Market Week: April 1, 2014

March 31st, 2014

The Markets

Ouch: Last week was large-cap stocks’ time to shine (or at least outperform). The Nasdaq’s 2.8% loss represented its worst week since early October 2012, and the small caps of the Russell 2000 suffered even more; both were hurt by selling in the tech and biotech sectors. Meanwhile, the Global Dow rebounded into positive territory year-to-date.

Market/Index

2013 Close

Prior Week

As of 3/28

Weekly Change

YTD Change

DJIA

16576.66

16302.77

16323.06

.12%

-1.53%

Nasdaq

4176.59

4276.79

4155.76

-2.83%

-.50%

S&P 500

1848.36

1866.52

1857.62

-.48%

.50%

Russell 2000

1163.64

1193.73

1151.81

-3.51%

-1.02%

Global Dow

2484.10

2451.31

2485.23

1.38%

.05%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.75%

2.73%

-2 bps

-31 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· And then there were seven: The largest industrialized nations of the world suspended Russia’s 16-year-old membership in the G8 in retaliation for the annexation of Crimea.

· U.S. economic growth slowed in the fourth quarter of 2013, according to the Bureau of Economic Analysis. The 2.6% annualized increase in Q4 gross domestic product was lower than Q3’s 4.1% gain. That helped cut inflation-adjusted GDP for all of 2013 to 1.9% compared to the previous year’s 2.8% growth. Meanwhile, after-tax corporate profits were up 2% for the quarter–slightly less than in Q3–and a 3.7% drop in corporate taxes last year left corporate after-tax profits up 6.9% for all of 2013.

· After two months of declines, durable goods orders were up 2.2% in February. According to the Commerce Department, a 1.8% increase in commercial aircraft and parts was a key factor in the nearly 7% increase in transportation orders, which led the overall improvement.

· New home sales fell 3.3% between January and February, and were 1.1% lower than in February 2013. However, the Commerce Department said the average sale price rose for the third straight month, though the $317,500 average price was still below the $335,600 seen in November.

· For the third month out of the last four, personal incomes rose 0.3%, and the Bureau of Economic Analysis said personal consumption rose at the same rate.

Eye on the Week Ahead

Unemployment data will be of even more interest than usual as a potential indicator of any rebound–or lack thereof–from the effects of winter weather. A speech on Monday by Fed Chair Janet Yellen will be closely watched for any follow-up on her “six months after tapering ends” remark about the potential timing of Fed interest rate changes. The European Central Bank also is scheduled to meet, and global investors will want to know whether any additional steps will be taken to fight less-than-desirable inflation. Additional data on manufacturing and services also is on tap.

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Food Prices on the Rise

March 27th, 2014

After years of drought across the US, South America and Southeast Asia, we’re seeing one result in the form of higher food prices, especially beef and poultry. The Bureau of Labor Statistics reported last week that food prices gained +0.4% in February, the biggest monthly increase in almost two years. After rising +6.1% in 2012 and another +3.0% in 2012, forecasters estimate meat prices will increase another +3.0% to +4.0% this year, resulting in a 3-year price rise of +13.6%.

As you might expect, droughts hurt food production by decreasing the yield of crops, reducing supply. And as we know from Economics 101, when the quantity supplied of a good decreases and demand stays the same, the price increases. While droughts are obviously detrimental to farmers, their effects can reach directly to your dinner table and wallet.

How droughts lead to higher food prices

Texas and California are two cattle-raising states that have seen major droughts over the past few years. When a drought begins, grass (cattle food) growth slows and farmers are forced to purchase grain and other substitutes to feed their herds; at the same time, the drought increases the cost of that grain and other raw materials. Farmers also face additional costs, such as they need to irrigate their pastures in order to help the grass grow—and don’t forget that the drought also increases the price of water. As these factors combine to increase the cost of owning cattle, farmers begin to “cull” (reduce the population of) their herds. Initially, the influx of cattle into slaughterhouses decreases the price of beef, but down the road the drop in the global supply of cattle starts to drive prices up rather quickly (as we are seeing now).

A smaller population of live cattle also means that less milk is produced. This shortage, coupled with rapidly growing Asian demand for milk, has caused dairy prices to increase substantially. US dairy exports grew +19% by volume in 2013, as American companies shipped record amounts of milk powder, cheese and lactose, while the value of these exports grew +31% to $6.7 billion. The much faster growth in value than volume shows how sharply prices have increased.

