June Newsletter

The SPX closed at 2096.27 on May 31, 2016, up for the month and +2.5% on the year. The NASDAQ closed -1.19% YTD.

The index is still 1.7% below its all time high of 2132.82 reached last July.

With 98% of companies having reported earnings in Q1 2016 the earnings decline was 6.7%.

The SPX forward 12 month P/E ratio is 16.7. The current P/E ratio is above the 5 year average of 14.5 and the 10 year average of 14.3 according to Factset.

The Fed was hoping to raise rates again in June or July before today's job figures. While the headline unemployment rate was 4.7%, non farm payrolls increased by only 38,000. U6, a broader definition of the unemployment rate is steady at 9.7%.

Average hourly earnings were up 2.5% over the past year. Average work week is 34.4 hours. Labor force participation rate has backed down to 62.6%.

The Fed is in a box and frankly their next move is hard to gauge.

Oil has bounced 92% from its low of $26/bbl of WTI but even at $50/bbl it is down more than 50% from 2 years ago, peak levels.

The big question after the 15% drop from last July to the February 2016 lows is; has the market already discounted an ongoing earnings recession?

Bulls argue the economy will pick up in the second half. Bears believe valuations are too high, margins are shrinking and earnings will not recover to compensate for the above P/E ratios.

The market is trying to come to terms with mixed signals.

Bill Gross of Janus believes that future returns from bonds and stocks will end up below the 7% and 10% averages achieved over the past 40 years.

Due to slow economic growth and repressed interest rates he believes the Barclays Capital U.S. Aggregate Bond Index will return between 1.5% and 2.9% over the next 10 years .

Stocks will earn about 3% more, or 4.5% to 5.9% with higher levels of volatility along the way.

Will more monetary stimulus from Japan, Europe and China lift those economies? Central bank moves now appear to have less effect on markets as well as the economy.

Will U.S. dollar strength resume after a nearly 10% drop below last December levels or has it begun a longer term decline?

The U.S. Dollar Index Chart below suggests a top may be forming.

If the U.S. dollar begins to decline,  earnings headwinds for U.S. multinationals will diminish and commodity prices will continue to rise, particularly precious metals.

The next Fed meeting takes place on June 14-15.The Brexit referendum takes place on June 23. Both bear careful watching.

Today the U.S. 10 year note yields 1.72%, 10 Year German Bunds +0.12%, the Japan 10 year -0.11%, the Swiss 10 year is at -0.43% and the UK Guilt +1.27%.

The public increasingly fears the trend toward negative rates. Negative rates not only offer less than zero returns but creates unease for savers.

Governments asking for a payment to hold their debt are creating a psychosis among investors. This in effect is a tax on savings.

Less savings does not necessarily lead to more spending. It can lead to more hording of currency, which creates the opposite effect of central banker intentions.

This upside down world has led individuals to remain on the sidelines with excess cash and institutions to reach for yield to meet payment obligations.

The 5/25/2016 market sentiment figures from AAII showed only 17.8% Bulls, 59.9% Neutral and 29.4% Bears.

Ironically, this is a rare reading which has proven bullish at similar junctures in the past.

We expect the year long trading range - SPX 2134-1810, may continue for some more time.

Given the volatility of bonds, commodities and stocks this year, we believe opportunities will arise to buy assets on the cheap.

Doug Coppola

John Coppola

June 3, 2016

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 Newsletter

The U.S. stock market as measured by the S&P 500 was up 1% while the NASDAQ was down 4.6% through end of April.

Charles Biderman of Trim Tabs, whose firm follows market liquidity, states that since the end of 2011, $2 Trillion of U.S. stocks have been bought by corporations on a net basis.

Individuals via ETF's and Mutual funds have been net sellers.

In 2016 Basic materials, Energy and Utility stocks have led with YTD returns of 10.2%, 13.4% and 12.8%. These were among the worst performing sectors last year.

Healthcare and Technology led the losers down 3% and 3.7% YTD having been among the top sectors last year.

The SPX sells at nearly 18x consensus estimates with a 2.2% dividend yield while the 10 year U.S. Treasury note yields 1.86%.

10 year German Bunds yield 0.26%, Japan 10 year notes pay -0.13%.

Investors like Warren Buffett are still wrapping their minds around negative interest rates and don't seem to like what it implies, i.e no growth and no yield.

Consequentially, U.S. corporations with over $2T held overseas are hoarding cash. The personal savings rate in the U.S. Is 5.4% now, higher than the official unemployment rate of 5%.

