First Half Review/Second Half Preview

U.S. stocks and bonds have treaded water in 2015, with SPX closing at 2063.11 only + 0.2 % year to date. The index posted its worst first half return since 2010. Bonds added little with U.S. 10 year treasury yields on the rise from January’s 2.13% to 2.32% at today’s close.

In the past few day’s worries about Greek contagion, Iran negotiation deadlines, and 3 Continent terror attacks plus wary words from well-known investors drove global stocks lower. Many remain confused and frustrated. The prospects for higher interest rates, a slowdown in economic growth and Greek chaos have frozen a stock market that rose from 1265.36 since June 2012.

Yes, fed fund rates are likely to rise soon from zero for the first time in many years. The FED has pledged a slow, steady, and transparent rate rise if they see a stronger U.S. economy.

A strong economy also means rising profits, rising dividends, continued share buybacks and more merger activity.

Valuations are somewhat stretched but below historic highs when compared to interest rates or forward earnings. Merger and Acquisitions have reached $1 trillion so far this year indicating CEO’s are confident and willing to buy future growth. Consumer confidence is rising while investor confidence swoons.

Investors worry about liquidity but we see no lack of liquidity. U.S. banks and major foreign banks have raised capital levels and shed bad loans for the past 5 years. Bank balance sheets are stronger than 2007-2010 by a large measure. J.P. Morgan’s 52 week range is $69.82 - $54.26. It closed at $67.76 today, with a market capitalization of $250 Billion, selling at 12.4 times earnings with a 2.6% dividend yield. Wells Fargo is capitalized at $290 Billion dollars or nearly 83% of Greece’s total debt of $350 Billion. WFC is 3% off from its recent 52 week high of $58.26, selling at 13.8 times earnings with a 2.6% dividend yield.

European contagion is not evident in Sovereign bond markets with German 10 year notes yielding 0.76%, France - 1.19%, U.K. - 2.02%, Spain - 2.29% and Italy at 2.33%. All but Italy have yields lower than the U.S.A. There is no contagion from a possible Greek exit from the Euro.

Apple Computer for example is selling at $125.43 per share and has a $722.58 Billion market capitalization, twice the size of the Greek debt. It sells for 15.59 times trailing earnings with a 1.60 % dividend yield. Would you rather own AAPL, Euro ten year notes or U.S. Treasuries?

Investors await the July 5 referendum in Greece regarding EU membership. We await the outcome of Iran nuclear talks. We await better news on the U.S. Economy along with 2nd quarter earnings reports. Nerves are on edge with the so called "new normal" 2.2 % GDP growth for the U.S. economy. In the fifties we had average GDP growth of 4.25 % and in the sixties - 4.5 %. From the seventies through the nineties we averaged more than 3 %. In the 2000’s we averaged 1.82 % and so the decline began accompanied by low wage growth as well.

Worries about China abound. China is in transition from an export and infrastructure driven economy to a consumer driven economy. Slow GDP growth there is the current 5 – 7 % range. China has volatile stock markets which began to rally in the past year after lagging the U.S. for many years. They have recently dropped by 20% raising more concerns.

We don’t see any danger of China’s imminent economic collapse as she holds $3.73 Trillion in currency reserves which is the largest amount of any nation in the world. The current 5 year plan is to keep the economy growing. The PBOC are now lowering interest rates.

In sum, we are undergoing a period of consolidation after 200% gains since the U.S. bull market in stocks began in March of 2009.

Slow global growth means low interest rates, low inflation plus high anxiety. Europe and Japan are both recovering with help from massive QE programs are spurring their economies. China’s GDP is growing more slowly than its recent past but much faster than Europe, Japan and the U.S.

Oil prices are down 50% in the past 6 months giving the entire world an effective tax cut. This puts pressure on oil dependent Russia and Iran to act more like civilized nations. The FED will likely raise rates late this year but with U.S. elections in November 2016 rate rises will not last long into the election season.

Doug Coppola

John Coppola

June 30, 2015

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 at all times subject to change without notice. We do 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 & 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

The Greek Crisis

A number of clients have expressed concern over the latest round of the EU –Greek debt negotiation. Is this going to result in a default which will drop stock and bond market prices worldwide?

