Thursday, December 5, 2013

November 2013 Review and Outlook

November 2013 Review and Outlook 

The S&P 500 closed up 2.8% for the month and has gained 26.6% before dividends year to date. Stocks again beat a tired bond market for the month and year to date.

The stock market has risen nearly 50% without a 10% correction. This is a very unusual situation. It speaks volumes to the fact that the global Central banks have kept interest rates at historic lows.

U.S. companies are making historic earnings with record profit margins and record levels of cash on their balance sheets.

The Morgan Stanley Global Stock Market index is up about 15% year to date while Emerging markets are showing a negative 8% return.

Capital spending has yet to kick in during this abnormally slow recovery. U.S. and European CEO's remain cautious about the pace of recovery, regulation, and tax rates. The Consumer remains wary of taking on more debt.

In this environment companies buy back shares and raise dividends helping to lift the markets.

Unfortunately Washington policies have done nothing to help raise wages for the middle class or help the economy get to back 2007 employment levels.

We expect market trends to remain in place through December. Tax loss selling will be featured in a month when the market typically rises 1.5%.

In 2014 we expect additional loses in long term bond investments while global stock markets outperform both bonds and commodities. At 15.6 times forward earning the S&P 500 P/E ratio is in neutral territory.

Inventors are likely to make more positive allocations to stocks rather than bonds after they review their 2013 returns.

The Federal Reserve is expected to remain in "ease mode" long after tapering their bond buying program, likely in March 2014. We do not expect any important legislation out of Washington until after the November 2014 midterm elections nor do we expect another government shutdown or debt ceiling impasse.

As always your questions and comments are welcome.

Best wishes for a Happy Holiday Season.

Doug
December 5, 2013

Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.

Monday, November 4, 2013

October Review and November Outlook

October Review and November Outlook

The S&P 500 finished October +4% bringing the index to new all time highs and +23.2 % year to date. Barclays Capital Aggregate Bond Index had a rare plus month up 0.81% yet still down 1.1% year to date. The 10 year note closed the month with a 2.52% yield.

Third quarter earnings are coming in slightly above expectations while revenue growth remains weak.

The Federal Reserve bond purchase program remains in place most likely until 2014.

Congress kicked the debt ceiling and budget negotiation cans down the road with a new deadline of Feb. 7, 2014 for an agreement.

Until this year investors had the luxury of a 30 year bond bull market to fall back on for low risk returns. With stock markets now significantly outperforming bond markets more money flows in to the asset which treats investors best.

US stocks at 15 times 2014 earnings estimates are not cheap but not expensive. They are very capable of going to higher multiples in a low interest rate environment with rising earnings.

There are few signs of a classic stock market top such as Fed tightening, excess leverage, or too much bullish sentiment.

We typically get to the point where stocks are the talk of the town and investors can do no wrong before a big setback.

Asian, European and Emerging market stocks are still feared and even loathed by some. Yet Japan +22%, Germany +19%, France +18%, UK +13% are big winners this year. Emerging markets are coming back from big losses and commodity based countries are hopeful for better times in 2014.

In this world of slow growth, companies with high quality products, record levels of cash, share buyback programs, and rising dividends are preferred to low coupon fixed income investments.

The global stock rally should continue barring monetary tightening or a regional conflict of significant magnitude.


Doug
November 4, 2013

Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.

Friday, October 4, 2013

Third Quarter Review

Third Quarter Review 

The SPX closed up 5% for the quarter while September gained 3%. Companies in the index are forecast to report earnings up 4.6% year over year. Revenues are expected to be weaker than earnings. The index now trades at 15.6 times 2013 expected estimates of $108. Nearly 80% of the 18% stock market gain in 2013 has been due to rising P/E's rather than rising earnings. This is unusual.

The rosy $114 estimate for next year is based on a belief that capital spending will pick up and the global economy has bottomed. Stock prices normally rise as we get higher earnings particularly when combined with below normal interest rates.

The 10 year Treasury note traded around 6% for decades prior to the financial crisis. In September it closed with a 2.64% yield up significantly from 1.66% in May this year. Bears believe higher rates will drive stocks lower along with bonds but it has not yet happened. However the spell of rising bond prices started in 1981 appears to be broken. We are a long way away from normalized rates which should keep P/E ratios at the high end of historic ranges.

The Federal Reserve failed to reduce its $85 billion dollar/month bond buying program recently which surprised the markets. The Chairman had spoken of tapering in May driving up yields, now investors are confused. It seems the Fed’s talk of tapering drove rates higher then they had anticipated. Given the current norm of +2% GDP levels the Fed needs to keep it's QE policy going.

Slow growth in this year's first half was due to higher income taxes plus uncertainty over Obamacare's costs to small business. This one two punch kept employment lower than what it might have been. Both individuals and CEO's are still hoarding cash and refinancing debt. Big business waits for corporate tax rules to change before investing more in the U.S. The Fed policy helps financial assets more than the economy or employment.

