In This Current Market Investors Need To Remember To Bob and Weave Baby

Iron Mike Tyson put it best when he said in his unique voice and style,"Everybody has a plan, until they get hit". The same is true with investing.  A well thought out plan coupled with the right attitude will only lead to the greater possibility for success. Being steadfast not stubborn.  Not proud but humble and possessing the wisdom to recognize the differences.   The markets have been hit with a few stiff jabs along with Joe Frazier-esque left hooks but we’re still standing and just a percent or so from record highs.   GSA believes we’re only in round five of a twelve round  title fight  within the current economic recovery and market rally.  We’re keeping our cups strapped on and headgear cinched tight as we’re sure to take a few more hits  while remaining vigilant but confident we’ll prevail as long as we stick with our plan.  For now, To The Scorecards Please: Leading Economic Indicators-LEI.  LEI popped +.6% in April, the biggest gain in a year.  The gains were led by average weekly manufacturing hours along with drops in average initial unemployment claims.  Overall nine of the ten components registered gains and point to further moderate economic expansion in the coming quarters.  Housing.  Housing starts flashed a solid increase of +6.6% to a seasonally adjusted annual rate of 1,172,000.  Separately, single family housing starts were up +3.3% reflecting a 778,000 annual run rate.  Also important as a gauge of future growth building permits were also up at +3.6% to an annual run rate of 1,077,000.  This sector of the economy continues to heal providing a solid base of good paying jobs.  These figures while healthy are being restrained by company’s inability to hire skilled workers along tight loan underwriting criteria. ISM Manufacturing-ISMM.  ISMM expanded for the third consecutive month adding on +.5% from April’s 50.8% to +51.3.  The New Orders Index was basically flat -.1% to +55.7%.   The Production Index eased off -1.6% to a still steady +52.6%.  There was some continued weakness in the Employment Index at +49.7% which was unchanged from the April reading not unexpected and explained by the weakness in the energy sector and mining.  Unlike the headline figure which remains modestly positive respondents were practically outright bullish.   1. Food, Beverage & Tobacco,”Business conditions remain strong ex-South America”.  2. Chemicals, “Consistent sales growth in Asia, Mexico and Canada flat for America’s and Europe”.  3. Fabricated Metals, “Continued brisk order flows for our business.” 4. Wood Products,” Market is improving steadily in both orders and pricing.”  This commentary would lead to expectations for continued growth and expansion in the coming quarters.  ISM Non-Manufacturing-ISMNM.  ISMNM dropped -2.8% to +52.9%, softer but solidly above the all-important +50% neutral growth line.  There was a weakening across all sub-indices but all remained comfortably in expansionary territory.  Respondents were generally more cautious as well citing weakness in the oil sector, a slow start to the quarter and high pressure on cost reduction.   Overall, respondents did not appear overly concerned just noting some easing from the prior months pace of business and some softening in demand.  Consumer Spending.  Here’s the counter punch the bear camp didn’t see coming.  Consumers ratcheted up spending +1% in April the best showing in seven years.   Consumer spending accounts for over 70% of US economic growth.  Consumers splurged on big ticket items such as auto’s and home improvements.  The increased spending was aided by lower energy pricing, improved employment conditions and improving incomes.   Incomes held steady at +.4% for the third of the first four months of 2016.  Where We’re Going: The markets remain exceptionally resilient as the economic indicators have been positive for the most part but growth uneven.   We’ll need to continue to bob and weave as risks remain abundant and constant. A few worth mentioning: 1. The upcoming Federal Reserve meeting on interest rate policy in June and July where a rate hike appears unlikely but still in play.  2. The UK’s vote later this month on whether or not to remain in the European Union (referred to as the Brexit).  3. China taking another attempt at allowing a free floating, market based Yuan exchange rate.  This could result in a severe appreciation of the US dollar, crimping exports, leading to a rolling crash of commodities and related stocks.   The positive available data and momentum currently far outweighs the risks.   Global central bank policy remains highly accommodative.  Current inflation levels and expectations for future inflation levels remain benign.   China is Orchestrating a successful soft economic landing.  India Prime Minister Modi’s economic reforms have jump started this slumbering giant to one of the fastest largest growth engines overtaking China.  Commodities appear to have bottomed.  The EU economy is gradually gaining traction.  Japan has restrained from hiking taxes which may have impacted the nascent recovery while looking to boost women’s presence and pay in the workforce. In the end the US for all our warts is surely the best house in a bad neighborhood.  Muhammad Ali transcended boxing and sports leaving a lasting impression.  The impact on America and the world was profound.   His words of wisdom are even applicable to our domain, investing when he stated, “He who is not courageous enough to take risks will accomplish nothing in life”.  So while no plan goes exactly according to plan it is how we adapt and adjust that aides in our successes.   With our investments in order to achieve our dreams and goals we must accept risk is present, but manage those risks appropriately.   For now we remained committed to the market patiently deploying our cash.    Thank you again for your patience in these very challenging markets.  Yours in pursuit of the KWAN! James Byrne Chief Investment Officer Grand Street Advisors 816-510-9897 http://investing-from-main-street.blogspot.com/ Click here to Reply or Forward

