Archive for financial news – Page 2

Market Brief – November 2016 

Posted by Koenig Investment on
 November 10, 2016
  · No Comments

Election Impact – Tuesday’s dramatic U.S. presidential election result has shocked the world.  A number of clients have expressed high levels of anxiety due to the outcome.  It is important to reiterate that elections by themselves do not decide policy outcomes, nor do they generally direct the long-term health of the economy and the businesses that operate within it.   Without knowing which policy proposals will eventually be enacted – and how implementation may play out – making preemptive, emotionally charged investment decisions is more likely to hurt one’s portfolio than help. 

We have carefully analyzed the performance of the stock-based mutual funds we own for their performance during the 2008-2009 sell-off, choosing funds that held up better than their peers and/or benchmarks during the downturn.  One can never assume past performance will be repeated in the future.  However, past activity can be a guide to probable reaction to similar future events assuming no great change in mission statement or portfolio manager(s). 

 Diversification – We cannot emphasize enough the importance of having a healthy level of respect for the highly unpredictable nature of the markets over the short-term.  We have learned this lesson over 30 years of managing money.  The start of this year saw equity markets decline across the globe.  Markets had regained the ground lost and returned to a 1-year high by May.  Then June saw a sharp Brexit related decline that now appears as a small blip on history graphs.  Managed futures holdings provided valuable diversification benefits and reduced risk to client portfolios during these events as they have almost no correlation to broad stock market activity.  A diversified portfolio, like that of most of our clients, should hold asset strategies that have positive expected returns and either low or no correlation to each other over the long-term.  As a reminder, correlated assets move with each other, while non-correlated assets move independently of each other.  For example, stocks and bonds tend to move separately, or even opposite of each other.  There are significant benefits to adding assets that have very low or no correlation, even if their expected returns are somewhat lower than that of existing holdings.  Managed futures is just one example of how we gain diversification and lower risk by adding assets with low correlation to an existing asset mix.

 Bonds – Bonds are another diversification tool we use in client portfolios.  We expect a gradual increase in interest rates over the next year.  Shorter term bonds and bonds with the ability to increase their interest rates, such as floating rate bonds, are sectors we are comfortable holding in client portfolios.  Bonds are lower risk assets to hold in case of a stock market sell-off, acting as a shock absorber as money flows from the stock market to bonds.  As with managed futures, we have been adding to these asset categories over the past year.  Media reports of a change in Federal Reserve policy regarding raising interest rates due to the election outcome are speculative in nature at this point in time.  This is currently an area of unknown policy shifts.

Summary – We have entered a period of uncertainty linked to possible and probable policy changes.  We do not know the nature of these changes yet. Trump’s most recent speech referenced infrastructure spending increases, indicating this is a likely front burner topic to be addressed by the new administration.  A measure of clarity in this and other areas will be obtained over the next 60 days as the outline of the new administration takes shape.  We have already seen some positive activity as the steep market drop predicted by after-hours and international trading failed to materialize.  Many stocks within the financial and energy sectors have seen large gains since the close of the election.  In contrast, tech based companies have seen some declines to their valuations.  It is too early to react strongly to any of the changes expected to materialize from this election.  It would not be prudent to react until new policy positions are noted and the details of these changes are fleshed out.  There will undoubtedly be a number of new positions to parse over the coming weeks, but we are not there at this point in time.  Now is the time to reflect on what this election shows about the country as a whole and to prepare for the general changes ahead.

 

October 2016 – U.S. Employment

Posted by Koenig Investment on
 October 7, 2016
  · No Comments

The employment situation in the United States has slowly, but steadily, been improving since the 2008 recession.  The below graph shows initial jobless claims numbers from 1967 through October 2016.  As you can see, current initial jobless claims are at the lowest level seen since 1973.United States Initial Jobless ClaimsThe U.S. economy added 156,000 new jobs in September.2  Larger employers (those employing 500+ workers) recently outpaced smaller firms in job creation.  Individual sectors do differ in their employment outlook.  For example, energy has seen a contraction in employment over the past year while trucking companies note difficulty filling positions even while offering signing bonuses of $5,000 or more.  The overall unemployment rate did rise slightly to 5%.  However, that rise has largely been attributed to previously discouraged workers reentering the labor market and is not an indicator of a softening job market.

Some workers are still struggling despite current job growth rates.  Figures noting people who gave up looking for work or who can only find part-time jobs remain flat at 9.7%.3  Much of this can be attributed to the “skills gap”, meaning workers without advanced skills do still have difficulty finding full employment.  This figure is not expected to change meaningfully as employers having difficulties filling job vacancies have noted the need for skilled workers within their industries.

A tighter labor market for skilled workers is driving wage inflation.  Hourly wages have grown by 2.6% over the past year to $25.79/hour, just below the post-recession high.3  The numbers of hours worked per person has also increased.  An improvement in both average hourly wages and hours worked is encouraging.  Several economists think we may begin to see worker shortages by next spring.  Pay increases are expected to continue as companies seek to either fill vacancies or retain skilled workers.  This trend is being watched carefully as it may spur an increase in overall inflation, leading to interest rate increases by the Federal Reserve.  A ¼ point rate hike is likely in December given these employment trends.  The employment trends noted above have been gradual, meaning the upward inflationary pressure and need for the Fed to respond have also been slowly growing.  A continuance of current labor market trends is likely to make the Fed more comfortable with future rate increases.  However, while these are positive trends with steady momentum, they are still slow moving.  While this does make future rate hikes more likely, it is not overwhelming pressure on the Fed to raise rates.  While we do expect to see interest rates rise in 2017, we do not expect to see large increases.

