FOFViewForm Object
(
    [form:protected] => FOFForm Object
        (
            [model:protected] => LegacyinterfaceModelCommentaries Object
                (
                    [default_behaviors:protected] => Array
                        (
                            [0] => filters
                            [1] => access
                        )

                    [__state_set:protected] => 1
                    [_db:protected] => JDatabaseDriverMysqli Object
                        (
                            [name] => mysqli
                            [nameQuote:protected] => `
                            [nullDate:protected] => 0000-00-00 00:00:00
                            [_database:JDatabaseDriver:private] => joomla
                            [connection:protected] => mysqli Object
                                (
                                    [affected_rows] => 1
                                    [client_info] => mysqlnd 5.0.11-dev - 20120503 - $Id: 15d5c781cfcad91193dceae1d2cdd127674ddb3e $
                                    [client_version] => 50011
                                    [connect_errno] => 0
                                    [connect_error] => 
                                    [errno] => 0
                                    [error] => 
                                    [error_list] => Array
                                        (
                                        )

                                    [field_count] => 1
                                    [host_info] => Localhost via UNIX socket
                                    [info] => 
                                    [insert_id] => 0
                                    [server_info] => 5.5.46
                                    [server_version] => 50546
                                    [stat] => Uptime: 7770524  Threads: 1  Questions: 3167731  Slow queries: 9  Opens: 160  Flush tables: 1  Open tables: 153  Queries per second avg: 0.407
                                    [sqlstate] => 00000
                                    [protocol_version] => 10
                                    [thread_id] => 286878
                                    [warning_count] => 0
                                )

                            [count:protected] => 17
                            [cursor:protected] => 
                            [debug:protected] => 
                            [limit:protected] => 0
                            [log:protected] => Array
                                (
                                )

                            [timings:protected] => Array
                                (
                                )

                            [callStacks:protected] => Array
                                (
                                )

                            [offset:protected] => 0
                            [options:protected] => Array
                                (
                                    [driver] => mysqli
                                    [host] => localhost
                                    [user] => joomlauser
                                    [password] => default
                                    [database] => joomla
                                    [prefix] => ap_
                                    [select] => 1
                                    [port] => 3306
                                    [socket] => 
                                )

                            [sql:protected] => 
SELECT COUNT(*)
FROM (
SELECT `#__legacyinterface_commentaries`.*
FROM `#__legacyinterface_commentaries`
WHERE (`access` IN ('1','1'))) AS a
                            [tablePrefix:protected] => ap_
                            [utf:protected] => 1
                            [errorNum:protected] => 0
                            [errorMsg:protected] => 
                            [transactionDepth:protected] => 0
                            [disconnectHandlers:protected] => Array
                                (
                                )

                        )

                    [event_after_delete:protected] => onContentAfterDelete
                    [event_after_save:protected] => onContentAfterSave
                    [event_before_delete:protected] => onContentBeforeDelete
                    [event_before_save:protected] => onContentBeforeSave
                    [event_change_state:protected] => onContentChangeState
                    [event_clean_cache:protected] => 
                    [id_list:protected] => Array
                        (
                            [0] => 0
                        )

                    [id:protected] => 0
                    [input:protected] => FOFInput Object
                        (
                            [options:protected] => Array
                                (
                                )

                            [filter:protected] => JFilterInput Object
                                (
                                    [tagsArray] => Array
                                        (
                                        )

                                    [attrArray] => Array
                                        (
                                        )

                                    [tagsMethod] => 0
                                    [attrMethod] => 0
                                    [xssAuto] => 1
                                    [tagBlacklist] => Array
                                        (
                                            [0] => applet
                                            [1] => body
                                            [2] => bgsound
                                            [3] => base
                                            [4] => basefont
                                            [5] => embed
                                            [6] => frame
                                            [7] => frameset
                                            [8] => head
                                            [9] => html
                                            [10] => id
                                            [11] => iframe
                                            [12] => ilayer
                                            [13] => layer
                                            [14] => link
                                            [15] => meta
                                            [16] => name
                                            [17] => object
                                            [18] => script
                                            [19] => style
                                            [20] => title
                                            [21] => xml
                                        )

                                    [attrBlacklist] => Array
                                        (
                                            [0] => action
                                            [1] => background
                                            [2] => codebase
                                            [3] => dynsrc
                                            [4] => lowsrc
                                        )

                                )

                            [data:protected] => Array
                                (
                                    [view] => commentaries
                                    [start] => 1760
                                    [limitstart] => 1760
                                    [option] => com_legacyinterface
                                    [Itemid] => 616
                                    [layout] => 
                                    [task] => browse
                                    [directionTable] => asc
                                    [sortTable] => published_on
                                    [filter_order] => published_on
                                    [filter_order_Dir] => desc
                                    [savestate] => 1
                                    [base_path] => /var/www/html/apcms/components/com_legacyinterface
                                )

                            [inputs:protected] => Array
                                (
                                    [get] => JInput Object
                                        (
                                            [options:protected] => Array
                                                (
                                                )

                                            [filter:protected] => JFilterInput Object
                                                (
                                                    [tagsArray] => Array
                                                        (
                                                        )

                                                    [attrArray] => Array
                                                        (
                                                        )

                                                    [tagsMethod] => 0
                                                    [attrMethod] => 0
                                                    [xssAuto] => 1
                                                    [tagBlacklist] => Array
                                                        (
                                                            [0] => applet
                                                            [1] => body
                                                            [2] => bgsound
                                                            [3] => base
                                                            [4] => basefont
                                                            [5] => embed
                                                            [6] => frame
                                                            [7] => frameset
                                                            [8] => head
                                                            [9] => html
                                                            [10] => id
                                                            [11] => iframe
                                                            [12] => ilayer
                                                            [13] => layer
                                                            [14] => link
                                                            [15] => meta
                                                            [16] => name
                                                            [17] => object
                                                            [18] => script
                                                            [19] => style
                                                            [20] => title
                                                            [21] => xml
                                                        )

                                                    [attrBlacklist] => Array
                                                        (
                                                            [0] => action
                                                            [1] => background
                                                            [2] => codebase
                                                            [3] => dynsrc
                                                            [4] => lowsrc
                                                        )

                                                )

                                            [data:protected] => Array
                                                (
                                                    [view] => commentaries
                                                    [start] => 1760
                                                )

                                            [inputs:protected] => Array
                                                (
                                                    [get] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [view] => commentaries
                                                                    [start] => 1760
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [post] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [cookie] => JInputCookie Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                    [get] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                    [view] => commentaries
                                                                                    [start] => 1760
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [post] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [cookie] => JInputCookie Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [files] => JInputFiles Object
                                                                        (
                                                                            [decodedData:protected] => Array
                                                                                (
                                                                                )

                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                    [get] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => applet
                                                                                                            [1] => body
                                                                                                            [2] => bgsound
                                                                                                            [3] => base
                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
                                                                                                            [11] => iframe
                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
                                                                                                            [15] => meta
                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
                                                                                                        )

                                                                                                    [attrBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => action
                                                                                                            [1] => background
                                                                                                            [2] => codebase
                                                                                                            [3] => dynsrc
                                                                                                            [4] => lowsrc
                                                                                                        )

