Market Week: April 29, 2014

April 28th, 2014

The Markets

After a mostly positive week, investors went into Friday seemingly determined to take some money off the table over a weekend when the Ukrainian conflict seemed to promise fresh sanctions against Russia. The small caps of the Russell 2000 took the brunt of the selling with a 1.9% loss on Friday alone, while the S&P 500 was left essentially flat.

Market/Index

2013 Close

Prior Week

As of 4/25

Weekly Change

YTD Change

DJIA

16576.66

16408.54

16361.46

-.29%

-1.30%

Nasdaq

4176.59

4095.52

4075.56

-.49%

-2.42%

S&P 500

1848.36

1864.85

1863.40

-.08%

.81%

Russell 2000

1163.64

1137.90

1123.03

-1.31%

-3.49%

Global Dow

2484.10

2504.44

2496.82

-.30%

.51%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.73%

2.68%

-5 bps

-36 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

· New home sales plummeted 14.5% in March; according to the Commerce Department, that’s the lowest level since July and more than 13% below March 2013. It’s the first time since September 2011 that year-over-year sales have dropped. The figures raised questions about how much of the recent slump was attributable to winter weather. However, the $290,000 median sales price was 12.6% higher than a year earlier.

· Sales of existing homes also slipped in March, but by only 0.2%, according to the National Association of Realtors®. That left them 7.5% below March 2013. Tight inventories continued to help push prices up; the NAR said the $198,500 median sales price was nearly 8% higher than in March 2013.

· Orders for big-ticket items such as aircraft and electronics surged 2.6% in March, following a 2.1% increase in February. The Commerce Department said the volatile transportation sector was up 4%, while non-transportation items also rose 2%, led by a 5.7% jump in computers and electronics and a nearly 8% increase in orders for communications equipment. Business orders for capital goods rose more than 7%.

· In the wake of an appeals court ruling that struck down so-called “net neutrality” regulations, the Federal Communications Commission proposed new rules that would allow broadband Internet service providers to charge content providers higher fees for speedier Internet connections as long as they did so in a “commercially reasonable” manner. The rules will be subject to public comment before going before the full commission for a vote, possibly later in the year.

Eye on the Week Ahead

Markets will have no shortage of potential influences next week. In addition to tension over Ukraine, the Federal Reserve will meet, though little change in its current tapering is expected. April unemployment figures and the first estimate of Q1 gross domestic product will be released, as will consumer spending and manufacturing data.

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: April 24, 2014

April 23rd, 2014

The Markets

Despite the holiday-shortened trading week, domestic equities managed to recapture virtually all of the ground lost the week before–and more important, the gains were across the board. Even the tech and biotech sectors that have suffered recently showed signs of stabilization, while the S&P 500 managed to return to positive territory for the year.

Market/Index

2013 Close

Prior Week

As of 4/18

Weekly Change

YTD Change

DJIA

16576.66

16026.75

16408.54

2.38%

-1.01%

Nasdaq

4176.59

3999.73

4095.52

2.39%

-1.94%

S&P 500

1848.36

1815.69

1864.85

2.71%

.89%

Russell 2000

1163.64

1111.44

1137.90

2.38%

-2.21%

Global Dow

2484.10

2470.01

2504.44

1.39%

.82%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.63%

2.73%

10 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

· Springtime for retail: Shoppers emerged from hibernation and returned to stores again in March, according to the Commerce Department. Retail sales rose 1.1% from February, and were 3.8% higher than in March 2013. Auto sales were up 3.4% for the month and up 9.5% from March 2013. The figures were hailed as confirmation that frigid winter weather was a major factor in previous months’ sluggish sales.

· China’s economy grew 7.4% over the last year, according to the country’s National Bureau of Statistics. That represents a slowing from the previous quarter’s annualized 7.7% rate, and is slightly below the targeted 7.5% growth for all of 2014. It also represents the nation’s slowest quarterly growth in 18 months. Chinese officials said weaker winter demand from the United States for exports and a sluggish housing market were major factors in the decline.

· Consumer prices rose 0.2% in March, helping to cut the inflation rate for the last 12 months slightly to 1.5%. The Bureau of Labor Statistics said the biggest increases were seen in the costs of food and shelter. Grocery prices overall were up .5% for the month and 1.7% for the year, while restaurant prices are up 2.3% since March 2013. The 2.7% increase in the cost of shelter since last March in part reflects rising home prices. Meanwhile, energy costs declined 0.1% in March, led by a 1.7% drop in gas prices.

