Weekly Market Update Teleconference Transcript, Conducted by: James Schmidt, Senior Vice President and Bernice Murff, Associate Vice President of Investments Raymond James - Member NYSE/SIPC Thursday, June 4, 2015 Bernie: Hi everyone, this is Bernie Murff of the Schmidt Wealth Management Group and today is Thursday, June 4, 2015 and this is our ten-minute breather, weekly midday live call to bring you current with market conditions as we go through this uncertain time of interest rate and stock market change. Jim is on vacation this week, but he forwarded these thoughts on the interest rate market, stock market, the economy and how we tie all these up with our indicators. Today, I have comments from our fixed income desk, our chief equity strategist Jeffrey Saut and some wrap up thoughts on how we use this information with our own indicators. Jim told me by email earlier this week that Doug Drabik on our Fixed Income Bond Desk had these thoughts on INTEREST RATES: Some important considerations we face daily on the fixed income desk are strategy, direction and search for opportunities. It is easy to overlook that any investor makes a decision whether or not any action is taken because a decision not to do anything is indeed a decision that is affecting one s portfolio. For many there is a thrill or game associated with prognosticating interest rate moves and stock market direction - to outwit the street and gain an advantage. For the majority though, the fixed income portion of the portfolio represents the stability of predictable cash flow and certainty of return of principal at a specified redemption date. We have endured continuous predictions of the imminent Federal Reserve rate increases. Nearly every expert on the planet was certain interest rates were
going to rise significantly from the beginning of 2014. A slightly less majority boldly predicted the rise in rates to occur here in 2015 and most certain that by the 2nd quarter, we would experience that first Fed move. As a matter of fact, these predictions have been going on throughout the last decade. The fact is when we look at rates today they are lower than they were at the beginning of this year and the beginning of 2014. Technical and fundamental analysis have really taken a back seat to the politics and decision making of the world s central banks. Jim wanted me to tell you that no sooner were Doug s words off the press on Monday that we saw yet another jump up in yields, just like we have seen in all these recent months since we started these weekly midday calls. With interest rates trending higher, we will continue to wait and see before making any decisions on short term bonds. For the STOCK MARKET, Jeffrey Saut our head equity strategist had these comments earlier today, Jeffrey said: I am focusing on the major breakdown in the bond market and how it can affect the stock market, bond prices have broken down badly over the past few sessions establishing higher rates. In fact, a technical analyst might say that bonds are involved in a move down in value. I find it interesting that just as everyone is asking about the changes in the stock market, everybody is also asking when Fed Chairwoman Yellen is going to raise short-term rates while the bond market vigilantes are actually raising long-term rates. I think it is interesting to see how the equity markets have acted in the current longer-term rising interest rate environment. So far, rates are rising but not affecting the stock market to the degree investors thought they would, and even though the stock market looks weak this morning prior to it opening; the equity markets remain choppy and untrending, I think that pattern should continue into next week when the markets should be re-energized for a move higher." Those notes are from head strategist Jeffrey Saut.
What do these thoughts mean to us as we manage your portfolios? We continue to hold on new bond purchases and are carefully keeping our offensive stock positions on the field as our equity indicators are still positive. We see the asset class strength first in US equities, second in International equities, and then US fixed income followed by cash. Currencies and commodities are not anywhere near favorable. That s our line-up for now. Before I conclude today s call, I wanted to take a moment to welcome our 7 th intern, Sandra Nwogu! Sandra is currently attending Virginia Commonwealth University (VCU) and will earn her Bachelor of Science Degree in Economics in May of 2016. Sandra is on the Dean s list and when not focusing on school work she acts as a Student Ambassador for VCU providing tours and information to prospective students and parents. Sandra enjoys fiction writing and reading and likes to do Pilates. If you have the chance to speak to Sandra if she answers the phone, take a moment to welcome her to the team. We think that you will enjoy her enthusiastic personality! Jim and I will be back next week with our next summary of the markets. See you then!
