Volume
volume6,6,Issue
issue11 — march, 2013
•
Substantially Higher
•
Economic Outlook
•
Find Your Own Tailwinds
•
The Age of the Crisis Ultimatum Countdown
Quarterly Newsletter
march, 2013
Market Perspective
SUBSTANTIALLY HIGHER
Market Rising on Substance
O
n the first day of 2013, the S&P 500 Index rose 2.5%. The remain-
(and you can count us among those that wish for it as soon as possible),
der of the first quarter seems to have followed suit, with the
we’ll need another driver to keep the market moving forward. That
index up nearly 9% as of this writing. The almost unmitigated rise in the
might come in the form of a better unemployment figure and conse-
value of domestic equities has many questioning how securely founded
quent accelerating in GDP growth, or it could be in the resolution to
these gains are. As the market is finally piercing historical valuation
debt problems in Europe.
levels with a P/E ratio above 14.5x, those concerns seem well-reasoned.
Conversely, there are a number of factors which could reverse the
Yet we can’t ignore that the earnings
course of our three-month run. Any weakening in earnings growth
picture on the broad market is as good as it
would call into question present valuation. Disappointments in eco-
has ever been. With the S&P 500 expected
nomic reports would likely be met with a less-than-tolerant posture,
to yield $101 this year and $111 in the year
given how drastically those figures have demonstrated an ability to
to come, we are well above where we were
change in short order.
the last time nominal index values reached
Brad Christensen
Director of Trading and
Wealth Management Advisor
Our managers are intent on finding value wherever it lies. While
this same level. It is this strength in earnings,
a strong market is certainly a friend to all, active managers earn their
combined with heightened expectations, that
keep in more tenuous markets. Our anticipation going forward is that
gives the market substance.
we’ll see some balance of these prospective scenarios – an environment
Several factors have combined to create
where we feel comfortable that we can add value for our clients.
the market surge that we’ve seen so far this year. First, with many investors realizing gains in anticipation of higher tax rates at the end of
S&P 500 Actual Earnings and Next Year Estimates
last year, there was plenty of sidelined money to be redeployed. Second,
many economic indicators have revealed key positive developments to
begin the year including a recovering housing market, strengthening
manufacturing metrics, and stabilizing unemployment claims. And
third, the Fed’s loose monetary policy continues to rain money supply
down from the heavens.
It’s plausible to expect that two of these three elements may remain,
but undoubtedly, monetary policy must normalize. When that happens
“Our managers are intent on
finding value wherever it lies.”
SPX Index F12 Est.
Source: Bloomberg
SPX Index Actual
110
100
90
80
70
60
50
2008
2009
2010
3340 Merlin Dr. Idaho Falls, ID 83404 | 2150 South 1300 East Suite 110 Salt Lake City, UT 84106
2011
2012
2013
1
Volume 6, Issue 1
Yellowstone Partners
march, 2013
Economic Outlook
Unemployment Rate Hovers While Jobless Number Recovers
Jobless
Unemployment Rate
Historical Trends: 4-5%
An analysis of the Jobless Claims reports and the Unemployment Rate
Source: Bloomberg
over the past five years gives us insight into a very important develop-
650
10 %
ment in our domestic economy: Jobless Claims (layoffs) have returned
600
9%
to normalized levels while the Unemployment Rate is still far from
550
historical averages. What this means is that as employment costs have
500
risen and technology has advanced, companies have been reluctant to
450
replace positions as the economy has recovered. With Unemployment
400
6%
above 7% in our country, it’s hard to envision GDP growth in its higher
350
historical 3-4% range.
5%
300
8%
7%
2008
2009
2010
2011
2012
2013
Domestic GDP Growth Remains Below Averages
GDP
Historical Trends: 2.5 – 4.5
Source: Bloomberg
As the primary component of global GDP growth, the US has historically averaged 3.2% GDP growth, sometimes dipping into recession
15
(consecutive quarters of contraction), but often reaching heights above
7%. In recent years, with a more mature economy, the upside has been
more limited, but we’ve also witnessed the deepest contraction of the
past half-century. Theoretically, a greater understanding of economic
concepts such as Money Supply, would put a firmer floor under these
numbers, but we are clearly still vulnerable to deep recession, and apparently not generating the higher growth figures from the past.
