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Aurum Wealth Management Group

Weekly investment news from Aurum Wealth Management Group.

LeBron's Decision Parallels Investor's Decision

Aurum Weekly Access - 7/10/14

By Michael McKeown, CFA, CPA - Director of Research

The anticipation in Cleveland is at a fevered pitch. Every basketball fan is refreshing twitter, listening to sports talk radio, and tuning into ESPN to find out the latest scoop. Akron's prodigal son, LeBron James, opted out of his contract with Miami and is deciding on whether he should return to the Cleveland Cavaliers where he started his career. It is not every day that a top 10 all-time player changes team, but coming home to the Akron-Cleveland area would be redemption for leaving four years ago. Billions of dollars hang in the balance for the players, organizations, sponsors, and fans. Many other players are free agents and waiting along with the teams to see who will go where, but only after LeBron decides.

Do you think these teams have a backup plan if things do not go as planned? Of course they do. There is too much at stake not to have a Plan A, Plan B, or Plan C if one free agent goes to Houston and another goes to Chicago. Billion dollar organizations do not 'wing it,' nor do the top investors.
It is clear that some investors do not have a plan if the stock market falls or interest rates rise causing bond prices to fall. Why? Because weak prices beget more selling as it did with the stock market's 50% drop in 2000-2002 and in 2008. The times when the biggest cash inflows should have taken place for rational decision makers was actually when the biggest outlfows occurred from equity mutual funds.

Chart6 071014 

Humans cannot help but revert to a protective mindset when their resources are threatened. The resources, namely financial assets consisting of stocks and bonds, decreasing in prices threatens future consumption. Wanting to minimize the likelihood of further losses, investors react to falling prices by selling. This is seen across asset classes, such as in bonds last year when interest rates rose, and across regions, as in the depth of the European crisis in 2010-12, investors pulled money out of the German, Greek, and Italian stock markets.

Having a plan for adding funds to stock and bond positions is a must for price weakness, along with selling contingencies as prices increase. This must occur before the event, to prevent irrational decision making. It is a dynamic and ongoing process of planning to achieve consistent investment results.

The Cavs have All-Star point guard Kyrie Irving and #1 overall pick Andrew Wiggins along with room to sign another free agent, though we are all hoping Plan A of signing LeBron goes as planned. Hopefully the other teams have to worry about Plans B & C.

 

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

What's the deal with GDP?

Aurum Weekly Access - 7/2/14

By Michael McKeown, CFA, CPA - Director of Research

 

Last week the Bureau of Economic Analysis released the final report for first quarter Gross Domestic Product (GDP), which measures the market value of all final goods and services produced. The result was an annualized negative 2.9% growth rate for the U.S. economy. This was the worst quarterly performance since the first quarter of 2009. Consumption was the only positive contributor with small detractions from fixed investment and government spending. The large detractors were inventory and net trade.

Chart1 070214

The simple narrative blamed the weather for the slowdown in consumer spending (which comprises 70% of the economy). Yet slowing spending started in the fourth quarter of 2013, before the polar vortex in January and February. The consumer is running slower than originally estimated at 1% versus the previous estimate of 3%, but not at levels that would indicate recession. This is according to our chart for monthly spending on retail and food services, which adjusts for both population and inflation. Since this is a discretionary category, consumers can quickly cut back on their spending when times begin to toughen up as they did in 2001 and 2007, prior to the last two recessions.

Chart2 070214

The unemployment rate continues to trend down (at 6.3% currently), manufacturing durable goods are positive, and surveys such as the ISM (Institute of Supply Management) still show a positive trend. Part of the big detraction was due to inventory, so it seems companies do not want to be caught with an oversupply. We will see payroll data this week for June, but job growth has been steady at an average of just under 200,000 per month for the past two years.

Chart3 070214

For now it pays to consider the weak growth from the first quarter as an aberration, however, there are warning clouds brewing. From mid-2012 to early 2014, inflation averaged 1.5%. Earlier this year it dropped to 1% before jumping to 2%. A further increase to 3-4% would be worrisome. Why? Because a small increase in inflation from 2% to say 4% is a doubling of the price level (recall 2011). In a consumption constrained economy, this would take money from discretionary consumer spending to non-discretionary items like gas or food, acting as a tax on the consumer. Many commentators believe that employment markets are tight and sowing the seeds for a cyclical rise in inflation.

Chart4 070214 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

Sports & Markets with the U.K. & U.S.A.