While rising milk prices can make farmers very happy, purveyors may not be thrilled. In the US, where per-capita milk consumption has been on the decline for decades, purveyors of milk aren’t able to pass along these higher costs to consumers without risking declines in sales. This is causing problems for companies such as Dean Foods (NYSE: DF).

Brazil, the world’s largest producer of coffee, sugar and oranges, is also in the middle of a long, persistent drought that is affecting its crops. Coffee has been particularly hard hit: this year, in just 6 weeks, the price of Arabica coffee (the world’s most widely produced variety) has increased an astounding +75%! (It has since come down some but is still up +46% since the end of 2013.) Luckily for you Starbucks drinkers, they won’t be raising prices anytime soon, as they had previously locked in prices (using coffee futures) for all of 2014 and about 40% of 2015.

Think Globally

While the effects of higher food prices are being felt in the US, particularly by lower-income families, the impact is far more significant in emerging markets. Consumers in developing nations spend a far greater percentage of their income on food than we do—in Africa and South Asia, for example, a significant segment of the population spends anywhere from 50%-75% of their income on food.

The drought in Brazil is producing a domino effect beyond food. As a heavily hydropower-reliant nation, they face increases in electricity costs and have already had to deal with some blackouts. Also, the Brazilian real has depreciated against other major world currencies, which means imports like gasoline are more expensive to Brazil’s citizens. To make things worse, China’s demand for raw materials has been declining, and they are currently the world’s biggest importer of Brazilian commodities such as iron ore and petroleum.

Act Locally

For many Americans, the biggest impact on their food budget has been from higher beef prices. So what can you do about it? You can pray for rain, but the outcome of that is uncertain. A quicker and more effective alternative is to consider substitute protein sources, such as chicken breast, less pricey fish such as tilapia, eggs, skim milk, and especially nuts and beans (including soy and tofu). (For those that of you that care, the least expensive protein source is dried pinto beans from Amazon.com.) These proteins have several advantages over beef:

  1. They are less expensive and prices are rising more slowly.
  2. They are healthier for you (see Ken’s blog, “The Redder the Badder”).
  3. They are healthier for the environment.

This last point is interesting. Land-based proteins, especially beef, use a lot of resources. Beef production consumes 60% of the world’s agricultural land but produces only 5% of its protein. The massive land use for beef is both for cattle grazing and feed production. Beef is also a water hog: it takes about 2,500 gallons of water to produce a pound of beef. As a Newsweek article once stated, “the water that goes into a 1,000 pound steer would float a destroyer.” Globally, the 58.6 million tons of beef expected to be produced in 2014 will require 293 trillion gallons of water (this is 8 times the amount of water in Lake Tahoe!). It’s no wonder beef prices are so affected by drought.

In addition, the prodigious amounts of land needed for cattle grazing and feed production have led to substantial deforestation in places like the Brazilian Amazon. And on top of that, the methane expelled by cattle account accounts for between 14% and 22% of the greenhouse gases produced each year.

We’re not saying become a vegetarian (unless you want to or already are). But substituting other proteins for some of your beef will likely leave both you and our planet a little healthier and a little wealthier. The average American eats 60 pounds of beef per year; that’s about 4.5 servings per week. If we all reduced our consumption to an average of 2 servings per week, there would be less heart disease and cancer, we’d free up 1/3 of our agricultural land for other uses, and we’d save 75,000 gallons of water per person (4 Lake Tahoes globally).

As the ads say, “Eat Mor Chikin.” Better yet, “Eat Mor Beens.”

Adam

Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®
Founder and President – Kenfield Capital Strategies (KCS)

Adam Bragman
Director of Business Development – Kenfield Capital Strategies (KCS)

Kenfield Capital Strategies℠ (KCS) is a registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with comprehensive financial, estate and tax planning services.

Market Week: March 24, 2014

March 24th, 2014

The Markets

The Fed taketh away and the Fed giveth: After domestic equities fell in the wake of Wednesday’s Federal Reserve announcement, encouraging manufacturing data, also from the Fed, helped stocks rebound to end the week with a gain. The Dow, which has generally been bringing up the rear in recent weeks, led the pack, though it remained solidly in negative territory for the year, along with its overseas counterpart. Meanwhile, bonds took a hit because of questions about the timing of an increase in short-term interest rates.