Small-Cap Growth funds have outperformed Big Cap Growth and Value funds. Growth stocks outperform slower stable and cyclical stocks in weak economic periods. Dividend focused investing has taken a back seat on this year's investment train.

Euro zone investor confidence turned positive for the first time in two years. The Europe 350 Index rose 5% this past month. Emerging markets rose 6.5% in September boosting 3Q gains to 5.1% after a rocky start in the first half.

Now we see Congressional budget negotiations have reached an impasse resulting in a partial government shutdown. This drama will likely continue until the October 17th when the current debt ceiling is reached. After this point, revenues received by the government must equal those spent by government. What a novel concept! Interest on the debt can and will be prioritized for payment if necessary.

If Congress and the Administration can ever manage to seriously address issues like Social Security, Medicare and Corporate tax reform we may experience a significant rise in market prices. For now share buybacks and dividend increases by rich corporations will continue to support markets. It appears that an unexpected recession or an exogenous shock to the financial system could derail this rosy scenario. We view this as unlikely any time soon.

European and Emerging markets are cheaper than the U.S. at current levels but are perceived to be more risky. As their economies do better they represent an interesting investment opportunity.

Lower quality bonds of short duration have outperformed higher quality, longer maturity bonds. This should continue to play out until the economy weakens materially.

Investor’s Business Daily pointed out that in the last 17 U.S. Government shutdowns the S& P 500 typically falls in the first week but ends higher a month later. October also marks the end of the DOW and S&P “Worst Six Month" period for share prices.

Doug Coppola
October 4, 2013

Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.

Tuesday, September 3, 2013

September Musings

"Blue Moon in August"
September 3, 2013

The SPX - S&P 500 lost 3.1% in August as Treasuries fell for the fourth straight month. The index has gained 14.5% year to date with 67% of that gain taking place in the first quarter. Corporate earnings growth was 5% in the first half while revenue growth was below 2%. 

Investors are suffering from negative bond market returns in 2013. We note that Jeff Gundlach's DBLTX - Doubleline Total Return fund is down 0.88% year to date having averaged 7% gains the past three years. This year he has outperformed 86 percent of his peers. The well known PTTRX - Pimco Total Return Fund managed by Bill Gross is down 3.6% for the year. U.S. government securities lost 0.7% in August declining 3.5% in the prior 3 months. 

Municipal bonds a $3.7 trillion dollar market segment have lost more than 6% year to date, measured by iShares National Muni ETF - MUB which closed the month at 101.91 down 11% from it's all time peak last November. Fears of rising rates and looming defaults abound in spite of municipal bonds excellent credit history. 

While the US dollar was flat in August gold and oil rallied. Emerging markets and EM currencies dropped once again. 

Syrian concerns surfaced late in the month as President Obama announced a retaliatory attack for the use of chemical weapons by the Assad regime. Over the Labor Day weekend Mr. Obama hesitated and decided to seek Congressional approval for a military strike. This uncertainty will hang over the markets until a conclusion is reached. 

Many of the world's stock markets are down year to date, with Brazil and India losing about 25%, Western European markets have recently turned positive as the Eurozone emerged from its long recession. 

US GDP was revised to +2.5% for the second quarter. The Federal Reserve looks for +3% growth in the second half of this year but some remain skeptical. 

Global markets are facing the following uncertainties going into the balance of the year: 
1- An imminent attack on Syria. 
2- The reduction and eventual withdrawal QE stimulus by the FED. 
3- The appointment of a new Fed Chairman. 
4- The effect of higher rates on consumer spending. 
5- The outcome of the September 22 national elections in Germany. 
6- The outcome of debt ceiling and budget negotiations in October. 

Ten year governments have climbed from 1.40% last summer to 2.90% without a negative impact on US or Euro stock markets. Past experience shows that if rates climb due to a strong economy, equity markets move higher. 

There is currently no sign of wage inflation with workers having scant bargaining power. Since 2009 non-government hourly pay is down from $8.85 to $8.77. 

On the positive side of the ledger we have diminishing unemployment, lower budget deficits, a stronger dollar and improving current account deficits. We are moving towards energy independence. We are the largest world economy and the US dollar is the reserve currency. 

While we are stuck in a 2% growth economy and for now headwinds must diminish to achieve 3% growth. Europe and Asia improvement will help.

The SPX closed August at 1633 up 4.3% from the 2007 peak of 1565. With the 2013 consensus SPX estimate of $107.85, earnings are up 23% from the 2006 peak. This implies downside cushion for stock prices. 

Selling at 15 times consensus numbers, equities are not unreasonably priced. Further gains should come if we have improving GDP and better earnings. It is unlikely we benefit from additional multiple expansion which has floated the market higher thus far. 

Money has continued to flow out of bond funds into money market funds. If confidence rises, stock allocations will likely increase. 