Aurum Weekly Access - 6/20/14

By Michael McKeown, CFA, CPA - Director of Research

England is a country rich in soccer tradition and boasting the English Premiere League, the world's top club league. The U.S.A. is allegedly always one step away from 'soccer becoming huge,' but Major League Soccer does not get much domestic attention, in favor of the multi-billion dollar National Football League. However, Monday's World Cup win against Ghana for the U.S. had the most viewers ever for a match (11 million), so it is moving in the right direction. Just 100 years ago, boxing and horse racing were the most popular sports in the country. With concussions getting more attention which could result in major lawsuits from former NFL players and popularity higher than ever, maybe American football is at its peak?

What the U.S.A. does have in common with the UK are similar financial markets. Note how closely the stock markets tracked each other since 2000. In 2013, U.S. markets took a big step ahead.

UKUSA STOCK MARKET 

Both the UK and the US had housing bubbles over the last decade, except that the UK is back to new highs. The U.S. meanwhile has seen many areas of the country recover, yet it is still below the 2006 highs at an aggregate level.

Housing

Because of the hot housing market, the Bank of England signaled intentions to raise interest rates sooner in 2015. Expectations of a rate hike moved earlier from May to February 2015, resulting in the 2-year UK Gilt yield rising and the sharpest move since 2010.

 2-year

Even interest rates seem to move in tandem for the countries. The broad moves in 2-year yield followed each other closely, yet the difference between the two today is quite wide. Some consider the Bank of England to be a little ahead of the Federal Reserve, so our short-dated bonds yield could play catch up. In addition, the below chart shows the yield spread between the 10-year and 5-year bonds for each country. This tracked closely the last several years.

 Yield curve

If the 5-year bond yield would rise to meet the 10-year, the spread could continue to fall. While it is a ways off, if the spread were to fall to zero, it would signal a very high risk of recession, just as it provided a warning shot across the bow in 2000 prior to the 2001 recession, and in 2006, prior to the 2008-09 recession.

This has implications for short-term bond funds, and particularly holdings in the 2-5 year area of the interest rate curve which includes some intermediate municipal bonds. Given these strategies take anywhere from 2-5 years of duration risk, assuming a 1% rise in interest rates, all things equal, bond prices would fall 2-5%. Yields on these strategies range from only 0.5% to 2%, so this does not seem to compensate for the interest rate risk. Our managers are looking at barbell bond strategies, pairing longer dated bonds and very short duration positions (often floating), while keeping credit quality high. Examining yields on bond portfolios is important today, as it may not provide the ballast to the total portfolio as it has in the past.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

Follow The Money

Aurum Weekly Access - 5/30/14

By Michael McKeown, CFA, CPA - Director of Research

Behavioral finance teaches that one factor influencing prices are emotional crowds and their compulsive need for social validation. Even though we humans are a social bunch, when it comes to investing, our need for acceptance must be left at the door. For by definition, portfolios must be different than the crowd to be above average. As Howard Marks, CEO of $83 billion firm Oaktree Capital said in his note last month, "If your portfolio looks like everyone else's you may do well, or you may do poorly, but you can't do different."

We discuss valuations quite a bit, as the price one pays is a key determinant of future returns and the chances of losing money. In addition, other investors influence the path of returns, as sentiment can pressure prices on the upside and downside.

The American Association of Individual Investors (AAII) polls its members monthly on their current holdings. It goes back to 1988 and provides a range of stock, bond, and cash allocations held by the group. Today, stocks make up 67% of portfolios, above the long-term average of 60%. Each time it reached this point, it essentially stayed above average for some time in the late 1990s and mid-2000s. The current weight is below the peak in 2000 or 2007, but certainly closer to the top end of the range. Bonds now are right about at the long-term average after several years above average. Cash sits at the lows of 18%.

may30aaiisurvey

Where have investors been adding over the last year? According to Morningstar, the equity allocations were boosted by mutual fund flows to international equity, up $135 billion or 7% of total assets. Bond allocations fell due to the interest rate rise last year and selling thereafter.

may30broad flows

Looking under the hood, it gets more interesting to see where investors are going with new funds. The Europe Stock category is a small one with only $22 billion in total assets, but investors feel confident about the European recovery story today, increasing net assets by 29% to Europe funds, though there were net redemptions during the heights of the Euro Crisis in 2011 and 2012. While overseas investors are not buying emerging markets, U.S. mutual fund investors increased exposure by $24 billion or 8% of assets under management. US equity allocations grew due to appreciation, but only modestly due to net flows into funds. (It should be noted this does not include flows into domestic equity ETFs, which had net issuance of $86 billion in the last 1 year period, per ICI.)

