italy, Spain and Greece were of concern, but now larger banks in Germany have become focal points. Pressures are mounting for European banks as the low rate environment set by the ECB is starting to take its toll on bank earnings. An assemblance of dynamics has propelled Germany’s largest bank into a precarious position. (Sources: Fed, OPEC, Eurostat, Reuters, ECB)

Amount Of Bonds With Negative Yields Globally: $12.6 Trillion

Equity Update – Domestic Stocks

A data sensitive environment has evolved into a wait and see scenario as the Fed’s uncertainty regarding interest rates continues to cause volatility in the equity markets.

The third quarter was positive for equities as the technology and financial services sector provided gains for the major indices. For the quarter, the Dow Jones Industrial Average was up 2.78% and the S&P 500 Index added 3.85%, both on a total return basis. The technology heavy Nasdaq Composite Index was up 9.69% for the third quarter.

It’s always welcoming when the bond market helps the equity markets. The benefits of rising prices for high yield corporate bonds translate into lower borrowing costs for companies, thus leading to greater margins and propelling stock prices. (Sources: Reuters, Bloomberg)

Europe’s Biggest Banks – International Banking

The ultra-low rate environment fostered by Europe’s central bank, the ECB, has made it ever more difficult for European banks to make money. The ability of banks to create profitability is primarily based on the interest rate environment, as they lend at higher rates than what they’ve borrowed at.

Some of Europe’s largest and most prominent banks are German, part of the single largest and most influential economy throughout Europe. A combination of low rates, dismal economic growth, the effects of Brexit, and recent penalties imposed by the U.S. Justice Department has levied a tremendous strain on the German and European bank sectors.europes-largest-banks

Politics are also playing a critical part in how a banking crisis might evolve or be entirely missed. The Chancellor of Germany, Angela Merkel, vowed not to use German tax funds to help bail out banks and now with a reelection on the horizon, it is almost certain that any government bail out or assistance of any type will most likely not occur. German policy makers have been known for believing that the banks in the southern regions such as Italy and Greece should not be bailed out or rescued by their native country. (Sources: ECB, Eurostat)

Atlanta Has The World's Busiest Airport

The Country’s Busiest Airports – Travel & Leisure

Fixed Income – Global Bond Markets

Some fixed income analysts believe that the Treasury yield curve is showing signs of mispriced bonds between long-term and short-term maturities, adding volatility to the overall bond market.

It is now estimated that there are over $12.6 trillion worth of bonds globally that yield less than zero. This dynamic is placing tremendous pressure on the world’s central banks to find a policy that will eventually stimulate economic growth and inflation. The Bank of Japan has had little if any success with its ultra-low negative yielding government bonds. All in all, this essentially means that Japanese rates will stay well below those in the United States for quite some time.

Money market funds reform has triggered a change in the London interbank offered rate, also known as Libor. Historically, higher Libor rates translate into higher long-term bond yields.

U.S. money fund reforms are set to take effect in the middle of October and have already affected short-term rates, notably the benchmark London Interbank offered rate also known as LIBOR. LIBOR is the base rate for many U.S. loans including various home mortgages, thus if LIBOR increases, then some mortgages in the U.S. could also see an increase in lending rates. Libor has risen by over 50 bps in the past year to 0.8456%, while the Fed has barely raised its short-term rate just 25 bps to 0.25-0.50%. (Sources: Bloomberg, Reuters)

Richest Person Ever In the World – Historical Note

Over the centuries, industrial leaders evolved who were able to generate tremendous wealth and in some instances popularity. Yet even with the onset of technology over recent decades, it has been difficult for any modern day billionaire to become as rich as Mansa Musa, the 14th century emperor of the Mali Empire. The value of Mansa Musa’s fortune calculated in today’s value is estimated to have been in excess of $400 billion.

Mansa Musa was the African ruler of an empire that once covered Western Africa. In the 14th century, Mali produced about half of the world’s gold from three highly productive mining regions. Bags of gold dust functioned as money in the kingdom, while nuggets were stored in the treasury as the property of the emperor. Wealth in the modern age is primarily stored in stocks, bonds, metals, and real estate.

Accumulation of wealth has always been a point of contention, as inherited wealth was more prevalent centuries ago; however, in the 19th & 20th centuries, the free market allowed entrepreneurs born to no wealth the ability to build and accumulate wealth. The free market and capital structure of the United States helped foster the establishment and wealth of the Industrial Titans of the turn of the century. Vanderbilt, Carnegie, Ford, and J.P. Morgan all developed enormous industries and wealth that became a backbone for the country’s economic and industrial infrastructure.

The Cost of a Dozen Eggs Fell Over 37% In The Past Year

The Bottom Line –

The U.S. domestic stock market still represents the best long term value given the current interest rate and economic environment.  Our U.S. domestic stock portfolio represents the highest quality of companies in terms of both size and earnings.  While there is no guarantee that there won’t be a stock market correction