This epic saga has gone on so long because the EU has done everything in its power to convince and cajole the Greeks to stay in the monetary union.

The Greeks for their part are happy to pay interest on their debts as long as someone gives them the Euros to do so.

The fact is they owe a total of $353 Billion dollars’ worth of Euros at today’s exchange rate of 1.12 Euros per US dollar.

Almost 75% of this debt or $264.75 Billion is owed to the International Monetary Fund and the EU itself. Those two institutions are Central Banks not commercial banks. They can print and lend money as they wish and their charters allow.

Neither the EU nor the IMF will go broke if the Greeks don t pay back what they owe. The big secret is they can’t afford to pay back this money.

Recently the EU has loaned the Greeks the cash to pay interest on the IMF loans. Some think an alternative, answer to this crisis is a 100 year Greek bond issued at low interest rates. I say why bother? These stalling tactics are now being ridiculed as preposterous by most observers.

This charade is about to end unless the Greeks get a better deal than the EU has offered to date. The Greek government refuses to negotiate a higher retirement age for their public workers which I believe is now 55 years of age. They want to keep their bloated public sector as it now is, fat and happy. They will accept no further cuts whatsoever and seem resolute. Hardworking Germans and others say no more. Poorer countries in the East of the Euro Zone say they can’t afford to pay Greek pensioners more than their citizens are getting.

So that leads markets to fret about the additional $88 Billion dollars owed to private individuals and institutions if the Greeks exit the Euro.

Here is a brief overview to put this matter in perspective:

• The Greeks are only 11 million people and had a $241 Billion GDP in 2013 or 0.39% of World GDP. 
• Entire Euro Zone had a$ 12.7 Trillion GDP in 2013.
• Tiny Switzerland had a $651 Billion dollar GDP and the USA had $16.8 Trillion GDP in 2013. 
• By way of further reference, Apple Computer has a stock market value of $735 Billion, Microsoft $372 Billion, Exxon $354 Billion, Berkshire Hathaway $342 Billion, Wells Fargo Bank $294 Billion, GE $ 274 Billion, Johnson & Johnson $ 273 Billion, Procter and Gamble $215 Billion, IBM $164 Billion, Intel $150 Billion and Cisco Systems $146 Billion. 

                             This is much ado about nothing, to paraphrase Shakespeare! 

The European Central Bank Chairman, Mr. Mario Draghi has indicated they are prepared if a default occurs. That means the Central Bank will keep liquidity flowing. They have a massive QE bond buying program of 60 Billion Euros per month in place.

Euro Zone interest rate rises will be kept in check with Central bank buying.

Spain, Italy, and Portugal will not bolt the Euro and this crisis will be over for most except the Greeks and their private bondholders.

There is not a huge amount of leverage tied to this Greek debt. Where it does exist investors holding this debt will be hurt and possibly wiped out. The system will be cleansed.

The Greeks get a fresh start with a new currency and may actually become more competitive.

The former CEO of PIMCO Mohamed El Arian puts the probability of default at 55% as of today.

Markets may react negatively at first but will return to normal .Our focus is on slow 2-2.5% GDP growth and corporate earnings.

The Sun will rise in the East!

Doug Coppola

John Coppola

June 16, 2015

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 at all times subject to change without notice. We do 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 & 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

June 2015

First Quarter 2015 GDP was revised down to -0.7 % as U.S. trade deficits soared on a stronger U.S. dollar. Nasty winter weather and a Port strike were also factors in the decline.

Consumer confidence slid to a 6 month low in May according to a University of Michigan survey coming in at 90.7% down from 95.9% in April.

There is little mention of millions of Americans still unemployed, despite the 5.4% official unemployment rate.

Please note that a 62.8% labor participation rates means that some 37.2% of job eligible Americans are no longer looking for work and are not counted among the “officially” unemployed.

Europe by contrast has an unemployed rate of 11.3% versus its 9.8% ten year average.

Bond yields remain firmly anchored at 2.12% for ten year notes almost unchanged from when the year began.