 may30equityflows

Fixed income is particularly intriguing. Investors attempted to minimize exposure to interest rates over the last year, buying Bank Loans and Nontraditional bonds (also known as unconstrained funds). They shunned the intermediate-term category. Catching most investors off-guard was the fact that interest rates fell sharply through the first five months of 2014.

may30bondflows

The title of this note, Follow the Money, is not a literal direction for one's portfolio assets.  The purpose is to point out that following where the money flows is a great way to to see how the crowd is positioned – and for understanding where and why your portfolio should be different.

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

What's Your Style?

Aurum Weekly Access - 5/23/14

By Michael McKeown, CFA, CPA - Director of Research

According to University of Chicago professor and Nobel Prize winner Eugene Fama and Professor Kenneth French of Dartmouth, the explanation for the outperformance of certain stocks is due to two main factors, value (cheap beats expensive) and size (small beats large).

Intuitively this makes sense, cheap stocks with a low price to book ratio have a higher chance of reverting to an average valuation and making positive returns. In contrast, buying expensive stocks which revert to an average valuation results in below average returns. For small caps versus large caps, it is easier for a small cap company valued at $1 billion to double in value to $2 billion, than it is for a $100 billion company to double in value to $200 billion, since the absolute size of profits and growth necessary is so much less for the small cap firm.

The outperformance of value and small cap factors is not an every quarter or every year phenomenon, it goes in waves based on starting relative valuations, investor sentiment, and macroeconomic factors affecting profitability (among others).

Small caps did in fact beat out large caps the last 35 years. This ratio is about one standard deviation below average today.

largesmall May14

Small cap growth had a rough 35 years losing to small cap value, but performed quite well during the past market cycle. This is partially due to value indices containing a higher percentage of financial sector stocks, which were severly impaired during the financial crisis in 2008.

May14 scv scg

In a bit of an anomaly, the value factor did not hold for large caps over the last 35 years as growth trumped value. Value did begin outperforming when tech, media, and telecom industries reached the apex in 2000.

May14 lcv lcg

---
Turning to more recent performance in the next chart, over the last five years, small cap growth was the top performer. This was followed by large cap growth, small cap value, and lastly by large cap value.

May14 5yearperformance

So far in 2014, all of the roles reversed with small cap growth faltering badly, partly due to biotechnology and social media stocks. Large cap value held up the best with its more defensive oriented sectors such as consumer staples and utilities (and because growth has a higher consumer discretionary sector weight, which underperformed recently).

May14 ytdperformance

Differences in performance bring differences in valuation. Using a simple price/book ratio as a proxy for value, we see large cap value and small cap value stocks being near the average of the last ten years. Large cap growth and small cap growth indices are both above one standard deviation rich to the average of the past ten years.

may14 price to book all

Next, we examine another valuation metric, the 5-year normalized price/earnings ratio. Rather than taking one year of earnings and looking back, we take the average of the past five years to account for fluctuations in the business cycle. The middle chart below shows this ratio is near its peak of the last 40 years and above two standard deviations to the average, thus very expensive.

may14 smallpe2

The top part of the graph shows the forward 5-year returns, lagged by five years. In this way, we can see what the normalized P/E ratio historically returned at different starting points. Note in the past when the ratio was one standard deviation rich (between the top horizontal red and green lines), returns on a forward 5-year basis were around zero. Buying when this ratio is cheap resulted in outsized positive returns. The bottom graph shows that earnings are usually falling when stocks get to a cheap valuation level.

Short-term market movements are difficult to predict, but buying assets that underperformed on long-term time frames and are cheaper than alternatives is one of the factors the Fama & French theory is built upon. In addition, mean reversion is a powerful force in financial markets. With a switch among style and size performance in the first part of 2014 and stark differences among valuations today, considering what style you want in your portfolio is important as ever.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

U.S. Economic Round-Up

Aurum Weekly Access - 3/28/2014

By Michael McKeown, CFA, CPA - Director of Research

The stat collectors released many data points over the past week. This note walks through a few charts we found interesting.