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [view] => commentaries
                                                                                                    [start] => 1760
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [post] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => applet
                                                                                                            [1] => body
                                                                                                            [2] => bgsound
                                                                                                            [3] => base
                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
                                                                                                            [11] => iframe
                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
                                                                                                            [15] => meta
                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
                                                                                                        )

                                                                                                    [attrBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => action
                                                                                                            [1] => background
                                                                                                            [2] => codebase
                                                                                                            [3] => dynsrc
                                                                                                            [4] => lowsrc
                                                                                                        )

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [cookie] => JInputCookie Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => applet
                                                                                                            [1] => body
                                                                                                            [2] => bgsound
                                                                                                            [3] => base
                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
                                                                                                            [11] => iframe
                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
                                                                                                            [15] => meta
                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
                                                                                                        )

                                                                                                    [attrBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => action
                                                                                                            [1] => background
                                                                                                            [2] => codebase
                                                                                                            [3] => dynsrc
                                                                                                            [4] => lowsrc
                                                                                                        )

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [files] => JInputFiles Object
                                                                                        (
                                                                                            [decodedData:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
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                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
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                                                                                                            [3] => base
                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
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                                                                                                            [10] => id
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                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
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                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
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                                                                                                    [attrBlacklist] => Array
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                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [env] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
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                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
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                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
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                                                                                                            [16] => name
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                                                                                                            [18] => script
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                                                                                                    [attrBlacklist] => Array
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                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [request] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => applet
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                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
                                                                                                            [11] => iframe
                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
                                                                                                            [15] => meta
                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
                                                                                                        )

                                                                                                    [attrBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => action
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                                                                                                        )

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [view] => commentaries
                                                                                                    [start] => 1760
                                                                                                    [limitstart] => 1760
                                                                                                    [option] => com_legacyinterface
                                                                                                    [Itemid] => 616
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                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [server] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => applet
                                                                                                            [1] => body
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                                                                                                            [3] => base
                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
                                                                                                            [11] => iframe
                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
                                                                                                            [15] => meta
                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
                                                                                                        )

                                                                                                    [attrBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => action
                                                                                                            [1] => background
                                                                                                            [2] => codebase
                                                                                                            [3] => dynsrc
                                                                                                            [4] => lowsrc
                                                                                                        )

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [HTTP_AUTHORIZATION] => 
                                                                                                    [HTTP_CACHE_CONTROL] => no-cache
                                                                                                    [HTTP_CONNECTION] => Keep-Alive
                                                                                                    [HTTP_PRAGMA] => no-cache
                                                                                                    [HTTP_ACCEPT] => */*
                                                                                                    [HTTP_ACCEPT_ENCODING] => gzip, deflate
                                                                                                    [HTTP_FROM] => bingbot(at)microsoft.com
                                                                                                    [HTTP_HOST] => 54.225.85.205
                                                                                                    [HTTP_IF_MODIFIED_SINCE] => Thu, 26 Apr 2018 21:57:19 GMT
                                                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm)
                                                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                                                    [SERVER_SIGNATURE] => 
                                                                                                    [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31
                                                                                                    [SERVER_NAME] => 54.225.85.205
                                                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                                                    [SERVER_PORT] => 80
                                                                                                    [REMOTE_ADDR] => 157.55.39.42
                                                                                                    [DOCUMENT_ROOT] => /var/www/html/apcms
                                                                                                    [REQUEST_SCHEME] => http
                                                                                                    [CONTEXT_PREFIX] => 
                                                                                                    [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms
                                                                                                    [SERVER_ADMIN] => ben@hubtech.tv
                                                                                                    [SCRIPT_FILENAME] => /var/www/html/apcms/index.php
                                                                                                    [REMOTE_PORT] => 22879
                                                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                                                    [REQUEST_METHOD] => GET
                                                                                                    [QUERY_STRING] => view=commentaries&start=1760
                                                                                                    [REQUEST_URI] => /?view=commentaries&start=1760
                                                                                                    [SCRIPT_NAME] => /index.php
                                                                                                    [PHP_SELF] => /index.php
                                                                                                    [REQUEST_TIME_FLOAT] => 1526899007.449
                                                                                                    [REQUEST_TIME] => 1526899007
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [session] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => applet
                                                                                                            [1] => body
                                                                                                            [2] => bgsound
                                                                                                            [3] => base
                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
                                                                                                            [11] => iframe
                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
                                                                                                            [15] => meta
                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
                                                                                                        )

                                                                                                    [attrBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => action
                                                                                                            [1] => background
                                                                                                            [2] => codebase
                                                                                                            [3] => dynsrc
                                                                                                            [4] => lowsrc
                                                                                                        )

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                    [__default] => Array
                                                                                                        (
                                                                                                            [session.counter] => 1
                                                                                                            [session.timer.start] => 1526899007
                                                                                                            [session.timer.last] => 1526899007
                                                                                                            [session.timer.now] => 1526899007
                                                                                                            [session.client.browser] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm)
                                                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                                                (
                                                                                                                    [data:protected] => stdClass Object
                                                                                                                        (
                                                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                                                (
                                                                                                                                    [commentaries] => stdClass Object
                                                                                                                                        (
                                                                                                                                            [limitstart] => 1760
                                                                                                                                            [filter_order] => published_on
                                                                                                                                            [filter_order_Dir] => desc
                                                                                                                                        )

                                                                                                                                )

                                                                                                                        )

                                                                                                                )

                                                                                                            [user] => JUser Object
                                                                                                                (
                                                                                                                    [isRoot:protected] => 
                                                                                                                    [id] => 0
                                                                                                                    [name] => 
                                                                                                                    [username] => 
                                                                                                                    [email] => 
                                                                                                                    [password] => 
                                                                                                                    [password_clear] => 
                                                                                                                    [block] => 
                                                                                                                    [sendEmail] => 0
                                                                                                                    [registerDate] => 
                                                                                                                    [lastvisitDate] => 
                                                                                                                    [activation] => 
                                                                                                                    [params] => 
                                                                                                                    [groups] => Array
                                                                                                                        (
                                                                                                                            [0] => 9
                                                                                                                        )

                                                                                                                    [guest] => 1
                                                                                                                    [lastResetTime] => 
                                                                                                                    [resetCount] => 
                                                                                                                    [requireReset] => 
                                                                                                                    [_params:protected] => Joomla\Registry\Registry Object
                                                                                                                        (
                                                                                                                            [data:protected] => stdClass Object
                                                                                                                                (
                                                                                                                                )

                                                                                                                        )

                                                                                                                    [_authGroups:protected] => Array
                                                                                                                        (
                                                                                                                            [0] => 1
                                                                                                                        )

                                                                                                                    [_authLevels:protected] => Array
                                                                                                                        (
                                                                                                                            [0] => 1
                                                                                                                            [1] => 1
                                                                                                                        )

                                                                                                                    [_authActions:protected] => 
                                                                                                                    [_errorMsg:protected] => 
                                                                                                                    [_errors:protected] => Array
                                                                                                                        (
                                                                                                                        )

                                                                                                                    [aid] => 0
                                                                                                                )

                                                                                                        )