Investors Be Wary When Hedge Funds & Politicians Begin Playing With OPM

The early pain markets experienced appears directly related to people playing with OPM (Other People’s Money)namely hedge funds liquidating and closing out positions.  Note last year’s most loved stocks GOOG, AMZN, FB took huge hits after reporting impressive earnings results and last year’s worst performers oil and mining have experienced equally impressive price spikes after having reported terrible quarterly results.  This suggests large positions being closed and was reflected in the price action and short covering rallies for commodities stocks in some cases up 30%-50%.  It also helps to explain some of the immense selling pressure that sent health care REIT’s spiraling including some we own.  The prices of which have recovered some in the recent rally but more work needs to be done to repair the damage.  

Where we’re at:

Jobs.  Non-Farm Payrolls registered in at a solid +242,000 headline figure for February with positive revisions to the prior two months adding an additional 30,000 jobs created.  The participation rate climbed to +62.9% which reflects a gain of +.5% since September.  This shows people who’ve been long term unemployed are re-engaging the work force.  Finally.  The Fed has been waiting for this figure to begin ticking higher as a sign of a healthier work environment becomes more inclusive.   There was broad based growth across the spectrum notably in healthcare, private education and construction which are good paying jobs.  Retail trade and food services also trended well but these jobs tend to be on the lower scale which may explain the tick down in hourly earnings.   Mining once again continued to experience declines. 

ISM Manufacturing-ISMM.  ISMM saw an increase of +1.3% to +49.5% which while still in contraction territory inched closer to the neutral +50% level.  There were bright spots.  The New Orders Index held steady at +51.5%. The Production Index popped +2.6% and Inventories +1.5%.  The big declines continue to be in Prices Paid Index at +38.5% reflecting lower materials pricing.  On the whole comments from respondents were fairly positive.  From Chemicals “U.S. business demand is solid, international soft”.  Computers “mobility spend is up”.   Machinery “very strong demand”.  Furniture “orders are coming in stronger than expected”.  So, while the headline figure remained in contraction territory should the demand continue its trajectory we would anticipate this indicator to return to positive growth come March’s release.

ISM Non-Manufacturing-ISMNM.  ISMNM was virtually unchanged ticking down -.1% to +53.4% from January.  A relatively positive report.  The Business Activity jumped +3.8% to +57.8. New Orders dropped 1% but remain at a still comfortable +55.5%.  Once again respondents were positive on the outlook.  Healthcare “overall business is increasing”.  Transportation “overall business transaction volume and inventory up year over year”.  Information “business and revenue holding steady”.   This report continues to point to a continued steady and moderate rate of expansion. 

Leading Economic Indicators-LEI.  LEI dipped .2% in February.  The headline figure was impacted by big declines in equity prices and unemployment claims.  Both of these headwinds have dissipated of late and as such we may see this indicator flip back positive when next released on March 17^th. 