In the coming months we shall see how events unfold. Fed moves remain "data dependent". 

Our goal to guide your funds with diligence, preserve your capital, and achieve acceptable returns over the long run. 


Doug Coppola


Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.

Monday, August 12, 2013

Second Quarter Earnings and Outlook

With 90% of S&P 500 companies having reported, earnings are up 2.4% according to Fact Set. The Financial sector led the way up 28% without which composite earnings would be down 3%.

Mining profits are down 60% squeezed by lower commodity prices and higher costs. Other major sector profits like Technology were down 8%, Energy down 9% and Materials down 10%.

2nd Quarter sales were up 1.6% with 55% of companies exceeding reduced expectations.

Next Quarter's sales are anticipated to be up 3% with earnings up 4% lower forecasts than 3 months ago.

At 1688.98 the S& P sells at 15.4 times 2013 earnings estimates and 14.3 times 2014’s expected number.

While P/E ratios have been rising for the past few years interest rates seem to have reached their low point for this cycle. This suggests better earnings growth is needed to propel share prices higher. The market's rise has exceeded its earnings rise particularly since late 2012.

Europe seems to be moving out of recession but a key German election looms in September and recovery in the Southern tier will be a long process.

China and Japan are both undergoing transitions in their policies affecting the economy of each country and Asia in particular. The jury is out on the results as big structural adjustments are required to be implemented which take time and determination. The under performing Emerging markets as well as commodity driven developed countries are mainly affected.

In the U.S. very soon we face intractable budget issues and the full roll out of Obamacare both problematical. The ongoing uncertainty keeps business spending and new hiring in check. As consumer spending slows as it has this past month so too may the economy.

It will be an interesting period ahead setting the course for a stronger recovery or a stall as the Fed begins to unwind its QE program.

With the turn in the calendar year we will see a change in Fed leadership as well. I anticipate increased market volatility as 2013 enters the final 4 months.


Doug Coppola 
August 12, 2013

Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.

Monday, August 5, 2013

August Musings

“The Beat Goes On!” 
August 5, 2013 

Stocks outperformed bonds in the month of July with the S&P 500 finishing up 5% at 1685.73. 10-year Treasuries closed with a 2.58% yield after the Fed said it will continue the QE program. Bonds recovered by +0.14% but were down 2.31% in aggregate for the year. 

GDP rose 1.7% for the second quarter which was better than expected but moderate growth for a post Depression recovery. The Federal Reserve forecasts 3% GDP growth in the second half as it anticipates 6.5% unemployment and 2% inflation before ending the bond purchase program. 

It seems we are in a secular bull market in US shares as measured by the SPX index. Levels are 9% above the high of 1565 reached in 2007. Many participants do not trust stocks as after 13 sideways years and 2 bear markets. The last bull run was 1982-1999. Pension funds are underweight equities and cannot meet 7 percent targets by owning bonds. 

Conversely a bear market in bonds began July 2012 with a 1.4% nadir in the 10-year note. Since May's 10-year yield of 1.60% longer term bond prices dropped dramatically. Other high yield instruments including Utilities, REIT’s, and MLP's have under performed the broad stock market averages. We have begun to price in an end to financial repression which has kept bond yields artificially low. 

Current concerns include China's 7% and slowing GDP along with Japan’s economic experiment and the upcoming the German election. Any surprise could tilt investors back toward a more cautionary stance but most forecasters see better economic times ahead. 

Recently a perceptible change has occurred whereby most bonds no longer provide positive returns. We are focusing our investments on low or no duration bond funds which have held up relatively well but are not gaining like stocks. Any investments less than 100% SPX has been relatively disappointing. Investors who formerly avoided risk now want performance that only equity exposure can provide. 

Global markets are smarting from severe drops in commodity prices caused by China's slowdown and recession in Europe. Most Emerging markets have negative returns year to date. European stocks are just beginning to perform while America's rebound has given greater confidence to a system that held together after a period of great stress. SPX earnings have increased from 2010’s $83.66 to $102.47 last year + 22.5% yet the market has rallied about 36 % because stock market multiples are rising. 

Investors know that slow earnings growth trumps rising yields. Except for the irrational P/E peak in 1999-2000 investors have been willing to pay between 7 and 22 times earnings for the past 8 decades. According to Yardini Research SPX operating earnings are expected to be $111.00 in 2013 and $123.58 next year. The market sells at a 15.18 multiple for 2013 and 13.63 times next year's estimate. We are above the midpoint of the historic range but not overvalued. 

If the economy and corporate earnings do not hit a wall stocks become the asset of choice. With earnings rising and bonds no longer a safe bet, the stage is set for more gains. Having made the case for stocks, we recall that corrections frequently come in the Fall as Congress gets back into session. Since 1964 we have had 17 autumn declines of more than 10 % with much of the damage done in October. 