U.S. stocks in the S&P 500 index remain impervious to weak economic news and talk of pending FED interest rate hikes. The index closed at 2107.39 up 1 .1% in May.

Factset estimated on March 31, that earnings would drop 4.7% in Q1 2015. However, blended earnings of all SPX companies ended up 0.7%. The current P/E ratio on the index is 16.77 times a 12–month forward EPS estimate of $125.66.

Mergers and buybacks continue to support stock prices as CEO’s feel and act more confident. M&A activity in the U.S. had its largest first quarter since 2000 with $414.7 billion in deals. More deals are in the pipelines.

72 % of SPX index companies participated in share buybacks in the 4th quarter of 2014. On a trailing 12 month basis, according to Factset, $564.7 billion was spent on share repurchases an increase of 18 % over the previous year.

At this time most global equity markets seem unconcerned that growth is anemic in comparison to past recoveries as stocks benefit from low inflation, low wage pressure, and low commodity prices. Economists expect global GDP to improve for the balance of 2015 and in 2016.

We hear concern from clients and professional managers that this recovery has gone on too long without a recession and perhaps P/E ratios are now unrealistically high.

Slow growth combined with QE staves off any recessionary tendencies which traditionally come about as a result of excess economic enthusiasm or leverage. Low interest rates make bonds less attractive than stocks therefore raising P/E ratios. Both investor and consumer enthusiasm is low for this stage of a recovery.

Anemic growth often occurs after a financial crisis. Banks are not encouraged to lend but rather asked to rebuild capital.

Add to this cautionary mindset policies from Washington that have delivered excessive regulation. We see this manifested not only in Finance but in Healthcare.

Defense spending is shrinking. Only Technology and Bio technology have shown strong animal spirits. Energy has been a mixed bag but has at least provided excess supply leading to lower prices.

We continue to be concerned about massive government debts which the markets choose currently to ignore.

High sovereign debt levels do however keep governments from further wasteful spending and keep Central Bankers wary of raising rates too soon.

Higher rates would mean higher interest payments for all and therefore higher deficits. This vicious cycle is to be avoided at all costs.

So for now, the music plays on, the public keeps dancing and stocks keep rising.

Doug Coppola

John Coppola

May 29, 2015

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 at all times subject to change without notice. We do 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 & 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

May 2015

The month ended with a selloff of 1.5 % wiping out most of April’s gains yet the market eked out a gain of 0.1% on the DJIA and 1.3%, on the S&P 500 year to date.

The yield on the 10 year Treasury closed at 2.03% down from 2.13% at year end. I shares Core U.S. Aggregate Bond Index – AGG, closed up 1.5%. Gold closed lower on the year while WTI oil has rebounded sharply from its $44/bbl. January and March lows.

We are in the midst of earnings season. With 201 companies reporting as of April 24th, 73% were above the mean estimate while only 47% reported sales above mean estimates. The 12 month forward P/E ratio is 16.8 x S& P 500 estimates of $123.83 according to Factset.

The Euro currency has rallied 7% off its March lows after a 17% plunge from the first day of 2015.

German 10 year bund yields settled at 0.36% after dropping to merely 0.7 %.

Switzerland has a negative 0.02% yield out 10 years and Japan pays a paltry 0.33%.Central Bank demand for sovereign bonds exceed issuance in major developed economies.

Bill Gross says shorting the German Bund may be the greatest opportunity of his lifetime! Negative yields are a certain loser for savers.

We conclude that with historic low yields, stocks are better bargains than bonds and perversely may be less risky.

These quotes from the WSJ illustrate the principal dilemma faced by investors. “The yield on the U.S. Treasury 2-year note is 0.52% and has averaged 0.73% since the beginning of 2008. In contrast, from 1988 through the end of 2007, the average yield on the two-year Treasury note was 5.23%....At the end of 2006 the average yield on a one-year CD was 3.8% and the average yield on a five-year CD was 4.1%, according to Bankrate.com.

Persistent low rates have forced investors into dividend paying equities. 47 % of S&P 500 stocks have dividend yields greater than the 10 year U.S Treasury yield.