Market/Index

2013 Close

Prior Week

As of 3/21

Weekly Change

YTD Change

DJIA

16576.66

16065.67

16302.77

1.48%

-1.65%

Nasdaq

4176.59

4245.40

4276.79

.74%

2.40%

S&P 500

1848.36

1841.13

1866.52

1.38%

.98%

Russell 2000

1163.64

1181.41

1193.73

1.04%

2.59%

Global Dow

2484.10

2428.58

2451.31

.94%

-1.32%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.65%

2.75%

10 bps

-29 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· As expected, the Federal Reserve’s monetary policy committee once again reduced its bond purchases by $10 billion a month. However, the committee’s statement said that rather than focusing primarily on a 6.5% unemployment rate to determine when to begin raising its target interest rate, policymakers would look at a variety of economic measures. The statement also forecast that an increase wouldn’t occur for “a considerable time” after the end of the bond-buying taper. When pressed about what that term might mean, new Chair Janet Yellen raised eyebrows by saying it could mean as soon as six months after tapering ends. A survey of Federal Open Market Committee members showed most expect the target rate, now close to zero, to end 2015 at 1%.

· Frigid weather across much of the country also seemed to freeze both new residential construction and sales of existing homes in February. According to the National Association of Realtors®, the weather plus ongoing low inventories and restricted credit availability cut home resales 0.4% during the month. And while building permits–an indicator of future activity–were up 7.7%, the Commerce Department said housing starts fell 0.2% in February.

· Food prices, especially those for food eaten at home, rose 0.4% in February, which the Bureau of Labor Statistics said accounted for roughly half of the 0.1% increase in all consumer prices during the month. The overall increase put the consumer inflation rate for the last year at 1.1%, approximately where it’s been for most of the last seven months.

· Data from the Philly Fed manufacturing survey showed a strong rebound to a reading of 9 from February’s -6.3. And while the Fed’s Empire State survey showed little change in overall conditions, new orders and shipments were both up.

· Two major automakers hit speed bumps last week. General Motors issued its second major recall in two months, this one for 1.8 million cars; the company is already under investigation for ignition defects involved in a 1.6-million-car recall last month. Also, Toyota agreed to pay a record $1.2 billion criminal penalty to settle a Justice Department investigation of previous safety problems, and admitted it had misled consumers about a defect that caused cars to speed up when customers tried to brake.

Eye on the Week Ahead

After managing to shake off the Fed and the Crimean conflict last week, investors will likely pay extra attention to speeches by several members of the Fed’s monetary policy committee to see if they shed additional light on last week’s statements. Final U.S. GDP numbers for the fourth quarter and all of 2013 will be out, plus data on housing, manufacturing, and consumer spending.

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Market Week: March 18, 2014

March 18th, 2014

The Markets

Disappointing economic data across the board from China plus the escalating tug-of-war over Crimea helped send equities south last week. The S&P 500’s decline put it back into negative territory for the year, while the instability in Ukraine sent investors scrambling for the relative security of U.S. Treasuries, sending the benchmark 10-year yield down as prices rose.

Market/Index

2013 Close

Prior Week

As of 3/14

Weekly Change

YTD Change

DJIA

16576.66

16452.72

16065.67

-2.35%

-3.08%

Nasdaq

4176.59

4336.22

4245.40

-2.09%

1.65%

S&P 500

1848.36

1878.04

1841.13

-1.97%

-.39%

Russell 2000

1163.64

1203.32

1181.41

-1.82%

1.53%

Global Dow

2484.10

2496.05

2428.58

-2.70%

-2.24%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.80%

2.65%

-15 bps

-39 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· Retail sales rose 0.3% in February, according to the Commerce Department, putting them 1.5% higher than in February 2013. The strongest gains were seen in sporting goods/hobby/music stores, which were up 2.5% for the month, nonstore retailers (up 1.2%), and health/personal care stores, also up 1.2%.

· Multiple signs that China’s economic growth slowed in January and February raised concerns that demand for many emerging markets’ exports could decline. Figures from the country’s National Bureau of Statistics continued to show growth year-over-year; retail sales were up almost 12%, investments in fixed assets rose almost 18%, and industrial production was up 8.6%. However, all of those numbers were lower than in previous months, even after being adjusted for the impact of the Lunar New Year’s vacation time. And sales of commercial buildings, which have helped fuel China’s overheated economy in recent years, have fallen 3.7% since December.