Existing Homes Sales.  Existing sales were up +.4% to the highest level in six months at a 5.47 million annual run rate.  Sales stand +11% year over year the largest gain since 2013.  The market is on solid footing constrained by a shortage of supply which in turn is pushing up prices.   These higher prices may also have the effect of squeezing out first time would be buyers.   Prices were up 8% year over year the largest increase since April 2015.  The lack of supply is reflected in the level of unsold inventory which currently stands at 4 months.  For reference a market in balance would be closer to a six month supply. 

Factory Orders.  Factory Orders rose +1.6% the largest jump in seven months.  Ex-aircraft (which tend to be volatile month to month) orders rose a still healthy up +3.4% the sharpest spike in over two years.   Commercial aircraft orders leapt 54.4%.  Machinery +4.6%.   This was a pleasant surprise as the strong dollar has been a strong hurdle to overcome and has weakened exports.  While this is certainly good news it is worth watching as the US dollar remains at elevated levels and foreign central banks continue on their respective Quantitative Easing programs which may further weaken their currencies and strengthening the US greenback pressuring this sector again. 

Monetary Policy.  As Dire Straits put it so well, “money for nothing, your chicks for free”.  Money, in many countries around the globe is being treated worse than nothing as Central Bankers race to debase.   There are negative rates in Japan along with the Euro-zone among others.  The Quantitative Easing strategy is running peddle to the mettle and the needle on the speedometer looks pinned but for some reason we’re not going very fast.   How long this can go on is anyone’s guess or a fools guessing game.   Central bankers globally are monetizing their debts.  This must come to an end.  The sooner it does the healthier our economies will be.   The Federal Reserve appears stuck between a rock and a printing press.   The first attempt at beginning the process of “normalizing”rates or hiking borrowing costs seemed quite destabilizing to global markets.  Keep in mind they raised one quarter of one percent, .25% and markets shuddered.   The problem I believe lie in the global linking of our markets, currencies, interest rates and economies.   This is where those chicks come home to roost, nothing is free.  No question the US economy is in a position to handle higher rates.  However, the EU and Japan are still attempting to regain their economic footing and as such are debasing their currencies and purchasing massive amounts of assets monthly.  Should the US continue to move without regard to their central bank counter parties actions the US dollar may continue strengthening.  This in turn hurts US exports and gives exporters of those countries an added advantage to sell to US consumers thus hurting US domestics as well.  Combined these two weights could pull down the US economy pushing us back into recessionary territory.   This is my attempt to shed a bit of light on the situation, rather simply.   

For now Federal Reserve monetary policy remains highly accommodative and supportive of growth.  They have done nearly all they can to assist in stabilizing the US economy and more than most thought they could.    The responsibility to reignite a higher level of expansion should have shifted long ago to the brain trust occupying D.C.  Those squatters got the address wrong when they sought to vent their rage and Occupied Wall Street.  The irresponsible and overly compensated have been hiding in broad daylight in D.C. for years.  A policy response to boost productivity and business investment spurring growth in employment and higher wages is what is needed.    The time is now.  Unfortunately for many Americans the silence has been deafening from those we elected.   

Going Forward:

This presidential election season seems best captured by Naughty by Nature “You Down With OPP?”(other people’s property). In one contest  we have one hopeful threatening to tax the US into recession.  His plan (though both contestants plans have many similarities) would introduce higher taxes across the board.  He proposes raising the top Federal rate to 52%, hike capital gains 20%-40%, adding on a 6% payroll tax among others.  His plan would raise (or reallocate) an estimated $1.5 trillion annually or $15 trillion over ten years.   So, shall we take all this new “found” treasure trove and say balance the budget?  Pay down our debt?  NO!  It’s free money so spend it while you can. 