10
5
0
-5
1955 – 1964
1965 – 1974
1975 – 1984
1985 – 1994
1995 –2004
2005 – 2014
Net Worth of Households and Non-Profits Back at Highs
Source: Bloomberg
Net Worth
The Federal Reserve has tracked the net worth of US Households and
Non-Profit Organizations in nominal dollar value on the Flow of Funds
report since 1997. During the 2003-2007 time frame, as home values
rapidly ascended, this chart did likewise. The decline was precipitous,
but the return has been slow and stable. This is especially encouraging,
considering that home prices are still drastically below the 2006 peaks.
Again, it’s nice to see many indicators returning to 2007 levels and this
one is particularly important because it measures individual wealth,
not just corporate wealth.
2
66,071.7
65,000
60,000
55,000
50,000
45,000
40,000
35,000
1998
2000
yellowstonepartners.com
2002
2004
2006
2008
2010
2012
Quarterly Newsletter
Volume 6, Issue 1
march, 2013
tailwinds
Find Your Own Tailwinds
Google Public Data Explorer
S
everal years ago, we profiled Hans Rosling’s online global trend
One can make economic assumptions and therefore market oppor-
analysis tool which you can find at Gapminder.org. Unfortunately,
tunity judgments by manipulating and analyzing this data. Measuring
the data has not been updated and while it remains an insightful means
some of these points has confirmed tailwind trends we have previously
of measuring global statistics during the 2002-2007 timeframe, we
considered, and in other cases, introduced us to new ideas – ideas that
hunger for more timely details.
we believe will help us generate outperformance for our investment
Not long ago Google picked up the torch and launched its newest
strategies. We’ve long believed that the internet and other technolo-
free functionality, an incredibly useful tool they call the Google Public
gies have leveled the playing field for investment analysis, and that
Data Explorer which is fed with information from the World Bank, the
our primary means of grasping market trends before they are widely
Census Bureau, and other information gatherers. There are almost infi-
recognized lies in our ability to find, tweak, and scrutinize data in
nite methods of considering datapoint, time, and regional comparisons.
ways others have yet to appreciate. While this is a public tool, freely
One idea I jumped on immediately was the regional world compari-
available to individuals (unlike much of the expensive research tools
son of how long it takes to start a business (a factor which was long ago
we and other investment advisors use), we believe there are nuggets
minimalized by capitalist enthusiasts in North America while other
of insightful guidance right there for the taking. We’d be fools not to
economies have restricted the activity with high regulatory hurdles).
consider them.
Here are a few of the investment tailwind ideas we can discover/
Interestingly, across the board since 2002, countries in every region
have reduced the number. Haiti, for a specific instance, a country in
confirm/understand with the metrics available with the Google Public
dire need of economic enterprise, averaged 200 days to launch a busi-
Data Explorer (hyperlinks in .pdf version available on our website):
ness until it abruptly changed in 2010 – reduced by nearly half to 100
•
Increasing Vehicle Demand
days, but still well above the North American average of 5.5 days.
•
Southeast Asia Smartphone Development/Available Market Share
•
Infrastructure Demand in Asia (Container Port Traffic)
•
Global Tourism Boom/(by tourists)
•
Natural Gas Energy Prevalence in US
Days Required to Start a Business
Latin America & Caribbean
East Asia & Pacific
Source: Google
World
South Asia
Europe & Central Asia
North America
80
70
in Internet Usage
When it comes to future expectations, one dataset that is particu-
60
50
larly interesting is the Frederick S. Pardee Center for International
40
Futures. We’d love to spellbind you with other investment tailwinds,
30
but the idea here is for you to find your own. If you find something of
20
particular interest, please reach out to Chris Jacobs at chris.jacobs@
10
2003
2004
2005
2006
2007
2008
2009
2010
2011
yellowstonepartners.com. We’d love to hear your ideas. t
Disclosures
The data and information contained within this report are deemed to be from reliable sources, but cannot be guaranteed as accurate or complete. Market conditions and our expectations are constantly
changing. The opinions and forecasts mentioned in this report subject to change at any time and without notice. This update is published for informational purposes only and should not be taken as instruction or solicitation to buy or sell any security. Investing in securities markets involves risks that may result in financial losses. Past performance does not guarantee future results.