                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [jrequest] => JInput Object
                                                                                        (
                                                                                            [options:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [filter:protected] => JFilterInput Object
                                                                                                (
                                                                                                    [tagsArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [attrArray] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [tagsMethod] => 0
                                                                                                    [attrMethod] => 0
                                                                                                    [xssAuto] => 1
                                                                                                    [tagBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => applet
                                                                                                            [1] => body
                                                                                                            [2] => bgsound
                                                                                                            [3] => base
                                                                                                            [4] => basefont
                                                                                                            [5] => embed
                                                                                                            [6] => frame
                                                                                                            [7] => frameset
                                                                                                            [8] => head
                                                                                                            [9] => html
                                                                                                            [10] => id
                                                                                                            [11] => iframe
                                                                                                            [12] => ilayer
                                                                                                            [13] => layer
                                                                                                            [14] => link
                                                                                                            [15] => meta
                                                                                                            [16] => name
                                                                                                            [17] => object
                                                                                                            [18] => script
                                                                                                            [19] => style
                                                                                                            [20] => title
                                                                                                            [21] => xml
                                                                                                        )

                                                                                                    [attrBlacklist] => Array
                                                                                                        (
                                                                                                            [0] => action
                                                                                                            [1] => background
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                                                                                                            [3] => dynsrc
                                                                                                            [4] => lowsrc
                                                                                                        )

                                                                                                )

                                                                                            [data:protected] => Array
                                                                                                (
                                                                                                )

                                                                                            [inputs:protected] => Array
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                )

                                                                        )

                                                                    [env] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
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                                                                                            [1] => body
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                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
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                                                                                            [2] => codebase
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                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [request] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
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                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
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                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
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                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                    [view] => commentaries
                                                                                    [start] => 1760
                                                                                    [limitstart] => 1760
                                                                                    [option] => com_legacyinterface
                                                                                    [Itemid] => 616
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [server] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                    [HTTP_AUTHORIZATION] => 
                                                                                    [HTTP_CACHE_CONTROL] => no-cache
                                                                                    [HTTP_CONNECTION] => Keep-Alive
                                                                                    [HTTP_PRAGMA] => no-cache
                                                                                    [HTTP_ACCEPT] => */*
                                                                                    [HTTP_ACCEPT_ENCODING] => gzip, deflate
                                                                                    [HTTP_FROM] => bingbot(at)microsoft.com
                                                                                    [HTTP_HOST] => 54.225.85.205
                                                                                    [HTTP_IF_MODIFIED_SINCE] => Thu, 26 Apr 2018 21:57:19 GMT
                                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm)
                                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                                    [SERVER_SIGNATURE] => 
                                                                                    [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31
                                                                                    [SERVER_NAME] => 54.225.85.205
                                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                                    [SERVER_PORT] => 80
                                                                                    [REMOTE_ADDR] => 157.55.39.42
                                                                                    [DOCUMENT_ROOT] => /var/www/html/apcms
                                                                                    [REQUEST_SCHEME] => http
                                                                                    [CONTEXT_PREFIX] => 
                                                                                    [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms
                                                                                    [SERVER_ADMIN] => ben@hubtech.tv
                                                                                    [SCRIPT_FILENAME] => /var/www/html/apcms/index.php
                                                                                    [REMOTE_PORT] => 22879
                                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                                    [REQUEST_METHOD] => GET
                                                                                    [QUERY_STRING] => view=commentaries&start=1760
                                                                                    [REQUEST_URI] => /?view=commentaries&start=1760
                                                                                    [SCRIPT_NAME] => /index.php
                                                                                    [PHP_SELF] => /index.php
                                                                                    [REQUEST_TIME_FLOAT] => 1526899007.449
                                                                                    [REQUEST_TIME] => 1526899007
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [session] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                    [__default] => Array
                                                                                        (
                                                                                            [session.counter] => 1
                                                                                            [session.timer.start] => 1526899007
                                                                                            [session.timer.last] => 1526899007
                                                                                            [session.timer.now] => 1526899007
                                                                                            [session.client.browser] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm)
                                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                                (
                                                                                                    [data:protected] => stdClass Object
                                                                                                        (
                                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                                (
                                                                                                                    [commentaries] => stdClass Object
                                                                                                                        (
                                                                                                                            [limitstart] => 1760
                                                                                                                            [filter_order] => published_on
                                                                                                                            [filter_order_Dir] => desc
                                                                                                                        )

                                                                                                                )

                                                                                                        )

                                                                                                )

                                                                                            [user] => JUser Object
                                                                                                (
                                                                                                    [isRoot:protected] => 
                                                                                                    [id] => 0
                                                                                                    [name] => 
                                                                                                    [username] => 
                                                                                                    [email] => 
                                                                                                    [password] => 
                                                                                                    [password_clear] => 
                                                                                                    [block] => 
                                                                                                    [sendEmail] => 0
                                                                                                    [registerDate] => 
                                                                                                    [lastvisitDate] => 
                                                                                                    [activation] => 
                                                                                                    [params] => 
                                                                                                    [groups] => Array
                                                                                                        (
                                                                                                            [0] => 9
                                                                                                        )

                                                                                                    [guest] => 1
                                                                                                    [lastResetTime] => 
                                                                                                    [resetCount] => 
                                                                                                    [requireReset] => 
                                                                                                    [_params:protected] => Joomla\Registry\Registry Object
                                                                                                        (
                                                                                                            [data:protected] => stdClass Object
                                                                                                                (
                                                                                                                )

                                                                                                        )

                                                                                                    [_authGroups:protected] => Array
                                                                                                        (
                                                                                                            [0] => 1
                                                                                                        )

                                                                                                    [_authLevels:protected] => Array
                                                                                                        (
                                                                                                            [0] => 1
                                                                                                            [1] => 1
                                                                                                        )

                                                                                                    [_authActions:protected] => 
                                                                                                    [_errorMsg:protected] => 
                                                                                                    [_errors:protected] => Array
                                                                                                        (
                                                                                                        )

                                                                                                    [aid] => 0
                                                                                                )

                                                                                        )

                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                    [jrequest] => JInput Object
                                                                        (
                                                                            [options:protected] => Array
                                                                                (
                                                                                )

                                                                            [filter:protected] => JFilterInput Object
                                                                                (
                                                                                    [tagsArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [attrArray] => Array
                                                                                        (
                                                                                        )

                                                                                    [tagsMethod] => 0
                                                                                    [attrMethod] => 0
                                                                                    [xssAuto] => 1
                                                                                    [tagBlacklist] => Array
                                                                                        (
                                                                                            [0] => applet
                                                                                            [1] => body
                                                                                            [2] => bgsound
                                                                                            [3] => base
                                                                                            [4] => basefont
                                                                                            [5] => embed
                                                                                            [6] => frame
                                                                                            [7] => frameset
                                                                                            [8] => head
                                                                                            [9] => html
                                                                                            [10] => id
                                                                                            [11] => iframe
                                                                                            [12] => ilayer
                                                                                            [13] => layer
                                                                                            [14] => link
                                                                                            [15] => meta
                                                                                            [16] => name
                                                                                            [17] => object
                                                                                            [18] => script
                                                                                            [19] => style
                                                                                            [20] => title
                                                                                            [21] => xml
                                                                                        )

