Author: jason

April kicked off the second quarter with several notable and new trends taking shape. Market momentum of latter half 2014 and Q1 2015 reversed course in many areas including oil, domestic equities, currencies, and bond yields. Overall market action in April could be categorized as a reflation trend as commodities, bond yields, inflation break-evens, and equities seem to be pricing in higher growth. As is often the case, commodity markets and the U.S. dollar were mirror images of each other. Commodities posted strong gains led by a 20% increase in WTI crude oil, which stands 30% over its mid-March lows. The strong U.S. dollar seems to have stabilized versus the Euro, weakening from an April high of $1.06/€ to end at $1.12/€. Continuing the reflationary theme, break-even inflation levels have risen from 1.54% to 1.95% and global sovereign yield curves have steeped materially. The 10yr German Bund has climbed 11x, from 0.033% to 0.37% over the past few weeks leading U.S. yields in the same direction, now back up over 2%.

Consumer, housing, and manufacturing indicators in April continued their downward trend while inflation and unemployment have remained relatively constructive. Overall, the U.S. economy has underwhelmed, most recently validated by an anemic Q1 GDP growth rate of 0.2%. Despite the low growth, Fed watchers now predict initial rate hikes as early as September of this year, whereas our internal forecast remains early 2016. April equity market internals have echoed the reflation trend with the S&P 500 hitting a new all-time high and the NASDAQ finally breaking through the tech bubble high water mark set 15 years ago. April markets saw larger companies outperform smaller ones and value outperform growth, both trend reversals from the first quarter. Of note were robust commodity markets, Chinese monetary stimulus, and reform economic policies in Brazil driving emerging markets to their biggest monthly gain in over three years.

On the back of a strong February, markets in March were of the up and down sort, ending with more of a risk aversion tendency. March gave us the official passing the six year anniversary of the bear market low, the start of Eurozone QE, and seemingly ever present geopolitical considerations in Europe & Middle East. A variety of data points were discounted including a dovish FOMC meeting, deteriorating U.S. economic conditions, Greek-Eurozone deliberations, and several oil market considerations. Net impact on the markets was weakness in global equities and commodities offset by strength in U.S. dollar and treasury bonds.

Eurozone QE and the resulting ultra-low/negative bond yields were warmly greeted in European markets as German markets hit all-time highs and France hit post 2008 highs. Unfortunately, US Dollar strength took a bite out of returns for US investors as the dollar appreciated 4.2% versus the Euro in March. Japanese equity markets posted strong returns in March, not due solely to Yen weakening (-0.3% vs USD). Significant government pension fund shifts into Japanese equities are believed to be a primary driver in that market. On the geopolitical front, a proxy war between Iran and Saudi Arabia in Yemen gave a short lift to oil prices amidst record U.S. oil supplies and Greek bailout negotiations heightened risks of debt restructuring and Eurozone stability once again.

Economic news for the month continued a trend of decelerating activity. The Atlanta Fed’s GDP Now forecast for Q1 GDP growth currently stands at mere 0.1%. Even the resilient job market registered its first disappointment. After 15 consecutive upside surprises in payrolls, March’s miss of 126,000 vs 247,000 was the biggest miss since January 2014. Meanwhile, the most recent JOLTS report showed 5.13 million job openings, which is the highest level since January 2001. While overall economic indicators have turned down, services (Non-manufacturing ISM) and housing sectors remain relatively buoyant.

February saw a complete reversal from January’s more dire start to the year.  Equities and commodities were up sharply while bond yields bounced off late January record lows.  Top market moving news during the month included Greek‐Euro negotiations, U.S. Fed policy guidance, slowing Chinese economic growth, and continued momentum in the U.S. labor market.

Toward month-end, Greece reached a temporary four month stop‐gap deal with the European officials which solved nothing and simply delayed the inevitable conflict.  Fed Chair Janet Yellen indicated that a “patient” approach toward rate hikes is no longer appropriate, but rather data driven decisions will pave the way forward.  Economic data, beyond the labor market, was average in February.  Leading indicator metrics have fallen in the U.S. but have risen in Europe.  Fourth quarter U.S. GDP was revised downward slightly to 2.2% on the back lower inventory growth but was overall a relatively encouraging report.  January headline and core inflation remained benign at ‐0.2% and 1.6% respectively.  Despite continued record oil inventories (largest seven week inventory increase on record), oil managed to have an up month for the first time since last June. In fact, at month end, there had been 28 straight days since the national average gasoline price had fallen.  Beleaguered European markets (+6.3%) received strong bids during the month as a result of the ECB’s January QE announcement as well as indications of growth improvements in Europe.  Meanwhile, the S&P 500 and Nasdaq experienced their largest monthly gain in more than three years.  Bonds, particularly long maturity treasury bonds (‐5.25%), sold off sharply with other rate sensitive asset classes such as REITs and utilities.