Many top quality companies borrow money, buy back their own shares, shrink their float and create cash flow in the process. Debt is tax deductible and dividend rates are set higher than the cost of capital.

Exxon's stock yields 3.4%. Exxon lost it's AAA bond rating not long ago, but raised it's quarterly dividend to 75 cents per quarter on April 27.

Unilever borrowed 750 million Euros for 7 years at a 0.5% yield on Jan 26th, they also borrowed 300 million euros at a yield of 0.08% with a zero coupon.

It has been only 4 times over the past 50 years that stock dividends are higher than the yield on the 10 year treasury note. That situation arose again in January 12, 2015.

S&P 500 percentage (%) performance after first day the dividend yield goes above the 10-year Treasury yield

Date One month Three months Six months One year

June 22, 1962 7.8 9.5 18.9 33.4

Nov. 19, 2008 10.1 -3.4 12.6 35.7

Aug. 10, 2011 3.0 10.6 19.8 25.4

Average performance 6.97 5.57 17.1 31.5

While the world is not completely irrational, we continue to be in a period where things seem amiss. On Jan 12, 2015 the SPX was about 2044, it has a value of 2088 today only 2% higher with the 2.2% dividend yield. One can argue things are a bit different this time. Performance has been carried forward by central bank policies.

U.S. First Quarter GDP rose by +0.5%, down from 1.4% compared to last year's Q1.

China GDP, stocks and oil prices came back strongly from the February lows.

We have rallied to just short of the May 2015 SPX high of 2134 in late April.

Wage and salary growth are both down so far in 2016, but consumer spending while soft is steady. Economists see no recession this year. The FED may raise rates once more but even that assumption is questionable given the upcoming elections.

The Presidential race is interesting but remains very unpredictable.

With 62% of the SPX having reported earnings for the 1st Q 2016, 74% of companies have bettered the mean estimate with 55% reporting sales greater than the mean estimate. The problem is estimates were dropped numerous times before the actual reports.

According to FACTSET we are experiencing an earnings decline of -7.6%. For the first time since Q4-2008 through Q3-2009 we are seeing four consecutive quarters of decline, the definition of an earnings recession.

The SPX forward P/E ratio is now 16.8x, above the 5 & 10 year averages.

In sum, with rates low, stocks are being held up not by earnings growth, but by lofty P/Es thanks to Central Bank policies and share buybacks.

While many are not feeling the “Bern”, 6 of 10 Democratic primary voters believe socialism has a "positive impact" on society.

Socialism prevailing over Capitalism among voters in every demographic does not sound bullish.

The public is down on business and politics but life goes on.

Doug Coppola

John Coppola

May 3, 2016

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 Madness Reigned on the Courts in the NCAA Basketball Tournament & in Our Global Financial Markets