                                                                                    [attrBlacklist] => Array
                                                                                        (
                                                                                            [0] => action
                                                                                            [1] => background
                                                                                            [2] => codebase
                                                                                            [3] => dynsrc
                                                                                            [4] => lowsrc
                                                                                        )

                                                                                )

                                                                            [data:protected] => Array
                                                                                (
                                                                                )

                                                                            [inputs:protected] => Array
                                                                                (
                                                                                )

                                                                        )

                                                                )

                                                        )

                                                    [files] => JInputFiles Object
                                                        (
                                                            [decodedData:protected] => Array
                                                                (
                                                                )

                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [env] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [request] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [view] => commentaries
                                                                    [start] => 1760
                                                                    [limitstart] => 1760
                                                                    [option] => com_legacyinterface
                                                                    [Itemid] => 616
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [server] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [HTTP_AUTHORIZATION] => 
                                                                    [HTTP_CACHE_CONTROL] => no-cache
                                                                    [HTTP_CONNECTION] => Keep-Alive
                                                                    [HTTP_PRAGMA] => no-cache
                                                                    [HTTP_ACCEPT] => */*
                                                                    [HTTP_ACCEPT_ENCODING] => gzip, deflate
                                                                    [HTTP_FROM] => bingbot(at)microsoft.com
                                                                    [HTTP_HOST] => 54.225.85.205
                                                                    [HTTP_IF_MODIFIED_SINCE] => Thu, 26 Apr 2018 21:57:19 GMT
                                                                    [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm)
                                                                    [PATH] => /sbin:/usr/sbin:/bin:/usr/bin
                                                                    [SERVER_SIGNATURE] => 
                                                                    [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31
                                                                    [SERVER_NAME] => 54.225.85.205
                                                                    [SERVER_ADDR] => 10.28.13.29
                                                                    [SERVER_PORT] => 80
                                                                    [REMOTE_ADDR] => 157.55.39.42
                                                                    [DOCUMENT_ROOT] => /var/www/html/apcms
                                                                    [REQUEST_SCHEME] => http
                                                                    [CONTEXT_PREFIX] => 
                                                                    [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms
                                                                    [SERVER_ADMIN] => ben@hubtech.tv
                                                                    [SCRIPT_FILENAME] => /var/www/html/apcms/index.php
                                                                    [REMOTE_PORT] => 22879
                                                                    [GATEWAY_INTERFACE] => CGI/1.1
                                                                    [SERVER_PROTOCOL] => HTTP/1.1
                                                                    [REQUEST_METHOD] => GET
                                                                    [QUERY_STRING] => view=commentaries&start=1760
                                                                    [REQUEST_URI] => /?view=commentaries&start=1760
                                                                    [SCRIPT_NAME] => /index.php
                                                                    [PHP_SELF] => /index.php
                                                                    [REQUEST_TIME_FLOAT] => 1526899007.449
                                                                    [REQUEST_TIME] => 1526899007
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [session] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                    [__default] => Array
                                                                        (
                                                                            [session.counter] => 1
                                                                            [session.timer.start] => 1526899007
                                                                            [session.timer.last] => 1526899007
                                                                            [session.timer.now] => 1526899007
                                                                            [session.client.browser] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm)
                                                                            [registry] => Joomla\Registry\Registry Object
                                                                                (
                                                                                    [data:protected] => stdClass Object
                                                                                        (
                                                                                            [com_legacyinterface] => stdClass Object
                                                                                                (
                                                                                                    [commentaries] => stdClass Object
                                                                                                        (
                                                                                                            [limitstart] => 1760
                                                                                                            [filter_order] => published_on
                                                                                                            [filter_order_Dir] => desc
                                                                                                        )

                                                                                                )

                                                                                        )

                                                                                )

                                                                            [user] => JUser Object
                                                                                (
                                                                                    [isRoot:protected] => 
                                                                                    [id] => 0
                                                                                    [name] => 
                                                                                    [username] => 
                                                                                    [email] => 
                                                                                    [password] => 
                                                                                    [password_clear] => 
                                                                                    [block] => 
                                                                                    [sendEmail] => 0
                                                                                    [registerDate] => 
                                                                                    [lastvisitDate] => 
                                                                                    [activation] => 
                                                                                    [params] => 
                                                                                    [groups] => Array
                                                                                        (
                                                                                            [0] => 9
                                                                                        )

                                                                                    [guest] => 1
                                                                                    [lastResetTime] => 
                                                                                    [resetCount] => 
                                                                                    [requireReset] => 
                                                                                    [_params:protected] => Joomla\Registry\Registry Object
                                                                                        (
                                                                                            [data:protected] => stdClass Object
                                                                                                (
                                                                                                )

                                                                                        )

                                                                                    [_authGroups:protected] => Array
                                                                                        (
                                                                                            [0] => 1
                                                                                        )

                                                                                    [_authLevels:protected] => Array
                                                                                        (
                                                                                            [0] => 1
                                                                                            [1] => 1
                                                                                        )

                                                                                    [_authActions:protected] => 
                                                                                    [_errorMsg:protected] => 
                                                                                    [_errors:protected] => Array
                                                                                        (
                                                                                        )

                                                                                    [aid] => 0
                                                                                )

                                                                        )

                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                    [jrequest] => JInput Object
                                                        (
                                                            [options:protected] => Array
                                                                (
                                                                )

                                                            [filter:protected] => JFilterInput Object
                                                                (
                                                                    [tagsArray] => Array
                                                                        (
                                                                        )

                                                                    [attrArray] => Array
                                                                        (
                                                                        )

                                                                    [tagsMethod] => 0
                                                                    [attrMethod] => 0
                                                                    [xssAuto] => 1
                                                                    [tagBlacklist] => Array
                                                                        (
                                                                            [0] => applet
                                                                            [1] => body
                                                                            [2] => bgsound
                                                                            [3] => base
                                                                            [4] => basefont
                                                                            [5] => embed
                                                                            [6] => frame
                                                                            [7] => frameset
                                                                            [8] => head
                                                                            [9] => html
                                                                            [10] => id
                                                                            [11] => iframe
                                                                            [12] => ilayer
                                                                            [13] => layer
                                                                            [14] => link
                                                                            [15] => meta
                                                                            [16] => name
                                                                            [17] => object
                                                                            [18] => script
                                                                            [19] => style
                                                                            [20] => title
                                                                            [21] => xml
                                                                        )

                                                                    [attrBlacklist] => Array
                                                                        (
                                                                            [0] => action
                                                                            [1] => background
                                                                            [2] => codebase
                                                                            [3] => dynsrc
                                                                            [4] => lowsrc
                                                                        )

                                                                )

                                                            [data:protected] => Array
                                                                (
                                                                )

                                                            [inputs:protected] => Array
                                                                (
                                                                )

                                                        )

                                                )

                                        )

                                    [post] => JInput Object
                                        (
                                            [options:protected] => Array
                                                (
                                                )

                                            [filter:protected] => JFilterInput Object
                                                (
                                                    [tagsArray] => Array
                                                        (
                                                        )

                                                    [attrArray] => Array
                                                        (
                                                        )