Markets in January had to reconcile several high profile headlines and increased volatility.  Most headlines emanated from Europe this month including a bond buying (QE) program by the ECB, a surprise currency policy shift by the Swiss national bank (SNB), and a victory by Euroskeptic party, Syriza, in Greece.

The announcement of an opened ended QE program (€60b per month) in Europe was the most important development impacting markets. International stocks and European sovereign debt both posted gains on the month in response to the aggressive policy action by the ECB.  The unexpected removal of the euro exchange rate ceiling on the Swiss franc caused the franc to skyrocket with global ramifications on currency brokers and businesses dealing in Swiss francs.  Greece took center stage again with new Prime Minister, Alexis Tsipras, striking a hard line on the Troika bailout package austerity measures and their impact on the Greek economy.  The bailout plan expires in late February and another restructuring of Greek debt and the austerity pact are officially on the table.

The S&P 500 posted a consecutive monthly loss. Energy and financials stocks weighed on the market while defensive sectors of utilities and healthcare led the way.  Primarily due to energy and financials results, U.S. 4Q earnings have been somewhat disappointing. Half of S&P 500 companies reporting thus far with revenue and earnings growth of ‐ 0.39% and 3.52%, respectively.  Earnings guidance and analyst revisions have been tapered as well.  The strong dollar and weak Euro‐Yen have begun to pressure U.S. overseas earnings.  On the back of a 5% 3Q14 GDP figure, 4Q14 GDP came in under forecasts at 2.6% but did reflect robust consumer spending.  UST bond yields and oil prices plummeted again in January.  Six consecutive months of oil price declines and a 10yr UST yield of 1.64% are leaving inflation hawks little to worry about for the time being.

December 31st, 2014

The big theme in the final month of 2014 was the continued price collapse in the energy markets with much speculation about the wide range of drivers and implications. Oil dropped another $13 (nearly 20%) in December and finished nearly 47% off its high on the year.  Ultimately both supply and demand factors have contributed to the bear market in energy.  Economist Rudiger Dornbusch famously stated, “In economics things take longer to happen that you think they will, and then they happen faster than you thought they could.”

For a long time we have known of the increased supply of oil as a result of industry drilling technology advancements, production coming back online (Libya, Iraq), and the unpredictable nature of OPEC cartel production policy.  At the same time, decreased demand from slowing global economic growth, increased fuel efficiency, and the emergence of alternatives have been well documented.  Implications are substantial for energy producers and service companies.

Earnings pressure and credit concerns in the high yield market (energy is the largest sector in high yield market) are clear.  The Russian ruble and budget implications for sovereign nations can also be pronounced but vary widely. The assault on the Russian ruble garnered many headlines as energy market collapse and Western sanctions hammered the Russian economy.

Equity markets and rates both experienced increased volatility during the month.  FOMC word-smithing mid-month produced another tailwind for the U.S. dollar (particularly against the Euro) and resulted in a strong bid in the stock market as the S&P 500 posted several record highs toward month end.  Interest rates stayed relatively flat for longer maturities (>7yrs) but rose sharply on the shorter maturities (<5yrs) to account for increased likelihood of Fed rate hikes in mid-2015.

The announcement of Greek snap elections in late January raised the possibility of another “Grexit” scenario where Greece exits the common currency regime, bringing back memories of Eurozone turmoil in 2011.  Prime Minister Abe won another 4yr term in Japan, ensuring the use of “Abenomics” policies in the future.  In the U.S., economic results remained encouraging with the exception of housing.  Final 3Q GDP was revised strongly upward to 5% and labor market improvements persisted.

October 31st, 2014

October was anything but boring.   After falling 8% month to date through October 15th, the bulls came charging back into the S&P 500 with a gain of nearly 11%. The DJIA saw triple digit moves in 16 of 23 trading days as volatility was pronounced. The ECB began the month underwhelming investors with what was perceived as a weak response to anemic conditions in Europe.  However, growth and Ebola concerns in the U.S. began to fade mid‐month with FOMC members portraying constructive views of the U.S. economy and U.S./global pandemic fears receding.

Decent quarterly earnings results (earnings +4.05% and revenue +9.35%) also worked to elevate the S&P back to record highs. The NASDAQ is actually within striking distance of the dot com bubble highs from March 2000. Non‐U.S. markets did not fare as well with most European markets posting sizable losses while emerging Asia (China, India, Taiwan) posted nice gains.  A big factor in non‐U.S. returns this year has been foreign currency weakness versus the strong U.S. dollar.

