December 2017

The market continues to surprise on the upside with the S&P 500 index 

rising 18.3% through November 30th.

Ten year U.S. Government bonds now yield 2.37%. Earnings estimates for the SPX are conservatively pegged at $131.36 for 2018 and will likely go higher with the soon to be passed GOP tax package, boosting profits on a new lower 20% corporate tax rate.

Q3 GDP came in at 3.3% last week. The Chicago Purchasing Managers Index rose

to 63.9 with a 50-level signaling expansion in the U.S. economy.

Inflation remains below the Fed target of 2% supporting the case for continued low interest rates. The Federal Reserve is expected to raise the federal funds rate by 0.25% in December and will possibly follow with 4 more similar hikes in 2018.

With an SPX close of 2642.22 we calculate an earnings/yield of 4.97% and a P/E ratio of 20.1X on a 2018 $131.36 earnings estimate. The dividend yield on the index is near 1.9% but dividends are still rising, some 10.2% in the Q3 alone.

With the imminent passage of the new tax bill in Congress expected by Christmas, earnings estimates will rise again, up to as much as $151.00 according to

UBS Wealth Management. This leaves us at a very reasonable P/E of 17.5x with an earnings yield of 5.7%. To add fuel to the fire, there are extremely low interest rates in Europe and Asia.

Easy monetary policy from the Japanese Ministry of Finance continues unabated while the EU Central Bank is just beginning the tapering its policy. Foreign capital is pouring into both the bond and stock markets in the U.S., according to the Wall Street Journal. Ten year yields in Japan are 0.03% and in Germany 0.30%. Equity prices are rising in most countries as are earnings and GDP levels. Dividends too are rising worldwide with the exception of Japan but

earnings there have grown nicely. Given low rates globally, a synchronistic rise in GDP and rising global earnings we have the perfect climate for higher equity prices.

What can go wrong?
-Inflation could begin to climb above 2% pushing Central Banks to raise rates higher and sooner than the markets currently anticipate. 2018 will most likely see 10 year yields up around the world, with 3% a likely first stop in the U.S.

-Both Europe and the U.S. are reducing their bloated balance sheets which have fueled this credit expansion and the bull market. A greater supply of bonds in the market place will likely lead to higher yields in the new year. Higher yields provide more competition for stocks

-Global tensions may rise to a crescendo with conflicts possible in North Korea or in the Middle East.

-OPEC and Russia have just agreed to keep on with production cuts holding oil prices steady. If, however, we have a blow up between Saudi Arabia, now led by a new brash leader and Iran's old repressive regime oil prices could spike in price, slowing global growth.

-Psychologically, this market has gone from ‘2008-2009 despair’ to slowly gaining confidence from 2010- 2017. A move towards euphoria in 2018-19 with a Goldilocks scenario continuing to unfold, may cause price spikes and sow the seeds of a serious correction.

We continue to believe stocks will outperform bonds and cash in 2018. We are on the lookout for negative signs such as an inverted yield curve, a credit crisis, or a parabolic stock market move that would signal the end of this Bull Market. In a fast changing world, we realize that stock prices at the higher end of historical ranges are always vulnerable. We are confident however that rising earnings, growing dividends and low interest rates will support those prices.

We wish you all a happy holiday season!

 Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA 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 always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & 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 avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.

October 2017

The S&P 500 closed September 30 at 2,519.36 an all-time high.

S&P 500 Large Cap Index (SPY), the Russell 2000 Small Cap Index (IWM) and the iShares Transportation Index (IYT) all made

new highs last week. This across the board strength was confirmed by the cumulative advance decline line, which suggests further gains for the

market through December. To date, uncertainty over the impact of the reduction of the Federal Reserve’s $4 Trillion balance sheet has been taken in stride. The geo-political uncertainty involving North Korea, Iran and the impact of two Cat 5 hurricanes has yet to impact stock prices.