Currently U.S. treasuries yield 2.03%. We don’t have strong conviction whether 10 year Treasuries will go 50 basis points higher or lower by year end.

We believe 2% inflation targets in the U.S., Europe and Japan will be a stretch in 2015. We do however expect better GDP and profit numbers in the second half of 2015.

With a forward estimate of $123.83 on the S& P 500 index, we calculate as follows:
123.83 of earnings / 2085 the SPX close on April 30 the = 5.9 % earnings yield.

This is a risk premium of 3.87 percent over the 10 year note, enough to compensate for holding riskier shares.

Other methods to measure value argue stock prices may be too high but low rates are here for some time to come and underpin prices as earnings and dividends both move higher.

Stocks look attractive in Europe and Japan where weak currencies and massive QE monetary programs are driving savers and pension funds into stocks given near zero bond yields. China has moved toward easy money and it has ignited a heretofore under performing market.

The wealth gap continues to widen as the rich have gotten richer as owners of shares, bonds, and high end urban real estate. Investor’s Business Daily points out that had we experienced a Reagan like economy with annualized 4% GDP versus the 2% annual pace we have seen since 2009, the U.S. would be richer by $2.5
Trillion in GDP terms or nearly $20,000 for an average American household.

Lack of investment due to low capital spending, weak employment and slow wage gains are the result of higher taxes, burdensome regulation, and low confidence in future growth.

Many nervous investors have stayed on the sidelines due to mistrust of markets and policymakers. This scenario leads us to conclude we will experience a longer than average economic and market cycle.

2015 is unfolding much like 2014 with GDP adjusted for price changes, up 0.2% in the 1st quarter.

The U.S. Federal Reserve Bank is preparing to raise in short term rates as economic data is expected to strengthen later this year.

Stocks should be able to weather turbulence created by higher rates, if they are modest and gradual. Stocks tend to climb after the first rate hike.

Needless to say too much U.S. dollar strength, the Iranian nuclear negotiation, Russian aggression and the
Al Qaeda/ ISIS war on the civilized world are possible roadblocks to higher prices.

Doug Coppola

John Coppola

May 1, 2015

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 at all times subject to change without notice. We do 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 & 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

April 2015

The S&P 500 closed the quarter at 2067.89, + 0.04% year to date but 2.3 % below its March 3rd all time high. The DJIA edged down 0.03% year to date at 17,776.12. According to Fact Set the SPX sells at 16.7 times forward 12 month earnings above the 14.1 times ten year average. Only 6 SPX companies have issued positive guidance for the first quarter the lowest number since 2006.

Small and Mid-cap stocks have begun to outperform their larger brethren. Cold weather, lower oil prices, and dollar strength along with a West Coast port slowdown have reduced earnings estimates along with Q1 GDP forecasts. For Q1 2015 earnings for the SPX are expected to decline by 4.5 % about 45 % of the decline due to energy companies. .

The Russell 2000 which represents the small cap segment of the U.S. equity universe returned 4.3% after under performing last year. Investors crave domestic exposure while the dollar is soaring despite P/E’s that are higher than in the big cap universe.

10 year U.S. Treasury notes closed with a 1.93 % yield versus a January yield of 2.17%. Similar yields in Germany and France are 0.18 % and 0.48 % respectively. European stocks are doing rather well finally as that Continent's QE program drives financial assets higher and the Euro lower.

Some 17 global stock indices set fresh new highs as easy money policies and signs of stability in some troubled economies lifted share prices.

With low yields in the U.S. and some negative yields in Europe savers are coaxed out cash into the longer part of the yield curve or into stocks to earn positive returns.

The savings rate here has risen to 5.8% recently contributing to slower economic activity.

While the Federal Reserve is talks about “ normalizing “ US interest rates European and Japan's QE programs are robust and continuing driving the dollar higher while making European and Japanese companies more competitive and profitable.

Plunging oil prices caused oil futures to drop 11% to $47.60 by quarter end. This is a good thing similar to a tax cut for consumers. The beneficial impact on consumer spending is generally delayed for a few quarters as they decide whether the drop in prices is permanent.