In summary, the U.S. job market has basically recovered to pre-recession levels.  Workers can expect raises as their skills are more in demand and valued greater.  The economy is likely to see some upward inflationary pressure due to the tightening job market.  We can expect the Fed to respond with measured interest rate increases.  Unskilled workers still face employment challenges and are likely to continue to do so.

1)  http://www.tradingeconomics.com/united-states/jobless-claims

2)  http://www.ftportfolios.com/retail/blogs/economics/index.aspx

3)  http://www.morningstar.com/news/market-watch/TDJNMW_20161007241/update-us-adds-156000-new-jobs-in-september.html

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Market Brief – July 2016

Posted by Koenig Investment on
 July 28, 2016
  · No Comments

We’re in the midst of 2016 second quarter earnings releases and I wanted to share with you the picture of the U.S. economy that is becoming clearer as companies release data.  Overall earnings figures are a bit better than expected.  In general, companies made more money last quarter than most analysts expected.  The consensus amongst most analysts is for a better than expected second half of 2016 than originally noted in January.  Both plow horse and tortoise metaphors are common in reports as they sum up thoughts on the current state of the economy.  While this often makes for bland reading and tame headlines, it is good news that should be welcomed as slow growth means less volatility in how companies operate.  Companies that are growing slowly and adding jobs at low, steady rates are less likely to overproduce and need to cut those jobs in a hurry when facing some contraction.  This lower volatility within operations helps keep the company, and the economy as a whole, chugging along a slow growth path.

There are several data points analysts are pointing to as they upwardly revise their expectations for the rest of 2016.  Unemployment is decreasing, year over year retail sales are up, housing starts continue to increase, and average worker pay – a previously worrisome weak spot in the recovery – is increasing.1  In fact, the current economy is basically meeting the definition of full employment.2  The one figure that has been noted again and again in these analyses is the ISM Manufacturing Index.  This index is a survey of purchasing managers around the country and tends to quickly reflect any changes in employment, production, inventories and new orders.  This index rose from 51.3 in May to 53.2 in June.3  Historically, such rises indicate a period of economic growth.  Lastly, investors are largely bearish at the moment.  The contrarian view is often correct as we do typically see a rising market when investors are pessimistic and expect a pullback.  The combination of all this data points to an economy continuing on a path of slow, steady growth.  While there is nothing especially exciting to report, this should nonetheless be welcome news embraced by the average investor seeking portfolio growth and lower volatility.

 

 

  1. http://www1.realclearmarkets.com/2016/07/27/fed_policy_not_in_tune_with_data_181382.html
  2. http://money.cnn.com/2016/05/23/news/economy/us-full-employment-williams/
  3. https://www.instituteforsupplymanagement.org/ISMReport/content.cfm?ItemNumber=30524

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

March 2016

Posted by Koenig Investment on
 March 7, 2016
  · No Comments

Volatile Markets

This year has begun with market activity that has left many investors nervous.  Although economists noted the overall U.S. economy was performing at a decent level throughout January and February, the markets reacted sharply to fears over China and lower oil prices.  The S&P 500 declined by a little more than 10% as of mid-February, leading to talk of recession in some media outlets.  Economists as a whole did not endorse this speculation, but could not definitively say if or when the market would recover.

The decline in overall stock prices occurred in tandem with a falling of oil and other commodity prices.  Many parts of the world are expected to have slower economic activity in 2016, with China most notably experiencing slower economic growth.  Declines in commodity prices appeared to be a reaction to various projections of slowing overseas activity.  Data on the economy led to an uptick in commodity prices in late January and into early February.  The broad stock market followed suit and gained back some of the ground lost earlier in the year.  As of March 6th, the S&P 500 has regained most of its earlier declines, now posting a modest year-to-date decline of less than 2%.

It is difficult to call either a market high or low until well after the fact.  While few are willing to definitively state that the bottom has been reached and passed, a number of analysts are now stating we have likely passed the bottom.  There are a number of reasons for them to begin to make this call.  Both Canada and Australia have economies heavily reliant on commodities.  Canada has a large oil sector and mining is important to the Australian economy.  Both currencies took a hit starting in 2014 as we saw non-oil commodity prices begin a decline.

The graphs of both the Canadian and Australian stock markets mirror their currency graphs with declines from mid-2015 and then bouncing back in February.  Commodity based company stocks such as Freeport-McMoran (copper), Alcoa (aluminum), and indices like the Dow Jones U.S. Steel Index all show declines beginning in the summer or fall of 2015, with bottoms in late January.1 While it is too soon to definitively call a bottom to recent commodity and market activity, a number of signs are pointing towards this being the case.

United States Economy

Employment – The unemployment rate continued its slow decline to 4.9% in February.  This was accompanied by a small increase in the labor force participation rate, meaning that the decline in unemployment is a result of increased employment and not workers giving up on looking for jobs.2  In fact, the discouraged workers (defined as persons no longer looking for work as they believe they will not find any) figure is down 18% from the previous February.

An interesting development in the current labor market is wage growth.  The average wage in February 2016 is 2.2% higher than for February 2015.3  Costco is a notable example of this upward wage pressure, making national news with their increase of a minimum wage to $13/hr.  They are not the only company to note pressure to increase wages in order to stem employee turnover and attract desirable workers.