The graphic below breaks up the five components of the U.S. Gross Domestic Product (blue line) to show the contribution made by each sector. Fourth quarter GDP came in at 2.6%, slightly below expectations and down from 4.1% in the third quarter. Personal consumption was solid while the inventory build in the third quarter predictably had companies pulling back in the fourth. Economic growth remains on track, though lackluster.

contribution to GDP

Since the sectoral financial balances simply account for whether each sector ran a surplus or deficit, by definition, it must sum to zero. The government deficit declined dramatically (see the increase in the blue line) over the past three years. The rest of the world runs a much lower surplus today, especially compared to the early to mid-2000s. Because not every country can be a net exporter, the lack of surplus is a byproduct of slowing growth in many emerging markets. The household sector continues to run a high surplus, especially compared to the previous decade.

sectoral balances

Residential housing detracted from growth for the first time since 2010 during the fourth quarter. Higher mortgage rates relative to a year ago held back mortgage applications and investment in the sector. This occurred with the average 30-year conventional mortgage rate at 4.5%. It is hard to believe 14 years ago, mortgage rates were double at nearly 9% yet so was the mortgage application index level. Today the index is at its lowest levels since 1996 with the peak in 2006 during the housing bubble.

mtgappsmtgrates

Finally, initial jobless claims improved again this week, hopefully foreshadowing a solid monthly jobs report for March (which comes out . One of our managers noted the increasing importance of the weekly claims data now that the Federal Reserve removed the Unemployment rate as a key metric at last week's Fed meeting. The inverse of the series is plotted below, which neatly tends to follow the S&P 500 price index over long periods.

joblessclaims

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

Emerging Markets Flow Show

Aurum Weekly Access - 3/21/2014

By Michael McKeown, CFA, CPA - Director of Research

Much is going in the world of geopolitics with effects on financial markets. From China allowing its currency to float in a wider band and of course daily news out of Russia, opportunity and risk are ever present. This note touches on an interesting development around investor behavior related to the broader emerging markets region.

According to EPFR Global, investors sold $100 billion of emerging market equity funds over the last 12 months. This amounts to approximately 10% of assets under management, compared to 2008 when 15% of assets were pulled (during the 60% peak-to-trough drawdown in only six months). The recent streak marks 21 straight weeks of outflows, a record in the last 15 years, after the 22% price drawdown over the past three years.

Emerging markets moved essentially sideways (top of the below graphic in gold) since late 2009.

SPXEM 2008 2014

Up until the beginning of 2012, U.S. stocks and emerging markets largely traded together over the previous five years. To start 2013, the S&P 500 traded with a Price/Earnings multiple of 13, compared to 10 for emerging markets. Today, the S&P 500 trades at 15.4 while emerging markets became cheaper with a P/E of 9.5.

The underperformance over the last two years seems to be the mean reversion for the emerging markets outperformance over the last 15 years. In hindsight, the outperformance seems obvious, but in 1999, U.S. stocks were flying high with large cap growth and technology going up 30%+ per year, while emerging markets were just one year removed from the Asian currency crisis in 1998.

SPXEM 1999 2014

Back in mid-2001, when the emerging markets index and S&P 500 began to diverge, the Forward Price/Earnings ratio was at 22X for the S&P 500 while the emerging markets stood at 10X.

The point being, the divergence has gotten much greater in the past, as investors reallocate to what has performed the best, namely US stocks. And as we know, decades of behavioral research shows that it's in our human DNA to chase returns. With the S&P 500 making new all-time highs, the current Forward Price/Earnings premium could increase versus emerging markets. As investors surrender assets at discount prices due to the thought of losing more money, our portfolios will be methodically rebalancing to those undervalued assets.

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

[1] Garner, Jonathan. "Asia/GEMS Equity Strategy."Morgan Stanley Research. March 21, 2014

Tax-Free Income Comeback

Aurum Weekly Access - 3/5/2014

By Michael McKeown, CFA, CPA - Director of Research

"The market's not a very accommodating machine; it won't provide high returns just because you need them." - Peter Bernstein

The low yield environment has investors scrambling for return opportunities, from social media stocks to junk bonds. One area where the baby was thrown out with the bath water is municipal bonds. As interest rates rose, bond prices fell. Investors bailed from any form of yield instrument, including municipal bonds.

Arguably though, with above average valuations for equities and high spreads to corporate bonds, municipal bonds seem like a compelling destination for capital. This is especially true considering today's highest effective marginal tax rate of 44.3%, which is the sum of the 39.6% Federal income tax, 3.8% net investment tax, and 0.9% Medicare surtax.