· Housing starts improved in March, rising 2.8%, but were nevertheless almost 6% lower than March 2013. The Commerce Department said building permits–an indicator of future activity–fell 2.4% for the month but were more than 11% higher than the previous March.

· U.S. industrial production grew 0.7% in March, driven largely by mining and the utilities sector. Also, the Federal Reserve revised February’s 0.7% gain upward to 1.2%; it was the highest monthly growth rate in almost four years. The increases represent an annualized 4.4% growth rate in Q1. Meanwhile, the Fed’s April Empire State manufacturing survey slipped 4 points to 1.3, but the Philly Fed’s survey for the month rose from 9.0 to 16.6, its highest reading since last September and the second consecutive month of gains.

· The nonpartisan Congressional Budget Office said the federal government’s cost of expanding health-care coverage under the Affordable Care Act (primarily from providing insurance premium subsidies) will be $36 billion in 2014–roughly 12% less than the amount predicted in February–and almost 7% ($100 billion) less than the $1,487 billion previously estimated for the next 10 years.

· The weekly earnings of full-time American workers during the first quarter were 3% higher than a year earlier; according to the Bureau of Labor Statistics, that’s the fastest annual growth since 2008 and was more than double the 1.4% increase in the Consumer Price Index over the last 12 months. The report said the increase put inflation-adjusted median weekly earnings at $796, their highest level since Q2 2012.

Eye on the Week Ahead

Data on home sales and manufacturing could suggest whether a spring rebound is in store. Many of the major Nasdaq tech companies will release Q1 earnings, which could influence whether last week’s rally shows some ongoing strength.

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 Tips

April 18th, 2014

A psychologist named Philip Tetlock did a study on experts. What he found, in part, is that experts that claim to be certain about a future event are more credible to the public than those that express uncertainty. But they were LESS likely to be right!

Most stock market blogs are really tip sheets, and the writers seem very certain that there tips are right. But of course in Tetlock’s study even the most famous tipsters turn out to be wrong as often as right. And of course we all know that the big-time funds rarely do better than the S&P index.

But options are different. They allow for error. So if you sell a naked put expecting to keep the premium while the stock goes up, and the stock goes down, all that’s happened is that you’ve acquired the stock at a price below what it was selling at. Then you can write a call at the old price and get two premiums while you own the stock at what one hopes is a bargain price. If you keep writing the calls you just keep taking in premium until the stock is called away.

And with call spreads, if the stock goes out of the profit zone you can just close out the position and roll it up to a new position, usually without loss.

Still, everyone is looking for market tips, so here are a few running around right now:

1. FCX, Freeport McMoran, just made a multi billion dollar acquisition, but it hasn’t moved the stock much. Meanwhile their balance sheet seems to be improving. For a long-term hold this looks pretty good. I’ll probably move my copper position into this instead of the copper ETF. And premiums on the calls and puts are pretty good.

2. Some think that there will be a shortage of platinum soon, which will cause the price to rise. The supply in Russia is dwindling. A labor unrest in South Africa might impact output there. And platinum has traditionally traded at a premium over gold.

3. Seadrill (SDRL) is paying a dividend over 10%, which seems incredible. It just raised its dividend. Cash flow is up. The company looks solid. I plan to do some research on this company.

4. While interest rates are low, some investors are looking at tax free muni bond funds like Invesco Value Muni Income Trust (IIM). The return of about 6% is equivalent to over 9% in a taxable return. For a short term investment while looking for others for long term, it seems like a good idea. But since everyone knows that interest rates have to go up eventually, you have to watch it and get out quickly before interest rates rise. Of course you could price out an interest rate hedge to cover the decline in value if rates rise. A good stock broker can do the analysis on that.

5. Some investors watch insider buying on the theory that the insiders know more than the outsiders. I wish there were some study on that. But I did notice that there was insider buying on General Electric (GE) recently, and that stock seems like a good long-term hold. And although the premiums are small, I like writing covered calls against the stock, and rolling them up if the stock moves up. That’s a good hedge against being wrong and having the stock move down.

Well, those are some of the hot rumors going around right now. Remember, before relying on these rumors CHECK IT OUT YOURSELF!

Merv Hecht

Market Week: April 17, 2014

April 16th, 2014

The Markets

The wave of tech and biotech selling that has taken the Nasdaq down more than 8% in just over a month spread to the large caps of the Dow and S&P 500 last week. However, the S&P is still only 4% away from the record close it hit less than two weeks ago. Meanwhile, the profit-taking in stocks sent the benchmark 10-year Treasury yield down as demand pushed prices up.