Corporate Earnings – Corporate profits remain steady overall.  We are seeing a smaller group of companies project earnings growth in 2016 compared to the number of companies projecting growth in 2012 and 2013.  This is a more mature market that is holding steady.  Dividend paying stocks remain attractive as investors seek alternatives to low interest rates paid by bonds.

Other sectors – Statistics for the overall U.S. economy continue to portray a boring, yet positive picture.  The economy is continuing its slow, steady growth with healthy levels of new-vehicle sales for February, greater than expected existing-home sales for January, and manufacturing and purchasing data in line with a GDP growing at about 2% annually.

Summary

2016 has gotten off to a volatile start, with markets regaining much of the ground lost in early 2016.  Commodities look to have been oversold in this period.  Recent price rebounds in commodity prices have been led by currency and stock market reversals in Canada and Australia, historically a signal of stabilizing or growing commodity prices.  The U.S. economy is in better shape, continuing its slow, steady growth.  We expect 2016 to continue to show steady U.S. growth and a recovery within a number of commodity sectors.

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

December 2015

Posted by Koenig Investment on
 December 7, 2015
  · No Comments

Federal Reserve and Interest Rates

The long anticipated Federal Reserve increase in interest rates is expected to occur this month.  While the rate change itself is likely to be a modest 0.25%, the stock market does tend to get a little nervous over interest rate increases until two are behind them.  The second rate increase is expected for the first quarter of 2016, meaning we are likely to see increased market volatility through March.  A variety of factors influence the Federal Reserve on when to increase interest rates.  Three factors to note in this current cycle are employment, wage growth, and consumer debt.

Employment – Nonfarm payrolls are up 2.8 million in the past 12 months ending October.  This is the best growth in a 12 month time period since late 1999.  October’s employment report was released in early November with surprisingly strong figures.  This was interpreted as a further push towards the beginning of the Federal Reserve’s long telegraphed move to increase interest rates.  November’s employment report released December 4th was also strong, showing 211,000 new jobs with the unemployment rate steady at 5.0%.1

Wage Growth – The US economy is starting to see signs of accelerating wage growth.  Average hourly earnings have increased 2.5% in the past year.  This is the biggest increase since the start of the downturn in 2008.2

Consumer Debt – Measures of the obligations consumers take on each month for categories like mortgage debt, car payments and credit card payments, the current ratio of income to debt is one of the best since the early 1980’s.  Debt delinquencies – including mortgage debt, auto loans, credit card loans and home equity loans – combined are currently $50 billion lower than a year ago.2

In summary, more Americans are employed, their wages are rising and they are more likely to be meeting their debt obligations than they were a year ago.  The news at the corporate level is also largely positive.  Most analysts expect U.S. companies to post higher earnings in 2016 than they did in 2015.  The biggest factor in a company’s stock price is the company’s earnings.  We may see interesting price fluctuations as some investors react to the Fed’s interest rate increase, but the overall picture for U.S. stocks is one of modest gains.

Oil

Saudi Arabia has been the biggest factor in lower oil prices.  They felt themselves losing influence within the global energy sector and decided to throw their weight around.  The objectives were to inflict pain on Russia and Iran, while undercutting the U.S. fracking industry.  Russia has suffered, Iran has not due to the lifting of sanctions, and fracking output has declined in the U.S.  The Saudis did not count on the efficiency gains U.S. frackers have been able to achieve, thereby, causing less of a decline in the industry than had been hoped for.

Obviously, large state-owned oil producing countries can’t flood the world with cheaper oil without direct economic pain.  These nations are now drawing upon foreign reserve accounts in order to fill the gaps created by lower revenues.  Russia and Venezuela are experiencing more severe pain than other oil producing countries.  Saudi Arabia’s net foreign assets declined by $90 billion from February 2015 through September 2015 as they began to tap into reserve accounts, with the full year total drawdown total estimate at $120 billion.3  The biggest Arab economy is burning through financial assets needed to support domestic spending and could fully deplete these reserves within five years if current policies are maintained.  Even stable oil economies like Norway have started to draw on reserves due to lower oil prices.  At some point the ongoing economic reserves will be drawn down.  Analysts are currently looking to the end of 2016 or into 2017 before Saudi Arabia is willing to curb current output levels and revert to more typical production and pricing.

On December 4th OPEC stated that it was going to raise its oil output ceiling cap to 31.5 million barrels from a level of 30 million barrels.  Given that they have already been producing 31.57 million barrels a day in recent months this is largely a symbolic move rather than a real change in production levels.4

Summary

We continue to see a great number of media reports regarding the economy that do not accurately portray the financial outlook of the average American household and business.  While our economy is not growing at leaps and bounds, the picture is more positive than negative.  Not every family or business has recovered from the financial crisis of 2007-2008, but the overall economy has.  It has taken years, but slow, plodding growth adds up over time.  Stories speaking about imminent doom and gloom cherry pick data points in order to appeal to the emotions of readers.  They do not give an accurate picture of either the status of U.S. businesses nor households as a whole.  The U.S. economy is not perfectly poised and many families do have issues with making ends meet.  There will always be weak spots in an economy as large as that of the United States.  A country with a population of 320 million is going to see some members financially unstable.  However, most companies are currently experiencing growth and most family finances show improvement.  Trumpeting that reality does not generate excitement and often loses out to stories with eye grabbing headlines.

Please remember that the market is closed on December 25th and January 1st.  It closes early on December 24th and 31st.  We hope you and your families have a pleasant holiday season.