U.S. 3Q GDP beat expectations (3.5% vs 3.0%) supporting the Fed’s constructive view of the U.S. economy. The job market continued to post encouraging results.  Labor market participation rates seem to have stabilized, both headline (5.8%) and U‐6 unemployment (11.5%) have improved materially, and we are in the midst of the longest consecutive monthly TNF payroll expansion since WWII.

A significant surprise stimulus move by the Bank of Japan (BOJ) at month end added to the bullish sentiment. The BOJ targeted an increase in base money 25% higher than previous (to $726B/yr.), more than making up for Fed Tapering.  The BOJ also announced an increase in government bond purchases by $267B and extended durations.  Lastly, they will triple purchases of ETFs and real estate.  As if that wasn’t enough, the Japanese GPIF (pension fund) announced a doubling of its equity allocation from 12% to 25%, which should lead to $500B in global equity purchases.

Fixed income markets performed well as October saw the 30yr U.S. Treasury bond yield fall below 3%.  While interest fell, high yield spreads tightened approximately 10bps on the month adding to returns of riskier bonds. September inflation data, released in October, remained benign at 1.7% but was marginally above forecast. Commodity markets had another rough month, particularly in energy and precious metals. U.S. oil supply gains coupled with Saudi price cuts, and OPEC production increases resulted in a collapse in oil prices to near $80/barrel.

September lived up to its historical reputation as one of the worst months of the year. World events, lower global growth trajectory, Fed policy, and recent disappointing economic data combined for a tough ending to the third quarter. Stocks fell globally in September, particularly smaller capitalization and emerging markets such as Brazil (-19.2%), Turkey (-12.1%), Australia (-11.4%), and China (-6.4%). Japan and the U.S. were the best geographical performers while Latin America and Pacific ex-Japan lagged.

Globally oriented sectors such as energy, materials, and industrials felt pressure from a strengthening dollar and the challenged global growth environment. Volatility increased materially toward month end along with the frequency of troubling world events including Ebola outbreaks, ISIS/Middle East conflict, Hong Kong protests, and continued Russian/Ukrainian tensions. Contributing to market anxiety was September FOMC guidance that the Fed’s quantitative easing bond purchases will conclude in October and the likelihood of a Fed Funds rate increase by mid-2015.

Fixed income markets provided no solace as both interest rates and credit spreads moved higher on the month. Rates increased across all maturities and the yield curve flattened as shorter rates experienced a meaningful increase. 2yr and 3yr rates increased 8bps and 11bps respectively. Spreads also moved higher on the back of market anxiety. High yield spreads moved from 380bps to 440bps and investment grade moved from 112bps to 120bps over comparable US Treasuries.

Albeit somewhat dated, the BEA’s revised second quarter U.S. GDP figure increased from 4.2% to 4.6% highlighting a respectable March-June growth rebound from the winter weather induced -2.1% first quarter result. Most third quarter GDP estimates have been downgraded to approximately 3% as September’s economic releases indicate a slowdown in growth metrics across housing, manufacturing, and various consumer barometers. Headline and core inflation registered 1.7% in August, a slight drop from the July reading but have exhibited a higher trend over the past few months. While headline unemployment has improved meaningfully, currently 5.9%, the FOMC’s broader measure, Labor Market Conditions Index, has trended sideways over the past several months. Lastly, commodity markets (-6.2%) continued to struggle in September in the face of a strengthening dollar (+9% since May) and robust global oil production

In August, U.S. equities bounced back from a poor start to the month to finish with strong gains. Bonds rallied across the board as both yields and spreads fell during the month. August experienced several troublesome markers including August 1st capping the worst week in the market in two years, Vladimir Putin displaying continued aggression in the Ukraine, Europe’s economic engine sputtering, and the ever-present radical Islamists drumbeat of insanity.

On the positive side were several positive notables including average jobless claims falling to eight year lows, the S&P 500 setting new record highs over 2,000 for the first time, strong 2Q corporate earnings & revenue growth of 4.4% and 9.3% respectively, and the U.S. budget deficit narrowing to its smallest levels since 2007.

U.S. Treasury rates fell to extremely low levels as risk aversion (Putin), limited supply (low deficits), and low relative European and Japanese yields drove investors into treasuries. The curve flattened further as 10 & 30 year bond yields fell while the short end remained anchored by Fed policy and benign near term inflation outlooks. The high yield market sold off and quickly recovered as we saw a record breaking weekly outflows (retail) from high yield mutual funds and subsequent buying (institutions) netting a tightening in spreads from 404 to 380 over Treasuries.