Upsets galore in early rounds continued through the Elite Eight and into the Final Four with only one #1 seed left in the contest. That team happens to be the UNC Tar Heels, whose home is right here in Chapel Hill.
While January and early February were tough sledding for the bulls, the bears got their comeuppance in late February and March.
February 11 proved to be the bottom of this year's version of the global growth scare. From that point on   commodities notably oil, emerging markets and high yield debt soared in price along with a broad array of stocks.  Yields in mid-February for junk bonds approached 2009 levels as oil hit $26/bbl. Panic gripped investors in many asset classes  as doom and gloom spread and prices plunged. But wait........
Just as we experienced on numerous occasions since the 2009 bottom, Central Bankers came to the market's rescue. Large and small capitalization stocks roared back to life as shorts ran for cover. Oil prices rallied more than 50%.
High bearish sentiment set the stage for this Bull Run as the Fed backed off its 4th rate hike goal set last December. The ECB went for more QE in Europe, China loosened credit standards and Japan stayed the course with negative interest rates.
The U.S. dollar retreated 6% from its Dec 2,2015 trade weighted high of 100.51 easing fears of an  earnings collapse for big cap U.S. corporations. This also helped emerging market economies, by taking pressure off commodity prices and their dollar denominated debt.
The Presidential contest has narrowed to five candidates. Nominees are to be decided upon in late July. Many voters are looking for a new hero not of the "ruling elite." Millennials and students wish to be rescued from college debt, blue and low pay white collar workers from stagnant pay scales.
Seniors fret over Social Security and Medicare, both underfunded. Social Security will be forced to reduce benefits in the not too distant future if something is not done soon.
Financial markets are buffeted by ever changing rules.  Central bankers change course as the fits of markets dictate. The Golden rule states.He who has the gold makes the rules. Central Bankers are modern day market kings and queens.
Ms. Yellen wants to get back to “normalization" for U.S. rates, but due to global economic concerns keeps delaying rate hikes.
Neither the Eurozone nor Japan can normalize due to slow or no growth economies.  Yellen retreats and hopes for better times down the road.  The Fed and most economists did not foresee the years of sluggish economic growth the past debt crisis would bring. Central bankers lend, extend and pretend all is well.
Fiscal austerity in Europe and discretionary government spending in the U.S. at 2008 levels have kept inflation low for 8 years. Politicians are frozen in their ideologies. Labor markets have improved but few feel like things are really good.
As Shakespeare once said, "All's well that ends well!" Markets are back to flat or up slightly up for the year. We have smooth sailing for the moment as the storm has calmed and sea monsters in China and other hot spots have submerged back into the depths.
 If we are to prosper in choppy markets it’s important not to panic and stay with your plan. Utilities and Telecoms lead the market this year after lagging last year. Energy is up in 2016 while Healthcare is down after respective horrendous and brilliant years for each in 2015.
With SPX at 2066, consensus estimates of $120.20 according to Yardini Associates, the P/E rests at  17.2 x forward earnings .While this is higher than the 5 and 10 year averages, in  light of a 1.78 % 10 year Treasury yield, German bunds at 0.15% and Japan notes at -0.04 % completion is not stiff. The reciprocal E/P derives an earnings yield of 5.8%.
It's been hard for active managers to figure out the rules of the road. Few are confident about earnings or growth levels at this late stage in an economic cycle.
Price gaps in markets have been a product of Dodd Frank regulation reducing market participation by banks and brokers as intermediaries. No uptick rules for shorting, plus algorithmic traders make plunges and screams higher more common.
Merrill Lynch reports we have record liquidity in client accounts as fear leads to under investment and caution. Two trillion dollars rests offshore rather than being invested here by U.S. corporations who refuse to repatriate cash and pay a world high 36% tax should they do so.
Computer programs with algorithmic settings move markets in moments, rather than in minutes or hours.
Leading hedge fund managers are struggling for positive returns as are 90% of portfolio managers. Active strategies are losing to passive ones.
Mutual funds are losing assets to ETF's. Cost of financial transactions has gone down for clients, but spreads, have gone up.
There are opportunities created by this seeming chaos.
Closed end funds that sell at big discounts approaching 2009 -2010 levels are one example.
We expect continued market volatility and slow growth in all economies. The Consumer at 68% of the U.S. economy is strong balance sheet wise and steady.
We are inclined to take more duration risk with high quality bonds as inflation is nowhere to be found. Longer dated AAA or AA bonds tend to rise when stocks fall and work well to balance a portfolio.
While the SPX may not be historically cheap more and more individual names got very cheap in the not so stealthy bear market we have lived through.
The Russell 2000 ETF index symbol -IWM - went from 123.10 on 6-23-2015 to 93.6 on Feb 11, 2016. That 24% drop in 8 months qualifies as a genuine bear market.
It has become crystal clear that the crowd is more often wrong rather than right. When values appear one must grab them quickly.
The rules of the game are ever changing as new market masters ply their trade.
The news cycle is short and negative. “If it bleeds, it leads", as the news room saying goes.
It is hard to stay patient and steady when the world appears to be falling apart around us. The 1820 SPX support zone has been tested 5 times since April 2014. The top of this zone is 2134 which we may see again before this year is out. The SPX closed +0.8 % through the quarters end.
In the long run, the country and markets seems to muddle through.

Doug Coppola

John Coppola

April 1, 2016

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

Central Banks are Shooting Blanks!

We have never before lived through such an elongated period of zero interest rates. Now with negative interest rates in Europe and Japan we are once again in uncharted waters.

Even Warren Buffet admitted on CNBC, he can't answer the question, “What happens after negative rates?”

In Europe, and more recently in Japan we have negative interest rates on government debt out to ten years. Japanese ten year bonds yield -0.07 %, Swiss ten year bonds -0.48%. Germany offers + 0.11% with the Netherlands at +0.25% and France at + 0.47% for their 10 year maturities.

About 25% of the developed world's government bonds offer negative interest to debt holders. Who buys them?

Foreign central bankers apparently feel that a shock to the system after a long period of slow growth, low rates and low inflation would bolster their sluggish economies.