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Market Brief – August 2015

Posted by Koenig Investment on
 August 24, 2015
  · No Comments

Market Sell-off

Stock markets across the globe went into selling mode last week, with stocks in the U.S. declining more than 5%.1  European markets saw a slightly higher level of sales.  The Shanghai Composite, the major Chinese stock market, sold off more than 11% last week.1  This activity is continuing this morning as we write.  The Dow Jones Index opened down nearly 700 points this morning, but then saw several hundred points gained back.  It is currently trading down by a few hundred points, with this figure likely to have changed by the time you read this Market Brief.  The recent devaluation of Chinese currency and concerns regarding further devaluations are front and center in this sell-off.

However, there is little evidence that the U.S. economy is about to slow, necessitating a large market correction.  Additionally, manufacturing activity in Europe and Japan has actually accelerated somewhat in recent months.  The economies in the United States, Europe, and Japan will all benefit from lower energy prices.  Oil price decreases from $104/barrel in June 2014 to the around $40/barrel price we are seeing currently significantly cuts energy costs for many sectors.  Recent data on retail sales and housing have been positive.  The Wall Street Journal surveyed economists recently, with the general consensus being an expectation of an upward revision of U.S. 2nd quarter GDP to around 3.3%.2  The Fed had been expected to raise interest rates in September because the U.S. economy has been performing well enough for inflation to begin to be of concern.  While this may now be delayed, the general indicators that show a strengthened U.S. economy have not changed.

China

China accounts for about 15% of the world’s economic output, with an economy heavily based on export activity.  While a slowdown will be felt in China, it is unlikely to impact the United States.  Exports to China from the United States comprise less than 1% of U.S. GDP.2  Japanese exports to China are greater at 2.7% of their GDP.2  European countries such as Germany, France, Italy, and Spain all have Chinese export figures similar to either the U.S. or Japan.  The bottom line for all of these economies is that a contraction in the ability of the Chinese consumer to spend will have little to no effect on the export economy of each country.  Countries near China, such as Korea and Vietnam, will likely see more significant effects to their economies from a slowdown in China.

Summary

I would remind both retired and near retirement clients that stock market sell-offs do not directly impact the level of income earned from their accounts.  Company profits determine dividend levels and other distributions, not stock prices.  The Price Earnings (PE) ratio for the S&P 500 is currently about 16.5,3 compared to a 60 year average of around 17.  In comparison, the PE of the S&P 500 in early 2000 – just before the market drop – was around 34.

Heavy fixation on the short-term can make it harder to remain focused on longer-term goals.  Each time the market has seen significant drops, a client or two has asked me to sell-off significant portions of their portfolio.  The plan is always to wait out the drop.  Unfortunately, this strategy has never worked.  In each case, the client sold at or near a low and waiting to reenter the market at a higher price.  This type of selling is emotionally gratifying, but cause real long-term losses.  Prudent homeowners do not sell their homes when Zillow dips as they know the value in the property is in the long-term.  The prudent stock market investor should view their portfolio from a similar perspective.  A well-diversified portfolio and a little patience helps the experienced investor ride out market volatility.

1) Wall Street Journal (weekend), 8/22/2015-8/23/2015, What Investors Shouldn’t Do Now, Jason Zweig

2) Wall Street Journal (weekend), 8/22/2015-8/23/2015, Economic Risk Varies Around the Globe, Greg Ip

3)  SPY PE for 8/21/2015 as listed by State Street and WSJ Market Data Center for 8/21/2015

May 2015

Posted by Koenig Investment on
 May 11, 2015
  · No Comments

May 2015

Last year we wrote a newsletter that referred to the U.S. economy as a plow horse – slow, but getting the job done.  While some of the details have changed, the overall picture of the economy has not.  The U.S. has been seeing steady growth, with some quarters turning out more attractive numbers than others.  While most investors would like to see greater growth, slow and steady growth is not bad.  The broad market is at record highs, but is not excessively valued.  While analysts are not predicting high rates of return from the U.S. stock market, nor are they expecting significant drops.  The general consensus is that we continue to see slow, steady growth.

Gross Domestic Product (GDP)

2015 1st quarter GDP figures were low and caught most analysts by surprise.  However, this is a repeat of the previous year.  The winters of both 2013/2014 and 2014/2015 were unusually harsh in the Northeast United States.  Charts that break out GDP figures by sector show drops in consumer goods and services both winters. This, along with falling oil drilling activity, took a heavy economic toll in the 1st quarter of 2015.  Just as GDP rose for the rest of the year in 2014, we expect to see an increase in the 2nd quarter of 2015.  While GDP was a mere 0.2% for the 1st quarter of 2015, that is much better than the -2.1% drop seen last year at this time. GDP rebounded nicely in the 2nd and 3rd quarters of 2014, and we would expect a similar rebound this year.

2014 GDP:

Q1 2014 Q2 2014 Q3 2014 Q4 2014
-2.1% 4.6% 5.00% 2.2%

Source:  Bureau of Economic Analysis

We will not see uniform growth across all sectors.  For example, auto sales are expected to grow at 4-5% in 2015 compared to 10% in 2014.  More incentives, higher inventories, and loans as long as 7 years all suggest that auto sales are starting to slow.  However, pending home sales in 2015 are showing a sharp acceleration after a slow 2014, with homes sales up 11.1% year-over-year in March.  Homes sales tend to drive purchases of retail goods.  On the opposite end, the drop in oil prices has made exploration and drilling of new wells less attractive.  This is expected to result in lower purchasing levels of the heavy equipment used in the drilling industry.  Sectors seeing growth are expected to outweigh contracting sectors for the near future.