Our job is to cope with changing circumstances as best we can. We therefore adjust portfolios in a deliberate manner. It has been a challenging task to adjust rapidly enough in this slow growth and government policy driven cycle. In a rising market the only winning strategy is to move into better performing securities. Trends have changed and we are acting accordingly. As always your questions and comments are welcome. 

Doug Coppola


Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.

Tuesday, July 2, 2013

Second Quarter Review

“Diversification Hurts”
July 2, 2013

Interest rates spiked suddenly in the second quarter as the Federal Reserve Chairman outlined a path to normalcy in a post QE world. Market participants got the much anticipated correction in stock and bond prices. Holders of long maturity bonds and precious metals suffered double digit declines and are now questioning the safety of those assets.

Gold suffered its biggest quarterly loss ever declining 23% since March 28, 2013. Commodities such as copper dropped 16%. China suffered a bout of financial indigestion with a liquidity crunch. 

These events coincided with sharply higher US interest rates and caused Emerging market stocks and bonds to suffer losses of 14.5% and 11%.

In spite of this caustic climate U.S. equities advanced 13% year to date but only 2.9% in this past quarter. June was the first down month all year.


As the Federal Reserve Chairman explained, continued QE will now be "data dependent" not a given fact of life. On June 19th Mr. Bernanke’s words threw fixed income markets into a selling frenzy. The 10-year Treasury note reached a 2.65% yield, a full percentage point higher than mid May’s 1.63%. Some corporate and municipal bond ETF's dropped 9% from their highs while the Standard and Poor’s 500 dropped 5.8% in short order.


Investors are learning that bonds are now as risky and volatile as stocks in an era of Government repressed interest rates. We learned governments cannot hold back huge sellers when they want out. Bond funds experienced record redemptions exceeding 60 billion in June, after inflows of more than 1 trillion over the past 5 years. The Fed was clearly surprised by the severe reaction and has since sent out spokesmen to dial back on Mr. Bernanke's remarks.


It appears that low duration bonds and floating rate notes are a good place to whether the interest rate storm. The latter asset class dropped less than half of one percent during the selloff. US stock markets performed extremely well considering the carnage that went on in other world equity markets.


Japan +14.2% year to date had strong equity gains due to their QE announcements early in the year. Major markets in Europe showed little gain, while China, Russia, Brazil, and South Africa each lost about 20%. Australia, Canada, India, and Mexico were down between 8% and 11%. Diversification hurt rather than helped returns.


Consensus expectations for S&P 500 earnings is $108 in 2013 and $114 for next year. Selling at a P/E multiple of 15 times earnings, stocks are priced below historical norms. If interest rates rise rapidly to 3% on the 10-year Treasury, markets may swoon again. However the Fed has often stated they will remain a buyer of bonds until the unemployment rate reaches 6.5%. That level of unemployment can occur only if the economy improves which brings higher earnings for most companies.


If continued bond redemptions result in money moving into stocks, all will be well for long term investors who go with the flow. If however, rates climb for reasons other than solid economic growth, it will be hard for corporations to continue to grow earnings as margins are at record highs. It becomes unlikely that P/E's will revalue higher in a rising interest rate environment.


Neither economists nor Central Bankers worldwide have a crystal ball but the fact remains that governments will try to keep rates low while economies recover. Governments in Europe, Japan and the US can ill afford higher rates given the level of sovereign debts and deficits.


US companies with transparency, large cash balances, increasing dividends and share repurchases should do well relative to the competition. While P/E ratios abroad are lower than those at home, money moving from cash or bonds will seek safety and liquidity over higher return but riskier possibilities.


I expect numerous economic clouds will remain on the horizon in Europe and China. Higher US interest rates will not drastically slow domestic economic growth. The United States is increasingly energy self - sufficient, thanks to fracking technology and vast natural resources. Low energy prices are giving domestic companies another competitive advantage.


Corporate revenues are expected to be up 1.8% while earnings should climb 3.0% according to new estimates in Barron’s. In a 2% GDP growth economy with 1% inflation, it is unlikely we see another interest spike soon. Bond rates will eventually climb as the Federal Reserve scales back on QE and consumers gain more confidence. US shares are likely continue to do well in this environment.



Douglas Coppola 

Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.



Tuesday, June 4, 2013

June Musings

Some interesting trend changes appear to have occurred in May. The most important were yields on 10-year US Treasury Notes went from 1.67% to 2.16%. The end of the 30 plus year bull market in bonds was declared by Bill Gross of Pimco. Utility stocks lost 9.1% of their value in May while Telecoms , REIT's MLP's and the majority of bond categories all had losses.

Investors pushed up stocks for the seventh month in a row as the S&P 500 finished at 1630.74, up 14.3% year to date. Speculation as to when the FED will begin tapering it's bond buying binge is a hot topic which seems to cause stocks to sell off.

