Hotaling Hosts October Seminar, “Understanding and Optimizing Your Equity and Fixed Income Investments”
Understanding and Optimizing Your Equity and Fixed Income Investments
Tuesday, October 6, 2015, 6 – 7:30pm
Radnor Memorial Library, Winsor Room
- Worried you will outlive your assets?
- Looking for ways to grow your investments?
- Seeking income from your investments as you prepare for retirement?
Simply looking over your monthly statement of assets doesn’t necessarily tell you if your investments are properly balanced to give you the growth or income you need to accumulate wealth or if you are prepared to retire and live off the income.
Join Hotaling Investment Management’s expert portfolio managers for an unprecedented opportunity to learn how to research and evaluate stocks and bonds and how they can be used together in your portfolio of investments to give you optimal return.
Bruce T Hotaling, CFA and Managing Partner: As a Chartered Financial Analyst, Bruce holds one of the highest professional credentials achievable in the financial services industry. With over 25 years of experience, he is highly skilled at designing and managing distinct equity and fixed-income investment portfolios using traditional and quantitative research and analysis. Hotaling invests for individuals, families and charitable organizations addressing each investor’s unique values, sensitivity to risk and expected near and long term returns.
Jean M Rosenbaum, CFA: Jean brings more than a decade of analyst expertise to her role as a portfolio manager at Hotaling Investment Management and over 20 years in the financial services industry. She has managed several multi-billion dollar portfolios that have been recognized by Morningstar and Lipper. Her success is anchored in securities research analysis. Jean’s keen intuition and analytics allowed her to successfully forecast and navigate the financial crisis.
Patricia A Markell, Investment Advisor: With more than a decade managing portfolios for high net worth clients and extensive background in research and analysis, Trish delivers the highest degree of personal touch to Hotaling’s range of portfolio management services. Her knowledge and application of global investment performance standards and exceptional talent in monitoring and tracking performance for individual clients reinforces Hotaling’s advisory capabilities.
Space is limited – Contact Valerie-Clark Roden to reserve your seat
(610)688-0697 or VCRoden@HotalingLLC.com
Financial Market Issues Explained – In Plain English
By Jean Rosenbaum, CFA and Portfolio Manager, Hotaling Investment Management, LLC
Why have the financial markets sold off so sharply recently? The Yuan devaluation seemed small.
The recent sharp decline in the S&P 500 was sparked by the devaluation of the Chinese Yuan. While the amount of the move in percentage terms has not been large, it has clearly destabilized some financial strategies, causing a broad sell off. Many investors had been confident the Yuan would remain stable or appreciate, but it has done the opposite!
The devaluation of the Yuan is the symptom of a bigger problem that began with the end of the Global Financial Crisis (GFC). To deal with the problems of the GFC, central banks, beginning with the Fed, lowered interest rates which caused a weakening of the currency. The low interest rates in the developed world, made the higher rates in the Emerging Markets (Malaysia, Indonesia, Turkey, Brazil, etc.) much more attractive, encouraging capital to move into the Emerging Markets. The influx of capital fueled the growth of EM, but has also left them with a big build up in external debt, denominated in foreign currency.
Debt denominated in another currency is only a problem when the local currency weakens relative to the currency in which the debt is denominated. Unfortunately, this is the situation that many Emerging Markets now find themselves in as their local currencies have depreciated relative to the value of the debt which is priced in U.S. dollars, Euros or Yen.
As the Chinese have watched their customers’ currencies weaken, their economy has suffered as well. To remain competitive and to move to make the Yuan more freely tradeable, the Chinese officials have weakened the currency. It is possible the currency weakens further if the GDP growth does not reach their targets.
Our main focus is investing in the stocks of U.S. companies. Our expectations hinge on factors much closer to home than China. Just the same, the global economy today influences investors who also invest in U.S. stocks. When trouble brews, it’s common for various asset classes to begin to behave similarly, until the smoke begins to clear.