Market/Index

2013 Close

Prior Week

As of 4/11

Weekly Change

YTD Change

DJIA

16576.66

16412.71

16026.75

-2.35%

-3.32%

Nasdaq

4176.59

4127.73

3999.73

-3.10%

-4.23%

S&P 500

1848.36

1865.09

1815.69

-2.65%

-1.77%

Russell 2000

1163.64

1153.38

1111.44

-3.64%

-4.49%

Global Dow

2484.10

2517.83

2470.01

-1.90%

-.57%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.74%

2.63%

-11 bps

-41 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

· Minutes of the Federal Reserve’s most recent monetary policy meeting showed most committee members favor expanding the amount of detailed guidance about interest rates after rates begin to rise. The minutes also showed a general consensus that an increase isn’t likely for some time.

· Exports from China were down 6.6% in March from a year earlier and imports were down more than 11% over the same time, raising concerns about the implications for the global economy. The customs data followed reports that the World Bank’s forecast for Chinese growth this year had been cut slightly to 7.6%, while Chinese Premier Li Keqiang said the economy might not reach its official targeted 7.5% growth rate.

· The International Monetary Fund’s semiannual report on its world economic outlook said global recovery is becoming stronger and broader. However, continuing problems in some emerging markets, notably Brazil and Russia, caused the IMF to cut its global growth rate forecast slightly to 3.6% for 2014 and 3.9% for next year. The 2.8% growth rate the IMF projects for the United States this year was unchanged from its January forecast.

· Wholesale prices jumped 0.5% in March; the Bureau of Labor Statistics said the increase could be attributed largely to the cost of services, which rose 0.7%.

Eye on the Week Ahead

As Q1 earnings season gets under way, forward guidance is likely to be just as significant as assessments of how earnings were affected by the weather; as economic data begin to reflect spring, a general failure to show improvement from winter’s numbers could be badly received by investors. Also, Wednesday will see the release of China’s Q1 GDP figures, which will be closely watched in light of last week’s signs of slowing trade.

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.

The Road to Failure is Paved with Past Successes

April 14th, 2014

Recently, a number of people—both clients and non-clients—have been asking why their accounts didn’t match the performance of the S&P 500 in 2013, when this widely-followed index shot up +32.3%. The answer is always the same: your accounts don’t contain just S&P 500 stocks, but are far more diversified, with other US stocks, foreign stocks, bonds from both the US and overseas, and other types of securities. Last year, it was hard to beat or even match the S&P 500 because it was one of the very best performing assets classes in the world. So the natural question becomes: Why not invest everything in the S&P 500 all the time? Today, we attempt to answer this question.

First we want to clarify that we are not recommending that you purchase or sell any specific security, index or asset class. In fact, we consistently recommend a (professionally)diversified portfolio appropriate for your cash flow needs, investment time horizon and risk tolerance. If you aren’t sure what this means, or whether your portfolio is properly diversified, please contact us.

Past Performance is No Guarantee of Future Results

These words are printed in virtually every prospectus, SEC filing, research report or other securities-related email or publication. The idea that past performance does not guarantee future results may seem obvious to you, but throughout history investors have forgotten this crucial concept and repeatedly flocked into “hot” assets near their top, while simultaneously shunning underperformers trading at bargain prices. Why is this? It has to do with the way our brains are wired: we tend to believe that a trend will continue indefinitely. In reality, most trends reverse, a phenomenon called “reversion to the mean.”

We see reversion to the mean in all areas of life, not just investing. Take competitive sports, for example. Even the best team loses periodically, and all winning streaks eventually come to an end. The recent college basketball upset, with UConn beating top-ranked Florida, is a prime example. Nothing is forever, neither a winning team nor a winning stock.

To fight the urge to “chase performance” and load up on investments (such as the S&P 500) after a long winning streak requires counter-intuitive behavior. Warren Buffett explained how to do this when he said, “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.” [Emphasis ours.]

At a recent CFA event, prominent bond manager Jeffrey Gundlach posed the following: “The S&P 500 outperformed every other major asset class last year. Why didn’t you have 100% of your assets and your clients’ assets invested there?” “Better yet,” he went on, “Why didn’t you have your entire portfolio in Tesla stock?” Clearly, a man whom Barron’s calls “The King of Bonds” was not asking the question seriously. Rather, he was making a point about diversification and why youdon’t chase past performance, as assets and asset classes tend to experience mean-reversion over time. In addition, you only would have experienced the outsize return of the S&P 500 or Tesla if you had known ahead of time that they would be among the best performers in the subsequent year (or far more likely, you just got lucky).