Valuation levels in slow growth/ high yielding stocks had reached levels not seen in some time relative to the market averages hence the sudden run for exits in this most successful investment category for the past year.

"Once everyone knows how to play the game they change all the rules" is a common Wall Street adage.

One of my fellow market observers Steve Reynolds of Craig Drill Capital L.P. has drawn attention to a recent Vanguard Group survey citing 86 years of market data which concludes the major predictor of stock market performance is valuation not GDP growth, dividend levels, earnings or interest rates. Economists and Wall Street forecasters focus on all these other issues but most recommend staying fully invested regardless of valuation.

Rational people buy when things are cheap and sell when things are dear. Warren Buffet is the richest example of such an investor who buys low and when he does sell, it is normally for high prices. Human psychology seemingly keeps rational people from doing the same as we move from phases of fear to greed and back again often overlooking valuation.

At 1630 the S&P 500 is trading at 15 times the $108 consensus estimate for this market index whose yield rivals that of the 10-year Treasury note. Stocks while not dirt cheap are cheap relative to bonds and their own historical averages.

Common sense indicates that bonds are far from cheap and likely very dear as rates have finally begun to rise as the global economy remains in growth mode. Stocks in the middle of their historic PE range of 7x - 22x are well off their March 2009 panic lows but have not approached valuations at previous market peaks.

In the short run numerous factors affect market prices around the world today: including timing the next Fed move, Japanese monetary policy, and global unrest.  

We will continue to focus on generating returns given our assessment of where value lies.


Douglas Coppola 

Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.

Wednesday, May 1, 2013

May Musings

Sell in May and Go Away?

The S&P 500 index gained 1.9 % in April versus its 1.5 % historical average return since 1950. Health Care stocks, Utilities and Consumer Staples led the year to date performance parade with returns of 19%, 18 % and 17 %. Defensive stocks rule and high dividend payers reign supreme in this yield starved environment; 175 companies have raised their dividends while only 9 have lowered them.

First quarter GDP was + 2.5 % with an unemployment rate of 7.6% and the lowest labor participation rate of 63.3 % since 1979. At that time we had double digit inflation and Jimmy Carter as President.


On the earnings front, 57% of reporting companies have posted lower than expected revenues but 70% have exceeded consensus earnings estimates. Managements are keeping costs down and margins up in this slow growth economy while facing the headwinds of strengthening dollar. In some spots earnings are beginning to sputter, with misses by CAT, GE, IBM and MMM .Despite these negatives the S&P has had the highest quarterly earnings ever of $26.44 annualizing at $105.76 for a 15 times forward P/E ratio.


Ten year US treasury yields closed at 1.67 % while German Bunds yield 1.22%. Spanish sovereign debt for 10 years now pays 4.14 %. Euro austerity measures and deleveraging on the continent have caused 27% unemployment in Spain and 12.1 % across the Euro zone.


Gold saw a 13.6 % drop in 2 days during the month or the biggest drop in 30 years .We seem to have abandoned the fear of hyper inflation? What happened to too much money chasing too few goods? We are witnessing easy money finding its way into financial assets rather than the real economy.


Japan has begun a massive asset buying binge that has rallied their long dormant stock market. They aim to jump start their economy and rescue an increasingly less competitive manufacturing base. As Japanese stocks soar the Yen plunges to multi year lows versus the dollar and Euro.


Europe ,China , Russia and the developing countries all feel pressure to stay competitive and will likely lower interest rates sooner rather than later. Austerity policies will shortly come to an end in the Euro zone as German elections near and unrest in the streets will likely create a need to stimulate GDP and job growth rather than curb deficits.


As we begin the "worst six months of the year" for stock market returns with the S&P 500 index at new all time highs one wonders if this rotation into high yielding equities can continue. History argues for a pause in this rally as the past 3 years saw declines beginning in May.


So far in 2013 U.S. stocks have outperformed non U.S. stocks as well as bonds and commodities. Can we continue this uptrend is the big question?


While bonds are unlikely to appreciate much from here without a global recession both domestic and non US equities are likely to benefit from easy monetary measures and Europe takes a holiday from austerity.


Gather Ye Rosebuds while Ye May!




Douglas Coppola

April 30, 2013

Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.

Monday, April 1, 2013

April Musings

New Highs Reached….Are April Showers Next?

The first quarter of 2013 was full of surprises. Florida Gulf Coast University, a Cinderella team, made it to the Sweet 16 level in the NCAA Tournament. A budget sequester in Washington and a brief trip over the dreaded Fiscal Cliff came then went with little effect. The nation's economy survived a sizeable tax increase and continues its slow rate of growth. Both the S&P 500 Index and Dow Jones Industrial Average reached new levels.

On the last day of the quarter the S&P 500 index reached an all time high by 3 points surpassing the 1565.15 peak of 2007. In 2000 at 1527.46 index earnings were $67, P/E ratios were 22.8 times. Earnings were $100 in 2012 with companies having half the debt they had 13 years ago. We seem to have broken out into a new uptrend.