Taxableequivyields

Source: Barclays

The Barclays High Yield Municipal index yields approximately 7%, which results in a taxable equivalent yield above 12%. Relative to corporate high yields this seems quite attractive. In addition, Moody's found the cumulative default rate from 1970 – 2012 for below investment grade municipals (which makes up the high yield index) was 2.56% versus corporate high yield at 13.87%. So that means there is a higher return expectation and lower default risk with municipal high yield versus corporate high yield.

Outflows in 2013 were a record with investors withdrawing $58 billion from tax-free bond funds. This even beat out the $44 billion withdrawn in late 2010 and early 2011, after Meredith Whitney made her foolish municipal market call on 60 Minutes regarding defaults.

CumulativeMuniFlows

Source: Investment Company Institute, Aurum

Investors found plenty of reasons to sell but it seems a reprieve from redemptions is finally here. A few headlines are here to stay and some may be transitory. Typically cited risks for municipal allocations include:
• End of Quantitative Easing and thus an interest rate rise
• Possibility of tax law changing status of tax-exempt municipal income
• Increasing credit risk due to pension liabilities and high profile distressed issuers such as Detroit and Puerto Rico

The Fed ending Large Scale Asset Purchases (also referred to as Quantitative Easing, QE) and resulting in a rise of interest rates is a risk across fixed income. Since the 'taper' was officially announced in December though, interest rates fell across the curve. Municipal yield spikes in the past have been bought relatively quickly. The white line below explains 80% of the municipal yield changes over the last 25 years. While interest rates could continue the ascent as inflation pressure builds, some of this seems to be in the price.

bondbuyerGOindex

Source: St. Louis Fed, Aurum

The political risk of taxing municipal income is heating up, especially with the swelling income inequality discussion and members of Congress looking at tax code changes. However, the political strategists we follow do not believe Congress would actually go through with changing such as an important aspect of the code after the last overhaul.

Finally, while credit risk is always a threat, municipals historically have much lower default rates across the credit spectrum versus corporate bonds.

A closer look at tax-free income is worth the time today given the paltry yield environment in fixed income.

 

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

Icy Weather, Lazy Narrative

Aurum Weekly Access - 2/21/14

By Michael McKeown, CFA, CPA - Director of Research

Its been the coldest winter in decades thanks to the 'polar vortex,' a term the average American resident can now define better than most junior weather forecasters.

NASA polarvortex

Source: Wired.com, NASA image showing the polar vortex in January

The good news, for what it's worth, is the Climate Prediction Center is pointing to El Niño returning in winter 2015, which would bring warmer temperatures and dryer conditions for the Northeast and Midwest.

All of the bad weather is affecting the data capital markets eye closely. Pundits blame the cold and snow for people not spending money at the store and the falloff in home sales. Sounds simple enough. Still, this does not seem much different than the last couple of years and how the seasonal cooling and warmer temperatures led the actual change in the Citi Economic Surprise Index.  We can see the correlation between economic data surprising on the upside and the temperature changing, and vice versa.

CESITEMPS 

Either the economists need to go outside more to actually change their data forecasts with the weather or seasonal adjustments to the data need reworked.

Yet even before the cold streak began in January, data came in soft. The jobs report for December added only 75,000 people to the payrolls, well below consensus estimates. According to Retuers, Wal-Mart and Amazon (which is unaffected by shopping foot traffic) both reported disappointing results for the fourth quarter.

Below is the yearly change in retail sales that goes into the consumption portion of GDP (roughly 70%). It excludes buidling materials, auto sales, and gas stations. January came in at the lowest level of the recovery at 2.3% and slowing simliar to the last cycle. Did the weather really matter just last month or is this a continuation of the trend?

RETAILSALES

The rise of interest rates clearly had a negative impact on mortgage applications, as the spike last summer made the change in applications flip from positive to negative.Mortgageratesandapps

It seems the rush to paint all of the disappointing data with a broad weather stroke may be hasty. Is this the start of continued sluggish growth or will the warmer temperatures into spring outperform the lowered economic expectations like previous years? We are open to both possibilities and rarely find broad and 'easy to tell' narratives to be entirely accurate.

[1] http://www.wired.com/wiredscience/2014/02/noaa-polar-vortex/

[2] http://www.reuters.com/article/2014/01/31/us-walmart-outlook-idUSBREA0U0YK20140131

Important Disclosures

This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.