· U.S. wholesale prices continued to give the Federal Reserve plenty of leeway to keep interest rates low. According to the Bureau of Labor Statistics, the wholesale inflation rate fell by 0.1% in February, its lowest level since last November. Most of the 0.3% decrease in prices for wholesale services was attributed to a 9.3% drop in margins for sales of clothing, footwear, and accessories. Demand for wholesale goods actually rose 0.4% during the month, led by a 0.9% increase in pharmaceutical prices.

· Shares of Fannie Mae and Freddie Mac plunged after bipartisan leaders of the Senate Banking Committee announced plans to phase out the mortgage giants, which have been operating under government conservatorship since the 2008 financial crisis. If adopted, the legislation would establish government-backed mortgage insurance administered by a new Federal Mortgage Insurance Corporation. Insurance payments would be triggered only after private lenders had suffered a loss of 10% or more on the loans involved. The measure also would require homeowners to put up at least a 5% down payment (3.5% for first-time buyers) to qualify for an FMIC loan, and would create a mechanism for standardizing mortgage-backed securities based on such loans.

Eye on the Week Ahead

Markets will assess Crimea’s vote Sunday to secede from Ukraine, which could mean economic sanctions against Russia that could affect oil prices and threaten Europe’s economic recovery. Wednesday’s announcement by the Fed’s monetary policy committee–its first guided by Janet Yellen–will be monitored for any shred of guidance on the timing of changes in the Fed’s target interest rate.

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Merv’s Weekly Investment Memo

March 16th, 2014

Copper hit a new 4 year low a few days ago. Today JJC, the most popular copper ETF, is trading at about $35.50.

Copper has been depressed for several reasons: first of all, commodities in general are down. Secondly, the experts think that China’s purchases of copper support the supply, and China is perceived as in a decline.

Personally I don’t think so, at least on a permanent basis. For me this is just another cycle to take advantage of. Yes China may suffer for a while, but the long-term outlook looks good to me, as I see a continuing trend toward capitalism and somewhat toward liberalization of the economy and even personal freedoms. After all, if you were the leader of a country with a potential for billions of unhappy dissidents wouldn’t you work hard to keep them happy?

And commodities always cycle up and down, just look at the chart on gold.

But the reason I’m buying copper is because it isn’t like gold. When you buy gold you are buying something the value of which is primarily subjective. Gold goes up when people are nervous about the economy. But when you buy copper you are buying something that reflects the ups and downs of the economy, because the value of copper is in its use, not just as a subjective hedge.

Right now the June 35 puts on JJC are selling at $1.20. That’s a pretty nice premium for a commodity that will continue to be of value and has dipped as far as this one has. And if you get put the ETF in June, subsequent call premiums will provide enough income to justify the investment.

Russia Bullies Ukraine–Again

March 12th, 2014

The major news story of this week concerns the Ukrainian region of Crimea, now under de facto Russian military occupation after the collapse of its government earlier this year. If you ask the Russians, they are just doing their part to stabilize an otherwise unstable country that remains under the control of an illegitimate government. Former Ukrainian President Yanukovych was removed from power by parliament in February and has since fled to safety in Russia. The United States, however, sees Russia as an aggressor, and this week imposed trade sanctions on Russia and froze the assets of individuals the Obama administration has identified as being involved in the invasion of Crimea. European leaders have threatened sanctions of their own if Russia fails to withdraw its troops from Crimea, but have been hesitant to pull the trigger as Russia is a significant trade partner for many European countries.

The Moscow-backed regional government of Crimea set a referendum for the 16th of March to ratify its recent decision (via parliamentary vote) to secede from Ukraine and join Russia, a proposal that about 75% of parliament supported. However, the decision (allegedly) rests in the hands of Ukrainian citizens who will vote for reunification with Russia or to remain within the Ukraine, and a simple majority will (again, allegedly) decide the outcome.

Implications

Perhaps the most significant development here in the US is that Democrats and Republicans finally agree on something! House Speaker John Boehner (and other Republicans) praised the sanctions laid down by Obama, even going so far as to say that Congress would work to give the president more tools to battle Russian President Vladimir Putin.