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Morning Tack Published by Raymond James & Associates Jeffrey D. Saut, Chief Investment Strategist, (727) 567-2644, Jeffrey.Saut@RaymondJames.com June 4, 2015 Investment Strategy U.S. Markets Close Net 1 Day % YTD % Dow Jones 18076.27 64.33 0.36% 1.42% Dow Jones Transports 8510.04 102.60 1.22% -6.89% Dow Jones Utilities 571.44-8.68-1.50% -7.55% S&P 500 2114.07 4.47 0.21% 2.68% S&P 400 Midcap 1535.64 7.59 0.50% 5.73% S&P 600 Smallcap 724.65 7.45 1.04% 4.25% NASDAQ 5099.23 22.71 0.45% 7.67% Russell 2000 (Smallcaps) 1264.58 12.78 1.02% 4.97% BKX (Banking) 76.90 1.00 1.32% 3.56% BTK (Biotech) 4146.50 11.98 0.29% 20.57% XOI (Oil Index) 1335.22-8.52-0.63% -0.96% SOXX (Semiconductor) 732.70-4.58-0.62% 6.67% XAU (Gold/Silver) 69.25-1.28-1.81% 0.68% Whe eve yo e is aski g the sa e uestio, it is usually the wrong questio! I remembered the aforementioned quote, from Berkshire Money Management (not Berkshire Hathaway), as I was continuing to respond to investors asking about the weak D-J Transportation A e age TRAN/.. Yeste day s uestio s o the T a spo t s Trauma were sparked by none other than noted technician Louise Ya ada s appea a e o CNBC (http://video.cnbc.com/gallery/?video=3000384780 ). Granted, Louise Yamada, Managing Director of Louise Yamada Technical Research Advisors, is one of the most respected technical analysts on Wall Street, having worked for 25 years at Smith Barney with another great one, namely Alan Shaw, from an era gone by. That said, even my uncle living in Deadhorse, Alaska knows the Transports have broken down! Meanwhile, while e e yo e as looki g at yeste day s + poi t ally i the Trannies, combined with a ~65 point lift by the D-J Industrials (INDU/18076.27), I was focusing on the major breakdown in the bond market, as measured by the ishares 20+ year Treasury Bond ETF (TLT/117.52). As can be seen in the nearby chart, the price has broken down badly over the past few sessions (read: higher interest rates). In fact, a technical analyst might say the TLT is involved in yet a othe ABC o e tio ha i g al eady go e th ough t o othe ABC o e tio s see ha t. If so, a easu ed o e o the TLT ould p odu e a ta get p i e of 109 versus its current price of ~117. Of course, the reciprocal chart, although it targets the 10-yea T ote s yield i stead of the 20-yea T o d s p i e, ould e the CBOE -year Tnote Index (TNX/~2.37%). Hereto its chart looks like an ABC move, implying a easu ed o e to a yield of. % e sus the u e t yield of 2.37%. I find it interesting that just like everyone is asking about the T a spo t s eakdo, e e y ody is also aski g he Ms. Yellen is going to raise short-term rates while the bond market vigilantes are actually raising long-term rates. (continued on page 2) When everyone is looking one way, we miss what is happening the other way. In terms of the stock market, when everyone is expecting something to happen, so ethi g else happe s.... Berkshire Money Management Index Cur Future Change Dow Jones 18,001-95 S&P 500 2,102-14 NASDAQ 4,487-40.7 Volume ADV/DEC 1 Day Volume Volume Issues NYSE 684,274,667 1.0 1.0 NASDAQ 1,857,060,000 2.5 2.3 Foreign Markets Intraday Net % Chg U.K. FTSE 100 6,858-91.97-1.32% Germany DAX 11,245-174.44-1.53% Brazil Bovespa 53,523-713.53-1.32% Japan Nikkei 225 20,488 14.68 0.07% Hong Kong Hang Seng 27,552-105.58-0.38% S&P Sectors Close % Chg 1 mo % Consumer Discretionary 611.62 0.72% 0.98% Consumer Staples 497.96-0.12% -0.59% Health Care 863.49 0.09% 2.80% Information Technology 724.94 0.16% 0.78% Telecom Services 157.58 0.84% -1.29% Energy 569.26-0.65% -5.87% Financials 333.87 0.66% 1.85% Industrials 484.71 0.52% -0.06% Materials 318.11 0.06% -1.04% Utilities 218.77-1.40% -3.13% Key Commodity Prices Last Net Crude Oil (WTI)/bbl 59.80 0.16 Natural Gas/mmbtu 2.65 0.02 Gasoline (USD/gal) 2.05 0.00 Gold/oz. 1183.00-1.90 Silver/oz. 16.44-0.04 U.S. Dollar Index 94.84 - Copper (USD/lb.) 2.70-0.03 Cotton #2 (USD/lb.) 65.14-0.10 Market Valuation 2014 2015E 2016E Consensus S&P 500 EPS $113 $116 $133 P/E 18.7 18.2 15.9 Earnings Yield 5.5% 6.3% Equity Risk Premium (10 yr) 3.1% 3.9% Treasury Yields 90D 10 Yr 30 Yr 0.01% 2.37% 3.11% Source: Thomson Reuters Data as of: 6:53 AM 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863
