LSA Connect

Over one hunded thirty of the top independent investment advisors in America are attending the 2 1/2 day LSA National Conference at the Crowne Plaza Hotel in Kansas City, Missouri.

The FOMC completed their meeting today, with little change. Easing monetary policy further, as a result of weakening U.S. economic data in the past few months, was not voted for, although they keep the option open and the possibility of such action at the September meeting remains relatively good. The language of their press release changed from ‘prepared to take further action’ to ‘closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed’—a small change in terms of language, but meaningful, nonetheless. TheFed is careful with the wording of their language as they know it is watched for interpretation quite closely.

The chances for further easing action are certainly higher now than a few months ago. Markets weren’t extremely happy with today’s result, but that is also largely to be expected. Short-term stimulus has been generally bullish for stock prices, while inaction is a bit disappointing to some wanting a quick boost. But, from a broader perspective, over time, an economy requiring less stimulus is preferable to one that needs more, so the lack of action could be viewed as more of a positive signal in many respects—we’re growing slowly, but not on life-support by any means.

With interest rates near zero, there are not many ‘conventional’ options remaining, so the focus remains on the more ‘unconventional’ easing activities. These actions would be targeted to either or both breadth (deeper) and timeframe (longer). As there is not a lot of further ammunition the Fed can readily use to ease, these may include keeping rates low using bond purchases and/or paying lower levels on reserves to banks to spur credit, among a few others.

This process has obviously been frustrating for officials looking for a lever that immediately leads to the intended outcomes of better and consistent economic growth and improved employment numbers. In one sense, staying accommodative has allowed Bernanke to implement one lesson he learned in his extensive studies of the Great Depression—not implementing counterproductive measures like raising rates too soon—leaving things alone for longer continues to be his preferred approach. Financial deleveraging after a major crisis event can take more time than normal recoveries, and we may only be partially through that process of ‘muddle-through.’ It does seem to be happening, however.

The FOMC meeting ended today with not much new to say.  Target rates remain ‘near-zero’ at 0.00-0.25%, which is unchanged and is of no surprise, considering their intention to keep rates ‘exceptionally low’ until late 2014. 

Additionally, there will be no new Quantitative Easing (‘QE’) as of yet but the committee did decide to retain and extend the Maturity Extension Program (aka ‘Operation Twist’), which consists of strategic Treasury bond purchases at different points in the yield curve designed to keep long-term interest rates low and accommodative.  This should provide additional ongoing stimulus for everything from home mortgages, to capital project loans to other general lending.  If the twist were not continued, the unwinding effect may have actually created an opposite tightening reaction, so continuing the program was not that controversial.

In the group’s other observations, household spending growth appears to be decelerating, employment growth has slowed and housing remains ‘depressed,’ both of which argued for more ‘QE’ by some.  However, it appears the Fed is remaining steadfastly data dependent—and may act if conditions end up being poor enough to warrant such action (as use of further stimulus is a politically charged issue, especially in an election year).  Markets may have been hoping for more QE, and may be disappointed by the lack of it, but, at the same time, an economy strong enough to stand up on its own without it is the best scenario in our minds.  But keep in mind the Fed’s dual mandate:  labor conditions are as important to the Fed as monetary stability.

LSA has posted our Manager Interview with Bonnie Baha of Doubleline

Bonnie Baha, CFA, CIC

Portfolio Manager, Global Developed Credit Co-Director, Credit Research

Ms. Baha is the Senior Portfolio Manager of DoubleLine’s Global Developed Credit Group, which is included as a separate sector in the various DoubleLine Core Fixed Income strategies. Prior to DoubleLine, Ms. Baha was a Managing Director and Portfolio Manager overseeing the Corporate Bond group at TCW for the past nineteen years. Prior to TCW, she worked for Deloitte & Touche, where she was a manager and specialized in the valuation of publicly traded and privately held companies in a variety of industries. Prior to that, she was employed as a Senior Analyst with Standard Research Consultants, a former division of Standard & Poor’s Corporation. Prior to her graduate studies, she worked at Kidder, Peabody & Co. where she was responsible for the regional distribution of new issues and secondary offerings of corporate debt and equity securities. Ms. Baha received her BA in Political Science from the University of California at Irvine and her MBA from the University of Southern California. She is a CFA charterholder and a Chartered Investment Counselor

In the interview Bonnie discusses the potential problems in the Euro zone and how the Fed might react in June.