Broad U.S. economic results on the month were positive as 2Q GDP was revised upward to 4.2% on the back of strong fixed investment and reduced inventory builds. Fixed nonresidential investment added 0.35% to annualized GDP growth, which is impressive considering investment makes up only 12.62% of nominal GDP. The job market continued to show signs of improvement as well with unemployment registering at 6.1% for August. The most recent Case-Shiller housing market indicators reflect an 8% yearly price gain. Most markets are up double digits off the 2009 lows while the index remains 17% below its high mark.

Overseas markets were driven by continued improvement in the emerging markets (Brazil +11%, Mexico +5%) while developed markets in Europe (+0.4%) and Japan (-2.2%) stumbled. Commodity markets sold off on the back of a strong U.S. Dollar which rallied sharply (+1.5%) in August.

Written by Christy Barton of the Barton Law Firm, PLC

What is the most important estate planning instrument you will ever sign? Most would answer “a Will” or “a living trust agreement” and either or both of those answers would often be correct – but not always. As our experience has taught us, the most indispensable instrument in your estate planning toolbox may prove to be a properly crafted durable power of attorney.

Though most planners focus on helping clients reduce death tax exposure, avoid probate administration and accurately dictate who gets what at the client’s death – all of which is quite important, the impact that disability can have on the ultimate outcome of an individual’s or couple’s estate plan is almost always overlooked. I will illustrate with a “real life” example of how a family’s estate plan can be wrecked by an unanticipated disability.

Years ago I was consulted by a CPA wrestling with a heartbreaking situation which could have been avoided with good estate planning. Mom and Dad were equal owners of a successful corporation which also employed their two sons. The parents’ estate plan was based on separate Wills for each spouse, with Mom’s Will providing that at her death, her 50% of the corporate stock would pass to Son A. Similarly, Dad’s Will gave his 50% share to Son B.

As it happened, Mom gradually lost her mental capacity and, as a result of poor legal advice, was declared incompetent by a local court. Generally speaking, one of the legal consequences of mental incapacity is that the incompetent person cannot change her Will.

Sometime after Mom was officially determined to be incompetent, Dad and Son B discovered that Son A had been stealing from the family business for a long time. His documented embezzlement exceeded $700,000 by the time he was exposed, after which Son A was fired. Unfortunately, Mom’s Will (which gave her 50% of the corporate stock to Son A) couldn’t be revoked or modified, so Son A was waiting in the wings to pounce on Mom’s 50% share of the family business at her death.

Though the preceding example is more flagrant than most, we have seen numerous instances where financial, health, relationship and legal challenges within a family, occurring after a family matriarch or patriarch has signed a Will and then lost mental capacity, produced woeful outcomes after the senior family member’s death when the Will was enforced.

These planning disasters can usually be avoided completely when Mom and Dad have executed state-of-the-art, enhanced durable powers of attorney which enable designated family members to modify the existing estate plan, or to even create an entirely new plan, to effectuate the parents’ intent in a financially protective, tax-free and probate-free fashion.

An enhanced durable power of attorney needs to explicitly equip the designated agent(s) to do anything and everything that the senior family member, i.e., the principal, could do himself, for example: (1) changing beneficiary designations on life insurance policies, IRAs, bank accounts and annuity contracts; (2) creating and funding revocable and irrevocable trusts and taking other steps to change the principal’s estate plan; (3) making unlimited gifts of the principal’s assets (for tax planning and nursing home protection purposes); (4) developing and implementing new financial and investment plans; (5) appointing additional agents to act on the principal’s behalf; and (6) exercising fiduciary and executive powers that the principal may have over other trusts, corporations, partnerships and LLCs.

Under Missouri law, special powers like those described above must be clearly spelled out in the durable power of attorney instrument; otherwise, the agent will not be able to exercise such powers. Iowa law has not meaningfully addressed financial/property powers of attorney in the past, so there has previously been no guidance on the statutory scope of a durable power of attorney in that state. All of that changed, though, on July 1st – the effective date of the new Iowa Uniform Power of Attorney Act.

Suffice it to say that, going forward, the enhanced durable powers of attorney we draft for Iowa residents will be significantly different from the instruments we have prepared for Iowa clients in the past. We also anticipate that when Iowa clients come in for a routine or special review of their existing estate plans, we will recommend updating their durable powers of attorney, to specifically comply with the new and sweeping provisions of the Iowa Uniform Power of Attorney Act.

Finally, given the critical role that an enhanced durable power of attorney could end up playing in the successful outcome of your estate plan, it would be prudent to have your existing power of attorney reevaluated in light of the standards discussed in this article.

Christy Barton with Barton Law Firm, PLC is not affiliated with Silvercap Wealth Management or Arete Wealth Management.