Final Obvious Insights Post

April 15th, 2014

This will mark the final posting to the Tower Private Advisor’s Obvious Insights blog.  We are pleased and excited to inform you that the merge of Tower Private Advisors and Old National Wealth Management becomes official on April 26, 2014.  Since the merger was announced, both organizations have spent hundreds of hours preparing for this transition.  Now, as one unified team, we are prepared to serve you with the very best that both Tower Private Advisors and Old National Wealth Management have to offer.  Going forward, we will use different methods to communicate the information you need to stay current with the national and international forces that shape the investment landscape.

We would like to thank our loyal readers and express our appreciation for your interest in Obvious Insights over the years.  It has been our pleasure to give you the timely information you needed – and the occasional “observation” that may actually have been more interesting than informational.

In the months ahead you will receive similar insights and observations from both our existing investment team and some new team members from Old National Wealth Management. As an example, please click the link below for the most recent edition of the Old National Economic Outlook.

We hope you find the information just as interesting and timely as that received from Obvious Insights.

Gary D. Shearer, CFA

Economic Outlook March-April 2014_1

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Weekly Recap & Outlook – 03.21.14

March 21st, 2014

Tower Private Advisors

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  • Divergent equity index results
  • Chairman Yellen speaks…or mis-speaks

Capital Markets Recap

Some interesting performances below (U.S. all green for one month; Europe quite mixed, etc.). Of note is that the S&P 500 touched a new all-time high today before backing off.

wro

Top Stories

There were several interesting stories that popped up this week, including several related to  comments in Janet Yellen’s first monetary policy meeting. First, there has been speculation that the Fed would modify its approach of trying to guide markets by referencing specific levels on specific indicators. For example, a 6.5% unemployment rate has been referenced for the past several months as one critical level. Well, the unemployment rate doesn’t tell the whole picture, as all know. So, with unemployment a hair’s breadth away from 6.5%, the Fed is going to move away from that, which Ms. Yellen made clear.

She also made clear–maybe too clear–that short-term rates would be heading upward–oh, about six months after it’s bond buying program ends. You will note below that, in March, the Fed further reduced by $10 billion its quantitative easing program of buying bonds. So, the present pace of buying is $55 billion; at the present taper rate of $10 billion per month, the Fed will be done buying bonds by September, at the latest; six months after that is–BINGO!–March 2015, which is far earlier than most have expected. The yield on the 2-year Treasury note, a proxy for monetary policy, jumped around and after Chairman Yellen’s comments, as shown below.

 2yr

  • The Federal Reserve released the results of its stress test of 30 major U.S. banks. Of the 30 banks, 29 passed with flying colors. The only one that failed was Zions Bancorp. The test was about capital adequacy, and Zion came up short. Its shares are down by a bit more than 3% today.
  • A suvey of consumers in China found that almost two-thirds of them plan to withdraw funds from their bank accounts and invest the proceeds “in financial products sold on the internet.” Yikes.
  • Thanks, at least in part, to last year’s big surge by equities, the top 100 corporations have seen their pension plan funding levels jump from 73% to 89%. Another year like the last one will leave them 108% overfunded, but they probably shouldn’t plan on that.
  • Here’s an interesting development. There have been commodity funds around for a long time, and in increasing numbers as ETFs have proliferated. One problem, though, is that most have been based on futures contracts, and it just hasn’t gone well. A firm I’ve never heard of, AccuShares, has filed with the SEC to offer 12 ETFs that offer exposure to the spot prices of six commodities. ‘Coupla things… It’s typically the spot price that we’re most familiar with, as few of us care about wheat for October delivery. This will allow market participants to speculate on spot prices. Notice…12 funds, six commodities. Like the futures markets, these will represent zero-sum games. So there will be, for example, a long-oil ETF and a short-oil ETF. Basically–and I might be butchering this–if oil prices go up, the holder of the short ETF will experience a reduction in value, while the holder of the long ETF will receive a distribution. The funds’ holdings will be cash equivalents. In the past, because expiring futures contracts have to be rolled into further-out–and often higher priced–contracts there has been a natural decay in value. This could open up an entirely new arena for investors.

This Week

Most of the economic data released this week was largely in line with expectations. In housing, the NAHB Housing Market Index, and index of homebuilder sentiment, rose slightly, from 46 to 47, below expectations of 50. There is some risk that the uptrend in builder sentiment is going to taper off, as shown in the chart immediately below.

nahb

Housing Starts fell slightly (-0.2%) from an upwardly revised 909,000 (previously 880,000), while Building Permits rose by a much-larger-than-expected 7.7%–economists expected an increase of 1.6%. Existing Home Sales were exactly as expected by economists (down by (-)0.4%.) Elsewhere, inflation, as measured by the Consumer Price Index, was almost non-existent in February, with both the headline and core (i.e. excluding food and energy) numbers coming in at 0.1%, which was in line with what economists expected. That both the headline and core numbers were the same tells one that food and energy prices, on average, were unchanged in the month. On a year-over-year basis, inflation is up by just 1.1% at the core level; 1.6% at the nominal level. The Fed has plenty of disinflationary cover to continue its current monetary policy. Speaking of monetary policy, the Fed announced its plans to continue its taper program, announcing that it had purchased $55 billion of Treasury and mortgage-backed bonds, $10 billion less than in February. Given that it has been transparent about telegraphing its plans, that was exactly as economists had expected. Jobless Claims ticked up just a bit but did nothing to suggest any future direction for the series, as shown below.

jobless

Next Week

It’s a busy week for the economists next week, with quite a few economic releases due out. There are several housing-related releases, including the broadest-based measure of national home prices, the House Price Index, Case-Shiller Home Price index, New Home Sales, and Pending Home Sales. Purchasing managers indexes are due out for the Manufacturing and Service sectors. We get the third incarnation of Gross Domestic Product, Jobless Claims, and a couple of regional Federal Reserve reports.

Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors

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Weekly Recap & Outlook – 03.07.14

March 10th, 2014

Tower Private Advisors

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  • Hodge podge 

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Weekly Recap & Outlook – 02.28.14

February 28th, 2014

Tower Private Advisors

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  • All-time highs for some indexes
  • Lousy starts for others
  • Elevated fear in Emering Markets, little in U.S. and Developed Europe
  • Mixed bag of economics

Capital Markets Recap

With today’s trading, the S&P 500 reached an all-time high, further pushing it into marginally positive territory for the year to date period, as can be seen in the table below. The rest of the year-to-date results are truly a mixed bag, with Australia down by (-)8.32% and Natural Gas up 12.4%.

wei

With few noteworthy stories this week–Ukraine and Crimea will get wrapped into the chart that follows–I decided to take a look at the so-called Fear Indexes for the U.S., Developed Europe, and Emerging Markets, given the unrest–around the globe, it seems. The chart below plots the next-30-days implied volatility–implied, so called, because it is implied from option pricing. When these go up, they suggest that market participants expect increased volatility; i.e. they’re fearful. From this, we can see that fear in emerging markets is up by about 37% from a year ago; it’s down by 8.50% in the U.S.; and fear in and about developed Europe is down by 20%. Notice how, for the most part, the indexes move in sync.

VIXES

On a longer term chart, only emerging markets seems at all elevated, and that’s probably to be expected what with the unrest in Ukraine, Thailand, etc. While our services suggest it’s too early to get excited about emerging markets, the time is getting closer for considering investments there.

vixeslt

Top Stories

None I could find that were worthy of your attention.

This Week

Here is a bit of a troubling developement–or it might not be. What you have here is a chart showing economists estimates for the U.S. economy relative to the actual releases. Technically, it’s called the Citigroup Economic Surprise Index. So, for example, economists produce estimates for Nonfarm Payrolls; the averaging of them is called the consensus estimate. Then, the actual Nonfarm Payrolls report is released and we find out how badly economists have missed the estimate. Very crudely speaking, if the line in the chart is rising, economists are being too pessimistic; if it’s falling, too optimistic. When the line is at the top/bottom, economists are missing by the widest margin. We’re now in a mode of economists being too optimistic, and depending on your view–of your portfolio–that can be good or bad. Heavy in bonds? Good news. Heavy in stocks? Depends on your view of the Federal Reserve. With disappointing economic data, the Fed is more likely to prolong its easy money policy. Companies, though, are obviously going to struggle in a weaker economy.

econsurp

We were treated to three regional Federal Reserve surveys (Richmond, Dallas, and Kansas City), Chicago Purchasing Managers index, and ISM Milwaukee. The Dallas and Richmond surveys showed sharp declines in economic activity; ISM Milwaukee a more modest decline, while the Kansas City Fed survey showed a better-than-expectations reading, but one which was lower than last month; the Chicago report, however, was better than expected (59.8 v. 56.4) and in line with last month’s reading.

Survey says…!

ff

Housing activity picked up a bit this week, however. The Case-Shiller Home Price Index showed an 11.30% year-over-year increase in home prices. There is quite a lag to the Case-Shiller indexes, with this release representing Q4 2013 data, which didn’t include the nasty weather that has been the whipping boy for every poor economic release. Arguably affected by weather, however, is housing activity, and New Home Sales enjoyed an unexpected increase of +9.6%, versus a forecasted decline of (-)3.4%. Pending Homes Sales, however, fell by (-)9.1%, again, astounding economists, who had looked for a (-)6.1% decline. The second coming of Q4 GDP was released this week, and it showed a decline from 3.2% at the end of January to 2.4%, the result of smaller personal consumption than originally figured. What goes on with GDP revisions is that some of the data for each quarter is initially estimated; each revision reflects the fact that more of the data is realizes as opposed to estimated; at the end of next month we’ll get one more revision on the Bloomberg terminal. After that, the data will continue to be revised and revised and revised.

Next Week

It’s the first week of the new month, and that means payrolls are released on Friday. They’ll come from two sources, the Establishment Survey (of brick-and-mortar establishments) and the Household Survey, from which we get the Unemployment Rate. Economists estimate that the Nonfarm Payrolls report will show 150,000 jobs were added, while they expect the unemployment rate to stay unchanged at 6.6%. They’ll be wrong on all these fronts, but, still, they estimate stuff. On Wednesday, we’ll get what purports to be a sneak peak at Friday’s report in the form of the ADP Employment report. Interestingly, economists estimate that report will show 155,000 jobs were added. It’s really a pretty heavy week of data, but none of it will matter in light of Friday’s report.

Goodbye, February.

Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors

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Weekly Recap & Outlook – 02.07.14

February 7th, 2014

Tower Private Advisors

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  • Correction over?
  • Emerging markets concerns remain
  • Payrolls report what the market wanted? Seems like it

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