Inflation

Inflation is expected to remain at the low end of the average range (2-3%)1 for the near future.  There are several large and contradictory contributors to the rate that make it an interesting back and forth story.  Of course, the most dramatic recent contribution to lower inflation is the price of oil.  The Consumer Price Index dropped noticeably from November through January, leaving March with a -0.1% annual rate.2  The drop in both gasoline and fuel oil prices are clearly responsible for this negative index rate.  Food prices are up 2.3% from last year, medical care commodities are up 4.9%, and shelter is up 3.0%.  There are other sectors that saw falling prices (used cars and trucks, apparel, etc.), but these are quite modest declines in comparison the energy sector figures which posted a -29.2% annual drop in gasoline prices and a -24.9% annual drop in fuel oil prices as of March.

We see upward inflationary pressure in the economy as sectors deal with the legacy of the housing crisis.  The economy has been operating well below capacity (labor, capital & productivity) since 2008, which has held down inflation rates.  It was nearly impossible for any business to raise prices in 2009 (at the trough of the economy) for the fear a competitor with excess capacity would not raise their prices, thus gaining market share.

Unemployment Rates:

2012 2013 2014 2015 est.
7.9% 6.7% 5.6% 5% – 5.5%

Source:  Morningstar Estimates

Excess capacity has shrunk considerably in 2015, due in part to lower unemployment rates.  This has allowed some manufacturers and service providers to raise prices and rates.  However, this is offset somewhat by long-term low population growth.  U.S. population growth has slowed from 1.8% in the 1950’s to 0.7% currently and is expected to slow to 0.5% over the next two decades.3  Most of the developed world is also seeing a slowing of population growth.  Less consumers automatically translates into less demand and less upward pressure on prices.

Low population growth is itself offset by pressures resulting from low unemployment.  2014 saw a shrinking excess labor force, resulting in labor shortages in regional airlines pilots, drywall installers and truck drivers.  These industries then saw pay increases to attract and retrain workers.  2015 has seen wage increases in the retail sector, with Target, Wal-Mart and Gap all implementing wage increases.  Wal-Mart increased their wages from $7.35 per hour to $9.00 per hour this year and noted plans to further raise them to $10.00 in 2016.3  The move at Wal-Mart will impact 500,000 employees.  As excess labor continues to decline, we’ll see continued upward pressure on both wage and price inflation.

Combine all of these factors with the current low lending rates by the Federal Reserve and it gives us a fairly stable, low inflation rate.  Analysts do expect to see an uptick in inflation and we agree with their overall theses – oil prices will rise at some point, the Fed will raise interest rates at some point, continued wage pressure will increase inflation to some degree.  What is uncertain is the timing and the degree to which inflation will rise.  We do not see any significant changes in the near future, but will continue to watch this area of the economy for the changes we expect.

Summary

The US bull market is starting to feel fairly mature as the market enters its 7th straight year of growth since the low in March 2009.  The historical broad market price-earnings ratio (PE) average is near 15.5, with a fairly wide range for normal activity.  The current broad market PE ratio of 20.65 is a bit high, but only at the high end of that average range.  It does not mean U.S. stocks are seen to be richly valued, but does make the hunt for undervalued stocks poised to grow a bit more difficult than at the same time last year.  This has narrowed the focus of the market as investors tend to look for more well-known stocks with growth potential and little chance of contraction, while avoiding much of the market that is felt to be fairly valued.  We see a shorter list of securities attracting new investment than we did at the same time last year, indicative of a more mature market.

Low interest rates make a shift to fixed income securities more challenging than during similar periods in the past.  There are bright spots for the investor though.  The PE equivalent for international markets is low, resulting in attractive entry points to many international sectors.  For this reason, we share a widely held viewpoint to continue to favor the international markets and add additional investments.  We agree that broad international markets are poised for greater rates of return than broad U.S. stock markets and have increased the international weighting of many accounts this year in order to capture these expected gains.  We are also looking at alternative investments like managed futures.  There are some interesting alternative oriented investments that are managed with an eye towards low levels of risk that are appropriate for some portfolios.  While we still look to U.S. stock exposure as the best way to grow client accounts, we are adding exposure to other sectors in order to properly diversify accounts in the current economic environment.  As always, we will continue to monitor economic developments and adjust client portfolios to take advantage of changes as appropriate for each client.

 

1) http://inflationdata.com/inflation/inflation_rate/long_term_inflation.asp

2)  http://www.bls.gov/news.release/cpi.nr0.htm

3) http://news.morningstar.com/articlenet/article.aspx?id=690965

January 2015

Posted by Koenig Investment on
 February 25, 2015
  · No Comments

Koenig Investment Advisory Market Update – January 2015

We would look for the U.S. economy to trend towards a steady, but moderate, growth status in 2015.  Industrial production in 2014 was 5.2% greater than in 2013.1  This is the greatest increase seen in several years.  These gains are broad based rather than heavily weighted towards any one sector.  One economic indicator we regularly monitor is capacity utilization.  This data point is helpful in determining how much unused capacity companies currently have.  The most recent data figures released are from November 2014.  November’s capacity utilization figure is 80.1%, about average for the U.S. economy over the past 40 years.1   In comparison, 2009 saw capacity utilization figures in the 50% range, indicating a large amount of slack in the system.