Mean reversion is why professional portfolio managers rebalance accounts periodically to align the actual weighting of each asset class to its target weight. For example, if you target an allocation of 25% large-cap US stocks, after a year like 2013 they might make up over 30% of your portfolio. Amateur investors chase past performance, and would hesitate to sell some of their large-cap US stocks for fear of missing out on future gains. Instead, many investors did just the opposite in early 2014, either increasing their exposure to US stocks or buying stocks for the first time after years of sitting on the sidelines. The better move is to (counter-intuitively) decrease your large-cap US stock exposure back toward the 25% level and buy some underperforming assets in their stead.

A graph of greed and fear

The graph below shows the performances of the iShares MSCI Emerging Markets Index ETF (blue line), S&P 500 (red line) and Vanguard FTSE Europe ETF (green line) from September 2008 (just prior to Lehman going bankrupt) through March 31, 2014.

S&P-VGK-EEM 2008-2014

Equities worldwide were clobbered towards the end of 2008 by what we now know as “The Lehman Moment.” Selling begat more selling and in less than 3 months, equity portfolios were down a shocking -45%! This was perhaps the example of typical investor behavior—being fearful when everyone else is fearful.

In 2009 investors were still incredibly bearish on equities, which dropped even lower by March of that year. When markets finally turned around, they did so with a vengeance. The best asset class in 2009 was emerging market stocks, which recovered all their losses and more by the summer of that year. By 2010 investors started to notice this outperformance and, chasing it as usual, piled into emerging markets. What happened? As of today, your early 2010 investment in emerging markets has gone nowhere, while US and European markets have continued to gain ground.

In the fall of 2011, markets were again hit by the European debt crisis. Not surprisingly, the US was less affected than European markets, as our economy is somewhat removed from that debacle. European stocks finally bottomed in June of 2012, having dropped -30% over the prior year (the US had recovered most of its 2011 losses by then). With Europe relatively cheap compared to the US, were investors buying? Of course not: Who would buy stocks of companies in countries whose debt levels were out of control and whose currency might cease to exist? In retrospect, this was a great buying opportunity, and people who realized that investor fears were overblown made a lot of money by being greedy when others were fearful.

Today, investors are finally flocking to European equities (and bonds) as well as US stocks. While the party may not be over, this is yet another case of investors flocking to asset classes after a period of outsized returns, when such assets may no longer be cheap.

Emerging Markets: The greedy have left the building

By any fundamental valuation, emerging market stocks are cheap relative to other major asset classes. A lower valuation on emerging markets is not unjustified, as political instability and inflation are greater threats than they are to developed economies. But the discount today is larger than it has been in decades, similar to what it was in the days when countries such as Brazil and China were more like banana republics than the economic powerhouses they are today. And if you ask professional and amateur investors alike, either through surveys or casual conversation (as we have done often over the past year), no one likes these markets. Fear (or disgust) has definitely overtaken greed for this asset class.

There are convincing pro and con arguments for the major emerging markets (e.g., Brazil, Russia, India, China) as well as for the asset class as a whole. The pro arguments include faster growth rates than developed economies, cheap valuations, political risks that are not as extreme as advertised, stabilizing economies and in many cases, massive currency reserves. Increased consumer spending should also serve as a boost to many emerging nations. Emerging market cynics point to increasing levels of debt relative to GDP (not that developed markets are in such good shape here), political unrest and impending asset bubbles. Slowing growth in China (where slowing means +7% annual GDP growth) is also a concern.

We believe emerging markets are an example of an asset class where the potential rewards outweigh the risks, where the greedy have moved on to more expensive assets. Clearly we do not know what the future holds, but the combination of cheap valuations and general distaste of an asset class is usually a positive signal for investors.

Turning Fear into Profits

So what is KCS doing now? As most of our clients are overweight to US stocks after their strong performance in 2013, we’ve been trimming those positions in favor of less pricey and unloved stocks. These include companies based in Europe, Asia and Latin America: developed and emerging markets that have lagged over the past couple of years. Similarly, we’ve been trimming some of the better-performing sectors, such as industrials and healthcare, in favor of laggards such as energy and materials.

One equity sector that’s done well but which we haven’t trimmed is consumer discretionary. But even here, we’re favoring companies in emerging countries like Brazil, Argentina, China, India and even Russia. Consumers there have a long way to go before they even begin to approach the buying habits of Americans, making this a long-term trend that could take quite a few years to revert to the mean.

Warren said it best: Be fearful when others are greedy and greedy when others are fearful.