Another contestant in this year’s reality TV show “Election ‘16” would build walls along our boarders and shut off immigration totally while penalizing US companies that operate abroad.  According to this contestant these moves would incent US employers to hire domestically and force up wages.  While it sounds good to hear the US actually needs a healthy level of immigrants coming to our shores and an expanding our work visa program.   There are jobs here in the US that Americans simply won’t do.  There are American jobs that outstrip our domestic supply of trained and skilled workforce.  Barring immigration would be a disaster and could drive our economy over the cliff.  Three of these remaining candidates have offered up financial plans that claim to balance the budget.  They do so by ramping up spending on defense and steering clear of any cuts to Social Security and Medicare all the while promising large and generous tax cuts for both businesses and individuals.  I thought we were watching “Election 2016” not David Copperfield.  Hey I love the sound of a strong defense and cutting my taxes.  Basic math just keeps me from getting too excited. 

At this point in time the market seems willing to shrug off the rhetoric.   As the field is narrowed we may not be able to continue doing so.  The recent rebound in oil pricing has removed a major headwind to the markets recovering some of the high ground ceded earlier.  While we don’t see oil spiking to the $60-$70 levels $35-$45 seems likely.   $40 feels like the Goldilocks rate.  Not too hot to temper consumers good mood and spending habits.  Not too cold to continue the carnage of jobs lost, earnings eliminated in the sector.    There is a meeting of OPEC and Non-OPEC members scheduled in March this should help determine if we’re heading for higher ground or a retest of the mid $20’s is in the cards.  I believe the worst may be behind us, but until an agreement is hashed out by producers on production freezes or cuts mine remains a hedged bet. 

I’m not sure who wins what in this year’s showdown but I do believe this year’s candidates are simply telling us what the latest polls tell them we want to hear.   I do know when Politicians are talking about OPP forget about Naughty by Nature be afraid very afraid. 

For now we remained committed to the market patiently deploying our cash.   

Thank you again for your patience in these very challenging markets. 

Yours in pursuit of the KWAN!

For Investors Wary Of Sovereign Wealth Fund Selling and Commodities Weakness This Markets A Slippery Slope To Navigate

Forget about oil and water not mixing, these days for investors oil and stocks don’t mix.  The near direct correlation between equity markets and the price of oil has far too many confused, perplexed or just pulling an ostrich and sticking their heads in the dirt.   Let’s help explain and simplify this new phenomenon.  Lower energy prices are a boom for consumers plain and simple.  For most businesses these same lower energy costs are a savings dropping right down to the bottom line as well.  Hugely positive.  Now the elephant in the ointment.  All oil and gas producing companies and countries are getting absolutely pole axed by the collapse in energy.  Exploration and production companies can cut capital expenditures and head count to help ease the pain.  Many of these companies during the explosion of US production due to hydraulic fracking and improved technology took on massive debt loads to purchase attractive drilling properties.  With oil at $100 a barrel, no problem.  At $30 a barrel, ouch.   We’re not done.   Major energy exporting countries  such as Saudi Arabia, Russia etc., already owned the land so that’s not the issue.   Oil revenues were the primary sources of these countries funding for their annual outlays and budgets.   They are running into similar problems.  Many of these exporting nations budgets were set based upon oil pricing $100 a barrel, no problem as long as oil is around that $100 level.  With oil at $30, ouch.  These same exporting countries ran sizable surpluses over the years and utilized these $100’s of billions of profits to invest in foreign assets through their sovereign wealth funds.  Again, now with oil around $30 those surpluses become deficits.  In order to plug government deficits those natural buyers of assets have become net sellers.  We’re talking about again 100’s of billions of dollars of assets (stocks, bonds, real estate, hedge fund shares, private equity funds) up for sale putting continuous pressure on near all asset classes.   This is a major issue that will continue until oil finds a bottom and or there is a response from Federal Reserve Chairwoman Yellen.  If recent history serves us we certainly should not expect our elected officials to think of the country first and build consensus for a policy response instead of worrying more about caucuses and elections.    No, speeches about  building walls to keep people out or stealing the money of successful savers and/or business-persons through higher taxes is much more effective economic policy response or at least what we can anticipate.