Housing sector – Other economic indicators appear positive as well.  For example, the housing market has stabilized.  The National Association of Home Builders Wells Fargo Housing Market Index (HMI) is a gauge created by surveying home builders and is widely viewed as a reliable indicator of housing activity.  This index ended December at 57.1  Readings above 50 have historically meant positive builder confidence.  November showed housing starts at an annual rate of just over 1 million units.  While that is still below the 10-year average, it is the highest level since April 2008.  The housing sector hasn’t turned around enough to be driving the current economy, but it is no longer the drag it was during the recession.

Stock Market Valuation – The S&P 500 Index finished 2014 at 2,058, and with a price earnings (PE) ratio of about 15.7.1  As a reminder, the PE ratio measures the multiple of earnings versus price.  For example, stock with expected earnings of $100/share and having a PE ratio of 15.7 would be worth $1,570.  The current PE is at the low end of average over decades of market history.  While the market has some room for growth, an increase in S&P 500 stock value above 2,150 would need to see a concurrent rise in earnings projections as the market is not likely to rise above an average PE ratio given current investor sentiment.

Oil – The energy markets have seen some rapid and notable changes in the last quarter.  Oil dropped to $35/barrel by the end of the year, quite a change from the $135/barrel high of 2008.  Neither this high, nor this low, have been near long-term price averages.  The U.S. rig count has recently seen a pullback in reaction to oil price changes, and we are likely to see more pullbacks over the next few months.  The excess capacity in oil production was estimated to be in the 1.5% – 2% range a few months ago.2  This is a historic low that is likely to rise as oil producers close the most expensive wells and idle those in the margin.  Just as oil dropped from its high to stabilize at lower prices, I expect to see oil prices rise and stabilize at levels closer to historic norms.  The general consensus amongst economists seems to be stabilization around $70 – $80/barrel later this year.  While that will be an increase from the current price of just under $50/barrel, it will be lower than the near $100/barrel price seen over most of the past few years.

 

The sharp decline in oil prices has been felt by all American consumers, but most sharply by working class families and retires on fixed incomes who by and large have not seen increases in wages or social security payments for some time.  A lowering of a monthly expense by 1/3 or more is greatly felt within these households.  The Federal Energy Information Administration recently estimated that the typical American household would save $750 this year directly from lower oil prices.3  This figure is $200 greater than the early December forecast and does not include indirect savings.  Heating oil and propane are regularly used commodities for millions of Americans living in the Northeast and Midwest.  These residents are expected to save about $750 per household this winter on top of their savings from falling gasoline prices.  These savings may not have a big effect on the budgets of the top 10% of households, but are substantial for families earning $50,000 or less annually.

The boost from lower oil prices will benefit the national economy, more than offsetting regional declines in North Dakota or Texas.  Household consumer spending contributes roughly 65% of gross domestic product (GDP), compared to about 4% of GDP coming from the oil and gas industry.   The January monthly consumer sentiment survey released by the University of Michigan reported its best monthly figure in 11 years.  The decline in oil prices is likely a main contributor to this rise.  As consumers feel more secure and have more discretion within their budgets, the more likely they are to spend and drive the economy forward.

Summary

The U.S. economy has come a long way from recession lows a few years ago.  While the effects of the recession still linger in some areas, the economy as a whole has moved on.  We have seen positive GDP figures for most quarters since late 2009.5  While this growth has not been felt by all citizens equally, we have moved past the declines of the recession as a whole.  Certain sectors may see surprise events, such as energy did in 2014, but the general economy is poised to continue its steady growth.  It will be interesting to see what changes 2015 may bring.  Will the Fed increase interest rates as is widely expected?  What will the inflation rate be, and how will the changes in energy prices affect this?  Will we see any game changing technological breakthroughs in any sectors?  I look forward to seeing what 2015 will bring and hope you do as well.

 

  1. Bob Brinker’s Markettimer, 1/5/2015, page 1
  2. https://strausscenter.org/hormuz/slack-capacity-in-the-global-oil-market.html
  3. http://www.nytimes.com/2015/01/18/business/economy/lower-oil-prices-offer-a-bonanza-to-us-workers.html?_r=0
  4. Mornigstar.com, The Upside and Downside to Low Oil Prices, Jeremy Glaser & Robert Johnson, 1/14/2015
  5. http://www.tradingeconomics.com/united-states/gdp-growth

December 11, 2014

Posted by Koenig Investment on
 December 11, 2014
  · No Comments

Koenig Investment Advisory Market Update – December 2014 

Global oil prices were above $110 per barrel in June of this year.  They have declined to below $70 per barrel since then.  There are a number of factors as to why prices have declined.  Demand for oil has declined in the U.S. as vehicles have continued to be more fuel efficient.  Demand elsewhere in the world has also slowed.  The biggest single factor influencing oil prices is U.S. oil production in Texas and North Dakota.  About 20,000 new wells have been drilled since 2010, increasing the daily U.S. oil production to almost 9 million barrels per day.  In comparison, Saudi Arabia is producing around 10 million barrels a day. [1]

On Thanksgiving Day (November 27th) OPEC held a meeting to discuss oil production from member nations.  A number of members wanted to reduce oil output to help firm up prices.  Saudi Arabia had a different agenda.  They wanted to make no change in oil output in order to push prices lower, inflicting economic pain on higher cost oil producers, specifically the U.S.  In the aftermath of this meeting we have seen oil prices continue to fall and no resolution to these conflicting agendas is in sight.

