June 20, 2016

The Markets

 

The world’s stock markets took it on the chin last week.

 

A one-two punch was delivered with the Federal Open Market Committee (FOMC) meeting leading and concerns Britain will leave the European Union following.

 

On Wednesday, the Federal Reserve confirmed what many had suspected. There would be no June rate hike. There was unexpected news, too. The Fed lowered its projections for U.S. growth to 2 percent through 2018. Barron’s reported the stance of various committee members had shifted from the previous meeting:

 

“At this week’s confab, there were seven projections for two increases, to 0.875 percent, and six for a single hike, to 0.625 percent. There also were two outliers expecting more hikes to above 1 percent. Excluding the highest and lowest guesses, the “central tendency” was in a range of 0.6-0.9 percent, according to the Fed’s projections…In March, however, there was a solid consensus of nine members expecting two hikes to 0.875 percent, and seven looking for more hikes to over 1 percent. Back then, the single outlier was calling for just one increase to 0.625 percent.”

 

In the past, dovish Fed actions have pushed U.S. stock markets higher; however, stocks were lower by the end of the day on Wednesday, according to MarketWatch.

 

Investor reticence may owe much to concerns about the possibility of a British exit. Experts cited by Barron’s suggested an EU exit may already be priced into markets since European bank stocks “have been crushed…with some down 40 percent and others at lows not seen in years.”

 

Treasuries and high-quality government bonds rallied through the end of the week as investors opted for ‘safe haven’ investments*. On Friday, investors took profits after eight days of gains and rates pushed slightly higher, reported The Wall Street Journal

 

BREXIT!  Brexit – is a word that has become used as a shorthand way of saying the UK leaving the EU - merging the words Britain and exit to get Brexit, in a same way as a Greek exit from the EU was dubbed Grexit in the past, For more info, click here: Brexit Explained

 

Is this a ‘Sell the Rally Opportunity’? The uncertainty over the non-binding Brexit referendum vote next Thursday has caused a flight to safety in the Treasuries and gold since the first of the month. If the vote is heavily in favor of leaving the EU then we would likely see one further climactic move down which could take days (hours?), not weeks to occur.. A vote to Stay could spark a short-term market rally. A marginal win by the ‘yes’ (leave the EU) really leaves the door open for Britian to remain in the EU. Why? Because this is merely a non-binding advisory, and in theory could be totally ignored by the UK government. It could get down to parliamentary politics. This incredible detail is explained in a blog post by Financial Times columnist and legal expert David Allen Green says that no legal provision was included in the EU referendum legislation that requires the UK Parliament to act in accordance with the outcome of the referendum. “The government could decide to put the matter to parliament and then hope to win the vote, Green says. In the scenario of Britain's EU membership being put to a Westminster vote, barring no dramatic change in allegiances, it is likely that MPs would vote to keep the country in the 28-nation bloc”.

For more info: David Allen Green Financial Times

Given these challenges, here are some Brexit observations:

  • We expect some sharp movements in global financial markets in the event of an “out” vote
  • We also anticipate credit ratings agencies will likely penalize the UK after an “out” vote
  • We have seen sustained depreciation pressure on the British pound thus far in 2016, some of which is likely related to “Brexit” risks, and some related to weakening interest rate support for sterling as markets priced out expectations for the Bank of England’s first rate hike
  • We’ve also observed underperformance of UK bank assets relative to peers, as many expect the financial sector to be negatively impacted by a potential “out” vote
  • The UK financial services industry would likely face increased transaction costs across the EU compared to the current status under the European Single Market

This “stay option” is another reason why selling into a rally is a real option.  Securus is monitoring the markets and any reaction, up or down, could be considered a knee-jerk reaction that could pose opportunities either way.  Stay Tuned…

 

OUR INVESTMENT STRATEGIES were unchanged over the past week.  We continue to focus on good stock and bond pickers as well as alternative investments.  We think the summer into the fall could produce more volatility and some of our model holdings do well during these periods.  With both stock and bond markets virtually flat on the year, our alternative investments have been a good addition to our models. 

 

 

*US treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit and market risk.  They are guaranteed by the US government as to the timely payment of principal and interest and, if help to maturity, offer a fixed rate of return and fixed principal value.

