The Teflon Market

The SPX rallied 3.8% in August, the best August performance since 2000.

Second quarter GDP rebounded to 4.2%, yet 10 year Treasury yields made yearly
lows closing at 2.34% down 66 basis points from January levels. Profits grew at a
7.7% rate in the 2nd quarter supporting new highs for the S&P 500 index. The SPX
is +8.4% YTD with the DJIA +3.1% YTD without dividends.

The market seems impervious to negative geopolitical events, a five year sub normal
U.S. economic recovery, higher than average P/E’s and recession signs appearing in
Europe. Italy has reentered recession and France, the second biggest Euro economy
is not far behind.

German Bunds now yield 0.88% on 10 year paper causing economists to call for
more vigorous ECB efforts to ignite growth. Euro-area inflation slowed to its weakest
rate since 2009 and unemployment remains far above acceptable levels. Deflationary
fears are exacerbated by threats of more sanctions against Russia. Major European
markets are now down year to date led by Germany’s DAX at -8.9%.

Emerging markets are showing some lift up 21% from February lows. They are
aggregately the cheapest of all stock markets on a P/E basis having grossly
underperformed the U.S. market for the past 5 years.

Back at home, we have gone nearly three years without a 10% correction. Since
1964, there have been 18 declines exceeding 10%. A majority of professional
investors are confident that the SPX will march higher through year end; 52.5% of
Investment Advisors are Bullish and only 15.1% Bearish.

A perfect storm of falling oil prices, falling interest rates, a rising dollar, rising profits,
rising dividends and improving U.S. economic activity continues to push stocks
higher.

As always your comments are welcome.

Douglas Coppola

John Coppola

September 2, 2014

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.

August

July closed with a bang with its last day bringing on a 2 % decline negating performance for the DJIA now -0.1 % on the year while the S&P 500 finished at 1930.67 + 4.5 % having reached a record high of 1991.39 on July 24th.
The global markets were affected by heightened tension in Ukraine as the downing of the Malaysia airliner by Russian backed separatists led to stronger sanctions by the EU and the U.S. on Russia. This action puts in doubt a fragile European recovery and set back the markets on the Continent with Germany, France, and the UK down by 8.2%, 4.3 % and 2.4 % respectively YTD. Money seems to be shifting over to Asia with China + 5.5 %, Hong Kong + 6.8 %, Taiwan + 9.2 % and Australia up 9.1 % YTD.
Negative news from Gaza, Argentina and Portugal combined with relatively high valuations for stocks and led to profit taking.
Needless to say this fluid environment affected 10 year Treasury bonds now at a 2.55 % yield down from 3% on January 1. 10 year German Bunds by comparison yield 1.2% as feared economic weakness coupled with easy money have driven Eurozone yields to levels not seen in centuries.
Both payroll employment and profits continue to grow in the U.S., as the slowest economic recovery since World War II stretches beyond 5 years of age. Dividends and profits of U.S. companies are now the key ingredients along with share repurchase helping stocks remain aloft. The re-rating of the price earnings ratio for U.S. stocks which fueled last year’s gains is likely behind us.
Without a recession, inverted yield curve, suddenly higher interest rates or another war, stocks will remain an investment of choice. U.S. energy production approached 30 year highs as we persistently free our economy from foreign oil dependence.
Since we have gone 33 months without a 10 % correction caution is warranted as the Summer and early Fall are typically weak periods for U.S. share prices.

Douglas Coppola 

John Coppola

August 1, 2014

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.

2014: First Half Review & Second Half Outlook

The first half of 2014 was full of surprises. Benchmark 10 –year Treasury yields fell from 3% to 2.6%. The S&P 500 finished up 7 % hitting an all time high on June 20th but small cap stocks and growth stocks underperformed. Utilities were up 13.5% The Russell 200 Growth Index was up 2.2 %.

Just like Hurricane Arthur which blew up the East Coast on July 4, annexation in Ukraine, war in Iraq and Syria, Government scandals, and a 2.9 % negative GDP did little damage.

Janet Yellen our new FED Chief is worried more about a 6.1 % unemployment rate than inflation or asset bubbles. She has just re- assured us of a continued easy rate policy ahead.

Gold and other commodities are rebounding while stock margin debt hit new all- time highs exceeding 2007 levels. Yet, no worries from Central bankers who focus on fragile economies in the U.S., Europe and Japan and some Developing markets.

The fact that the USA is now the world’s biggest oil producer, having just overtaken Saudi Arabia in the first quarter and remains the world’s largest natural gas producer since 2010 has helped keep the lid on energy prices. No recession is on the horizon and GDP in the 2nd half should go positive. No threat of rising rates keeps the party going.

Earnings are expected up again in 2014 but like last year, single digit gains do not post an obstacle to outsized stock market gains. The 2nd Quarter estimated growth rate for S&P earnings is 4.9% with revenue up 2.7%. Earnings are helped by company share buy backs. Dividends continue to go higher.

