At The Year End

From the December 5th peak for the Dow Jones Industrial Average, 17,982 major U.S. stock indices dropped 5% through Dec 16th. Additionally, the world was stunned by the 50% drop in oil prices in a matter of months.

Spillover effects from this swift and precipitous plunge in oil prices have crushed energy stocks as well as other investvestment categories such as High Yield bonds and Master Limited partnerships. These MLP’s, popular for their high yield and tax advantages earn money on the volume they move not on the underlying price of the oil and gas. In a panic babies are thrown out with the bath water.

Emerging market bonds and global stocks joined the retreat. Russia has became the poster child for what too much dependence on one commodity can do to your economy. Sanctions from Mr. Putin’s military actions in the Ukraine have reduced Russia’s capital flows and capital raising capacity. The Ruble plunged 50% and Russia’s troubles became a problem for the world of investments.

Many diversified bond funds lost net asset value as their portfolios have significant exposure to high yield energy companies which comprise about 20% of that market niche. At year end prices of losing assets tend to go even lower than seems rational as taxable investors lock in 2014 losses to offset earlier gains.

December which is typically one of the strongest months in the calendar year, up 1.7% on average, has so far proven to be just the opposite. The volatility of the past few weeks reminds us of October with wild swings in both directions. Yesterday the Fed came to the rescue again saying it would be patient before “normalizing “policy.

Long dated Government notes and bonds have soared in price this year as a flight to safety has prevailed. Rates of high quality debtors like Germany 0.58 %, U.K. 1.87% and Japan 0.35 % yield even less than U.S. 10 year notes. 10 year Treasury Inflation Protected Securities - TIPS have a nominal yield of 0.55 %. Bill Gross thinks they are a good buy here.

Our 10 year rates have dropped by more than a third since January from 3% to below 2% in mid-October. As you know the U.S. has seen rising employment and rising GDP in 2014. Not one of 67 Economists in a Bloomberg survey forecasted lower U.S. rates in 2014 this time last year.

Today you get paid 2.2% to loan the government your money for 10 years. This is attractive to many foreign buyers who get more yield than they do at home and benefit from a rising U.S. dollar exchange rate. In addition U.S. banks hold huge amounts of Treasuries as capital on their balance sheets encouraged to do so by bank regulations.

Diversification away from the highest quality US assets has be wrong footed in 2014 as other investments are nearly all lower in U.S. dollar terms.

Stocks in hard asset countries such as Canada, Mexico, Brazil, Australia and Russia are down 4.5%,16%, 22%, 12% and 45% respectively.

In Europe; France, Germany and the UK stocks are down about 14%. Japan and South Korea markets are down 7% & 14%. Only China +5% and India +19 % along with the US show gains.

The question is can US stock markets continue to rise with most markets abroad signaling recession? Additionally, will rates rise in the US next year or remain abnormally low due to international concerns?

Oil prices at these low levels benefit consumers worldwide. U.S. inflation numbers will be temporarily below the Fed's 2% target and cheaper energy costs should boost our GDP growth now projected at 2.6% to 3.0% by FED economists. A recession here looks highly unlikely as we have the world’s most diversified economy. The Fed is on hold for at least a few more meetings as of yesterday. While Ms.Yellen would like to “normalize” rates the FED seem fearful of doing so in this climate.

Continued US dollar strength will be a headwind against multinational profit growth. The 4th Q 2014 EPS growth was 3%. Full year 2014 SPX earnings according to Factset will be $119.09, up 7% year over year and at $128.38 up 7.8% for 2015 .

Central bank money printing has helped owners of financial assets far more than the average American or the retired saver. Now these tactics are being embraced in Japan and to a lesser extent in Europe with little economic effect except record low interest rates.

Every forecast we have seen from Wall Street now sees higher stock prices ahead for 2015 .

A Santa Claus rally should lie ahead over these final 8 trading days of the year. There is an old saying, if Santa Claus should fail to call Bears may come to Broad and Wall.