Seventeen Wall Street analysts predict a year end close of 1583, with forecast earnings of $110.51. Today’s price level is a still modest Price/Earnings ratio of 14.1 times forward earnings. The dividend yield is over 2% with an earnings yield E/P of 7%. Index return on equity is 21%.


For the month and YTD, S&P 500 was +3.3% and +10% respectively. Except for bank loans at +2.11%, every bond index was down marginally. The aggregate bond index -0.20%, T-bills returned 0%. Commodities returned -1.1%.


Japan's Prime Minister Shinzo Abe declared an end to the era of deflation and embraced aggressive monetary easing policy similar to our own Ben Bernanke. The Nikkei 225 index in Tokyo managed an 11.7 % gain in dollar terms and 21.5 % in Yen terms. This was the best in the developed world.


Emerging stock markets were down 2.2 %, led by Brazil at -7.5%. Losses came about despite negative cash inflows, lower P/E ratios and higher earnings growth expectations than US shares.


The US dollar index has rallied 5.5% from its September 2012 low despite numerous predictions of the currency's demise. This may account for a similar percentage decline in gold prices this quarter.


Europe is still reeling from concerns over their currency union and overleveraged banks. Spain and Italy suffer from very high unemployment and recession while Greece and Cyprus are in Depression with no release valve from currency devaluation. Necessary and traditional currency devaluations are not in the lexicon of the elite Eurocrats.


An ever tightening noose is slowly asphyxiating already weak economies.


It is logical to assume that the sick men of the south will likely die from the prescribed cure 
called fiscal austerity. Alternatively and ultimately the strong countries like Germany will be forced to guarantee the debt of their weaker brethren or suffer a Euro break up.

Bank deposit confiscations, above 100,000 insured Euros in Cypress are likely to cause 
every Euro bank depositor to question the safety of their money.

Institutional and individual investors alike are anxious for a return on their savings. With 
much of the average of the S&P 500 index paying dividend yields exceeding the 10 year US Treasury’s 1.85% many find stocks a reasonable alternative to bonds. In addition, dividend and capital gains are taxed at 20% or less while income is taxed at the higher federal rate of 39.6%.

With the Central Bank’s ultra easy policy assured for 2 more years, uncertain new 
leadership in China and a weak Euro zone investment choices have narrowed. Our solution is to continue to seek higher yields from lower credit bonds with short durations. Credit defaults remaining low in the US make high yield corporate debt relatively attractive.

Mortgage Backed Securities still look good with housing prices on the rise. Additionally, 
Master Limited Partnerships provide high yields, tax deferral and a way to participate in essential infrastructure build out.

It is important to note that despite record debt levels the US is moving toward energy 
independence. With “fracking technology” we are unlocking our domestic shale reserves.

This gradual but steady move away from foreign energy imports improves our current 
account and budget deficits. Low energy costs due to domestic sourcing will encourage an industrial renaissance in this country.

With gridlock in Washington, a solid housing recovery, historically low interest rates plus 
emerging energy independence the stage appears set for further share price gains.

Increasingly the US is seen as a haven for foreign assets. It is interesting to note that both 
the Chinese and Russians are buying our real estate and energy assets.

Consumer confidence may be low but the world's confidence in our financial system appears 
to be rising.



Douglas Coppola 
April 1, 2013


Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.

Friday, March 1, 2013

March Musings

The S&P 500 was up 1.1% in February. The DJIA closed at 14054.49, merely 110 points away from its October 9, 2007 closing high, while the S&P is just 3.1% below its all time closing high. Is this period in time like the last quarter of 2007 or for that matter similar to the previous market peak in March of 2000?

We believe there are major differences in market valuations, economic prospects, leverage on personal and corporate balance sheets and government policies. All indications are for continued 2% US GDP growth and 3.2 % global GDP growth rather than another boom - bust cycle. While the S&P 500 has rallied 13% from the November 2012 lows, earnings have come in strong so far in Q4 2012 with more than 60% of companies beating expectations. Corporate profits will come in around $100 for the S&P 500 in 2012 and are expected to rise to perhaps $110 for 2013. Morgan Stanley’s research group, however, expects only $98 in S&P 500 earnings in 2013.


I find it noteworthy that in March of 2000 with the S&P 500 high of 1527 and in October 2007 at all time highs of 1565, earnings were $66.97 and $93.36 respectively. At present we have higher earnings with lower P/E ratios and much lower interest rates, some 4% lower. After both prior peaks corporate earnings plunged 52% and 86% within two years. As we know in hindsight, this was the result of the NASDAQ bubble and the recession that followed plus terror attacks in 2001. In 2008 we experienced a housing bubble, financial panic and global recession all due to excess leverage in the system.