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: April 10, 2014

April 10th, 2014

The Markets

For the second straight week, the large caps of the Dow and S&P 500 fared better than the Nasdaq, which continued to be hurt by selling in the technology and biotech sectors that played such a big part in its 2013 gains. The S&P hit a new all-time closing high on Wednesday, while the Dow came close to matching the record close seen on New Year’s Eve 2013. Meanwhile, a jobs report that seemed to support the Fed’s current gradual tapering left bond markets relatively stable.

Market/Index

2013 Close

Prior Week

As of 4/4

Weekly Change

YTD Change

DJIA

16576.66

16323.06

16412.71

.55%

-.99%

Nasdaq

4176.59

4155.76

4127.73

-.67%

-1.17%

S&P 500

1848.36

1857.62

1865.09

.40%

.91%

Russell 2000

1163.64

1151.81

1153.38

.14%

-.88%

Global Dow

2484.10

2485.23

2517.83

1.31%

1.36%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

3.04%

2.73%

2.74%

1 bps

-30 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 created 192,000 new jobs in March, and the Bureau of Labor Statistics revised its figures for January and February upward. However, because more people sought work, the unemployment rate remained at 6.7%.

· There was encouraging news about the U.S. manufacturing sector. After two months of declines, the Commerce Department said new orders at U.S. factories were up 1.6% in February, led by a 7% increase in transportation equipment, and shipments also rebounded. Manufacturing data from the Institute for Supply Management® also showed accelerating growth in March; the half-percent increase to 53.7% was the 10th straight month of growth. And in the services sector, the ISM’s March survey also showed acceleration, with a 1.5-point increase to 53.1%.

· Despite a 0.5% inflation rate–the lowest in more than four years–the European Central Bank left its key interest rate unchanged at 0.25%. President Mario Draghi said the ECB discussed adopting both conventional and extraordinary quantitative easing measures, including a negative deposit rate and asset purchases, to prevent the threat of deflation. Such measures could weaken the euro, potentially increasing European exports. However, the group decided to postpone action to see whether the inflation rate rises to a more acceptable level after the end of a warm winter that has cut heating and food prices there.

· According to the Commerce Department, the U.S. trade deficit rose 7.6% in February to its highest level in five months as a 0.4% increase in imports, particularly oil, wasn’t enough to overcome a 1.1% decline in American exports.

· Despite the winter weather, a 1.2% increase in money spent on commercial buildings helped push overall construction spending up 0.1% in February, according to the Commerce Department.

· The Department of Justice confirmed that it is investigating the practice of high-frequency trading to see whether it has been used to violate insider trading laws. The SEC and Commodity Futures Trading Commission also are investigating HFT.

· Past performance was no indicator of current results: Despite the troubled rollout of www.healthcare.gov, the White House said that by the March 31 deadline, more than 7 million individuals–the initial goal–had signed up (or were in the process of doing so) for health insurance coverage under the Affordable Care Act.

Eye on the Week Ahead

Investors will watch to see whether the tech selling continues and whether it spreads to the large-cap indices. However, they’ll have little economic data for guidance, though minutes of the recent Federal Open Market Committee meeting could show the extent of any division among members about the future of interest rates.

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.

High-Frequency Trading

April 2nd, 2014

Is the stock market rigged in favor of high-speed electronic trading firms? Perhaps, but that shouldn’t matter to most investors.

Recent media reports and a new book by author Michael Lewis have focused on a form of high-frequency stock trading where professional traders use sophisticated computers and complex programming to see stock orders coming in and position themselves ahead of the orders as middlemen between existing buyers and sellers. All of this is done very rapidly, over and over again, often netting the high-frequency trader a few pennies on the stock price.

While short-term traders fight it out at lightning speeds over these pennies, long-term investors are generally above the fray. If you are an investor focused on the longer term fundamentals of an investment, generally speaking, you have little to fear over the very small price moves caused by high-frequency trading.

High-frequency trading has been gathering headlines for 15 years. But, in recent years, this trading has shown some signs of stressing the fabric of the markets, for example, with the May 6, 2010 “flash crash,” when the Dow Jones Industrial Average dropped 1,000 points in just minutes, then rebounded by the end of the day. Investors should bear the risk of their investment; they should not have to bear the risk of whether the markets are functioning fairly or effectively. In response, regulators have taken some action. The Dodd-Frank legislation, passed in 2010, effectively restricted high-frequency trading by the big banks. Yet, not everyone sees high-frequency trading as a negative; some mutual fund companies have publically noted that using such strategies reduces transaction costs and benefits the investors in their funds.

In short, high-frequency trading may create small inefficiencies over the short run, but for long-term investors it has little impact on achieving their financial goals.

Sincerely,
Westside Investment Management