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The current bull market began in early 2009 and prices, measured by the S&P 500, have risen an impressive 205% since then. Other notable bull runs of the recent past include those beginning in 1997 (+106%) and 2002 (+101%). Both ended with 50% pull-backs in stock prices. What goes up must come down? This phrase, or idea, is attributable to Sir Isaac Newton back in the late 1600’s. Newton was strictly concerned with the more or less predictable forces of gravity. Apparently, at this point, stock prices seem to be oblivious to gravity and are following their own laws of nature.
Recently, stocks rallied a sturdy 5.49% in February and consensus was we had recovered from a punk January. Then March arrived (in like a lion, out like a lion). Stock prices tipped back downward, falling 1.74% for the month leaving the benchmark S&P 500 up a mere 0.95% for the quarter. Some investors are pointing a cautionary finger toward valuations, noting the market is moving into bubble territory. According to FactSet, the 12-month forward P/E ratio is 16.7x, above the 14.1x 10-year average. Other measures paint a similar picture. Dividend yield on the S&P 500 is 1.9% (2.0% 10-year average) and the P/CF (price to cash flow) is 11.8x versus (9.7x 10-year average). I agree some heightened attention is prudent, though I do not think, with the current backdrop, stocks are in a bubble.
Most of the market’s drama-points have carried over from March. The Federal Reserve is under close scrutiny as to when (not whether) it will raise rates. There is a contingent calling for higher rates with the thinking the Fed is implementing arbitrary price controls. Higher rates equate to normal. In my opinion this is extremely short-sighted. The economic data is not compelling and the ultra-strong dollar is a deterrent to growth. While Fed Chairwoman Yellen has said she sees rates beginning to rise this year in a gradual manner, there is ample precedent higher rates will not derail the stock market. Other significant issues in play are the continued pressure on oil prices (supply / demand imbalance) and generally slower global growth, particularly in the emerging markets.
In my opinion, the greatest risk to the market for stocks in the U.S. continues to be an unexpected global event (black swan) that destabilizes the prospects for future growth. Russia is the leading antagonist in this play. As we recently saw in France, a Germanwings co-pilot purposely flew a passenger jet into the ground in an apparent suicide – trouble seems to be capable of springing up nearly anywhere. The other area of great concern is the oil patch. While prices at the pump are optically pleasing, there will likely continue to be fall-out, of the second derivative. Another law, the law of unintended consequences (not a law of physics), may well surprise us. An extended period of low prices is likely to create pressures (Russia, the Middle East, South America) from reduced oil revenue, and outcomes that we cannot accurately perceive at this point. Something will have to give. For example, more than 50% of the Russian government’s reported total revenue is from petroleum exports, and prices have fallen by more than 50%.
Near term, the key to stock price behavior will be earnings. April brings spring flowers, and Q1 2015 earnings reports. One thing that has been happening, and will be born out further with the coming earnings announcements, is Wall Street analysts have been lowering their forecasts. The energy sector alone accounts for nearly half the decline in expected earnings for the quarter. The earnings from the energy stocks are highly correlated with the price of oil and the energy sector represents 8% of the S&P 500. According to FactSet Research, estimates for the S&P 500 have fallen from $29.5 (12/31/14) to $27 (3/31/2015). As the price of stocks year-to-date is only slightly positive, this amounts to an increased multiple on those earnings. Prices move higher from increases to earnings, the multiple, or both.
Apart from this cautionary note on earnings, stock prices remain in an uptrend and are exhibiting that Goldilocks trait of being not too expensive, and alternately not too cheap. We are buyers, though we look to patiently buy on the dips. The most attractive sectors for us are consumer discretionary, health care and technology, and to a lesser extent, financials. Materials, telecom, utilities and especially energy are not looking attractive, at all. We also have some concerns with industrial stocks (ie. rails, oil and gas equipment, machinery), and are trying to determine where we want to be in this sector. While we often speak of the stock market, we view it as a market of stocks and are constantly looking for both value and opportunity.