Since 1960 yields have ranged from 15% in 1981 to as low as 1.4% last summer. At the same time P/E ratios on the DIJA have ranged from about 27 times earnings 1929 and 1999 to as low as 7 times in the 1930’s and 7 times again in the mid-1970’s. Yes, this time things are different, however with huge government debt in the developed countries the stage may be set for the bursting of a government created bond bubble.


We are concerned about the high level of government debt and the potential for higher inflation, yet the gold price has retreated for 5 months in a row. The GLD, Exchange Traded Fund sits 12% below its October 2012 high and 17.7% below its August 2011 peak. In February gold ETF assets dropped 4%, the most since April of 2008.This is not a sign of impending inflation.


With the yellow metal sitting near bear market territory and treasury bonds near historical low yields we ask: where can investors make a decent return on their money? The surprising answer seems to be US stocks.


At 1514 for the S&P 500 the P/E is likely to be 14.5 times forward earnings. In spite of the recent price rise, the market sells below its midrange historic average of 17 times. With 10 year treasury yields at 1.88%, stocks carry an earnings yield of $104/1514 or 6.86%, also exceeding the 6% yield available on so called “junk” corporate debt. We are optimistic that bond yields will remain steady this year but it is likely US stocks will outperform bonds.


As for the Sequester scare, we believe that $85 billion in cuts will not sink the $16 trillion, US economy. At merely 2.25% of the total US budget, Washington will learn cuts won’t hurt and may even help as a rising US dollar seems to indicate. As long as the world views the US as a safe haven we will not see a run on the US dollar nor the US stock or bond markets that many fear. Reducing deficit spending will eventually be viewed in a positive light.


Indeed a correction in stock prices may be overdue but in the past years mid-April has turned out to be the preferred selling point for investors.


In our bond portfolios we continue to seek low duration higher credit risk bonds. If we can manage to avoid a US or global recession in 2013 reasonable returns should be available in both stocks and shorter duration bonds.




Douglas Coppola

March 1, 2013


Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.

Thursday, February 7, 2013

February Musings

“As January goes, so goes the market”

The rally that started on November 16, 2012 in stocks has carried us up again in January, with the S&P 500 posting a 5.2% gain for the month. It was the best January since 1997. U.S. Treasury 10-year notes ended the month with about a 2.00% yield after dipping briefly below 1.40% in July of last year. The Barclays Aggregate Bond Index lost 0.70 % in the month as rates rose across most areas of the bond market being most pronounced in 30 year treasuries.

One of the top discussions among market mavens is whether we have begun a shift away from bonds into stocks by institutional and individual investors alike.


US equity mutual funds shed assets again last year, in spite of a double digit market rise. Yet for the first month of 2013, equity fund flows have turned positive. After a 125 % gain off the panic lows of March 2009, the S&P 500 now sits at 1500. Bullish sentiment of 54.7 % has risen near its 5 year high of 58.8 % according to Investors Intelligence. Bears are currently at 21.1 %, signaling investors are feeling confident after this 4 year BULL run.


Our job is to allocate your assets according to your individual risk tolerance, goals, and investment objectives. It is most important to have a frame of reference as to where markets now are in terms of economic and valuation cycles. Additionally, we need to diversify among various asset classes as well as weigh the risks against the potential rewards of a given asset. Typically we look to history as a guide. We have witnessed significant changes over the past 30 years. Most notably, US Treasury bonds have gone from having 14.0 % yields in 1981 to 1.40% in mid-2012. We have beaten back the 1970’s era of inflation. US stocks have rallied from about 1000 in August 1982 to 14,000 on the DJIA currently. There are few straight lines in investing. Treasury bond yields have declined steadily over 3 decades and the US has gone from a large creditor nation to the biggest world debtor of all time. Yet yields have declined as 1970s peak inflation turned into 2008 deflation. A generation of Investors has only experienced declining yields and politcians have yet to feel the public’s wrath for too much spending. We believe however that the rising tide of bond prices has crested.


We no longer expect positive returns in long dated US Government Bonds. 


Since the bailouts of European banks last summer, both the ECB and the Ministry of Finance in Japan have followed in the Fed’s footsteps. All three major currency blocks are printing money via asset purchases. These actions have propelled global stock markets higher and have helped stocks outperform bonds since mid 2012. Pension fund investors with bogeys of 7-8 % for expected returns can no longer rely on bonds to reach their goals and meet promised payment levels. Even high yield low quality corporate bonds yield below 6 %.


Many individual investors are understandably spooked by the enhanced volatility of stocks since 2008.


Stocks are still cheap relative to bonds and have favorable tail winds from rising dividend yields and increasing percentage payouts of their earnings steams. Corporations sit with trillions in cash on their balance sheets and record profit margins. Global GDP growth is anticipated to be 3.2 % this year. U.S. GDP growth is anticipated at 2% and the consensus earnings estimate for the S& P 500 is $110/share putting the PE ratio at a level of 13.6 times forward earnings which still reasonable and below the historic norm.