                                                    [tagsMethod] => 0
                                                    [attrMethod] => 0
                                                    [xssAuto] => 1
                                                    [tagBlacklist] => Array
                                                        (
                                                            [0] => applet
                                                            [1] => body
                                                            [2] => bgsound
                                                            [3] => base
                                                            [4] => basefont
                                                            [5] => embed
                                                            [6] => frame
                                                            [7] => frameset
                                                            [8] => head
                                                            [9] => html
                                                            [10] => id
                                                            [11] => iframe
                                                            [12] => ilayer
                                                            [13] => layer
                                                            [14] => link
                                                            [15] => meta
                                                            [16] => name
                                                            [17] => object
                                                            [18] => script
                                                            [19] => style
                                                            [20] => title
                                                            [21] => xml
                                                        )

                                                    [attrBlacklist] => Array
                                                        (
                                                            [0] => action
                                                            [1] => background
                                                            [2] => codebase
                                                            [3] => dynsrc
                                                            [4] => lowsrc
                                                        )

                                                )

                                            [data:protected] => Array
                                                (
                                                )

                                            [inputs:protected] => Array
                                                (
                                                )

                                        )

                                    [cookie] => JInputCookie Object
                                        (
                                            [options:protected] => Array
                                                (
                                                )

                                            [filter:protected] => JFilterInput Object
                                                (
                                                    [tagsArray] => Array
                                                        (
                                                        )

                                                    [attrArray] => Array
                                                        (
                                                        )

                                                    [tagsMethod] => 0
                                                    [attrMethod] => 0
                                                    [xssAuto] => 1
                                                    [tagBlacklist] => Array
                                                        (
                                                            [0] => applet
                                                            [1] => body
                                                            [2] => bgsound
                                                            [3] => base
                                                            [4] => basefont
                                                            [5] => embed
                                                            [6] => frame
                                                            [7] => frameset
                                                            [8] => head
                                                            [9] => html
                                                            [10] => id
                                                            [11] => iframe
                                                            [12] => ilayer
                                                            [13] => layer
                                                            [14] => link
                                                            [15] => meta
                                                            [16] => name
                                                            [17] => object
                                                            [18] => script
                                                            [19] => style
                                                            [20] => title
                                                            [21] => xml
                                                        )

                                                    [attrBlacklist] => Array
                                                        (
                                                            [0] => action
                                                            [1] => background
                                                            [2] => codebase
                                                            [3] => dynsrc
                                                            [4] => lowsrc
                                                        )

                                                )

                                            [data:protected] => Array
                                                (
                                                )

                                            [inputs:protected] => Array
                                                (
                                                )

                                        )

                                    [files] => JInputFiles Object
                                        (
                                            [decodedData:protected] => Array
                                                (
                                                )

                                            [options:protected] => Array
                                                (
                                                )

                                            [filter:protected] => JFilterInput Object
                                                (
                                                    [tagsArray] => Array
                                                        (
                                                        )

                                                    [attrArray] => Array
                                                        (
                                                        )

                                                    [tagsMethod] => 0
                                                    [attrMethod] => 0
                                                    [xssAuto] => 1
                                                    [tagBlacklist] => Array
                                                        (
                                                            [0] => applet
                                                            [1] => body
                                                            [2] => bgsound
                                                            [3] => base
                                                            [4] => basefont
                                                            [5] => embed
                                                            [6] => frame
                                                            [7] => frameset
                                                            [8] => head
                                                            [9] => html
                                                            [10] => id
                                                            [11] => iframe
                                                            [12] => ilayer
                                                            [13] => layer
                                                            [14] => link
                                                            [15] => meta
                                                            [16] => name
                                                            [17] => object
                                                            [18] => script
                                                            [19] => style
                                                            [20] => title
                                                            [21] => xml
                                                        )

                                                    [attrBlacklist] => Array
                                                        (
                                                            [0] => action
                                                            [1] => background
                                                            [2] => codebase
                                                            [3] => dynsrc
                                                            [4] => lowsrc
                                                        )

                                                )

                                            [data:protected] => Array
                                                (
                                                )

                                            [inputs:protected] => Array
                                                (
                                                )

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                                    [title] => Tax-Exempt Securities Confounding the Consensus in 2014
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                                    [fulltext] => 

- Blame the central banks

- Six factors supporting the tax-exempt market

- Beware of the "de minimis" tax threat

- Update on municipal credits in the news 

Rarely do the financial markets provide the double treat of simultaneously rising equity valuations and falling bond yields.  Almost midway through the second quarter of 2014, key stock indices reached new all-time highs while global bond yields have retreated to levels not seen in over six months. Something has to give: either stock prices retreat or yields rise. Right? At least this is the popular assumption supported by classic economic rationale for a normal investment environment. 

But all is not normal according to the markets.  If it were, then stocks should continue their ascent and bond yields should be on an upward trajectory due to strengthening global economies, just as the consensus predicted at the start of the year.  Why is this not happening? The heavy hand of global central banks continues to play the leading role in the economic recovery story.  Assurances by the Fed's chair that the U.S. central bank will "remain accommodative"  for an unspecified period has buoyed both domestic equity and fixed income markets.  Persistent low inflation and an uneven labor market recovery are worrisome.  Internationally, the picture is equally cloudy.  The precipitous decline in Eurozone bond yields is likely a reflection of even greater economic recovery skepticism in Europe than in the U.S.  Sluggish growth in Japan and many emerging economies (i.e., China) will likely sustain accommodative monetary policies around the world.  A significant rise in global interest rates appears unlikely any time soon in our view. 

We have identified a number of factors likely to be supportive of the tax-exempt market over the near-term.

1. Municipal bond yields are attractive based on historical relationships relative to U.S. Treasuries.  The comparative "cheapness" broadens the potential investor base on a taxable- equivalent basis. Sustained investor demand for government debt could be a market prop going forward.

2. Municipal bond new-issuance is contracting.  Net supply is estimated to be $24 billion (8%) lower by street estimates versus 2013.

3. Retail demand is increasing. According to Lipper Analytics, $1.78 billion of inflows have gone into tax-exempt funds YTD (through May 7), with most of the purchasing occurring in recent weeks.

4. The "capitulation" trade might be unfolding.  Dramatic declines in global bond yields since the beginning of the month suggest investors might be throwing in the towel on the expectation for both rising rates and stock prices. While still too early to tell, the old stock adage, "sell in May and go away" might be unfolding once again in 2014.

5. The peak municipal market reinvestment period is approaching.  Historically, the largest reinvestment of coupons and maturing bonds occurs in the months of June-August.  According to JP Morgan, $10 billion will need to be reinvested this summer, equivalent to two-months of new tax-exempt issuance.

6. Property and casualty insurers will likely increase buying of tax-exempt debt due to the roll-off of tax loss carry forwards incurred during the financial crisis and the need to reinvest the maturity  proceeds of significant bond purchases made between 2004 and 2008. 

The move to lower tax-exempt rates over the past several months has initiated a move by new-issue underwriters to issue bonds bearing lower coupons.  Potentially, this could impact liquidity and adversely impact the pricing of these securities should they become subject to the "de minimis" tax. Investors should be cognizant.  We prefer the purchase of premium to discount bonds. 