Stock market volatility, as measured by the VIX, is down more

than -30% year-to-date. The market continues to climb its "Wall of Worry," due to low interest rates, low inflation, rising profits and improving economic activity. According to FactSet, the forward 12-month price earnings ratio

is 17.7X for the S&P 500, above the 5 and 10 year averages

but below prior market peaks. Analysts foresee an 8% earnings increase for the coming year. The dividend on the SPX remains about 2%. Global economies are on the rise in China, Europe, Japan and many developing countries.

There is now a 70%+ probability the Feds will raise the  

Federal Funds rate in December. The 10-year Treasury note yield of 2.33%, is just above their yet to be reached inflation target, and provides little room for a

policy error or an inflation spike. Bonds appear to be less attractive than stocks at these levels. Economists see few signs of recession in the cards for the next 12 months. Tight bond credit spreads and a positive yield curve continue to support 2% GDP growth even without fiscal stimulus.We still expect a tax reduction package late this year or early next which will improve earnings prospects and repatriate overseas corporate cash to the U.S.

We continue to monitor signs of change in either interest rate or

fiscal policies that may upset this "steady as she goes" apple cart.

Of course, a 5% correction which has not occurred for over a

year is possible at any time.

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA 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 always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & 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 avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.

September 2017

The S&P 500 managed a small gain in August while U.S. 10-year Treasury bonds traded at a yield slightly lower than the dividend yield on that index. The Barclay's AGG advanced 3.6 % with the 10 year US Treasury finishing with a yield of 2.12 %.

Sentiment on stocks continues to be well below bullish levels reached in March. Unemployment held steady at 4.4%, wages rose modestly, inflation is below the 2% target set by the FED. Q2 GDP came in at 3 %.

The tragedy of Hurricane Harvey will likely cause a dip in Q3 GDP and may cause the Fed to pass on a December rate hike while proceeding more slowly with reducing its huge balance sheet.

Tax cut proposals are expected to be unveiled in coming weeks by the Administration. Lower corporate and individual tax rates would boost earnings estimates for 2018.

A weak U.S. dollar in 2017 has helped boost profits of multi- nationals more than domestic companies The Russell 2000 has rallied 4.4% year to date. Returns on non-U.S. stocks in both the developed and emerging markets exceeded U.S. returns for the first time in many years. Gold's rise bested that of the S&P 500's + 11.9 % year to date.

The global economy is in a cyclical, synchronized upswing. Corporate earnings in the U.S. are expected to grow by 10 % in the coming year, in the Euro area by low to mid-teens and in Japan by high teens.

Despite numerous negative news stories ranging from civil unrest to North Korean aggression, the stock market continues to climb a wall of worry.

 Q2 2017 earnings rose 10.2% on revenue growth of 5.1% according to Factset. Forward P/E ratio on the SPX is 17.6 X versus 15.4 X the five-year average.

Bull markets do not die of old age. Imminent recessions and the end of a credit cycle coupled with too much leverage in the financial system stop bull runs. These dampeners often accompany an inverted yield curve or an exogenous shock to the system.

With the current combination of slow but steady growth, low inflation, low interest rates and subdued investor sentiment we anticipate clear sailing for the balance of 2017.

 Low bond yields support high stock prices. If rates begin to rise due to growth in the economy, as may soon be the case, stocks often continue their rise for some time.

While we have yet to see the effects of the FED reducing its balance sheet, by selling mortgage and treasury bonds we can only deduce that it will contribute to a rising rate climate.

Of course, we have not experienced a 5% or more retracement in stocks since the November, 2014 - February, 2015 period, so we would not be surprised if a short, sharp drop happens at any time.

Have a good Labor Day weekend!

This communication doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA 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 always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & 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 avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.

August 2017

July 2017 saw the SPX rise 1.90%. 

The 10-year treasury​ ended the month about where it started at 2.29% yield. 

The renamed Bloomberg Barclays Intermediate Credit Index was unchanged

for the month.  Q2 preliminary GDP was estimated at +2.6%. Earnings for SPX companies, according to Thomson Reuters are expected to rise 11% for the quarter, following a 15% increase in the first quarter.  Sales are expected to rise 5%, the second biggest increase in more than five years.

We continue to see ​GDP growth around 2% for another year. Inflation is under 2%.