Raymond James Morning Tack I went into this rate ratchet diatribe this morning because I think it is interesting to see how the equity markets have acted in the current longer-term rising interest rate environment. So far, the yield on the TNX has risen from yield-yelp low of 1.65% in Ja ua y to yeste day s i t aday high of 2.39%, and the S&P 500 (SPX/2114.07) has rallied from ~1981 to ~2114 over that same timeframe for a gain of ~6.7%. Could it unfold as it did i the to ate ape he e Fed fu ds i eased from ~1% to 5.25% because the economy and earnings were getting better, causing the SPX to rally some 30%? This morning, however, that does t see to e the ase ith the p eope i g &P futu es off a out poi ts o i te est ate fea s. That is i keeping ith ho I e ded yeste day s Mo i g Ta k y s i i g, The equity markets remain choppy and untrending. That pattern should continue into next week when the markets should be re-e e gized fo a o e highe. U t e di g i deed... 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida 33716 800-248-8863 2
Raymond James Morning Tack U.S. Markets Index Information: U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. The Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. The Dow Jones Transportation Average is the most widely recognized gauge of the American transportation sector. The Dow Jones Utility Average keeps track of the performance of 15 prominent utility companies. The S&P 500 is an unmanaged index of 500 widely held stocks. The S&P Mid Cap 400 Index is a capitalization-weighted index that measures the performance of the mid-range sector of the U.S. stock market. The S&P Small Cap 600 Index is an unmanaged index of 600 small-cap stocks. The NASDAQ Composite Index is an unmanaged index of all stocks traded on the NASDAQ over-the-counter market. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. 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Portfolio Objective By Doug Drabik June 1, 2015 Some important considerations we face daily on the fixed income desk are strategy, direction and search for opportunities. It is easy to overlook that any investor makes a decision whether or not any action is taken because a decision not to do anything is i deed a de isio that is affe ti g o e s portfolio. For many there is a thrill or game associated with prognosticating interest rate moves and stock market direction and to outwit the street and gain an advantage. For the majority though, the fixed income portion of the portfolio represents the stability of predictable cash flow and certainty of return of principal at a specified redemption date. We ha e e dured o ti uous predi tio s of the i i e t FOMC rate raise. Nearl e er e pert o the planet was certain interest rates were going to rise significantly from the beginning of 2014. A slightly less majority boldly predicted the rise in rates to occur here in 2015 and most certain that by the 2 nd quarter, we would experience that first Fed move. As a matter of fact, these predictions have been going on throughout the last decade. Being a Cubs fan, it may be easier to relate to next week, next month, next year and the empty results that become reality. TSY 6/1/15 1/1/15 1/1/14 1yr 0.242 0.216 0.114 2yr 0.603 0.666 0.382 3yr 0.921 1.071 0.766 5yr 1.473 1.654 1.743 7yr 1.85 1.972 2.452 10yr 2.107 2.172 3.029 30yr 2.865 2.752 3.969 (Source: Bloomberg) Interest rates are not only lower from Ja uar, 4 he e er o e as ertai rates ere headi g north but we are insig ifi a tl ha ged fro the egi i ig of this ear he e er o e as ertai the Fed would move by mid-year. If portfolio decisions were made solely on the prediction of interest rates, a lot of bad realignments would have been made. Fortunately fixed income strategies, in general, do not rely upon interest rate direction since the focus is typically on wealth preservation. Technical and fu da e tal a al sis ha e reall take a a k seat to the politi s a d de isio aki g of the orld s central banks. As noted in the Fixed Income Quarterly, previous Fed moves resulted in a compression of the yield curve as short-term rates rise and long-term rates move notably little. It seems the shrewd move is to focus on portfolio objective and optimization and not the strategies which are dependent on the ertai t of i terest rate o es. Ref. 2015-016337 until 04/28/2016 2014 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 2014 Raymond James Financial Services, Inc., member FINRA/SIPC Raymond James Corporate Headquarters 880 Carillon Parkway, St. Petersburg, FL 33716 The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions
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