Central bankers see their policies as working to stop deflation, bolster GDP, and give shaky governmental and corporate borrowers a new lease on life.

Investors now appear to fear higher interest rates and bubbles in bond and stock markets. Is growth in our economy real or artificially induced by government policy? Trust of government solutions is near an all-time low even as markets make new highs.

Politicians sit back and let Central bankers do the heavy lifting while they give lip service to fiscal policy reforms.

Markets do what markets do with easy money, they go higher. Yet with little tangible evidence that the economy is safe and on a sound footing we experience periodic bouts of fear, when short sharp sell offs ensue.

As 2016 is a presidential election year, the Fed will only have a small window in which to raise rates. September is our best guess for the first rate rise.

Global conflict concerns center around the Middle East. Iran wants sanctions lifted and the US President and Europe want a deal which will reintegrate Iran into the world economy. Opposition to any agreement is vocal but the world’s desire for greater rapprochement is a strong force. Russia has weathered their own self-inflicted storm and appears to have gone quiet for now.

Energy prices, continued US dollar strength, and a genuine global GDP recovery are open questions. Our US stock market has stalled around levels first reached in late November 2014.

Should proxy wars in Syria and Yemen escalate oil prices could turn quickly and markets will be shaken. A nuclear arms race in the Middle East will be unsettling. More Russian bellicosity could derail the Euro recovery.

For the moment, however the trends of a stronger dollar, a rising Europe, an improving Japan and a steady China are holding in place. An Iranian- Western deal on their nuclear program has not hurt oil prices.

Low rates with low inflation and soon to continue rising earnings indicate stocks are the best choice for most investors. Signs of recession, an inverted yield curve, and an overheated economy are not far away from investors' minds but not imminent.

This recovery was never robust but will likely make up in length what is lacks in strength. We remain more invested in stocks than bonds. For the fourth time in 50 years the SPX yields more than the 10 year Treasury. We do not fear the pending interest rate rise and we see value in global stock markets and specific bond markets.

Doug Coppola

John Coppola

April 6, 2015

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 at all times subject to change without notice. We do 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 & 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

March 2015

Reversing January losses, February proved to be a winner for stocks while 10 year Treasuries sold off to a 1.99 % yield, 32 basis points higher than last month’s close but still lower than year- end levels.

The S&P 500 posted its best monthly performance since October 2011 up 5.5 %, closing +2.2 % YTD. While earnings estimates for the full year 2015 came down, stocks went up.

U.S. GDP saw + 2.2 % growth in the final quarter of last year, 2014 finished with + 2.4 % GDP growth. The Federal Reserve is” patiently” waiting to raise rates according to Janet Yellen’s latest testimony. According to 39 forecasters surveyed by the Federal Reserve of Philadelphia real GDP will grow 3.2 % in 2015 and 2.9 % in 2016.

Cold weather plus a major port slowdown likely hurt retail sales in the first two months of this New Year. SPX consensus earnings forecasts are now $120.37 for 2015 versus $117.77 in 2014 up only 2.2 %. Earnings growth in the 4th quarter was 3.7 % with 485 of 500 companies reporting. At 2104.50 on the SPX we have a forward P/E multiple of 17.48 X earnings, higher than the 10 year average.

Low energy prices have hurt recent earnings and forecasts. Low energy costs, however, are clearly a positive for future GDP growth. WTI crude rose to $49.76 or +3.1 % in February along with Brent Crude’s rise to $62.58 both measures saw their first gains since last June when WTI crude was near $ 106 /bbl. Precious metal commodities lost 3.24 %

While earnings growth has slowed dividends continue to rise with the SPX yielding about 2.00 % despite higher prices. .Thirty three S&P 500 companies increased dividends in January 2015 while only one company decreased their payout, 375 companies in the index increased dividends in 2014.

With the 9th of March being the 6th anniversary of this Bull market and the NASDAQ having regained 5000 many ask: Is the Bull Run at its end? We think the answer is no, due to ample credit availability, a steep yield curve , growing consumer confidence, growing earnings and residue fear from 2 major declines keeping sentiment in check.

German and Japanese bond yields are only 37 and 36 basis points respectively. Europe has 5 countries that have negative yields, with Swiss yields at -.05 % at 10 years.