Intermittent 10 % stock market corrections have taken a holiday this cycle as we have gone 32 months without one. Stock valuations are stretched but not excessive at 15.7 times forward earnings estimates of $126.17. Peak valuations have reached as much as 25 times in the past.

As Laszlo Birinyi recently said “This is not an ordinary, average, typical or normal bull market”

Market participants have come to realize that caution does not pay dividends, interest or capital gains but stocks and bonds do.

Douglas Coppola
John Coppola
July 7, 2014

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.

Sell in May,No Way?

Why are long dated bonds rallying, stocks climbing with Q 1 profit up a mere 2.1%? Q1 revenues up 2.4 %, yet GDP down 1%? 

Despite slowing profits the S&P 500 rose 2% in May and has outperformed most other domestic averages year to date. Long term bonds have outperformed stocks for the biggest surprise of 2014. 

We have observed that low short term rates provide little competition for long dated Treasuries and the ongoing 5 year old bull market in stocks.

Ten year sovereign bonds in Europe yield a meager 0.69 % in Switzerland, 1.34 % in Germany, 1.72% in France, 2.55 % in Britain and 2.81% in Spain. Stock indices in Europe generally have greater yields than comparable 10 year bonds. 

Some believe the recent thrashing of the old guard Socialist parties in France and Britain is a welcome sign that Europeans have awakened from their anti-business, slow growth slumber. No growth breeds high unemployment and discontent. 

We are concerned that stagnant GDP growth in the developed world will lead to a new recession without further central bank stimulus. The ECB meets on June 5th and will likely lower rates further. At this point, pro growth fiscal policies are needed to achieve real growth. 

With Gold trading below $1300/oz we see less fear in the financial system. The VIX or Volatility Index at 11.68 is down from 48 in July, 2012. Investors have become complacent.

Investor Sentiment Surveys put bullish sentiment at 30.4% versus a long term average of 39%. This positive albeit contrary sign indicates stock prices may have further to run.

 Large global companies are doing well with low labor costs, low material costs, and sizeable share buybacks. S&P 500 companies have record profit margins and record profits. If profits stall in the second half of 2014 however, stocks will likely turn lower.

The US is increasingly a self sufficient energy producer and is attracting more foreign manufacturing for the first time in decades. Housing is not soaking up marginal investment dollars as it did in the 1995-2006 period. 

Defense spending is down as US trade and budget deficits shrink. Capital spending is still in stall mode. 

While the average P/E in the past decade was 13.8 times, we lurched higher in the past year and now trade at 16 times forward earnings. 

Aggressive investors who shorted U.S. Treasuries at year end yields of 3% are getting squeezed as Treasury bond issuance is lower than past years. 

While major stock averages climb, a recent Investor’s Business Daily survey indicated that mutual fund managers are struggling with negative returns as growth stocks dropped from favor and utilities soared in 2014. A stealth correction is underway. 

We continue to believe that earnings will rise in 2014 and stocks have not yet peaked for this cycle. At the same time, we believe economic weakness here and abroad combined with political risks may lead to a long overdue market correction. 

Douglas Coppola
John Coppola

June 2, 2014

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.

May Market Musings

The DJIA finished April at 16,580.80 an all-time high but unchanged on the year. SPX closed + 1.9 % YTD, Nasdaq -1.5 % YTD after
9.7 % correction which began in March. 

Ten year treasuries closed the month with a 2.64 % yield. 1 year CD rates hover around 1.00 %. 

Cold weather frosted the 1st Q GDP + 0.1 % versus a 1.2% expectation. We have experienced a 19 quarter recovery which has produced only +11.1% GDP growth. 

The previous 10 recoveries averaged+ 21.4 % GDP growth. In dollar terms we are $12,800 per household below average, according to IBD. Five years of economic anemia have many questioning the Obama administration’s economic policies. Average household income is $51,017 or 8.3 % below 2007. 15 % of Americans live in poverty. The labor participation rate is now 62.8 % at March 1978 levels when Jimmy Carter was the US President.

Russia annexed Crimea and masses troops on Ukraine’s borders. Western allies wring their hands but do little to stop Mr. Putin‘s aggression. Markets blinked but did not crumble. European financial markets held up surprisingly well indicating no economic concern. 

Emerging markets are selling at 10 P/E ratios given a lack of confidence in global growth projections and consumer demand for their commodity related products.

Japan raised taxes in the first quarter and her reform policies are stalling. China is attempting a transformation from an export to consumer driven economy. 

Our 2014 fiscal deficit will be $492 billion down from $680 billion in 2013 thanks to higher tax revenues. As a percent of GDP our yearly deficit has dropped from 9.8 % in 2009 to 2.8 %. If current laws persist however we will move back up to $1 Trillion per year deficits in 2022-2024 according to the Congressional Budget Office.

We have gone 31 months without a 10 % correction in the SPX. 

