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.

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.

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.

December Musings

 

"This year has proven to be quite an eye opener in the financial markets." You would never know it from listening to network news that the S&P 500 is down only 0.8 % year to date. Interestingly enough this placid surface masks gut wrenching market volatility.

The NYSE Finance Index is down 18.6 % YTD while the Dow Jones Utility Index is up 10.8 %. Since the financial meltdown in 2008, markets have lived in fear of another like event. Dread of a similar meltdown scenario in Europe haunts investors. Ongoing liquidity concerns and the recent  debt downgrades of  the U.S. and several  European countries has ironically  caused investors to  seek refuge in U.S. Treasury notes, German Bunds  as well as bonds issued by Japan and Switzerland and the U.K.. All of these government bonds have recently reached yield levels not seen in 50 years. Additionally, lower quality debt issuers and global stock markets have all underperformed the US Treasury bond market.

Emerging Equity Markets have led this year’s declines with negative returns ranging from             - 32.9% India, - 23.7% Brazil, - 27.2% China Small Caps, -15.9% China Big Caps to -17.7% in Russia. The equity markets in developed countries have also produced negative returns across the board; Australia - 8.6 %, Canada -11.4%, France - 16%, Germany -13.8% and Japan -13.7%.

Widespread fear of an encore performance of the recent bear market, combined with negative sentiment and sickening volatility have caused investors to flee equities. Corporate earnings however have climbed back to 2007 levels above $100 for the S&P 500 Index. This has resulted in a significantly below average Price/ Earnings ratio of approximately 12.5 times , calendar year 2011 earnings estimates.  

The problem is clearly not in the earning power of our corporations, but in a lack of confidence in global economic growth prospects. Investors see weak political leadership in Europe, Japan and the U.S. Politicians are unable to face the realities of growing deficits and ageing populations. Promises that have been made to voters have proven to be as illusory as the proverbial free lunch. Until we get a reset of leadership and renewed political resolve with an eye toward fiscal responsibility, this fear based environment will continue. The problems we collectively face are not unsolvable, but growth oriented policies and a downsizing of entitlements requires difficult and unpopular actions.

Our approach is to take advantage of this confusing environment and position our portfolios to earn attractive yields from dividends of high quality companies and bond issuers who can weather this fiscal deleveraging storm. In sum, our strategy is to be paid while waiting for the winds of change to calm.  In addition, we continue to believe that gold, energy M.L.P.’s, REIT’s and other tangibly backed assets can provide significant returns in this stealthy inflationary environment.

We welcome your comments and look forward to helping you design and monitor an investment portfolio that suits your specific needs.   

Douglas Coppola 

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 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.   Each person should seek advice based on its particular circumstances from independent legal, accounting and tax advisers regarding the matters discussed in this e-mail.