Source: SMC FIM and Thomson Reuters 

Credit update:                                                                 

Puerto Rico and Detroit 

The news out of Puerto Rico continues to be mixed.  On the positive side, the unemployment rate on the island continues to decline.  Governor Padilla has announced a $6.9 billion balanced budget proposal for 2015 that calls for $1.4 billion in spending cuts and no deficit financing.  While the proposal is light on specifics, a combination of economic growth initiatives and austerity measures are proposed. No layoffs or new taxes are anticipated. Notably absent from the plan is any discussion of a possible restructuring of the Commonwealth or any of its agencies, although the government announced that it had recently hired a restructuring specialist. 

Negative news has come from the Puerto Rico Supreme Court, which struck down many cost-saving reforms legislated last year to address the high pension costs embedded in the Teachers' Retirement System.  In addition, the Commonwealth reported an anemic 0.1% growth rate in the first quarter.  Although the economy is still contracting, it is doing so at a decelerating rate.  Adding to the negative news, the government's revenues were 4.4% below projections through April. By comparison, revenues through March had been 1.25% above projections. 

In recent weeks Detroit has made progress toward an exit from bankruptcy by striking deals with pensioners and unlimited-tax general obligation bondholders (UTGO).  The feasibility and final outcome of Detroit's bankruptcy plan remains highly debatable.  To address this question, the presiding bankruptcy judge has engaged a municipal finance expert witness and a court consultant.  A trial on the final plan is now scheduled to begin in late July. 

The tentative settlement with the UTGO bondholders would have the City pay 74 cents on the dollar or approximately $388 million on allowed aggregate claims.  The judge has ordered mediation sessions between the City and its creditors to continue.  If the City is unable to settle with its remaining creditors, it could consider asking the court for a "cram down". A cram down would allow for confirmation of a plan of adjustment without the agreement of creditors. 

 

Disclosures 

The information provided in this commentary is not intended to be a complete summary of all available data. Certain information contained herein has been obtained from published sources and/or prepared by sources outside SMC Fixed Income Management (“SMC FIM”), a division of Spring Mountain Capital, LP, and certain information contained herein may not be updated through the date hereof. While such sources are believed to be reliable, no representations are made as to the accuracy or completeness thereof by SMC FIM or any of their respective affiliates, directors, officers, employees, partners, members or shareholders, and none of the former assumes any responsibility for the accuracy or completeness of such information. Nothing contained herein shall be relied upon as a promise or representation as to past or future performance. 

This commentary does not constitute an offer to sell or a solicitation of an offer to purchase securities, or any other product sponsored or advised by SMC FIM or its affiliates, nor does it constitute an offer or a solicitation to otherwise provide investment advisory services.  It should not be assumed that any of the security transactions listed were or will prove to be profitable, or that the investment recommendations we make in the future will be profitable.   

Statements contained in this commentary that are not historic facts are based on current expectations, estimates, projections, opinions and beliefs of SMC FIM. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Unless specified, any views reflected herein are those of SMC FIM and are subject to change without notice. SMC FIM is not under any obligation to update or keep current the information contained herein. 

This commentary does not take into account any particular investor's investment objectives or tolerance for risk. The information contained in this commentary is presented solely with respect to the date of its preparation, or as of such earlier date specified in it, and may be changed or updated at any time without notice to any of the recipients of it (whether or not some other recipients receive changes or updates to the information in it). 

No assurances can be made that any aims, assumptions, expectations, and/or objectives described in this commentary will be realized. None of the authors, SMC FIM, or any shareholders, partners, members, managers, directors, principals, personnel, trustees, or agents of any of the foregoing shall be liable for any errors (to the fullest extent permitted by law and in the absence of willful misconduct) in the information, beliefs, and/or opinions included in this commentary or for the consequences of relying on such information, beliefs, or opinions. 

Neither this commentary, nor any of the contents hereof, may be reproduced or used for any other purpose, or transmitted or disclosed in whole or in part to any third parties, in each case without the prior written consent of SMC FIM.

Copyright © 2014 Spring Mountain Capital, LP.  All rights reserved.

 

[description] => Rarely do the financial markets provide the double treat of simultaneously rising equity valuations and falling bond yields. Almost midway through the second quarter of 2014, key stock indices reached new all-time highs while global bond yields have retreated to levels not seen in over six months. Something has to give: either stock prices retreat or yields rise. Right? At least this is the popular assumption supported by classic economic rationale for a normal investment environment. [author] => Michael Smith, Bob Meyer [legacyinterface_firm_id] => 484 [published_on] => 2014-05-30 [digest_date] => 2014-05-30 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-30 20:15:33 [created_by] => 948 [modified_on] => 2014-05-30 20:24:50 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 756 [hits] => 0 ) [1] => stdClass Object ( [legacyinterface_commentary_id] => 692 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13947 [apv_conversation_id] => [content_type] => market-commentary [title] => Weekly Economic Commentary [slug] => nt_053014 [fulltext] =>
I recently returned from my annual tour of our offices in the Asia-Pacific region. Two weeks, eight cities, 54 hours in flight and one suitcase. When I got home, my clothes burst out of the bag and marched into the washing machine on their own.

The schedule sounds grueling, but the quality of the conversations kept my energy at a very high level throughout. It’s always good to get a close-up of key markets to complement the wide-angle view one gets from a distance. Following are some impressions and themes that emerged from the dozens of meetings that took place during the journey.
  • The biggest question I took to Asia was whether China was headed for a hard landing. Those concerns were echoed loudly by clients in New Zealand and Australia. But as I got closer to the Chinese border, there was considerably more confidence that the challenges facing Beijing are manageable. 

    Australia and New Zealand have felt the impact of China’s slowing manufacturing sector, and those I spoke with in those countries asked tough questions about the country’s financial stability. To most Asians, however, the downshift in Chinese economic growth seems quite normal. They noted that recent readings on Chinese activity seem to be stabilizing, and they contended that the transition to a more sustainable level and composition of growth is being carefully choreographed. 

     

    Chinese real estate construction clearly has slowed,, and Chinese real estate prices are declining in some areas. Officials there are very much aware of this situation and understand how it might progress. (They are students of the U.S. experience of a decade ago.) They have immense reserves that could be used to fill any cracks that might emerge in their financial system. 

    I was reminded that China has dealt with a series of developing pains successfully over the past three decades and that policy-setting is not hindered by the messiness of multi-party politics. The current economic strategy combines selective short-term stimulus with long-term reform. 

    I left somewhat reassured but still wary. I remember analysts in the United States (including me) calming foreign observers in the midst of our housing boom, suggesting that the challenge was both well-understood by American policy-makers and manageable in scale. Those proved to be famous last words. 

  • The trip coincided with the one-year anniversary of Ben Bernanke’s hint that the Federal Reserve might begin tapering its asset purchases. That statement triggered very sharp market reactions that were particularly acute for some emerging markets. 

    After several months of malaise, equity markets in emerging Asia have recovered somewhat. Capital flows have resumed, and economic prospects seem solid. 

     

    Emerging Asian economies have held the lessons of their 1997-98 crisis closely, and the discipline borne of that experience has encouraged investors. This stands in contrast to some emerging markets elsewhere in the world that seem to make the same errors repeatedly. 

  • Tensions in Southeast Asia have escalated. Vietnam and China are in conflict over an oil-drilling rig that is anchored in disputed waters; a coup d’état placed the military in control of Thailand; and the sparring between Japan and China shows no sign of abating. I would agree with those who see Asia as a tremendously exciting place for economic development. But regional conflict there has deep historical roots and tends to resurface periodically. Investors will have to roll with those punches. 