The expected effects of this policy were a weaker domestic currency versus the dollar, higher stock markets, greater economic activity and higher inflation.

While the jury is still out we witnessed the soar of the Yen and Japanese stocks down 10% right after Japan implemented negative rates.

Both Europe and Japan are hoping to avoid deflation and recession but both appear to be  losing the battle. Equity valuations in both zones appear cheap but there is little confidence in European banks, Japanese economic reforms and a QE policy that seems to have gone about as far as it can go.

In the U.S. our Federal Open Market Committee moved in December, for the first time in 10 years, to raise short term rates. Markets have reacted with lower stock prices and lower long term interest rates on government debt. Our domestic 10 year bond  yields 1.74% versus 2.17% at year end. This rate is still generous for a developed country and the world’s largest economy. Amazingly the U.S. yield is higher than the countries mentioned above, plus Italy, Spain and the U.K.

Not surprisingly over the past year world trade has contracted considerably along with energy prices. Consumers have yet to get the memo that they have more money to spend.

China appears to be an economic wild card as few believe official growth rates. Their domestic stock markets have dropped about 50% from the peak. Will they react with more stimulus?

The economy in the U.S. chugged along at 1% growth rate in the fourth quarter of 2015 with 1.3% inflation in a year over year basis.

China is growing perhaps 4-6 % with Europe at 1% and Japan back in negative territory. Brazil and Russia are in recession.

Interest rate spreads have widened materially versus government guaranteed debt and stocks have declined globally with the U.S. now catching up to foreign markets.

Confidence is dropping while investor sentiment shows Bears exceeding Bulls by 1% in the most recent Investors Intelligence survey.

Investors are rightly frustrated that positive returns have been concentrated in a few growth areas leaving the average holder of shares over the past year and one half with losses.

Experts have suggested avoiding long dated bond maturities for years, yet long dated Treasuries along with similar foreign government bonds and municipals have performed very well.

Riskier credits which central bankers encouraged with low rate policies have performed poorly by comparison.

In sum, markets lacks confidence, central bankers have run out of ammunition and political leaders in the U.S. and Europe have few answers to spur growth. The SPX is down  5.5% YTD with the NASDAQ down 9%. Both indices have dropped from last year’s peak levels by 9.5% and 12.9% respectively.

According to Factset at 1932.23 the SPX sells at 15.6x forward earnings of $124.2 still above 5 and 10 year average multiples.  Analysts expect no pickup in SPX earnings until Q3 of 2016. Few economists expect an imminent recession with Wells Fargo recently putting the probability for a 2016 recession at 26%.

The FOMC is likely to stay pat in March with a 32% chance of another ¼ point raise in June and a 54% chance by December.

Uncertainty over the future leads to lower P/E multiples and we surely live in uncertain times.

Earnings will likely dictate the future market direction for stocks. Markets will fall and rise depending on the rate of global economic activity. Central bankers have done nearly all they can to help growth and employment, now we require genuine long term solutions.