Where we’re at:

Gross Domestic Product-GDP.  4^th quarter GDP came in at an anemic +.7% as of the first reading which is subject to two more revisions over the coming weeks.  A very large drag on the top line figure was inventory draw downs.  Conversely the second and third quarter figures sported reasonable +3.9% and 2% rates of expansion driven by consumption helped by lower energy prices and employment gains.  While the fourth quarter figure is weak by any measure, the inventory draw down leaves open the prospects for better news in the coming quarters as firms look to restock inventories.  There are two items that bear watching closely.  First the newly agreed to budget was a sequester buster.  So, government spending should no longer be a drag on growth and actually may add +.5%-+.75% to growth this year.  Second, any stumble in converting the energy savings into stronger and continued consumer consumption could be the canary in the coal mine and bring to fruition the talks of a looming recession.  We’re not even close to there yet.  But, we’re on watch.

Institute for Supply Management Manufacturing Index-ISMMI.  ISMMI registered in at 48.2% that was +.2% from December.  While still reflecting a contracting manufacturing sector there were bright spots.  New Orders and Production both gained +2.7% and +.3% respectively.  No shocker, due to the free falling commodities prices the Employment component dropped -2.1% and the Prices Index  stayed flat at 33.5%.  Surprisingly survey respondents remained fairly upbeat.  We’ll see if that optimism plays out and translates into a resumption to manufacturing expansion. 

Institute For Supply Management Non-Manufacturing-ISMNM.  ISMNM came in at +53.5% comfortably above the 50 level of expansion.  New Orders and Employment were softer at +56.5 and +52.1% again a nice cushion above 50.   Here again respondents remained relatively positive about current and future business activity.  One soft spot was in pricing due to low energy pricing and stronger dollar squeezing margins.

Housing.  Housing continues to benefit from ultra-low borrowing costs and higher employment levels.  Existing home sales surged +14.7% to an annualized 5.46 million rate in 2015 the highest since 2006.  Consumers willing to make such large scale purchases flies in the face of so called recession fears. 

Autos.  Another strong sector for the US.  January domestic auto sales reached an annualized run rate of 17.58 million from Decembers reading of 17.34 million.  Very positive for both of these important economic pillars and drivers of good paying jobs.  The question remains are these levels sustainable and is the consumer’s confidence in making these big ticket purchases  warranted or are they too myopic to realize the light at the end of the tunnel is the recession train steaming down the tracks head on.   We see no reason why these levels cannot be sustained as the average age of auto’s on the road is still at an historically high eleven years old.

Inflation.  The Federal Reserve’s boogey man is largely absent or in hibernation.  While the Fed continues on their perennial game of where’s Waldo consumers continue to benefit from these low to slow growth price gauges.  The one area being impacted from stronger demand lies in shelter or rents which posted a strong +3.2% which helped support the CPI rising +2.1%.  Ex-housing the figure drops to +1.3%.

Leading Economic Indicators-LEI ticked down -.2% in December following the prior two readings of +.5%.  Year over year the index registered +2.7% which would continue to suggest a moderate rate of expansion.

Going Forward:

This current market volatility is in our opinion not, contrary to a few popular perma-bears, due to an oncoming recession but very simply (though no less painful) due to the flows of capital.  Look no further than the Middle East countries and OPEC members.  The overly generous subsidies these governments provided its citizenry (In Valenzuela gasoline costs $0.04 per gallon) in order to keep them happy and politicians/monarchies  in power, at $30 a barrel are no longer feasible.   During the prior prosperous decades the enormous sovereign wealth funds, instead of using these surpluses  to invest domestically and diversify their economies, purchased foreign assets that now must be liquidated in order to maintain these programs as long as possible.  The US’s day of reckoning  will be upon us soon enough if we do not tackle Social Security benefits and Healthcare spending we simply cannot afford as the plans currently operate and are funded today.  But the US can borrow our way right up to the gates of Armageddon.  At least that’s what our elected brain trust is betting voters will believe.  Until oil producing nations have adjusted budgets to the new reality of oil prices being lower for longer the selling pressures will remain a headwind and overhang.   Investing in  companies with strong balance sheets, experienced management, excellent products and solid dividends remains a prudent approach.  This sell off is and will provide opportunities  to invest in companies at attractive valuations.  In this market patience is an investors best friend and virtue. Trying to call a bottom in this environment would be more tricky than catching a greased pig at a country fair.   Oil rules for now.  But Chairwoman Yellen is up next and she might just save the day starting tomorrow on Capital Hill.  We’ll be tuned in for her speech.   

