LSA Connect

Economic Notes

European concerns continued to dominate other issues.  This is unfortunate, considering that U.S. news has been looking better as of late and is perhaps underappreciated.  Japan, which has also been largely ignored, grew for the first time in four quarters.

The European Central Bank purchased €10 Billion to purchase Italian and Spanish Bonds in order to bring yields in both of those nations back below 7.0%—the often-referred-to “breaking point.”  In response to criticism he could be doing more, ECB President Mario Draghi maintained that ‘price stability’ should remain the institution’s primary objective and doing otherwise might threaten its credibility (note that many central banks, including the ECB, are subject to only a single mandate, as opposed to the Federal Reserve’s dual mandate of stable prices and maximum employment).  Of course, with such a broad mandate, a wide variety of actions could be justifiable. Continue reading →

The Federal Reserve decided to hold steady again today, with target rates at 0.00 to 0.25%, which was largely expected.  They reiterated their expectation of keeping rates at these lower levels for the same “extended” period (mid-2013 at this point), as well as continuing the extension of overall average maturities in the portfolio (aka “Operation Twist,” announced in Sept.).

On a positive note, the committee acknowledged that economic growth had “strengthened somewhat” in the third quarter, as household and business spending has increased “at a faster pace” in recent months in contrast to prior comments and data from earlier in the year.  On the more tempered side, investment related to housing remains depressed and the employment environment remains weak.  The FOMC continues to expect moderate economic growth over coming quarters, but also acknowledges that “global financial markets” remain a concern on the downside.  This language was unchanged from prior meetings.

Much of the commentary is what we expected.  We anticipate that as the European situation resolves itself, risks to recession emanating from that crisis should abate, and could add to more of an overall positive tone from the FOMC as that “wildcard” is removed.  As it stands, domestic data has improved from prior meetings, which is in line with numbers we’ve seen.

Just as October gave us a month with equities up 10+%, November started with more negativity.  While European financial officials last week worked countless hours to find an outlet to contain and absorb losses on Greek (along with other peripheral) debt, Greek Prime Minister George Papandreou made a surprise announcement that a special referendum would be held to approve this latest bailout.

Markets were shocked, but this isn’t the first time political posturing has entered the economic process, especially during the European debt issues.  This may not turn into a deal-breaker, but yet is just another wrinkle into this soap opera.  From the prime minister’s standpoint, taking the item to the legislature rather than making a unilateral decision might be a smart move politically at home, despite the perceived uncertainty it leaves the rest of us with.  Greek politicians are very aware of the tightrope they’re walking, and are hoping to, even if cosmetically, contain some of the damage and blame while saving face in front of their own electorate.

Pessimism seems to come in twos, and it’s often interesting how one piece of data can very easily outshine another on good (or bad) days.  Today, the second negative piece was the ISM survey coming in a bit weaker from a headline level, despite its composition being fairly decent (new orders were the highest since April).  The weakness was caused by inventory drawdown and lower export orders, for the most part.

Portfolio Manager Insights

When markets took their initial tumble back in early August – after the S&P U.S. sovereign downgrade – we felt a tinge of excitement and initiated buying activity, as some of the earlier complacency that had characterized the market was washed away, revealing the underlying financial fault-lines about which we had earlier been concerned. As the focus moved from the U.S. credit downgrade to serious, systemic concerns about Europe, the markets have been on the cusp of taking another leg down and risk perception has increased.  Continue reading →

It’s been quite a quarter in the investment markets.  Declines in stock prices, coupled with a reduction in value for many other assets (including commodities and many bond categories) have combined to push the value of investments across the board down sharply in the month of September.  
As a species we call ourselves Homo sapiens, wise man. We certainly haven’t been acting very wise lately. Many investors are panicking on an almost daily basis. First they flood out of stocks, commodities and other longer-term assets, the so-called “risk-off” trade. Then they buy back into these longer-term assets and out of cash, Treasury bonds and gold, the “risk-on” trade. These waves of risk-on and risk-off largely describe the massive volatility we have seen on an almost daily basis. Each bit of news, good or bad, leads to a violent reaction in the markets. We’ve seen more gains and losses of 100 Dow points or better lately than is typical. Volatility has been very high. Why?

Continue reading →

The third quarter was a rough one for investors, marked by the toxic debt limit debate, the sounding of recession alarms in the U.S., and doubts around the ability of policymakers in Europe to act decisively to stem a broadening crisis. These fears have taken a toll on a range of asset classes. With a number of issues unresolved headed into 4Q, investors with a long-term time horizon (3-5 years or more) should remain cautious, but balanced. Core fixed income and non-correlated strategies can help to minimize volatility, while compelling valuations in equities and high-yield bonds may represent an opportunity to rebalance at an attractive entry point.  September marked a month where the benefits of a diversification was muted while most asset classes were experiencing negative returns primarily lead by a lack of confidence and fear.  In our “Portfolio Revision Presentation” for the Private Client portfolios we discussed the probabilities for a pull back in the markets to different levels.  Continue reading →