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Broker Check

May 9, 2016

The Markets

 

Reading economic portents can be tricky.

 

For example, do signs that economic growth is slowing – like last week’s employment report, which was anemic relative to consensus forecasts, and first quarter’s gross domestic product (GDP) growth – mean the economy is headed for trouble? Or, does it mean the economy is going to continue to grow slowly?

 

It all depends on whom you ask.

 

Some see current lackluster economic data as a harbinger of trouble. Last week, Barron’s cited an expert who was concerned about employment data. “…It could be a sign of trouble...Specifically, falling profit margins will put pressure to trim costs and head counts later this year and into 2017, which would slow consumer-spending growth.”

 

Others believe the United States is destined to experience a persistent period of slow growth. In 2013, Barron’s suggested the enviable pace of growth in the United States since World War II was likely to decline, along with the size of its working-age population and gains in worker productivity. The new era:

 

“…could have broad repercussions that will affect not only the pugilists in Washington but businesses and investors. Weaker growth will make it harder for companies to improve earnings, fatten dividends, or garner better stock returns. It also threatens to fan social inequality and class tensions and limit the ability of government to fund various entitlement programs like Medicare and Social Security. Tax revenues also are likely to fall short of projected levels.”

 

Of course, a lot depends on how you gauge growth. A 2009 discussion in a Harvard Business School blog asked whether slower growth, as measured by current indicators, was meaningful since, as this commentary mentioned last week, gross domestic product (GDP) is a flawed indicator. “Further, in an age of concern about the environment, questions are raised about whether certain forms of growth – let alone incorrect measures – serve a very good purpose.”

 

Investors expressed their opinions last week. They weren’t thrilled by mixed economic data or the possibility of slower growth. Reuters suggested markets’ downward shift indicated a reduced appetite for risk.

 

OUR INVESTMENT STRATEGIES were unchanged this week.  We continue to focus on alternative funds that do not focus directly on the traditional stock and bond markets.  Below is rationale on why we are focusing on alternatives:

 

 

One of our research analysts provided this chart with the below comments:

 

We show the link to our interview on CNBC in late 2014, where we mentioned that we should not see the S&P rise more than 5% higher until the big top in late 2017

So far, so good

All attempts to be long have not led to much

As long as there is no close above the trend line, we do not change our mind

The short term cycle that we show today for the S&P still does not support much upside

In the meantime, we see the economy pick up in Europe and China

Our model calculates that the strength in China will be over in a few months

For now, we see iron prices picking up

In addition, steel prices are strong

Our models still show that the market is too expensive

 

 

We show the S&P cycles again, and they do not look good for the second half of the year

 

Gold is another area of interest to us.  Below is rationale from another analyst on how we feel about gold and potentially adding it to our models:

 

Record COT Numbers for Gold in 30-Year CFTC Database Rising open interest (the number of outstanding contracts) tends to be supportive of a trend. In the case of gold, the open interest is now at the highest level since 2011 indicating that the new buyers are offsetting the power of the sellers. We are interested in the figures when they reach extremes in absolute levels, but more importantly when the rate of change (measured with an RSI and the Bollinger Bands) reach extremes. There are more net speculative long positions in gold than any time in the thirty-year database of the CFTC. And, at 294,201, the commercial short position is within 14k of its all-time high recorded in November 2009 and 1k of the high in October 2009. Gold topped two and four days following the dates that the commercial position exceeded the current level. Prices declined 5% and 15%, holding above their previous breakouts, and eventually went on to new highs. This move pushed the RSI(14) readings to the most extreme readings in the database; 19.2 for commercials and 81.8 for speculators. It also puts the COT numbers well outside the Bollinger Band The other point of significance is the magnitude of last week’s changes. Commercials increased net short positions by 54,793 contracts. Noncommercials increased net longs by 50,791 contracts. CHARTWORKS – 5/8/2016 2 There are only thirteen instances where the net changes exceeded 45,000. These occurred on breakouts of trading ranges as new highs gave trend followers and mechanical systems confirmation of the underlying uptrend. A review of those examples shows how imperative it is that pullbacks only overlap the recent breakout point ($1273 close of March 9th) by no more than 1% ($1260). Moving below that would likely kick off large selling by overcommitted speculators. Once the selling starts it normally takes weeks, not days to produce an important bottom.