The 67 “wrong way eeconomists” who took the Bloomberg survey noted this past year that market direction and interest rates are no easy call.

In the long run it pays to remember that 11.5% returns from stocks and the 5.21% returns from 10 year bonds are the historical norm from 1928-2013.

These returns are indeed earned by investors who are capable of staying the course. Volatility can be our friend but as it ramps emotions it is often our enemy.

Douglas Coppola

John Coppola

December 18, 2014

CFA is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where CFA 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

December 2014

November ended another historic month for US stocks with all-time highs in the S&P 500 and DJIA, up 11.9% and 7.6% year to date without dividends respectively.

West Texas Intermediate oil prices dropped 31% from their June highs dragging down energy stocks as well as energy related MLP's. This is a boon to retailers and consumers.

In recent weeks, 2nd and 3rd Quarter GDP were revised up and now GDP is expected to grow over 3% trough 2015. We lead developed countries in growth, albeit the slowest since the 1940’s. Ebola and a global growth scare were quickly forgotten after the nearly 10% SPX correction ended mid-October.

30 year US Treasuries now yield 2.99%. The Treasury yield curve flattened somewhat with 2 year notes at 0.55%, 5 years at 1.61% and the 10 year note at 2.25%, down from 3% in January.

Long maturity U.S. government bonds are outperforming this levitating stock market against all predictions here and elsewhere.

We are experiencing a very strange world; global oil price tanks 30%, long bonds soar, and U.S. stock indices rise simultaneously. This new paradigm is based on rising earnings, low inflation, an abundant new energy supply sprinkled over with low global interest rates. U.S stocks and Government bonds have become assets of choice, here and abroad, despite our $18 trillion U.S. debt and continuing huge deficits.

Europe and Japan are either back in or teetering on recession. The U.S. dollar has appreciated about 10% on a trade weighted basis as our interest rates are significantly higher than nearly all developed counties. Comparatively speaking the U.S is a growth engine. China, Japan, and Europe are all trying to stimulate growth with more QE or lower rates.

Gold closed November down for the year after a horrible 2013 and a 15% rally in the first quarter. The yellow metal is -40% from Sept 2011 highs.

A majority of Hedge funds and Equity mutual fund managers continue to underperform the U.S. broad based stock market indices. Central banks rule the roost and can turn markets on command with words and printed money.

Tax considerations in December will likely exacerbate existing trends until the New Year has begun.

Douglas Coppola 

John Coppola

December 4, 2014

CFA is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where CFA 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. CFA 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 advisors regarding the matters discussed in this e-mail.

November 2014

October lived up to its rocky reputation as a month of high volatility. On
October 15th the SPX culminated a nearly 10% correction. This was the
morning after a deflationary plunge in US and global yields down to 1.9 %
on the US 10 year note and 0.88% on German Bunds of the same maturity.

Weak economic news and several U.S. Ebola cases caused a plunge in stocks
to 1820, down on the year, from all time highs on the September 19th.

Fast forward to Oct 31st .Surprise, the global decline went poof on
Halloween as Japanese stocks soared 5% overnight on a new and massive
QE program by the Ministry of Finance .Taking up the baton from the US
Federal Reserve which ended QE only days before the Japan plan is to buy
bonds and stocks both local and international.

Presto and thanks to monetary smoke and mirrors major indices went back
to their highs closing up 9.2% on the SPX and 4.9% for the DJIA year to
date. All this fun in two weeks! The Bears were gored again.

Oil has plunged 18.2% in 2014 and 11.6% during October taking energy
related shares along for the ride. Gold and other commodities made new
lows. Energy sector stocks are -1.0% YTD while Utilities and Healthcare
sectors are +21%.

Tactical moves proved fruitless as investors found themselves cash rich and
stock poor by month's end having sold holdings to take gains or avoid
serious losses. The 5 year bull move off 666.79 SPX March 2009 lows
continues.

The markets are saying have faith in Central Bank monetary policy.
All will be well. The Japanese Ministry of Finance and the ECB are now on an
easing path even as the U.S. Fed moves to QE Lite.