yellowstonepartners.com
3
Yellowstone Partners
Volume 6, Issue 1
march, 2013
Yellowstone partners
The Age of the Crisis
Ultimatum Countdown
debt ceiling. fiscal cliff. sequestration. In the past 18
Control Act of 2012” - raising the ceiling with the agreement that a
months, these terms, previously foreign to lexicon of the American
supercommittee would meet to address the resolution and that if none
public, have suddenly become commonplace. News stations splash
were obtained, it would come in the form of automatic, across-the-
countdown tickers, complete to the minute, on daily broadcasts, re-
board cuts - see “sequestration.”
minding viewers of the impending doom. Headlines abound with
warnings and threats. As soon as one menacing deadline is “resolved,”
another emerges. Maybe it’s because these issues were never truly
solved in the first place, or maybe it’s because we are in a new era: the
age of the crisis ultimatum countdown.
In his masterpiece, “The Prince”, Niccolo Machiavelli offers this
bit of advice to a neophyte noble: “It is much safer to be feared than
loved because ... fear preserves you by a dread of punishment which
never fails.” It seems clear that both the national news media as well
as the political infrastructure of our country are bent on provoking
fear in the American people. Leaders from both sides of the aisle have
Fiscal Cliff
As 2012 neared an end, Congress intensely debated the combined
economic impact of the expiration of the Bush tax cuts and reduced
government spending along with the reality of expenses which far exceed revenues. The consequences of inaction were broadcast and widely
referred to as “the Fiscal Cliff” in reference to the potential economic
impact. They ultimately settled on a package entitled the “American
Taxpayer Relief Act of 2012” with a 2:00am vote on New Year’s day 2013.
The package had the net effect of raising taxes, while claiming “relief”
due to potentially otherwise higher impacts.
Sequestration
participated in the hyperbole.
The result is a public that is weary, wary, and weary of being wary.
With the aforementioned supercommittee again stuck at an impasse,
Investors are particularly affected when their perspective on invest-
as the March 1st deadline for spending cut resolutions approached,
ments they have is nearer term. Investing, already an emotional
again the ultimatum saturated the airwaves. Despite raucous claims
endeavor, becomes altogether more intimidating with the constant
of ubiquitous atrocities, this time the countdown had no heroic rescue.
threat of government meltdown and consequent economic turmoil.
The sequester cuts went into effect and, interestingly, it happened while
Understanding the course of these events and the nature of the
be semantically parsed, because the term “cuts” is used in reference to
negotiations may help investors feel more at peace.
Google Trends – Search interest and news references
Source: Google
Fiscal Cliff
100
Sequestration
Debt Ceiling
reductions relative to anticipated spending, not decreases from previous years. In fact, if the discussion were to truly entail cuts as you and
I understand them, perhaps a meaningful resolution might possibly
80
60
the equity markets were notching new highs. These “cuts,” though, can
be achieved.
40
Conclusion
20
These stalemates were not unlike similar situations in the past.
2009
2010
2011
2012
2013
matums. What is newer, however, is the sensationalism of them. While
Debt Ceiling
In August of 2011, the federal government reached a point to where it
could legally borrow no more without Congressional approval. The
debate centered around approving an increase only with concurrent
measures to reduce the deficit and how much of that resolution would
come from increased taxation and how much would come from decreased spending. At an impasse, Congress settled on “The Budget
4
Gridlock in Congress is part of the process, as are deadlines and ultithere have certainly been highly-anticipated decisions with major implications in the past, the ‘decision ticker’ as we have seen so much of
recently, is a rhetorical device and a means of boosting news ratings.
By all means, investors must be attentive to such discussions, but they
mustn’t allow themselves to be emotionally affected to a point at which
they act irrationally. t
3340 Merlin Dr. Idaho Falls, ID 83404 | 2150 South 1300 East Suite 110 Salt Lake City, UT 84106