It doesn’t take an expert to see what Putin is doing—forcing Crimea’s hand by deploying Russia’s military to control the region (and government) under the disguise of “stability,” then turning around and saying Russia isn’t interested in annexing Crimea, adding that “only the citizens themselves can determine their own future.” The US and the rest of the world have no interest in allowing Russia to all but invade its neighbor and exert its will on Crimea and its people, many of whom wish to remain a part of Ukraine. “In 2014, we are well beyond the days when borders can be redrawn over the heads of democratic leaders,” said Obama, who specified that the sanctions are punishment for Russia’s violation of Ukraine’s “territorial integrity.”

Global markets (including the US) fell sharply Monday owing to further escalation of the crisis, but recovered most of their losses the very next day. The consensus seems to be that Russia will eventually find itself backed into a corner with very few supporters (none of whom is willing to defy the US and its allies) and will have no choice but to come to an agreement. The quick rebound also suggests that investors aren’t too worried about the result of the March 16 vote—it appears the issue isn’t whether or not Crimea remains part of Ukraine or joins Russia, but whether or notRussia takes the diplomatic way out in a timely manner or has to endure further “punishment” before it plays nice.

The Russian economy, on the other hand, is being hit hard by a combination of political instability and looming trade sanctions. The Russian Ruble is down anywhere from -8.8% to -11.5% against major world currencies since the start of 2014, while the Moscow stock market has fallen about -18.2% in dollar terms . Russia, as of 2011, ranked #2 (behind Germany) on the list of the world’s largest net exporters, and is thus highly reliant on other countries to buy their goods (mainly natural gas and oil). The last thing it needs is an ongoing political standoff with major world powers that would make its economic situation even worse.

We have no idea what the March 16 vote will yield (and it’s likely to be rigged anyway), or if we will even get to that point before a resolution is reached that enables Russia to save face in exchange for their withdrawal of troops from Crimea. But the political and economic implications are greatest for Russia and Ukraine, and for Russia’s trading partners in Europe who may be forced to take an economically risky stand against Vladimir Putin.

Make fun of Congress all you want, but at least we don’t have to worry about being invaded by Canada or Mexico!

Best,

Adam

Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®
Founder and President – Kenfield Capital Strategies (KCS)

Adam Bragman
Director of Business Development – Kenfield Capital Strategies (KCS)

Kenfield Capital Strategies℠ (KCS) is a registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with comprehensive financial, estate and tax planning services.

Market Week: March 11, 2014

March 11th, 2014

The Markets

Fab five: The S&P 500 marked the fifth anniversary of the stock market’s post-2008 low by recording another all-time record close. Once again, the Dow couldn’t quite manage to break even for the year, though it came close, while the small caps had the week’s strongest gains. The benchmark 10-year Treasury yield rose as investors seemed to place more importance on better-than-expected domestic economic data than on potential fallout from the tension over Ukraine.

Market/Index

2013 Close

Prior Week

As of 3/7

Weekly Change

YTD Change

DJIA

16576.66

16321.71

16452.72

.80%

-.75%

Nasdaq

4176.59

4308.12

4336.22

.65%

3.82%

S&P 500

1848.36

1859.45

1878.04

1.00%

1.61%

Russell 2000

1163.64

1183.03

1203.32

1.72%

3.41%

Global Dow

2484.10

2484.68

2496.05

.46%

.48%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.66%

2.80%

14 bps

-24 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· The unemployment rate edged upward to 6.7% and away from the 6.5% that would have led to increased speculation about the Federal Reserve possibly accelerating an increase in interest rates. According to the Bureau of Labor Statistics, the increase–the first since December 2012–occurred despite the U.S. economy adding 175,000 jobs in February. The BLS noted that severe weather could have had an impact on its survey results.

· Spending rose faster than personal incomes in January, according to the Bureau of Economic Analysis. Personal income was 0.3% higher for the month, while consumption was up 0.4%.

· Construction spending was up 1% in January, primarily because of gains in the housing sector, but gains were much lower than December’s 2.2% increase. The Commerce Department said residential building was led by a 2.3% gain in construction of single-family homes, while nonresidential construction was down 0.2% and government construction fell 0.8% during the month.

· U.S. manufacturing rebounded a bit in February as the Institute for Supply Management®’s gauge rose by 1.9% to 53.2%. Meanwhile, the ISM’s services survey showed growth slowing by 2.4%, though the 51.6% reading still represented growth.

· The European Central Bank declined to adopt fresh stimulus measures to combat a less-than-desirable 0.8% inflation rate there. The ECB left its key interest rate unchanged at 0.25% and the rate on overnight bank deposits at 0%. Meanwhile, economic recovery accelerated in both the 18-member eurozone and Europe as a whole; European GDP rose 0.3% during Q4 2013 and was up 0.4% in the eurozone.