November, December, and January are historically the strongest
consecutive months for market gains which average 3.4% or nearly double
the average 1.86 % return in any “normal" 3 month calendar period.

Stocks are no longer historically cheap at 18.9 trailing earnings according to
Birinyi Associates. Factset however puts the forward P/E at 15.5x so if
earnings can grow as predicted the market can rise in line with earnings
growth plus a near 2% dividend yield.

With two thirds of companies having reported profits, they are up 7.3 % for the 3rd quarter. For the 4th Q 2014 some 46 companies have issued negative guidance while 18 have raised guidance.

The US dollar has strengthened this year which hurts returns on non US investments. EFA , the leading non US stock index is -4% YTD.

The Fed appears ready to raise rates mid to late 2015 and bonds may lose their attraction drawing even more money into stocks as both domestic and foreign investors move where superior returns are earned.

As most professional managers have gotten interest rates and stock selection wrong this year , money moves increasingly into index investing exacerbating current trends.

If Republicans win a Senate majority, markets will be further encouraged. Perhaps a lower corporate tax can be achieved in the next 2 years along with a greater national energy focus which improves both jobs and income.

Douglas Coppola 

John Coppola

November 4, 2014

CFA is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where CFA 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. CFA 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 advisors regarding the matters discussed in this e-mail.

October 2014

Global stock and commodity markets got rocky in September. The S&P 500 lost 1.6% in the month, was up 0.6% for the quarter and +8% on the year. It appears that S&P 500 and NASDAQ Composite Index strength mask a deeper correction. For the NASDAQ 47% of stocks are at least 20% off their highs.

Small caps as measured by the Russell 2000 led the parade down 7.9% in the quarter and 4.4% YTD. Importantly, 40% of this broader index is down over 20% from the highs. Today this index reached 10% correction territory.

Short term government bonds are returned only 0.57 % YTD. Very few expected long rates to drop as the U.S economy improved and QE ends This year started with 10 year yields of 3%, they ended Q3 at 2.5 %.

German 10 year Bunds now yield 0.90%, as Europe is losing its fight to recover from the recession. The Vanguard FTSE Europe ETF dropped 10.8% since June 18th in dollar terms. The ECB Head, Mario Draghi is still trying to muster support for his quantitative easing program which may be announced as soon as Oct 2. The German DAX has broken key support levels having dropped 15 % from June highs in dollar terms.

Japan’s Abenomics is stalling with recent sales tax increases hurting the recovery. When you raise taxes people buy less! With 10 year Japanese government bonds yielding 0.52 % many question the continuation of optimism for the world's third largest economy and its stock market.

China’s GDP growth is around 7% with major protests in Hong Kong bubbling concern to the surface. A recent infusion of capital into large banks by the Central planners is expected help stem a receding growth tide. Absent economic progress the natives get restless.

I-Shares China symbol FXI is down 10% from its high on September 3rd. Both Hong Kong and Mainland China stock indices are down about 1.5% YTD.

Much of the drop in commodities can be laid on the door of a stronger U.S. dollar up 7% on a trade weighted basis during Q3. Emerging markets had advanced to yearly highs in August only to sell off by 9% in September.

Even with chaos in Iraq, Russia, Syria, and Ukraine oil prices plunged 13% in Q3. Global energy demand is weakening and U.S. consumption of imported oil is now down to 26%.

While the majority of market pundits believe the U.S. will remain recession free and earnings on the S&P 500 will continue to rise, we know the U.S. is not an economic island. A significant percentage of S&P 500 earnings and sales come from overseas markets.

We are currently viewed as a safe haven; GDP is growing along with earnings, dividends and share buybacks continue at a record pace. Mergers and Acquisitions are occurring more frequently. With stock prices having risen for 5 years there is clearly more risk to owning shares now than in the past few years. If there is no global pick up in the near future the U.S. Stock Market will surely cool down.

Douglas Coppola

John Coppola 

October 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.

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.