    Within countries, the politics of inequality are thick. Developing countries progress unevenly at first (and sometimes for a long while afterward), and the resulting extremes of fortune can destabilize governments. Support for the market mechanism is often a casualty of regime change. 

  • Everywhere I went, there were complaints about housing. Foreign buyers, bearing cash, have been snapping up property at high prices. This has raised concerns over the stability of values and the accessibility of the market to native first-time homebuyers. 


    To curb the enthusiasm, policy-makers in a number of countries have been raising down-payment requirements and tightening lending standards. But these measures matter little to cash buyers. More recently, Singapore and Hong Kong (among others) have increased taxes on the most-expensive properties. 

    Nonetheless, investors continue to flock in. To many of them, purchasing property in foreign capitals diversifies their portfolios across asset classes and currencies. It also serves as a hedge against a significant financial correction or harsher regulation at home. 

    This situation should serve as a cautionary tale for those who would like to apply macro-prudential tools to control financial excess. Cooling overheated markets is a very difficult thing to do. 

  • Australia should be the economic envy of the developed world: no recessions in 22 years; AAA-rated credit; a diverse industrial base; normal levels of interest rates; and very modest levels of national debt. And yet when the Treasurer announced the annual budget earlier this month, he made it seem like the country was on the road to ruin. 

Budget night in Australia is a major event, which prompts many subsequent days and nights of televised debate. (Imagine Americans tearing themselves away from reality shows to debate the nation’s finances… not going to happen.) Wrapped in the discussion of revenue and expense are issues related to education, infrastructure, health, the environment and retirement. 

The last item was the subject of the most angst: Australia faces mounting bills for its aging population, and it needs to address them now while they are still manageable. Encouraging people to work longer, indexing benefits to need, and promoting saving were among the planks in the platform. Kudos to Treasurer Joe Hockey for daring to tackle this challenge publicly; we could use some of that kind of initiative here in the United States. 

The compensation for all of the travel time was some really good food. Barramundi with a view of the Sydney opera house; seafood stew looking out over Hong Kong harbor; lamb with cumin in Beijing; whole fish with red curry in Kuala Lumpur; and Christine’s salad with oranges, walnuts and pomegranate seeds in Balnarring were among the many highlights. I send thanks to my gracious hosts for sharing their ideas, their company and their cuisine. 

My body clock is still centered somewhere between China and Chicago, so I’ve been a little slow at times this week. My partners say that they hardly notice the difference from my normal level of engagement. I’m not sure whether they’re being supportive or snide, but I am looking forward to a little rest this weekend. 

EU Elections: Ripple or Sea Change?

Last weekend’s European Parliament (EP) election generated reams of headlines about a “political earthquake,” yet virtually no market reaction. It’s possible that investors noted that the more-moderate blocs will continue to dominate the legislature. But it’s probable that, like most of the voters, they still don’t see the EP as having much real power. Although little may seem to change in the near term, the surge in support for right-wing populist parties will have an impact on various national political scenes and negative longer term economic and policy consequences at the EU level. 

Another grand coalition of moderate center-left and center-right parties will dominate the next parliament. However, the final tally across all 28 countries saw aggregate support for euro-sceptic parties roughly double to about 20%, giving these parties 141 of the 751 seats. The combination of low turnout (43%) and a proportional representation voting system helped boost support for the extremists. Voters are also much more inclined to support fringe parties in an election that they see as less important to their daily lives. 

It was in countries such as France and the Netherlands – where the impact of the 2008-09 recession still bites – that voters used the EP elections to vent their frustration. Economic performance across Europe remains very uneven, and very tough fiscal choices lie ahead. 

 

At the national level, the big winner was Italian Prime Minister Matteo Renzi. His Democratic Party won a resounding 41% of that country’s EP vote, compared with just 21% for the left-populist Five-Star Movement. After only a few months in office, Renzi effectively has a renewed mandate to keep pushing for economic and political reform. 

The biggest “loser” was French President François Hollande. Already plummeting in national opinion polls, his party was pushed into third place while support for the far-right Front National (FN) surged to 25%. The FN has only two deputies in the national parliament, but its showing in the European vote will further undermine an already-weak administration and make it harder to gather support for his government’s tentative reform program. 

By contrast, Chancellor Angela Merkel’s conservatives claimed first place in Germany’s EP vote, while the euro-sceptic AfD won just 7%. Already at odds on a number of fronts, the EP election has further driven a wedge between Germany and France, the Union’s two pillars.. 

None of the euro-sceptics elected to the EP last weekend will have any direct say in their respective national parliaments. But claiming seats at the EP gives euro-sceptic parties access to more funding and raises their profile at the national level. The results will also shift the national political discourse to the right in countries such as France, Netherlands, Denmark and the United Kingdom, where we can expect to see renewed debates about immigration and welfare policies. 

So what does all this mean for the EU? For the next few months, policy-making will slow even more than is usual after a parliamentary vote. The new European Commission (the EU’s executive arm) must be appointed, along with a new Commission president. The EP is already showing signs of pushing back against the practice of positions being filled through back-room horse-trading among national governments. This could lead to a prolonged stalemate over appointments, which will hardly endear the European politicians to the voters. 

To function as a true Union and unleash their full competitive potential, the 28 countries need a more unified approach to policy-making that tackles the rigid labor and product markets still plaguing some members and begins to reduce chronic high unemployment. The results of this election will likely have the opposite effect. Although elected to a European parliament, the various representatives are beholden to national electorates and national party organizations. A lot of them will now be even more leery of advocating anything that voters back home will see as “more Europe.” They will certainly be in no hurry to propose changes that would need ratification by national parliaments. 

All of which suggests that any new reform proposals will be delayed until at least the end of this year; that moves toward increased fiscal integration will slow even further; and that completion of banking sector reforms could be delayed. Ultimately, it means that the European Central Bank will continue to be the only European institution capable of undertaking meaningful actions. 

The EU did not fall apart in 2009-11, and it will not as a result of these elections. But it will continue to muddle through with ad-hoc responses to crises. Meaningful policy change will continue to occur mostly at the national level – which means some countries (Germany, Netherlands, Sweden, the United Kingdom) will continue to have more competitive economies while others may be left behind.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
[description] => Reflections from a fortnight abroad;Last weekend's European elections will make cooperation more difficult [author] => Carl Tannenbaum [legacyinterface_firm_id] => 317 [published_on] => 2014-05-30 [digest_date] => 2014-05-30 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-30 20:28:01 [created_by] => 948 [modified_on] => 2014-05-30 20:28:16 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 757 [hits] => 0 ) [2] => stdClass Object ( [legacyinterface_commentary_id] => 672 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13927 [apv_conversation_id] => [content_type] => market-commentary [title] => Is There a UK Housing Bubble?​​​ [slug] => pimco_052914 [fulltext] =>
  • We see the UK experiencing a very traditional monetary cycle involving lower mortgage rates, higher house prices and then – hopefully – higher transactions. 
  • The Bank of England can address rising house prices either by raising financing costs via the banking system or by raising interest rates. Markets will watch BoE activity closely. 
  • Our expectation is for a gradual and modest interest rate cycle, with low rates in the UK economy for years to come. Housing may be an overvalued asset, but one that is secularly supported by low rates.

