The Hudson River Group at Morgan Stanley

Transcription

1 The Hudson River Group at Morgan Stanley 80 State Street, 12 th Fl Albany, NY / July, 2015 And whatever I do, focus on the central banks and focus on the movement of liquidity. Most people in the market are looking for earnings and conventional measures. It s liquidity that moves markets. -Stanley Drunkenmiller, Stanley Drunkenmiller is one of the greatest investors of all time. His track record while at Duquesne Capital Management and as the lead portfolio manager for George Soros s Quantum Fund puts him on the Mount Rushmore of investors. The story of how he started is worth repeating. At the young age of he was promoted as director of research at Pittsburgh National Bank solely because his was the only one that had not worked through the decade long bear market that the managers had just witnessed.. His boss said Now, do you know why I m doing this? Because for the same reason they send 18-year-olds to war. You re too dumb, too young, and too inexperienced not to know to change.we ve all got scars. We re not going to be able to pull the trigger. So I need a young, inexperienced guy. And so his career started. At a recent forum he spoke about his successes and failures and how his mentor, the man that promoted a kid out of college, taught him two valuable lessons. The first to never invest in the present and the second, focus on the central banks and liquidity. There is no need for us to discuss/debate how quantitative easing (QE) both in the United States and abroad has impacted all facets of the investment landscape. More importantly how will QE, or lack thereof, impact the future? In that regard, we often ask ourselves how will QE, or lack thereof, impact the future? It is widely expected that the Federal Reserve will initiate the first rate hike this year. Morgan Stanley s economists believe it will take place in December [i] while others see two hikes this year while others do not see a hike until Whatever the timing of the hike, the conclusion is the same: QE for the US is over, at least for now. We believe the economy (maybe not the markets initially) is ready for a hike. One measure that gives us this comfort is the pace of lending, the heart of potential economic growth. As you can see below, even after a large drop in oil prices the rate of growth has not slowed, which we perceive as bullish: Domestically Chartered Commercial Bank C&I Loans (Commercial & Industrial) Source: Bloomberg Annualized Growth % % YTD % Page 1 of 5

2 Across the pond QE is still in its early stages in the Eurozone and while no one knows for sure how long the ECB will stay dovish, our guess is that it will be many years down the road until they even ponder ending the program. Economically the Eurozone has already started to feel QE s impact with GDP growth, wage growth and inflation all picking up materially. Japan, benefactor of the largest QE enacted on a percentage basis continues its strong economic path; though off a very depressed multi-decade base. Wage growth is forecasted to hit its highest this year since 1996 and Morgan Stanley s economist see nominal growth for 2015 reaching 3.1%, the first time in almost 20 years 1. China continues to see slower growth. The days of high single digit/double digit growth are in the rear view mirror. Ghost cities are still prevalent and the credit boom that ignited the country is something many now fear. The biggest wildcard for China is their central bank. We anticipate more easing even after the fourth rate cut since November was announced last weekend. We also would not be surprised if the bank cuts some very large blank checks to resolve/cover up any major issue. Positioning Equities: We see Europe and Japan as more attractive than the US. Continued monetary policy, a strong US Dollar (weak Yen, Euro) plus lower oil prices are all tailwinds which have positively impacted corporate earnings. The sell-off in Europe due to Greece has only created a better entry point for investors in our opinion as we see the continent as well suited to deal with this tragedy i.e.: supportive ECB, low contagion risk and small exposure to Greek debt globally. The sectors we like include Financials (higher loan growth & rising global rates plus a dash of increased capital plans; Consumer Staples (first half sell-off due to rising rates, strong dollar and hike in the minimum wage has created an opportunity to invest in Fortune 50 mega-caps with long histories of rising dividends): Energy (oil has bounced the stocks have not but large cap integrated companies now offer attractive dividend yields) and Technology (still the best balance sheets in the world which have led to increases in dividend/buybacks, M&A and activist investors trying to unlock value). Fixed Income: After an extremely volatile 1H, we continue to believe the 40 year bond bull market is over; i.e. rates will move higher over time. Keep duration short. Credit over rate sensitive as investment grade spreads are the widest since Municipal bonds over all for high net worth investors. Page 2 of 5

3 Be cognizant of what your mutual fund owns: With low global rates, style drift, or managers diverging from its stated investment style/objective does happen. Higher yields = higher risks (Greece, Argentina, Puerto Rico, etc.) We continue to be worried about the lack of liquidity in the marketplace but are somewhat perplexed over its possible impact since it seems like all the players on Wall Street are thinking the same thing. Over the past month we have read similar worries from the likes of Jamie Dimon, CEO of JP Morgan, Ansu Jain, Deutsche Bank co-ceo, Gary Cohen, Goldman Sachs COO, Steven Schwartzman, Blackstone CEO, PIMCO etc. etc. etc. Commodities: For the first time in a while we are getting interested in commodities. Since 2011, they have been the 1 st or 2 nd worst performing asset class and over the past 10 years they have been the only asset class with a negative return 3. Rising inflation expectations after years of fearing deflation may cause a classic reversion to the mean in a very out of favor sector. While we respect the view of Mr. Drunkenmiller, we also find it hard to not look at the markets fundamentals. The two major silos we watch are earnings and what multiple the street pays for those earnings. In order for us to get very worried we need believe there is a high probability for both of these to drop. Currently, the Greece/Puerto Rico news will cause the latter to pullback; however we do not see global earnings falling on a year over year basis, hence our current stance. Away from the fundamentals, we are always worried about the laundry list of geopolitical issues that we acknowledge are very difficult to time/assess the possibility of occurrence/collateral damage: Cyber Security; Middle East, Emerging Markets Politics, Russia/Putin. Enjoy the summer months! The Hudson River Group Bert Trombly Senior John Malicki Timothy Meigher George Danes Brian Schlaks, CMT Vice President Page 3 of 5

4 [i] Morgan Stanley. US Economics, FOMC: Balancing Act. July 17, Morgan Stanley: Cross-Asset Playbook May 2015, May 17, Morgan Stanley: Credit Strategy Playbook, June 26, Morgan Stanley Wealth Management GIC: Asset Class Returns as of May 31,2015 This material is intended only for clients and prospective clients of the Portfolio Management program. It has been prepared solely for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument, or to participate in any trading strategy. The individuals mentioned as the Portfolio Management Team are s with Morgan Stanley participating in the Morgan Stanley Portfolio Management program. The Portfolio Management program is an investment advisory program in which the client s Financial Advisor invests the client s assets on a discretionary basis in a range of securities. The Portfolio Management program is described in the applicable Morgan Stanley ADV Part 2, available at or from your. Past performance of any security is not a guarantee of future performance. There is no guarantee that this investment strategy will work under all market conditions. The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. The investments listed may not be suitable for all investors. Morgan Stanley Smith Barney LLC recommends that investors independently evaluate particular investments, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment will depend upon an investor's individual circumstances and objectives. Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer's credit rating, or creditworthiness, causes a bond's price to decline. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made. NOTE: High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Interest in municipal bonds is generally exempt from federal income tax. However, some bonds may be subject to the alternative minimum tax (AMT). Typically, state tax-exemption applies if securities are issued within one s state of residence and, local tax-exemption typically applies if securities are issued within one s city of residence. International investing may not be suitable for every investor and is subject to additional risks, including currency fluctuations, political factors, withholding, lack of liquidity, the absence of adequate financial information, and exchange control restrictions impacting foreign issuers. These risks may be magnified in emerging markets. Page 4 of 5

5 Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention. Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness. Morgan Stanley Smith Barney LLC. Member SIPC Page 5 of 5