Interest rates remain low with no wage pressure or commodity pressure. The inflation adjusted federal funds rate continues to be negative. ​ Washington gridlock means the existing rules of the road remain unchanged. If Republicans in Congress can agree on lower individual & corporate taxes, an infrastructure plan, or repatriation of overseas cash, corporate earnings will rise further​.

Dollar weakness has been a boon to U.S. multinationals. We also have improving economies and earnings in both Asia and Europe as well as many developing countries. In sum, the global and domestic backdrop supports rising stock prices. While many anticipate a short-term correction in the traditionally weak August to September period, the trend of higher equity prices is likely to

continue for the balance of 2017. ​

Enjoy the rest of your summer.

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA 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 always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & 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 avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.

The first half of 2017 has been good to investors in financial assets. Bonds and stocks rallied even as the Fed raised rates and talked about shrinking its $4.5 trillion balance sheet. Barclay's AGG, a total bond index was +2.1%. The S&P 500 +8.1%.

Growth continued to outperform value despite a late June sell off in technology stocks. Five technology stocks accounted for 28% of the S&P 500‘s return through 6-30-2017.

Over the past century value stocks on average outperformed growth stocks, but this has not been the case since 2005 according to Barron’s magazine. While that may change, it would require a more vibrant economy as growth stocks rule in a low inflation, slow growth world.

U.S. 10-year note yields dropped to 2.29% down from 2.44% at year end. German 10 year bunds have risen 73 basis points over the past year and yield 0.55%, while Japanese 10 year bonds yield 0.09%. One can argue the U.S. rates are currently this low, due to the fact that European and Japanese rates are absurdly low.

Unemployment dropped to 4.3% and U.S. GDP growth remained stubbornly below 2% coming in at 1.4% in Q1 2017.

So far in 2017, we have seen no tax cuts, no repatriation of overseas corporate cash, no infrastructure bill and no health care reform.

Investors await legislation on some or all of these fronts and have been very patient for results. The political divide seemingly allows only a narrow path to a positive conclusion. If we have stalemate in 2017, we doubt the political landscape in 2018 will prove to be easier.

Most foreign stock markets have rallied year to date. The U.S. dollar weakened by 6% on a trade weighted basis. The World Bank forecasts 2.7% global growth in 2017. They forecast advanced economies will gain 1.9% while emerging market and developing economies are expected to improve by 4.1%.

Comparisons of key financial measures indicate that foreign markets are cheaper than the U.S. stock market. U.S. stocks trade at 17.4x forward SPX earnings above the past 5 and 10 year averages but below the 2000 peak of 26X.

Oil prices have dropped about 20% year over year due to rising U.S. oil production. This is akin to a tax cut for consumers and helps keep a lid on inflation.

Bitcoin, a digital currency has rallied 170% year to date as more attention is being paid to crypto currencies. Blockchain technology, a non-centralized and non-regulated method to verify economic transactions between parties, is being explored by some in the banking community, major corporations and wealthy individuals. Investment implications may be similar to early stage internet development, but are far from clear.

The U.S. has begun to challenge trading partners to consider the broader impact of imbalanced trade flows. Trade surplus countries like China, Germany and Mexico have taken notice. The Middle East continues to roil with regional conflict. North Korea appears to be willing to provoke fellow Koreans, Japan and the U.S.

The Fed is about to end its buying of additional Mortgage backed and U.S. Treasury bonds as soon as September. They will likely will not raise rates again until December. We should find out soon how markets react to this policy change.

Can the stock market continue to rise with headwinds from the Fed? Are slowing auto sales and rising loan loss provisions a sign that the 9-year recovery is coming to an end?

Our belief is that as long as profits continue to climb and the hope of lower taxes is ahead, only a policy mistake or an outside threat will derail this aging bull market.

S&P 500 companies are expected to report 8% Q2 earning growth on a 4% revenue gain, according to Thomson Reuters. They also look for growth of 8.6% and 13.1% in Q3 and Q4. In 2018, Thomson Reuters anticipates another earnings gain of 11.7%.

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA 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 always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & 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 avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.