 


Data as of 6/17/16

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor's 500 (Domestic Stocks)

-1.2%

1.3%

-1.4%

8.1%

10.3%

5.7%

Dow Jones Global ex-U.S.

-2.5

-3.4

-13.8

-2.0

-1.4

0.0

10-year Treasury Note (Yield Only)

1.6

NA

2.3

2.2

3.0

5.2

Gold (per ounce)

1.2

21.5

9.6

-2.3

-3.4

8.5

Bloomberg Commodity Index

-0.3

12.9

-11.7

-12.1

-11.0

-6.2

DJ Equity All REIT Total Return Index

0.9

8.9

14.8

11.1

12.0

7.3

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

are you worth your weight in platinum or, maybe, saffron? Gold is not the only substance that commands a hefty price per pound. The Telegraph recently reported on the most valuable materials in the world by weight and some were quite surprising!

 

  • Saffron is the most valuable spice in the world. Most of the world’s saffron comes from Iran and it can cost as much as $65 a gram, according to The Guardian. There are almost 454 grams in a pound, putting the value of saffron at $29,510 a pound.
  • Beluga caviar is mighty expensive. Guinness World Records puts the price at about $34,500 a kilogram. A kilogram is a little more than two pounds.
  • Platinum is expected to cost about $1,005 an ounce during 2016, according to Kitco. There are 16 ounces in a pound, putting its per pound value at $16,080.
  • Gold may run about $1,250 an ounce, or $20,000 a pound, by the end of 2016, according to CNN Money.
  • White truffles are “the fanciest tubers in the fungi kingdom,” according to com. A four-plus pounder sold for $60,000 at auction in 2014, but more common varieties sell for about $300 a pound.
  • Venom is pretty tough to harvest, and it commands a premium price. Snake venom runs about $370 per gram, scorpion venom about $596 per gram, and spider venom comes in at about $1,342 per gram. Multiply these amounts by 454 and you get (per pound for each) $167,980 for snake venom, $270,584 for scorpion venom, and $609,268 for spider venom!

 

Gram for gram, there are some things in the world more valuable than gold!

 

Weekly Focus – Think About It

 

“My father gave me the greatest gift anyone could give another person, he believed in me.”

--Jim Valvano, College basketball player, coach, and broadcaster

 

Best regards,

 

The GPS Team

 

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

 

* The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.

* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Past performance does not guarantee future results. Investing involves risk, including loss of principal.

* Consult your financial professional before making any investment decision.

 

Sources:

http://www.barrons.com/articles/dow-falls-1-on-brexit-growth-worries-1466226796?mod=BOL_hp_we_columns (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/06-20-16_Barrons-Dow_Falls_1_Percent_on_Brexit_Growth_Worries-Footnote_1.pdf)

http://www.barrons.com/articles/fed-acknowledges-reality-rates-are-going-nowhere-1466032816?mod=BOL_hp_highlight_1 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/06-20-16_Barrons-Fed_Acknowledges_Reality_Rates_are_Going_Nowhere-Footnote_2.pdf)

http://stream.marketwatch.com/story/markets/SS-4-4/SS-4-110696/

http://www.wsj.com/articles/u-s-government-bonds-pull-back-after-eight-day-rally-1466173428 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/06-20-16_WSJ-US_Government_Bonds_Pull_Back_After_Eight-Day_Rally-Footnote_4.pdf)

http://www.telegraph.co.uk/business/2016/05/18/the-most-valuable-substances-in-the-world-by-weight/saffron/

https://www.theguardian.com/world/2016/feb/04/iran-saffron-sales-lifting-sanctions

http://www.asknumbers.com/PoundsToGrams.aspx

http://www.guinnessworldrecords.com/world-records/most-expensive-caviar/

http://www.kitco.com/news/2015-12-22/HSBC-Platinum-To-Average-1-005-Palladium-655-In-2016.html

http://money.cnn.com/2016/02/02/investing/gold-prices-rise-2016/

http://www.vox.com/2016/6/15/11932370/truffles-expensive-costs-thousands

http://www.brainyquote.com/quotes/quotes/j/jimvalvano358465.html?src=t_fathersday

http://durableportfolios.com/UK-European-Union-Referendum

http://blogs.ft.com/david-allen-green/2016/06/14/can-the-united-kingdom-government-legally-disregard-a-vote-for-brexit/

 

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