 

 

 

The Presidential Stock Market Cycle

Aurum Weekly Access - 1/31/14
By Michael McKeown, CFA, CPA - Director of Research
 

One of the more fascinating patterns in markets is the tendency for outsized returns in the third and fourth year of the presidential cycle relative to the first and second.   

Read more: The Presidential Stock Market Cycle

Heat Maps & Mean Reversion

Aurum Weekly Access - 1/24/14
By Michael McKeown, CFA, CPA - Director of Research
 

There are few, if any, variables that provide solid evidence of predicting short-term asset prices.  One powerful force over the long-term that investors should consider when rebalancing portfolios is mean reversion.

Read more: Heat Maps & Mean Reversion

The Psychology of Rebalancing

Aurum Weekly Access - 1/17/14

By Michael McKeown, CFA, CPA - Director of Research
 

The father of Modern Portfolio Theory in 1951 did not actually stick to his breakthrough theory with his own money, which is kind of odd considering all of his accolades.  Instead, Harry Markowitz preferred to minimize his future regret bias and split his personal portfolio 50% stocks and 50% bonds.

Read more: The Psychology of Rebalancing

Taper Talk to Interest Rate Hike Hearsay

Aurum Weekly Access - 12/19/13
By Michael McKeown, CFA, CPA - Director of Research
 

If your ear drums have not blown out from the overuse of the word 'taper' in financial media, then you will be happy to know the Fed announced it will be slowing its asset purchases by $10 billion next month.  We mentioned this back in May in our piece "Closer to the Q-End?", highlighting the Fed's putting markets on notice and before interest rates spiked.   Lately many folks guessed whether taper will come this month, in three months, or six months, we began to think about when and how an interest rate hiking cycle could come about.

Read more: Taper Talk to Interest Rate Hike Hearsay

Looking in the Bond Direction

Aurum Weekly Access - 12/12/13
By Michael McKeown, CFA, CPA - Director of Research

For the dear readers of our (semi) weekly missive will know that our penchant for bonds fleeted over the last few years.  We do not have anything against fixed income securities per se, it is just that the value for today's price is less than historical averages.  In our view, there is no such thing as a bad asset, just a bad price to acquire that asset.

 

Read more: Looking in the Bond Direction

Watching Home Prices with Zillow

Aurum Weekly Access - 11/22/13
By Michael McKeown, CFA, CPA - Director of Research
 

Every week plenty of data on national real estate is released.  Watched by analysts closely are the mortgage applications and monthly changes of the Case-Shiller Home Price index.  'On fire' is the only way to describe the housing data over the past 18 months, registering double digit price gains across regions.

Read more: Watching Home Prices with Zillow

Chart Check-up

Aurum Weekly Access - 11/8/13
By Michael McKeown, CFA, CPA - Director of Research
 

A picture is worth... you know how it goes.  But we will just add a few bits of our observances on the graphical displays of data.

Read more: Chart Check-up

Less Taper Talk, Not Much Action

Aurum Weekly Access - 9/20/13
By Michael McKeown, CFA, CPA - Director of Research
 

After every research shop on Wall Street put out estimates of whether a little bit of taper or a lot of taper would be announced at this week's Fed meeting, it was all for naught.  Ben Bernanke & co. surprised everyone by announcing that the LSAP (Large Scale Asset Purchases) would continue as scheduled at $85 billion per month.

Read more: Less Taper Talk, Not Much Action

Mom & Pop, "Welcome to the Club"

Aurum Weekly Access - 9/5/13
By Michael McKeown, CFA, CPA - Director of Research
 

Large private equity firms are bringing new products to the masses.

In early August Barron's published "The Next Private-Equity Investors: Mom and Pop" and the Wall Street Journal covered the topic in May with Megafirms Talk about Challenges Catering to Retail Investors.

Read more: Mom & Pop, "Welcome to the Club"

The Role of Cash - Part 2

Aurum Weekly Access - 8/14/13
By Michael McKeown, CFA, CPA - Director of Research
 

Cash deserves an allocation within portfolios.  Last week we covered why for liquidity management reasons, but its importance  extends to  opportunity  risk management.
 

Read more: The Role of Cash - Part 2

The Role of Cash - Part 1

Aurum Weekly Access - 8/7/13
By Michael McKeown, CFA, CPA - Director of Research
 

We believe that cash is an important asset class within portfolios. The proper cash allocation is driven by two main factors: (1) liquidity management and (2) opportunity risk management.
 

Read more: The Role of Cash - Part 1

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