It is not a 1980s or 1990s bull market, but we are clearly experiencing a rising trend, so we’ll work with it. This January’s rally in stocks typically presages a profitable year ahead. Despite the increased volatility during 2008-2012 where the median loss in the S&P 500 was 19 % versus an average of 11% in the 1970-2012 periods, investors who can handle the volatility will likely reap rewards.



Douglas Coppola 
Feb 7 2013



Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.

Thursday, January 3, 2013

January 2013 Outlook & 2012 Retrospective

The story of the markets in 2012 will be remembered as one of challenges conquered. Despite the European debt crisis, a Chinese slowdown, anemic US GDP numbers, a contentious US election and peering over the fiscal cliff the S&P 500 managed a respectable gain of 13.4%. The market made most of its progress in the first quarter then swooned several times as the various crises came then went. The MSCI World Index gained 13.96%. Treasury bonds of all maturities returned 1.9% in 2012. The Barclay’s US Aggregate Bond Index Benchmark returned 4.1%. 

Bull markets climb a wall of worry and 2012 was no exception. As we move into 2013 concerns about debt, deficits, and GDP growth continue to befuddle investors. After two ferocious bear markets in the past decade many are still worried about the return of capital rather than their return on capital. Investors clearly prefer bonds to stocks as money flows demonstrate. 


Institutional investors like Warren Buffet and Lee Cooperman of Omega Advisors believe US government bonds are in bubble territory. Cooperman points out that Cisco Systems sold at 100 times earnings with no dividend in 2000 while US government 10 year notes had a yield of 6 %. Now CSCO sells for 10 times earnings with a 2.75 % yield and Treasuries yield 1.91%. Where is the bubble? He further stated that buying Government bonds now is like bending over to pick up a dime in front of a steam roller. 


Simply put holders of long dated bonds will get rolled over when interest rates rise. The Fed has maintained a zero interest rate policy for 48 consecutive months. This policy is unlikely to continue forever.


Trillion dollar deficits and zero interest rates do not a sound fiscal policy make. The US Government is on a crash course with economic reality. 


Now that we have sidestepped the fiscal cliff and raised taxes on married couples earning over $450,000 we need to address spending cuts in earnest. This next bout of negotiation comes to the fore in March as we face the prospect of increasing our $16.4 Trillion debt ceiling. Early signs indicate that another political battle looms. 


As for history helping us predict stock market returns, we see two choices on the menu. Since 1926 the average return for the first term of a new President is 8.2 %; however for an incumbent it turns out to be - 0.3 %. 


Despite easy money policies in Europe, Japan and the USA we believe the developed world will manage GDP growth between 1-2 %. 


Better growth will come from the BRIC nations and other developing countries. These nations have low social spending obligations and tax rates. They have high savings rates. Their populations are looking to build wealth rather than spend it. They have a growing middle class with better balance sheets personally and governmentally. Finally their stock markets sell at levels that do not fully reflect their growth prospects.


The US stock market is not expensive at DJIA -13,391 and SPX-1458 .This level about 13.2 times $110.00 2013 SPX earnings expectations. Historically the price earnings ratio has averaged 15.33 on the S&P 500 Index. Bond yields no longer exceed stock yields, which had been the case for most of the past fifty years. Dividends are still tax advantaged along with capital gains. We conclude that shares are still attractive. 


Our bond strategy is to identify and invest in low duration assets that provide solid yields. One example is Doubleline Total Return Bond Fund. This fund is invested in a combination of guaranteed and non guaranteed mortgage backed bonds with duration of 1.15 years and a current yield around 6 %, far higher than the entire Treasury curve. 


The Federal Reserve policy of buying $90 billion per month of Treasuries and Mortgaged Backed Securities makes MBS a very sound choice with housing prices now stable and rising. 


Come March, another debt crisis will likely materialize. We are more confident that interest rates will rise on steady economic activity than we are that our leaders will meet the challenges of this ongoing debt and deficit dilemma. If we fail to control our budget another downgrade of US debt is in the cards. 


We continue to believe that developed countries are willing to risk higher inflation and currency debasement in order to remain competitive in global markets. Ironically this is a benefit to stock markets as long as inflation remains relatively low given the alternative yields from bonds. 


We expect hard assets and stocks to outperform bonds in 2013. Unfortunately, the volatility of these asset classes keeps many investors at bay. Trying to remain rational in an irrational world is not always easy. 


Our goal is to reduce the volatility of portfolios while retaining risk on positions in order to increase returns. 


Best wishes to you and your family for a healthy and prosperous year. 



Douglas Coppola  

January 4, 2013

Client First Advisors, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Client First Advisors LLC and its representatives are properly licensed or exempt from licensure. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Client First Advisors, LLC does not provide legal, accounting or tax advice. Any statement regarding such was written in connection with the explanation of the matters described herein and was not intended to be relied upon.

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