· China announced a 2014 target growth rate of 7.5%–slightly lower than 2013’s 7.7%–and a target inflation rate of 3.5%. Also, China’s General Administration of Customs said exports fell 18.1% in February, leading to a nearly $23 billion trade deficit; the sharp decline in exports was surprising given January’s 10.6% increase.

· The frigid weather that socked in much of the nation in February made an accurate assessment of economic data more difficult, according to the Federal Reserve’s “beige book” report. However, the report expressed optimism that the economy will show improvement once the weather does.

Eye on the Week Ahead

In a week that’s light on economic data, the Ukraine situation could assume greater importance in market psychology. Investors also may begin anticipating the following week’s Federal Reserve monetary policy meeting.

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Market Week: March 7, 2014

March 6th, 2014

The Markets

After making several attempts at setting a new all-time record high, the S&P 500 finally managed it at the end of the week. Buoyed by the possibility of a slowdown in Fed tapering, domestic equities more than erased the previous week’s losses; it was the first week so far this year that the S&P has ended in positive territory year-to-date.

Market/Index

2013 Close

Prior Week

As of 2/28

Weekly Change

YTD Change

DJIA

16576.66

16103.30

16321.71

1.36%

-1.54%

Nasdaq

4176.59

4263.41

4308.12

1.05%

3.15%

S&P 500

1848.36

1836.25

1859.45

1.26%

.60%

Russell 2000

1163.64

1164.63

1183.03

1.58%

1.67%

Global Dow

2484.10

2465.31

2484.68

.79%

.02%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.73%

2.66%

-7 bps

-38 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· The U.S. economy grew a bit more slowly in Q4 2013 than previously thought (2.4%). According to the Bureau of Economic Analysis, that put growth for all of 2013 at 1.9%.

· Home prices saw a slight (0.1%) decline in December, according to the S&P/Case-Shiller 20-City Composite Index–its second straight drop–but were 13.4% higher than the previous December.

· Despite the frigid winter weather in much of the country, the Commerce Department said sales of new homes were almost 10% higher than in December and more than 2% higher than the previous January.

· Orders for durable goods fell 1% in January, according to the Commerce Department. Though it was the third month of the last four to see a decline, it wasn’t nearly as bad as December’s 5.3% drop, and most of the decline was due to the often volatile transportation sector. Excluding the 5.6% transportation loss, new orders were up 1.1%.

· Tokyo-based Mt. Gox, at one time the largest Bitcoin exchange, filed for bankruptcy following days of suspense after its website went dark. The company said hackers may have made off with roughly 750,000 bitcoins owned by customers and 100,000 of its own–the equivalent of nearly half a billion dollars’ worth of the virtual currency. Meanwhile, Federal Reserve Chair Janet Yellen told a congressional committee that the Fed has no authority to regulate Bitcoin but suggested that Congress could look into doing so.

· Yellen also told Congress that the Fed is keeping a close eye on signs of weakness in economic data over the last month and is prepared to slow its tapering efforts if necessary. The Fed wants to assess the extent to which the weakness was the result of a slowing economy or simply lousy weather.

Eye on the Week Ahead

In addition to Friday’s jobs numbers, investors will be watching the European Central Bank on Thursday to see if any additional monetary easing policies might be announced. On Wednesday, the Chinese government will announce its forecast for economic growth there in 2014. Finally, the tense situation in Ukraine could also factor into the psychology of the markets.

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Bitcoin — Currency of the Future or Passing Fad?

March 1st, 2014

Many of you have probably heard of Bitcoin, a peer-to-peer payment system and digital currency that was introduced 5 years ago and gained tremendous popularity over the past year. Today we’ll discuss the relevance of Bitcoins and answer some of the questions we’ve been asked about it. This is not an investment recommendation: we are not suggesting that you purchase Bitcoins or transact in the currency.

What is Bitcoin?

It makes sense that the first “digital” currency has its share of skeptics. We, too, are skeptical about the future viability of the currency and the risks to holders of Bitcoins. The anonymity allowed by Bitcoin intermediaries reportedly made the currency popular in illegal transactions such as drugs and online gambling, which hasn’t helped its reputation and has also brought about regulatory intervention. At the same time, even as regulatory pressures increase, there are still plenty of major companies, including Overstock.com, the NBA’s Sacramento Kings and Zynga, that accept Bitcoins as a method of payment.