For now we remained committed to the market holding our cash, biding our time to deploy.  The surprise may be that time may come sooner rather than later. 

Thank you again for your patience in these very challenging markets. 

Yours in pursuit of the KWAN!

Wall Street Crosswinds Are A Blowin'. Investors Should Get Ready To Trim The Sails & Search For Value

This year has gotten off to an onerous beginning with the US market being dragged down almost 6 percent to begin 2016.   It brings me back to some misspent days of my youth at the racetrack.   We had the opportunity to see this behemoth of a horse Secretariat strutting around the track.   He was a big beautiful muscular beast.    We just knew he was our horse and we all ran for the window to place our bets, to show of course (which is 3rd place or better).  We didn’t have much money so we had to play it safe.   Lucky for us we played it closed to the vest.  For on that day he got trapped on the rail and even though he thundered down the final stretch he couldn’t make up the lost time and came in second beaten by a horse named Onion.   While disappointed we all came out winners which meant a delicious bowl of clam chowder for us all once we cashed in.   That’s where we are currently in this market.  The market broke out of the gates poorly.  There’s some congestion impeding our path starting with the sell-off in China’s markets coupled with light volume.   But, as you all are aware investing is not a sprint and we haven’t even reached the first turn.    The economy remains in good not great mode.   Job creation is still solid.  Consumer spending and confidence are both gaining while low energy prices will provide trail winds that will remain supportive.  So, let’s look at where we are.  GDP.  Fourth quarter GDP will be released later on this month.  Estimates are for a one and a half to two percent gain.   If this pans out we’ll have booked another not so great year for the expansion.  The primary drags on growth were front and center.  Energy, mining,inventories and cuts to government spending (the last doesn’t appear to be a bad thing).   The new budget just inked in D.C. has put to rest and further fears (by some) of austerity and responsible spending of our tax dollars.   That should allay fears of and continued drag from cuts to government spending and possibly add ½% to 5/8% to GDP growth going forward.  As well the draw down on inventories bodes well as companies will need to restock those shelves in the coming quarters.  We’d anticipate a continuation of this good not great environment and look for 2016 GDP to fall within a range of 2 1/2% -3%.  JOBS.  Job creation remains on solid footing adding 252,000 jobs in November followed by Decembers whopper of +292,000.   The participation rate ticked up +.1 and the unemployment rate stayed steady at 5%.   Hourly earnings along with the workweek remained largely unchanged.    The big gains were seen in good paying jobs such as professional and business services adding 73,000.  Construction add 45,000 and healthcare tallied a 39,000 gain.   The argument that the jobs created are all of low quality, is slowly being put to rest.  This is good news going forward as well.  Leading Economic Indicators-LEI.  LEI for November was up +.4% following October’s +.6%.  Strength was noted in building permits and interest spreads.   The rate of growth has moderated some though this data point suggests a positive outlook for this just completed fourth quarter and into the new year.   This would also lead investors to dismiss rumors or arguments for an imminent recession for the US.  ISM Manufacturing Index-ISMM.  ISMM dropped -.4% to 48.2 in December from November’s 48.6%.  A reading below 50 reflects a contraction in the sector.  The hit to the ISMM index came from the obvious sectors, energy and commodities.  The new orders index was a rare bright spot rising slightly to 49.2% while the employment index dropped -3.2% to 48.1%.  The only saving grace domestically lies in the fact the US economy is not overly reliant on the manufacturing sector to drive growth along with the drag on the sector from lower energy and mining.  ISM Non-Manufacturing Index-ISMNM.  ISMNM December shaved off -.6% from November’s +55.9% to +55.3%.  This continues to reflect an expanding services sector in the US but at a slightly slower pace.  There were many areas of strength.  The New Orders Index added +.7% to +58.2%.  The Employment Index also posted a +.7% to +55.7% with prices dropping -.6%.   Respondents were generally rather positive.   Management Companies and Support Services stated “Business continues to be strong for consulting services”.    