LSA members can login to listen to this replay by going to “Resources –Training – Manager interview.”

Please note that we have posted REVISIONS for the following portfolios:  Private Client, PC Less Thank $100k, Bear Market Entry, Cautious Bear Plus and Schwab NTF.  To view the changes, login to the LSA website with your username and password, then simply hover over the “Portfolios” tab, select the platform and select “Model Portfolios,” the revisions will be posted at the top of the following page.

Revisions to be released AFTER market closes today (May 24th):  ETF Strategies, ING VUL, Jackson National VA.  Make sure to check back later today to review all changes.

If you have any questions, please feel free to contact us at 866-581-5724.

Once again we find markets reacting to poor language from the Euro Zone. It is hard to believe that it has now been two years of Greek headlines and once again we seem to be on the verge of once again deciding if Greece will decouple from the Euro Zone or if they will continue to kick the can down the road.

Equities were down sharply this week as concerns about a Greek exit from the Euro and solvency of Spanish banks led the news, and U.S. data was mixed. U.S. large-cap stocks dramatically outperformed small-cap and foreign issues. From a sector standpoint in the S&P, defensive industries like utilities and consumer staples outperformed, while financials and materials lagged.

Bonds inched upward on the week with movement away from risk assets. High yield and other corporates also lagged on wider spreads. On the year so far, the BarCap Agg has outpaced small caps, but continues to lag large caps. From a macro perspective, negative sentiment is pervasive in risk assets, and valuations remain attractive… not necessarily a bad combination—current volatility aside. Fundamentals continue to favor risk assets over fixed income.

Commodities were generally higher, due to agricultural contracts, but oil continued its slide along with industrial metals—both based on economic uncertainty. Gold has really sold off in recent months marked by a headline we happened to note on Wednesday: ‘Gold Tumbles Into Bear Market on Concern Greece May Leave Euro.’ At first glance, this condition is ironic and may have puzzled some gold bugs out there that figured another chapter in the Euro drama would favor ‘risk-off’ and ‘real’ assets like precious metals, as was the case from 2009-2011. Ironically, a stronger U.S. dollar may be gold’s biggest enemy lately.

With the recent pull back LSA is going to use this as an opportunity to revise some of the portfolios and conduct a complete rebalance. (more information below)

LSA Portfolio Revisions.

LSA will be posting revisions to portfolios over the next week. Given the recent volatility and pull back in the markets we are going to make a few changes to the strategies. We have been looking for the Dow to drop below 12,500 as a soft target to introduce the changes and 12,300 as a hard target. Given the pull back today we are going to go ahead and release the revisions and get portfolio traded before the holiday weekend.

Here is the scheduled release dates, please login to the LSA site to view all changes;

Wednesday May 23rd after market close:

• Private Client
• Private Client Less than 100K
• Bear Market Entry
• Cautious Bear Plus
• Schwab NTF

Thursday May 24th –

• ETF Strategies
• ING VUL
• Jackson National

Video commentary will also be posted on Thursday walking through what the revisions look like.

Bob Farells’ 10 Market Rules: The 10 Commandments To Remember

1. Markets tend to return to the mean over time

2. Excesses in one direction will lead to an opposite excess in the other direction

3. There are no new eras — excesses are never permanent

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

5. The public buys the most at the top and the least at the bottom

6. Fear and greed are stronger than long-term resolve

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend

9. When all the experts and forecasts agree — something else is going to happen

10. Bull markets are more fun than bear markets.