Most importantly, I am pleased to announce Patricia (Trish) Markell has joined our team as an investment advisor. She rounds out our capacity to deliver on all fronts of the investment spectrum. She has a strong background both engaging clients and on the analytical/research front. I will introduce you to her the first chance we have, and will send you her bio in the meantime so you can read more.
Finally, as it is April, we are here at the ready. Please let us know if you have any last minute tax questions. We are happy to work with you and your accountants to put your tax filing to bed as quietly as can be.
Bruce Hotaling, CFA
The more things change, the more they stay the same. After two months, 2015 has a similar look and feel to 2014 and many of the issues in front of investors echo last year. Measured by the S&P 500, stocks rose 5.75% for the month, their best since October 2011. After a dismal January where prices fell 1.58%, stocks opened higher on February 2nd (closing up 1.3%) and never looked back. This was a handy performance considering recent inconclusive economic data and the edgy global backdrop. Many market participants call this “climbing the wall of worry” where stock prices move higher in the face of unfavorable news flow.
Mirroring 2013 and 2014, investors find themselves waiting for the Federal Reserve to raise rates. You may recall the “taper tantrum” of May 2013 when investors over-reacted to then Fed Chairman Bernanke’s comments regarding reducing quantitative easing. The Fed’s manipulation of the Fed Funds rate is its primary monetary policy tool. The Fed is not likely to raise rates until it is convinced the economic recovery is on a solid foundation. So, while the initial impulse may be to sell for fear the economic good-times may be over, I would not expect a permanent effect on stock prices. There is evidence that when rates increase in a gradual manner, stocks can in fact generate reasonable rates of return. Thus, I expect to see multiple buying opportunities (buy on the dips) for stocks throughout the year as investors try and game the Fed, much to their chagrin.
Wages, an important and tangible factor impacting consumer behavior, are showing clear signs of strength. After imploding during the financial crisis, and remaining subdued for years, it looks as though workers may finally be getting a break. Along with several states, Walmart (reportedly the largest private employer in the US) raised their minimum wage for some 500,000 employees, possibly signaling an improved trend in employment. Empirical Research, Portfolio Strategy March 2015, noted that retailers, restaurants and hotels account for 28% of the employment of the S&P 500 and 6% of its earnings. Risking their already thin margins, Walmart has chosen to do something and increasing wages in an economy based on nearly 70% consumer spending, will prove positive.
The global backdrop is unfavorable and in my opinion, this represents the black swan in the room. Hot spots abound, but in my opinion, Russia leads the pack. The recent murder of opposition leader Boris Nemtsov is one more in a long list of never to be resolved deaths (Litvinenko, Politkovskaya). In conjunction with its support for the Ukraine separatists, the annexation of Crimea, there seems to be no end in sight. Now with oil prices in the $50 per barrel range, the ruble crashing, the Western economic sanctions and an apparent flight of capital strangling its economy, one would expect some turmoil (backlash) to ensue. Russia could well be a game changer, though it’s difficult to plan for the potential impact of various outcomes on stock prices.
Amidst that backdrop, the market for stocks is now becoming more expensive, no question about it. According to FactSet Research, the current 12-month forward P/E ratio for the S&P 500 is 17.1, above the 14.1 10-year average. The NASDAQ, recently closed above the 5000 level for the first time since March of 2000, and trades for 20.7 times earnings, slightly higher than its 10-year average. The market, based on my assessment, is slightly overbought. Expectations for the next month or so ought to be tempered. Buying should be judicious and limited not to the market as whole but to names that have fallen to an attractive level. By the way, we do not buy “the market,” or utilize index funds. We buy individual stocks. This, critically, is a point-in-time thing where investment results are linked to what we pay for that stock or bond.
Finally, as a reminder, corrected 1099’s are out as of February 20th. Unfortunately, there is the chance for further corrections, and if so, by mid-March. This relates to the provision of information by the issuers of securities and not our custodian. If you have any questions please do not hesitate to call.
Bruce Hotaling, CFA, Managing Partner