Construction “Professional and skilled labor remains hard to find”. Professional, Scientific and Technical Services “ We see continue spend demand higher than any months of this year.  However productivity reaches its peak and projects need to be carried over to 2016”.  Educational Services “ Construction continues at a record pace”.     The headline figure along with the commentary continue to paint a very positive picture for demand and growth heading into 2016.  Housing.  Housing remains mired in a conundrum.  Even with the recovery in home prices many would be sellers remain underwater thus limiting the supply of existing homes for sale.  This lack of supply is allowing sellers to demand higher pricing.  Coupling this dynamic with many “newbie” or first time home buyers strapped with onerous student debt they are being either priced out of the market or unable to gain access to credit.  This would partially explain  the good not robust recovery in housing.  Another hindrance to adding to new supply is builders are having difficulty finding skilled workers (see above ISMNM).  During the housing bust many craftsmen left the industry and simply haven’t returned.  Inflation.  With commodities in near free fall for the prior eighteen months and little signs of stabilization currently, the ability for the Central Bankers to stimulate inflation has turned into a herculean task.  The wildcard here is actually quite obvious.  If commodities prices simply are able to stabilize the US and EU Central Banks 2% target rate would seem easily attainable.    We’re seeing upward pricing pressures from rents, home prices, auto pricing, medical care, education and to a lesser extent wages.  If pricing for energy, food stocks and metals simply stopped falling through the floor we would be more concerned about inflation, but current pricing action   isn’t supportive of this just yet.  Chair Yellen alluded to this in her testimony to Congress in 2015.  Where are we going; As we begin 2016 there are considerable risks, both known and unknown.  Black Condors: 1.     China aggressively devalues the Yuan.  China’s transition from one driven primarily by manufacturing and export to one similar to the US reliant  on services and domestic consumption is happening just not quickly enough to the latter to offset the slowdown in manufacturing and exports.   The manufacturing and construction build out over the last few decades  have led to vast overcapacity and enormous debt loads.  In order to prop up manufacturing the Peoples Bank of China may aggressively devalue the Yuan triggering a race to debase of trading partners respective currencies in order to remain competitive.   A cheaper currency would in effect make goods manufactured for export cheaper for China giving them a decisive edge.  This could set off a catastrophic set of events from massive emerging market currency devaluations stifling the somewhat fragile global recovery.  2.     Russia retaliates against Turkey’s downing of one of their jet fighters.  As the US retreats from being the sheriff of the Middle East choosing to lead from behind Russia looks to expand their sphere of influence, further strengthen their ties with Iran and Syria while forcing NATO to defend an ally against an aggressor setting off a firestorm and direct confrontation between the US and NATO v Russia.    3.     Brazil ousts Rousseff setting off a set of events that further paralyzes growth potentially forcing Brazil’s oil giant Petrobras into default.  That’s over $120 billion in debt and $90 billion in dollar denominated debt.  That would be a tough pill to swallow.  Petrobras is caught in a corruption, graft and kickback scandal who’s web has snared prominent business leaders and politicians alike.   The investigation is ongoing and still playing out.  Petrobras plays a huge part in Brazil’s economy and the global energy markets overall.  As it stands Petrobras debt has been downgraded, projects have been put on hold and investor confidence is non-existent.  This is one to watch as revenues from Petrobras fund social programs, subsidize and allow for cheap below market energy prices that keep the populace content.  Take that away and watch out.  The markets are currently caught between major crosswinds.  China’s economy is slowing more rapidly than planned for causing capital flight and a policy response to devalue the local currency the Yuan.  One of the many explanations for the strengthening of the US dollar.  The strength in the US dollar in turn is helping push down the prices for oil and commodities in general since most are priced in dollars.  The near collapse in those commodities will push many over leveraged producers to file for bankruptcy and force the survivors to significantly curtail budgets.   We’ve already witnessed outsized layoffs in excess of 150,000 in the sector with more to come.  