At 15.4 times forward earnings of $123.12 stocks are not historically rich but far from cheap. The P/E ratio is above the 5 –year (13.2) and the 10 -year(13.8) averages.

Dividends rose to $ 17.8 billion in the 1st Q + 22.9 %. Payouts at 36 % of earnings are below the 52% average. The SPX dividend yield on March 9 ,2009 was 2.72 % it is now 1.87 % . This rally is over 5 years old which is nearing old age for recoveries but may still have legs due to a lack of excesses in the system. 

Corporate mergers are heating up. Large U.S. domiciled companies seek better tax treatment here and are unwilling to repatriate $2 trillion in overseas deposits. There is little incentive for companies to remain captive to the highest corporate tax rates in the world. They seek opportunity elsewhere and have begun buying non US companies as a way to easily change their home country base. Our employment base suffers even at is has now reached a 6.3 % unemployment rate. 

Energy finds on this continent are a potential game changer for employment, the dollar, and foreign policy but is being under emphasized by the Administration. 

The market appears to be digesting last year’s gains. Fully 54.7 % of professional investors remain bullish according to Investors Intelligence while only 20 .8 % are bearish. 

We remain wary of an unexpected recession triggered by a sudden foreign conflict which could break the positive. We are unwilling however to risk capital in long term bonds.

If the pace of GDP growth improves later in 2014 we will continue on a leisurely but favorable course for stock markets.

Your questions are comments are welcome. Thanks for reading!

Douglas Coppola
John Coppola

May 2, 2014

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.

First Quarter Review, 2014

Despite headwinds from awful winter weather and the annexation by Russia of Crimea, the S&P 500 managed a 1.3% gain in the period while the DJIA dropped by 0.7 %. Virtually all of the gain in March and year to date came in the last two days of the month.

March madness had some real bracket busting outcomes including a Putin showdown where the opposition never turned up and therefore forfeited the game.

The Fed continues to reduce buying of Treasury and Mortgage backed bonds by $10 Billion per month yet yields on 10 year treasuries dropped to 2.73 % from 3.00 % at year end. This was perhaps the biggest financial surprise as Barclay's Aggregate bond index rose by 1.8 % in the quarter. In 2013 bonds posted their biggest drop since 1994.

Soft economic news from China and the lowest inflation numbers in Europe since 2009 have not derailed US or European stock markets. China's Big Caps declined 6.7 %, Japan -6.7 % and bad boy Russia -16.9 %.

According to Fact Set, the S&P 500 is trading at 15.2 times the next 12 months expected earnings, This compares with 13.2 times over the past 5 years and 13.8 for the past decade. Without extraordinarily low interest rates some might conclude the market is overvalued. However, as rates are expected to remain low and profits are still growing we see no major market decline as long as a recession is not on the horizon.

At current P/E levels profit growth is the key to higher stock prices. S&P 500 earnings grew 10.6% in the fourth quarter and markets are still digesting last year’s 30% gain. The US economy continues to be stuck in a +2-3% GDP range, accompanied by very low inflation.

With elections coming in November it seems increasingly likely the GOP may control both branches of Congress in 2015 as President Obama's reset of the economy and foreign policy has provided little by way of new net jobs or wage gains for the middle class. A stalemate in D.C. means fewer negative surprises emanating from our leaders.

In sum, not much has changed since year end. Spring will hopefully bring warmer weather and less international tension.

Douglas Coppola
John Coppola

April 1, 2014

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.

February Market Review

The S&P 500 rose 4% in February to close +0.6 % year to date despite a rough start to the New Year. The DJIA was down 1.5%.

U.S. 10 year Treasury rates closed at 2.65% from nearly 3.0 % as the year began boosting bond prices.

The Polar vortex led to slower retail sales while Emerging Market weakness caused concern for some investors.

Fourth quarter 2013 earnings are still coming in and are better than anticipated.

Goldman Sachs recently published S&P 500 estimates through 2017 as follows:

2013 - $108 

2014 - $116 

2015 - $125 

2016 - $132 

2017 - $138 

Given the median P/E multiple has been 15x forward earnings for the past 10 years we calculate a value of 2070 for the index late in 2016. This target is only 10.7% higher than today's 1870 level. Based on this calculation alone the market appears to be overvalued by 6.95 % today.

We know that history shows market returns deviate widely as sentiment moves from fear to euphoria. At today’s 16x forward estimates we are benefiting from low interest rates and abundant liquidity provided by the Fed and other Central banks.

To conclude that we've appreciated too much might be premature. Holding cash or bonds make for poor returns. Inflation remains low. Labor costs are under control while profit margins are at record highs as are Corporate Earnings. Dividends continue to rise and payout ratios are still low historically.

Without a recession or much higher interest rates this bull market will likely prove to be long lasting but not without sudden corrections along the way.

Doug Coppola
John Coppola

March 4, 2014

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.