As of November 2013 there were more than 35,000 Bitcoin-accepting merchants online as well as 1,000 “brick and mortar” businesses willing to take them. As of this writing, the value of 1 Bitcoin (BTC) is approximately $558. Click here to see the historical USD/BTC conversion rate (value of 1 Bitcoin in US dollars).

Bitcoins as a “real” currency

Clearly Bitcoins are a different animal from most universally-accepted currencies, but there are also a number of similarities that may allow Bitcoin to become a “real” (and more widely accepted) currency. Like the US dollar, whose supply is regulated by the Federal Reserve, the growth and creation of Bitcoins is regulated by the Bitcoin protocol, which has similarities to a “central bank.” There are over twelve million Bitcoins in circulation with an approximate creation rate of 25 more every 10 minutes. These new issues are created, or “mined,” from transactions that award payment processors with newly issued Bitcoins that are added to the “block chain.” The Bitcoin money supply is kept in check, in part to monitor and prevent excessive inflation. Not surprisingly, this is also a mandate of the Federal Reserve.

The total supply of Bitcoins will be capped at 21 million, and every few years or so the creation rate will be halved, meaning that new Bitcoins will continue to be created for more than a hundred years (if they still exist that far into the future). While online wallets are the more popular method for storing and transacting in the currency, owners of Bitcoins can turn their online currency into physical bills and coins.

Why Bitcoins may not become a “real” currency

It’s undeniable that Bitcoins are a currency. If you can purchase Bitcoins using US dollars or other widely accepted currencies (which you can), and you can purchase goods and services using Bitcoins (which you also can), then technically it is a currency. But this by itself isn’t enough to solidify Bitcoins as a viable currency, and investors are not going to hold Bitcoins if they don’t think of it as a real, stable currency like the US dollar or the Euro. If major corporations and financial institutions have concerns about their exposure to the Turkish Lira and other emerging market currencies, they will not even think of holding Bitcoins. This fact alone may be enough to exclude Bitcoins from long-term viability, at least for anything more than transactions between consumers and small businesses.

Investors are hesitant to hold risky currencies, and Bitcoins will continue to be considered risky for years to come. Take the “Fragile Five” for example—the name given to Indonesia, South Africa, Brazil, India and Turkey owing to mounting pressures on their currencies in 2013. If even these well-established currencies that serve in nearly every transaction done in these countries can be suffer massive selloffs when investors start to worry, then certainly Bitcoins can as well. Thus it seems safe to say that if the currencies of the Fragile Five countries (with $trillions in reserves) are being sold off, then even a small regulatory hurdle, asset price bubble or other hiccup could send Bitcoins into a tailspin that would leave them nearly worthless.

Is there any reason to own Bitcoins or transact in them?

We’ve established that Bitcoins are legitimate enough to buy NBA basketball tickets or Overstock.com items, but this does not mean they’re a smart place to put your money. Don’t fall into the trap of believing that Bitcoins would serve as a stabilizing force in case of a US dollar crisis, inflationary or otherwise. Speculation that Bitcoins would be a “safe haven” in the event of a financial disaster is at best premature and probably completely unrealistic.

We said above that we aren’t recommending you purchase or transact in Bitcoins; now we are specifically recommending you do not buy Bitcoins as a speculative investor, as Bitcoins aren’t even of high enough quality to be a speculative investment. Even a speculative startup business will, if successful, provide you with dollars that can buy your food and pay your rent. Any holdings you have in which Bitcoins are the underlying currency carry both the usual business risksplus an additional risk premium (likely a massive one) to account for the uncertain future of Bitcoins.

While we don’t recommend you transact in Bitcoins, and certainly don’t think you should treat them as an investment, we aren’t saying avoid them at all costs. Personally I might consider buying one or two Bitcoins to play with, maybe to buy some basketball tickets or do some light online shopping, just to see how they work. It may be fun to have a couple physical bills or coins, but you should treat this as a “fun” activity, one that may cost you some or all of the money you spent on them.

It will be interesting to see where Bitcoins end up, both in terms of their long-term value and their viability as a currency. We recommend you join us on the sidelines.

Adam

Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®
Founder and President – Kenfield Capital Strategies (KCS)

Adam Bragman
Director of Business Development – Kenfield Capital Strategies (KCS)