 

 


Data as of 5/6/16

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor's 500 (Domestic Stocks)

-0.4%

0.7%

-1.5%

8.3%

9.0%

4.5%

Dow Jones Global ex-U.S.

-3.7

-2.1

-14.6

-2.9

-2.3

-1.2

10-year Treasury Note (Yield Only)

1.8

NA

2.3

1.8

3.2

5.1

Gold (per ounce)

0.3

21.4

7.9

-3.7

-2.8

6.7

Bloomberg Commodity Index

-2.5

6.2

-20.3

-14.4

-12.2

-7.3

DJ Equity All REIT Total Return Index

4.3

8.6

15.0

8.3

11.5

7.0

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

it probably won’t surprise you to learn russia was on top. In countries around the world, crony capitalism has thrived during the past two decades. The net worth of wealthy business folk, who worked closely with their governments, was almost $2 trillion in 2014, an increase of about 385 percent from 2004. That is about one-third of the total wealth of billionaires around the world.

 

The National Review defined crony capitalism as “…an insidious system in which businesses’ success is based on a close relationship with government and, specifically, with the people in power who dispense favors, subsidies, bailouts, and other forms of special treatment.”

 

The Economist offered some specific examples. “As commodity and property prices soared, so did the value of permits to dig mines in China or build offices in São Paulo. Telecoms spectrum doled out by Indian officials created instant billionaires. Implicit state guarantees let casino banking thrive on Wall Street and beyond.”

 

In an effort to measure the influence of crony capitalism on wealth, The Economist developed an index. The publication took Forbes’ annual lists of the world’s billionaires, designated each billionaire as crony or not-crony (as determined by the industry in which he or she had accumulated wealth), sorted them by country, and then calculated wealth as a percent of their country’s gross domestic product (GDP).

 

Russia, Malaysia, Philippines, Singapore, and Ukraine topped the 22-country index in 2016. Germany, Poland, South Korea, Japan, and France were at the bottom. The United States was 15th on the list. U.S. billionaires’ wealth is equivalent to about 13 percent of GDP, but wealth earned through crony capitalism accounts for just 2 percent of that amount.

 

Weekly Focus – Think About It

 

“The price of success is hard work, dedication to the job at hand, and the determination that whether we win or lose, we have applied the best of ourselves to the task at hand.”

--Vince Lombardi, Past Coach of the Green Bay Packers

 

Best regards,

 

The GPS Team

 

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

 

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.

* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Past performance does not guarantee future results. Investing involves risk, including loss of principal.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

* Stock investing involves risk including loss of principal.

 

Sources:

http://www.barrons.com/articles/trump-on-the-debt-the-dollar-and-yellens-fed-1462593730?mod=BOL_hp_we_columns (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-09-16_Barrons-Trump_on_the_Debt_the_Dollar_and_Yellens_Fed-Footnote_1.pdf)

https://www.bea.gov/newsreleases/national/gdp/gdphighlights.pdf

http://www.barrons.com/articles/SB50001424053111904897104579149772682783890 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-09-16_Barrons-Slowing_to_a_Crawl-Footnote_3.pdf)

http://hbswk.hbs.edu/item/what-does-slower-economic-growth-really-mean

http://www.reuters.com/article/us-usa-stocks-idUSKCN0XX0ZT

http://www.economist.com/blogs/graphicdetail/2016/05/daily-chart-2 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-09-16_TheEconomist-Comparing_Crony_Capitalism_Around_the_World-Footnote_6.pdf)

http://www.nationalreview.com/article/422402/republicans-and-crony-capitalism-michael-tanner

http://www.economist.com/news/leaders/21698261-how-disentangle-business-government-dealing-murky-moguls (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-09-16_TheEconomist-Dealing_with_Murky_Moguls-Footnote_8.pdf)

http://www.brainyquote.com/quotes/quotes/v/vincelomba125250.html?src=t_success.”

 

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Spire Wealth Management, LLC), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Spire Wealth Management, LLC.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Spire Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the website content should be construed as legal or accounting advice.  A copy of the Spire Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request.