Doug Coppola

John Coppola

March 1, 2016

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

As January Goes So Goes the Market

Despite a big Friday rally, the S&P 500 finished the month -5.1%, NASDAQ -7.9% and the Russell 2000 -8.6%. This result was the 7th worst start for U.S. markets since 1950.
January's global market action caused Bank of Japan head, Mr Haruhiko, to ride to the rescue on the last trading day of the month. He stated "there's a risk recent further falls in oil prices uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset. The BOJ decided to adopt negative interest rates ... to forestall such risks from materializing."
According to Howard Silverblatt of S&P Dow Jones, the old adage, "as January goes, so goes the market" has been correct 72.4% of the time.
Volatility in China's markets, combined with a continued plunge in oil prices and worries about U.S. and global growth all hurt stock prices in January.
The 10 year Treasury note finished with a 1.92% yield. Similar sovereign debt maturities are 0.32% in Germany and 0.09% in Japan.
Negative rates in Europe and Japan will likely persist for some time. U.S. treasuries and municipal bonds were among the few asset classes that made money for the month.
Bank stocks were particularly hard hit as the KBW Bank index of 24 companies declined 13% in January despite hopes of higher rates from Janet Yellen's Fed. This type of decline is disturbing and reminiscent of 2007.
Many investors have concluded, the December FOMC rate hike was a mistake. U.S. and global economies are weakening, credit spreads have widened, so why raise rates?
The 4th Q GDP in the U.S. was up 0.7% with personal consumption expenditures up 2.2%. This is the fourth year in a row where GDP growth has fallen short of Fed estimates.
Where is the increase in consumer spending? We have seen a 65 % drop in energy prices that puts more cash in most pockets.
In Q4 2015 some 47% of personal consumer expenditures went to higher healthcare costs, in part the effect of Obamacare.
With U.S. GDP growth stuck in second gear and Emerging Markets, including China responsible for 46% of Global GDP growth over the past 5 years, confidence in central planning and central bank printing is waning.
On a contrary note, market sentiment as measured by Investors Intelligence shows 29.2% Bulls and 35.4% Bears, often a point from which market rallies begin. Formerly forlorn gold, rallied 5.3%, indicating fear has returned, but not fear of inflation.
With the S&P 500 down to 15.5 times forward earnings of $124.58 and 16 times trailing earnings, P/E's on the index have gone down.
One problem however, is that Factset expects an earnings decline of 5.8% in Q4 when all companies report. Even at the sector level, 8 of 10 sectors recorded a decline in bottom up EPS during January.
The strong U.S. dollar is a constant headwind for U.S. multinationals earnings.
The fact that 2016 is an election year does not appear to be helping markets with Iowa primaries just getting underway. Outcome for the 2016 elections are about as clear as the skies over Beijing.
With Japan's latest monetary move, China is more likely to let it's currency drift lower to aid her trade competitiveness. This will no doubt export deflation to the rest of the world, including the U.S.
While we remain skeptical that the current decline has run it's course, 5 of 6 weak prior Januaries have resulted in gains for the rest of those years, though not necessarily a positive year.
We remain apprehensive of further tinkering by central bankers who seem to be very low on ammo after many years of low rates. How much lower than zero can rates go and who does it help?
The world does not need more easy money, the world needs growth. While the U.S. seems to have a love affair with regulation, taxation and litigation, Europe and Asia tolerate a different brand of government tinkering with free market forces.
While QE has helped financial assets rise until recently, the positive effect on GDP has been fading as global growth forecasts are now under 3% according to the World Bank.
We appear to be stuck in a widening  trading range from 1820 support to 2134 resistance for the S&P 500.
Until oil stabilizes and a recession is no longer on the horizon we expect continued volatile markets.

​

Best Regards,

Doug Coppola

John Coppola

February 1, 2016

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  

Looking Back & 2016 Preview

The final numbers are in for 2015; S&P 500 index -0.7%, DJIA -2.2%, and the Russell 2000 index -5.9%.

U.S. stocks had their worst annual performance since 2008 closing out a rocky year. There were only 220 stocks that posted gains while 280 stocks lost ground in the S&P 500. The average stock in the index was down 4%.

The energy sector fell 24% while the NASDAQ rose 5.7%. A select cadre of growth stocks in the consumer, health care and technology sectors were the shining stars of 2015. Utilities declined 8%, Materials -10% & Financials -3%.

U.S. Treasury Government Bond Total Return was + 0.91%.

U.S. Corporate Bond Total Return was -0.46%.

The i Shares High Yield Corporate bond ETF fell 10%.

Gold fell 10% its third year in a row of negative returns.

U.S. crude oil futures fell 30.47% to $37.04/barrel.

The dollar gained 11.4% against the euro.

Emerging market stocks, as measured by the EEM exchange traded fund declined by 15%.

The January 4, 2016 edition of Investor's Business Daily published returns for North Coast Asset Management, a well-respected fund manager based in Greenwich, CT. Interestingly, each of their approaches : Tactical Income, Diversified Core, Diversified Growth and Tactical Growth showed negative returns of -3.8%, -3.5%, -3.8% and -3.5% respectively.

Such correlated returns ranging from pure bond portfolios to growth stock portfolios and balanced stock/bond portfolios are very rare indeed. This implies that while all boats benefited from a rising tide of printed money from 2008-2015 Central bankers must now concern themselves with an ebbing tide in asset prices.

Given poor returns this past year and the length of the bull market run, the longest since the 1990's, expectations for the New Year are muted.

Worries center around a continued decline in energy prices and the effect on corporate bond credits. The pace of the recovery in the U.S., Europe, China and Japan has not only been below past recovery levels but also below most economists recent expectations.

In December the U.S. Federal Reserve began a tightening cycle after 10 years of easing and an extraordinary low interest rate policy since 2008.

In 2016, we will have a U.S. Presidential election with the Republican race wide open.