The global decline in oil prices means a giant wealth transfer of $1.5 trillion.[2]  Funds that would have flowed to the Middle East are now flowing to the United States, Europe and Japan.  The average American who spent $3000 on gas in 2013 may now see an $800 annual savings.1  In the United States we could see some additional growth in 2015 GDP from lower oil prices.  In addition, big oil importing countries like India, Japan and Europe will likely see significant savings and an economic benefit of lower oil prices.

Oil exporting countries like Russia, Venezuela and those in the Middle East will have less money to fund their respective governments.  Russia and Venezuela in particular are being significantly impacted by lower oil prices.  These countries rely heavily on oil exports to balance their government balance sheets.  In January of this year, it took just over 30 Rouble to buy 1 U.S. Dollar, today it takes around 54.[3]  The Rouble losing nearly 50% of its value against the U.S. dollar is a huge setback for Russia.

The current decline in oil prices will impact companies like Exxon and Shell, who will likely reduce their exploration budgets going forward.  Much of the price adjustment burden will fall on the U.S. shale industry.  Harold Hamm, CEO of Continental Resources and a major player in North Dakota’s Bakken oil fields, has said he can cope with oil above $50 a barrel.[4]  In Texas, where wells tend to be closer to existing pipelines, the breakeven on oil production may be somewhat less than $50 a barrel.  If oil prices stay between $65 and $70 a barrel we will likely see production growth slow.  At $60 a barrel production growth could come to a stop.  When oil prices decline, energy firms tend to cut their exploration budgets first, followed by production cuts.  These production cuts will be what help stabilize oil prices.

To give an example of drilling costs, Exxon and Russia’s Rosneft Company recently spent two months and $700 million drilling a single well in the Kara Sea, North of Siberia.  Although successful at finding oil, it will take years and billions of dollars before the project is complete.[5]  In contrast, a shale oil well can be drilled in a week at a cost of $1.5 million.1  Shale oil producers have gained efficiencies in drilling and operations allowing them to significantly lower their costs.  Given the fairly new nature of this business, further efficiencies are likely to continue.

A year out we will likely see a slowdown in shale oil production.  Some frontier areas in shale oil such as Oklahoma, areas outside the Bakken in North Dakota, Eagle Ford and the Permian Basin in Texas will likely be hard hit as companies in these areas tend to be late players with heavily leveraged balance sheets.  Longer term adversity will likely make shale oil producers stronger as it will prompt a new round of innovation in a fairly young industry.  Down the road with a recovery in oil prices, new wells in Texas and North Dakota can be brought online in weeks not years.

We often remind people that in early 2008 oil was roughly $135 a barrel and by the year end was trading near $33 a barrel.  We believe oil prices will continue to be volatile, not seeking a stable price until mid-2015.

While most of our clients do not have significant exposure to oil and gas producers such as Exxon, Shell, etc. we do hold a number of pipeline companies in client accounts.  Oil and gas pipeline companies operate like a toll road.  The major pipeline companies like Energy Transfer Partners, Enterprise Products and Magellan Midstream are largely pure transportation plays where their costs to customers is not related to the price of oil or gas.  Some smaller pipeline companies have oil exploration aspects to their business and the oil price decline has impacted their share prices.  Master Limited Partnerships (MLPs) in the pipeline business have seen price declines because they are part of the energy sector as a whole, not because investors expect to see a significant reduction in corporate earnings.  MLPs remain a strong dividend paying holding that we expect to keep in portfolios for the longer-term.

Overall, we see lower oil prices as a positive, especially to the US, Europe and other developed oil importing nations.

[1] www.economist.com Sheikhs v shale, December 6th 2014

[2]  www.washingtonpost.com Key facts about the great oil crash of 2014, December 1st 2014

[3] www.xe.com USD per 1 RUB

[4] www.economist.com In a bind, December 6th 2014

[5] www.ft.com Rosneft and ExxonMobil strike oil in Artic well, September 27th 2014

November 2014

Posted by Koenig Investment on
 November 12, 2014
  · No Comments

November 2014

Interest Rates

The below graph of the 10-year Treasury rate over the past century puts current interest rates in a clear historical context.  From 1946 to 1976 – a period of 30 years – interest rates steadily rose from 2.19% to 7.74%.  Interest rates then experienced a sharp uptick in the late 1970’s and early 1980’s before receding to a historically normalized level.  Current rates are at lows not seen since the 1940’s.  The graph clearly illustrates that rates are not likely to go lower, but rather to rise.  The wider bond market tends to move in conjunction with Treasury rates.  From 1945 through the late 1970’s the average annual return in the bond market was about 3.5%. From 1980 through 2012 the average annual return for bonds was closer to 8.5%. A bond gains in attractiveness, and therefore value, when its interest rate is higher than the current market average.  Conversely, a bond declines in value when its interest rate is lower than that of newly issued bonds.  Bonds issued at today’s low interest rate will be less attractive than bonds newly issued at higher future rates, meaning these bonds and the funds that hold them are expected to decline in value.  Given rates are likely to gradually move upward – reverting to more typical historic levels – bonds will not provide the strong anchor position investors have experienced for several decades.  Considering these projections, we would be more cautious on bonds over the next 5 years.

chart medium CSource: www.multpl.com

Stock Market Valuations

Many of us remember the stock market decline following the extended technology market advance in the latter half of the 1990’s.  By the late 1990’s many investors only wanted to own technology stocks.  This caused the price to earnings ratio (P/E) of the S&P 500 Index to climb to around 30 near the end of 1999, compared a longer term average of 17.[1]  To date 76% of U.S. corporations that have reported 3rd quarter earnings, reported above analyst expectations.  This is above the long-term average of 63%.[2]  In a few weeks the market will be moving its focus on 2015 earnings. Currently the updated P/E ratio on estimated 2015 S&P 500 earnings is about 15.72.  While a number of pundits speak about an overvalued market, the P/E ratio contradicts this negative market assessment.