Domestic bond yields, while historically low, are attractive relative to foreign yields and current inflation of 1.5 %. If the Fed raises short rates this summer long rates will likely rise more slowly than we saw in 2013 or during past rate hike cycles. Both Europe and Japan are aggressively pursuing QE policies which help GDP growth overseas and add to our virtuous circle.

Douglas Coppola

John Coppola

March 4, 2015

Communication is for informational purposes only and 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 at all times subject to change without notice. We do 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 & 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

February 2015

As January goes so goes the market is part of market lore. Except for 2014 when the SPX declined 3.6 % and finished the year up. This barometer has an 89% accuracy ratio. Investors now hope for a second “ bad “reading as stocks had another down January with the Dow Jones Industrials -3.7 % and the SPX -3.1% in early 2015.

Perhaps it was leftover profit taking from 2014 or perhaps it was fear of global deflation?

There are a plethora of worries as earnings reports have been less than robust with 227 of the 500 Index companies having reported earnings +2.1 % on sales+1.4 %. So far 37 large U.S. companies are reducing forecasts while 9 have issued positive guidance.

U.S. GDP rose 2.6 % in the last quarter, down from a 4.8 % average the previous two quarters.

Our 10 year Treasury note yield has continued to rise in price and the yield has dropped to 1.64 %. Global money flows have gone into” safe haven” bonds, even after amazing gains in 2014.

Since the ECB announced a 60 Billion/month QE program of its own; German 10 year yields moved to 0.30%, France 0.53%, UK 1.33%, Spain 1.41% and Italy 1.59%, all below U.S. levels.

30 year U.S. Treasuries now yield an historic low of 2.22%. Inflation and inflation expectations remain well below the FOMC’s target of 2%.

Japan and Switzerland with yields of +0.27% and -0.11% are some of the lowest in the world. Imagine paying a government to hold your funds for 10 years? Germany bunds have a negative 0.05% yield out to 5 years.

This price action scares investors into thinking that we may be on the verge of a global recession, contrary to the continuous happy talk from “money printing” Central bankers and politicians worldwide.

The U.S. economy is still the best in the West yet GDP grew only 2.4% last year.

Our Central bankers forecast a 3% GDP year in 2015, as they have for the past two years, and warn they may raise rates later this year.

The current 12 month forward P/E for the SPX is 16.3x earnings. This is above the 13.6, 5-year average and the 14.1, 10 year average. Earnings in 2015 are now expected at $123.47 versus $116.77 last year an increase of 5.7% although this consensus estimate has come down in the past few weeks.

While historically U.S. stocks are not cheap they are still attractive compared to current “risk free” interest rate yields. The yield on the SPX now about 2% is higher than our 10 year note as well as that of the developed world.

We have to look back to the 1950’s and prior decades to find a time when stocks paid out more in dividend yields than bonds. Additionally, payouts are now much lower as a percent of total corporate earnings and are tax advantaged. Finally, U.S. companies have enormous cash hordes to maintain those dividends.

The ECB markets save Greece appear to like the new QE program as European stocks have rallied post the Jan 22nd announcement. Global markets through Jan 30th are still -1.9 % year to date. Emerging markets are +0.6 % with positives in China and India. Japan is +2.3 % in 2015.

There are two key reasons why rates are so low around the globe:

1 In normal times, rates rose as economic activity picked up and dropped when it fell. With QE programs from the three major currency blocs; ECB, Japan and the U.S. , Central bank buying of huge amounts of their own as well as corporate bonds has distorted the price mechanism. This begs the question, “What happens when Central Banks stop buying “?

2- Given the period of deleveraging since 2008 we see excess capacity in labor and other capital markets. Time and again governments have not encouraged free markets to work freely. Central bankers, at this juncture seem to have done all they can with monetary policy. Now, it is time for politicians to make fiscal policy reforms including labor and tax laws to stimulate real growth.

Because of QE programs bond and stock prices have rallied however real economies are mired in slow growth.

We anticipate more of the same.

Douglas Coppola 

John Coppola

February 2, 2015

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