This is just direct layoffs in the energy and mining sectors not that me be directly or indirectly affected such as equipment providers Deere, Caterpillar, GE etc.  In the indirectly geographically affected areas like Texas, Pennsylvania Oklahoma etc. we’ve seen a slowdown in construction projects ,layoffs in restaurant staff, drycleaners, bar staff etc.  Aside from the drags on the economy from cheaper energy and food stocks there is a definitive and very visible benefit to both business and consumers alike.  Conventional estimates point to a $193 billion annual savings to the consumer from the decline in gasoline alone.   For every $.01 drop in the cost of gasoline this would point to an equal $1 billion in savings to consumers.    From the 2011 average of $3.53 (high was $4.12)  to today’s current price of $1.60 leaves consumers with $1.93 or $193 billion in extra discretionary spending.  While not exact the figures are pretty impressive.   As consumers gain confidence that lower prices are here for longer those dollars should find their way out of savings and back into boosting consumer spending.   This massive figure doesn’t even take into account the savings on heating oil and natural gas.  Further, companies use natural gas and liquid gas as a feedstock to make plastics, tires, aerosol, refrigerants, power barbeques, detergents and foam among others items/products you may use.  You can see this touches consumers everyday lives and benefits us all in one or more products and savings.   As for the overall domestic economy growth remains constrained below its long term average growth rate of +3.25% with 2015estimated to come in at +2.2% with a slight improvement expected in 2016.   Headwinds remain, a strong US dollar, weak emerging economies and fears of rising interest rates.  Tailwinds include a robust domestic service sector, aerospace and auto sectors are firing on all cylinders, strength in housing, rising consumer confidence, increasing wages and fairly robust job creation along with a still very accommodative Federal Reserve policy.   Add in India’s economy has overtaken China as the fastest growing major economy and expected to outpace by a full 1% to 7 ½% in 2016.  Lastly you have to take into account the slow steady recovery taking place in the Eurozone.  The Eurozone should exit 2015 at +1.6% growth and we look to 2016 for modest improvement to +1.8%.   These major crosswinds are the catalysts driving the turmoil in the markets along with generating angst among investors and CEO’s alike.  During highly volatile market swings investors sometimes cave into fear and move to liquidate positions seeking the safety of cash. Similarly, CEO’s during times of uncertainty and low visibility for their business prospects cut back on capital expenditures and hiring.  These can exacerbate the emotions and selling to say the least.  The market volatility is here to stay and gains in 2016 will be hard fought for.   Now is not the time to wager on so called Unicorns as many gamblers did after watching Onion stride to victory over Secretariat only to watch him huff turf a few weeks later at the Marlboro Stakes.   Now is the time to go with the best of breed. Investing in companies with a proven business model, management with a vision and plan backed by solid revenue growth and earnings coupled with a an attractive dividend to help cushion the ride around this track we’re all too familiar with, even if it feels different this time around.    For now we remain committed to the market closely monitoring data along with any signs to change course in which case we’ll be in contact immediately.  Thank you again for your patience and confidence in this very challenging investing environment. Yours in pursuit of the KWAN! Investor Alert!  The Equity markets are taking their direction from energy.  Plain and simple.  Oil broke through $30  on Friday.  Should that selling pressure and price decline continue on Monday we advise adding to cash positions as $22-$25 would be the most logical next stop.  The market remains oversold but can remain so for some time.  So, adding to cash positions until oil finds a base would be a cautious but prudent step.  When the oil market bottoms there will be plenty of time to reengage.   So, researching and building out your watchlists would also be a prudent use of time.    We urge against attempting to pick through beaten down energy and mining companies.   The supply demand equation is incredibly difficult to predict with more Iranian and Libyan oil coming back to the markets while demand remains consistent while not strong enough to absorb all that is still sloshing around or being pulled out of mines.

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