U.S. Economic and Financial Markets Outlook- Economy Crawls Along With Low Growth and Inflation! (Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)
In March, the Dow Jones Industrial Average gained 4.65%, the S&P 500 rose 3.69%, and the NASDAQ increased 3.54%. For the first quarter, the Dow inched forward .46%, the S&P fell .18%, and the NASDAQ retreated 3.87%. Policy makers, business owners, and c-suite executives all face the same problem as the question of how does your respective entity achieve quicker growth? Small business principals and management teams of publicly traded companies see increased pressure from a slowdown in demand in end markets. They also confront heightened competition in nearly every industry. Regulatory burdens have become more challenging (higher minimum wage laws, health care demands, environmental restrictions, compliance) in nearly every state and local jurisdiction. Capital is always precious, so decisions take longer in a tougher investment climate. As a policy setter, job growth and better economic activity has been elusive for quite some time. At the federal level, monetary policy has carried the water for a long time, nearly a decade. The lack of consensus on how to improve economic conditions remains at the center of the debate between both political parties. Spending levels on entitlements versus defense appropriations and security never seems to be agreed on. With interest rates at rock bottom levels (10 year treasury bond below 2%), oil priced at below forty dollars a barrel, and most commodity prices near decade lows, consumers may never see a more favorable environment. Wage and salary growth remain punk, which ties directly into the low growth, low inflation status quo.
For investors, the last three months were volatile as markets dropped like a stone to start the year, only to see the commodity and materials sectors benefit from a retreat in the dollar (thanks Mrs. Yellen and the Federal Open Market Committee). What could the next nine months bring? Hard to say for sure, and many are predicting profit problems as corporate profits have seen a year of lower results. Still, corporations have held up their end of the bargain, for the most part, with respect to financial performance. One thing to keep in mind is, as the CEO of a major oil company recently said, lower for longer does not mean lower forever. Duly noted
Global Economic and Financial Markets Outlook- Dollar Weakness Benefits Emerging Markets, Oil, Commodities! (All country index data provided by the market data section of the Wall St Journal, March 30, 2016.)
Changes in the currency markets related to weakness in the U.S. dollar have benefited a wide range of areas. Specifically, any exporter of raw materials and commodities clearly were helped. With many commodity prices still near their historical lows, including all important oil, the dollar decline over the last few weeks have been a welcome relief. Let's take a look at a few country indexes for some more specifics. The most obvious beneficiaries have been the RTS Index (Russia) up +11.4% for the year. Brazil (+18%), Chile (+6.8%), Argentina (+10.7%), and Canada (+3.2%) are also helped, but some of these gains should be attributed to the changing political circumstances in Argentina and now Brazil (potential move away from socialist leaders to potentially more market friendly heads). Elsewhere around the globe, lots of red ink in Europe as the lingering effects of terrorism and the continuing irrigation issues plague economic activity. Most European indexes have retreated anywhere from 5-10% for the year. The largest losses have been found in Chinese markets, losing anywhere from 7-17%, and Japan (-10%). Taiwan (+3.3%), Thailand (+8.1%), Philippines (+4.6%), Indonesia (+4.1%), and New Zealand (+5.6%) all have seen solid gains. Looking into the future, it will be interesting to see if dollar weakness persists and the implications in various global markets.
Sector Analysis: Weak Dollar Helps Materials, Oil, Telecom, and Utilities!
The range of performance outcomes for specific industries during the first quarter was fairly wide. Materials (+4.80%), mining (+38.16%), and energy were helped by weakness in the U.S. dollar against most major currencies. Utilities and telecommunications had great quarters, each up a little over 14%. for the three month period. Consumer services (+1%) and health care, (same) outside of biotechnology and pharmaceuticals, were for the most part flat. The group suffering the most from the actions of the Fed was the financial services sector. It took it on the chin as investors retreated when they realized four interest rate hikes during the year is probably not in the cards. Real estate investment trusts of all kinds were solid with gains of anywhere from one to seven percent. The gaming area benefited from the thinking the worst may be over in Macau. The largest loser of all the industries was alternative energy, down 17.72%. Interest rate and currency fluctuations were dominant themes during the last three months and the same could be true the rest of the year.
The Art of Contrarian Thinking: Dealing With Debt- Accurate Analysis Can Lead to Large Opportunities!
Investors in capital markets have been conditioned to believe debt is a terrible, no good, awful, miserable financial instrument. The biggest disasters in equity investing take place when excessively burdened debt-laden companies cannot meet interest obligations and render the common equity nearly worthless. These kinds of situations take place when debt gets hidden in different financing structures (off-balance sheet), or when liabilities are mismatched with cash flow timing, usually borrowing short and lending long. However, by focusing on the terms of a company's debt facilities and the assets relative to the amount of debt, you can analyze whether enterprises has the ability to meet both it's interest payments and maturity requirements. In these situations, both the debt and equity securities might be solid possibilities to own.
For example, here in Las Vegas, the largest gaming businesses all have balance sheets with large amounts of debt, but the differences are dramatic in terms of what the specific aspects of the debt are and how much interest coverage the underlying business generates in cash flow. Companies which generate consistent and large cash flows with minimal expenditure probably should be using debt to make their capital structures as efficient as possible for shareholders. Many investors get frightened by debt levels, especially absolute amounts, but analyzed in the context of maturities, covenants, and the underlying business, a prepared person can use negative market perception to their advantage for potential ownership of wonderful businesses.
Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.
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