Purchasing Managers Index (PMI)

PMI has continued to move up this year, as we reported last month.  Data reported at the end of October showed a 2.4% monthly increase to 59.0.  The index was originally developed by Herbert Hoover as a quick and reliable monthly survey and early indicator of the health of the economy.  Below are a few comments from respondents of the latest survey. [3]

“Holiday orders are exceeding seasonal forecasts. Customers are demanding additional quantities above prior orders. Fuel costs and other positive signals appear to be creating demand above normal.” (Food, Beverage & Tobacco Products)

“Weakness in commodity prices very positive on our business.” (Fabricated Metal Products)

“Outer body material changes in the auto industry means new equipment and manufacturing growth.” (Machinery)

Media

Media often steer dialog to the more negative aspects of any story.  Human beings have a genetic hardwired response to run from fearful events.  The news media understands this impulse well and many outlets rely on fear to some degree in order to hook an audience.  While fear responses originated with reactions to predators in the wilderness, it does not end with our move to modern societies.  A person investing for retirement who is uncomfortable observing their account balance decline on a day-to-day basis is often responding to this same danger stimulus.  It can be difficult to sort probability from possibility in all manner of situations.  Part of our responsibility as your advisors is to help filter out media noise and provide relevant market information to help you decide what real risks are for you, versus possibilities that are unlikely to ever occur in reality.

A recent perusal of financial headlines was cause for mirth within the office.  You may have recalled the oil price spike in spring 2012.  Article titles from the time called up scenarios of doom and gloom.  One would think a decline in oil prices, as we are currently experiencing, would result in happy headlines.  Not so.  According to various articles oil prices are “swooning”, “slipping”, “sliding”, etc.  Here are a few headlines related to the drop in oil prices:

Falling oil prices put pressure on Russia, Iran, Venezuela – Washington Post 10/20/2014

Oil Prices: Will the slide hurt the US shale boom? – The Christian Science Monitor 10/23/2014

Is the Cascade in Crude Overdone? – Investing Daily 10/24/2014

Oil Prices Slip on High Supplies – Wall Street Journal 10/24/2014

Markets are constantly in flux.  Every change results in a mixed bag of winners and losers.  The media has a habit of focusing on the losers and forgetting, or downplaying, the winners in any given situation.  While this attitude may help make it easier for us to identify situations to avoid or alter, it often leaves us without the knowledge of positive gains from changes in economic events.

Master Limited Partnerships (MLPs)

In mid-October we saw MLPs in the oil & gas pipeline sector incur higher than usual market volatility.  Energy Transfer Partners a large pipeline company, was trading around $64 a share on October 6th.  By October 15th it had traded down to $53.50.  Just a week later it was back above $64.  Many other pipeline stocks experienced similar price moves. During this time period we saw a broad market selloff of more than 5%, with oil prices sinking 12% in October and more than 25% since the summer season.[4]  Markets were driven down by heavy selling in the broad energy sector as investors were concerned about profitability of oil & gas exploration companies.  Hedge funds further contributed to the selloff in MLPs as some were forced to sell in order to cover their margin balances.[5]  The benefit of MLPs in the pipeline sector is that their profits come from transporting oil and gas, not exploration, meaning profits are less dependent on higher oil prices.  We believe the October selloff in oil and gas pipelines was an overreaction and has since corrected itself.  We maintain our belief that pipeline MLPs are a strong longer-term position providing steady income.

Summary

We tend not to hear from clients during market advances, but see an increase in client contact during market pullbacks.   When viewing account balances on a daily or weekly basis one must keep an appropriate perspective, knowing investments are meant to be held for a longer time period.  Declines are common in the stock market, and many are short lived with little fundamental relevance.  Do you recall the pullback of August 2004?  How about June 2006 or September 2011?  While each of these declines did affect investors at the time, these temporary pullbacks have faded from memory for the long-term investor.  Our office had been expecting the market correction we recently saw for several months.  We feel this pullback is now over and are looking forward to what corporate earnings, GDP, manufacturing data, and other economic metrics are indicating – a period of mode

[1] www.multpl.com S&P 500 PE Ratio

[2] Thomson Reuters, Proprietary Research Earnings Aggregates, (October 31, 2014)

[3] ISM, Manufacturing ISM Report on Business, October 2014

[4] Morningstar

[5] Virtus Investment Partners, What Happened to MLPS, October 15, 2014

« Previous Page
Next Page »
2022 © Koenig Investment Advisory, LLC | Website by Michaels & Michaels Creative, LLC | Photography by David Gibb

Koenig Investment Advisory, LLC is a registered investment advisor with the SEC. Advisory firms with five or fewer client households are exempt from registration in such states. The advisor may not transact business in states where it is not appropriately registered, excluded, or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities or the rendering of personalized investment advice for compensation will not be made without registration or exemption.