We clearly need tax and entitlement reforms to address the doubling of the deficit since 2009. The Congressional Budget Office has warned the Social Security $2.8 Trillion trust fund will run out in 13 years.

For now, the U.S. Economy chugs along at 2.3% GDP levels. Median household income of $56,700 is among the highest in the world but is stuck exactly where it was at the end of 2007.

The poverty rate in the U.S. as of 2014, the last full year where figures are available was 14.8%. This number is now higher than in 1966 when President Lyndon B. Johnson began his "War on Poverty".

As many Americans believe and some politicians state the system is now broken. Fewer Americans are finding ways to prosper given current levels of government taxation and regulation and litigation.

Monetary policy has carried us out of the crisis atmosphere of 2008, but only new and better fiscal policies aimed at growing the economy can bring about broader prosperity and profits for the majority of working people.

Disruptors like Amazon, Facebook, Netflix and Google have led the market's table of winners while companies in older industries like industrial, material, energy and retail are dragging down the averages.

Growth in corporate revenues, not profits, or dividends has been the winning ingredient for this past year's selective stock market gains. Overall SPX profitability slowed in 2015 to $118.12 est. per index share from the $116.77 calendar 2014 levels. This amounts to a meager 1.1% profit growth rate.

For Q 4, 2015 the estimated earnings decline is 4.7%. If there is an actual decline in Q4, it will mark the first time we have seen three consecutive quarterly declines since 2009.

In sum, the market has been in a multi quarter earnings slump. The SPX has a forward P/E ratio of 16.09 times $127.02 projected 2016 earnings. This represents a 7.5 % earnings growth, year over year. If the index can reach this earnings level and pay a 2% dividend yield, a return of 9.5 % is achievable.

China, Europe and Japan are all still in an easing mode. Additionally, the largest economies overseas benefit greatly from low energy prices as well as their two year currency devaluations versus the U.S. dollar. The IMF has a global growth estimate of 3.1% for 2016.

For the coming year the balance for the stock and bond markets will be tipped by global growth levels, a potential leadership change in the U.S. and the prospects for more or less global conflict.

Corporate earnings will likely hold up without global recession or interest rate shocks.

History shows that after a flat to down market year, U.S. stock markets normally rebound. We saw such rebounds in 1949, 1971, 1979, 2006 and 2012.

While we expect a rocky glide path our inclination leans towards higher stock prices which outperform bonds in 2016.

Doug Coppola

John Coppola

January 4, 2016

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  

End of Year: 2015

The S&P 500 gained 0.1 % in November and is now up 1 % YTD. Over the trailing 12 month period the index is up about 1 %.

The 52 week high, 2134.72 was on May 20th. From that level, there was a   12.5% drop in August to 1867.01, followed by a 13% rally to where we sit today, 2% below the spring highs.

Much ado about nothing except for those who own Energy and Utilities on the negative side or growth oriented Consumer Staples or Technology stocks on the plus side. The best returns came from growth stocks with accelerating revenue trends namely: AMZN, ATVI, GOOG, PANW, NVDA, and NFLX to name a few.

More than half of the index components are down year to date.

Bond indices are up 0.88% in 2015. Commodities and commodity equities are down with oil dropping 10% in November alone.

The U.S. dollar has appreciated 25% since early last year versus a basket of currencies, making earnings reported in U.S. currency harder to come by despite growing GDP up 2.3% in the 3rd Quarter.

The terrorist attack in Paris combined with other attacks abroad lead some investors to believe the U.S. is a safe haven for investor funds. All the more so with the Fed close to hiking interest rates for the first time in many years at the December 15-16 meeting.

For U.S. investors with overseas exposure the only positive returns came from Japan +10% and Russia +14% YTD.

The long list of losers include: Brazil -38%, Canada-19%, Large Cap

China -10%, India -9%, Germany -0.6%, Mexico -10%, and UK-4.8%.

It has been difficult to achieve positive returns after costs.

Don’t forget we still have negative interest rates in European countries and more easing to come in the Euro zone post the terror attacks in Paris.

In sum, in order to achieve positive returns, you must own growth stocks with accelerating revenues that can overcome headwinds from an appreciating U.S. dollar. You must be willing to own and hold high P/E and high beta shares that can fluctuate violently at times.

Without a significant growth component in your portfolio, investors must remain content with paltry returns unless cyclical economic activity picks up in a meaningful way.

Doug Coppola

John Coppola

Dec. 1, 2015

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