As many of us are aware, there are two most British of conversations – the weather and house prices. Maybe it is because we have just experienced the​ wettest winter since records began in 1910 (according to the UK National Weather Service), or maybe it is because house prices have experien​ced a remarkable renaissance. Once again, the whole nation appears to be focused on the performance of the UK housing market. Jon Cunliffe, the recently appointed Deputy Governor for Financial Stability at the Bank of England (BoE), called housing “the brightest light” on the risk dashboard of the Financial Policy Committee (FPC), while the vast majority of questions at the BoE’s May 2014 Inflation Report press conference centred around the prospects of a bubble having developed in the UK housing market. With that in mind, what is the state of the UK housing market? And, more importantly, what are its investment implications?

Prices are rising faster than volumes
As most readers are aware, UK house prices have been rising strongly for much of the last 12 months, with increases of 10% now common across major house price indices (see Figure 1).

 
We also know that over the long run, house prices cannot continually outpace the rise in household earnings. Given average weekly earnings growth of 1.7% at the time of writing (UK Office of National Statistics as of March 2014), the first obvious point to note is that 10% house price growth cannot be sustained without something truly remarkable happening to average earnings (and frankly, if average earnings were growing at 10%, that would likely present up an even bigger set of problems).

What started it? And, importantly, is it sustainable?
While there is much debate about the cause of the turnaround in the UK housing market, its seems pretty clear that a combination of falling mortgage rates, less systemic risk from Europe and the UK government’s “Help to Buy” scheme have all contributed to the improvement in the housing market (see Figure 2). Although the “Funding for Lending Scheme” at the BoE has also been cited by some as a key stimulant, we believe this has been a less powerful factor than the other reasons we have cited.

 
Indeed, the most recent decline in UK mortgage rates commenced in Q3 2012, shortly after the pinnacle of the eurozone debt crisis and coincident with the subsequent fall in bank funding costs across Europe, including the UK. There are a number of fascinating aspects to Figure 2, some of which we will return to later. For now, let it suffice that we appear to be going through a very traditional monetary cycle involving lower mortgage rates, higher house prices and then – hopefully – higher transactions, greater house building and a growth handoff to the business sector (via higher investment spending, rising productivity and then real wage growth).

To date, the improvement in housing transactions in the UK has been very disappointing, with volumes still barely at levels consistent with previous cycle lows; there is certainly ample scope for transactions to rise. To make the recovery more sustainable, we would need to see higher volumes (and lower price rises would be most welcome). Unfortunately, until the banking system is fully recapitalised, and therefore able to provide additional financing for (risky) new home building, it is hard to see a rapid acceleration in UK housing transactions. This should be a warning to us all. Without a fully rehealed banking system, and absent a government programme to significantly increase social housing projects, it remains likely that prices will continue to take the lion’s share of the improvement in UK housing sentiment.

Are valuations stretched?
There are a number of ways to look at valuations, including house price/earnings ratios, the cost of owning a house compared to renting and housing affordability indices (comparing the proportion of earnings needed to service a mortgage being amongst the most popular indices). We believe that the simple combination of a house price/earnings ratio and an assessment of affordability provides you with enough information to make a reasonable assessment of the current state of the UK housing market.

For starters, the average house currently costs just under five times average earnings.     Figure 3 may suggest that this is not too bad; however, just pause for a moment before drawing that conclusion. For example, current levels are commensurate with the peak ratio seen ahead of the prior UK housing boom in the late 1980s, and we are still some 16% above the average UK house price/earnings ratio of the last 30 years.

 
It is also pretty clear why house prices are rising – mortgage costs as a percentage of disposable income remain low. Mortgage payments on a typical repayment mortgage are just under 30% of disposable income, and have rarely been lower. In short, house prices in the UK are going up because the cost of servicing the debt has been coming down (see Figure 4).

 
What happens when rates start to rise?
All of this raises the obvious question – if house prices are rising as a result of low borrowing costs and improved access to mortgage financing, what happens when those factors reverse? Interestingly, we now have policy tools available to the BoE that can address both of those aspects of housing finance. As part of its tool kit, the FPC has the ability to raise the cost of providing mortgage finance via the banking system, which would in turn restrict supply (and possibly the price). Meanwhile, the Monetary Policy Committee (MPC) retains the blunter tool of raising interest rates. In BoE parlance, the FPC is the “first line of defence”, while the MPC is the “second line of defence”. That basically means we should expect the FPC to try to tighten up access to mortgage financing first before the MPC acts to raise interest rates (which has a broader effect across the economy).

While the activity of the FPC in the months and quarters ahead will undoubtedly prove fascinating, particularly for those interested in both the housing market and the broader markets, it is the activity at the MPC that will prove the most interesting. It is here that we would like to take you back to Figure 2, showing UK mortgage rates alongside the UK swap rate, which you can think of as a broad proxy for the current cost of funds to the banking system. Prior to the global financial crisis, the cost of funds to the banking system equated to the interest rate available on a 75% loan-to-value mortgage. In contrast, post-crisis we have seen mortgage rates come down by much less than swap rates. Given this development, and the fact that house prices look high relative to long-term metrics, it seems sensible to believe BoE Governor Mark Carney’s repeated statements along the lines of “any hikes in official interest rates will be gradual and will have a much lower terminal point than those seen before the crisis”.

New Neutral rates will be a part of the UK environment for years to come
As my colleagues Bill Gross and Richard Clarida elaborated in PIMCO’s recently published May 2014 Secular Outlook, “The New Neutral”, we expect secularly low official interest rates to support growth given continued high levels of aggregate debt. This will most certainly include the UK, where gross levels of debt remain high, the banking system remains under regulatory pressure and the savings rate remains low. As we have seen in the last 12 months, that does not preclude an economic recovery; but it does strongly suggest that the interest rate cycle will be modest and that low rates will be a characteristic of the UK economy for years to come. So, to answer the initial question – do we believe there is a housing bubble? No. An overvalued asset that will be secularly supported by low policy rates? Yes.

As for our view of the broader investment implications, while the UK bond market will go through its usual cycle, investors should get used to low rates for the foreseeable future. Credit selection and “spread product” will remain supported by benign underlying interest rates and a gradually healing economy, while inflation will be underpinned by modest (but respectable) domestic and global aggregate demand.

As with the global market, mid- to low-single-digit total returns for bonds look likely, which together with any PIMCO alpha should be sufficient to create the potential for a relatively attractive real return. It may not sound like much, but for a fairly low risk asset in an economy likely to grow at 2%–2.5% in real terms over the secular horizon, this is not such a bad deal.


All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investme​nts may be worth more or less than the original cost when redeemed. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world.

©2014, PIMCO. ​

[description] => We see the UK experiencing a very traditional monetary cycle involving lower mortgage rates, higher house prices and then – hopefully – higher transactions. The Bank of England can address rising house prices either by raising financing costs via the banking system or by raising interest rates. Markets will watch BoE activity closely. Our expectation is for a gradual and modest interest rate cycle, with low rates in the UK economy for years to come. Housing may be an overvalued asset, but one that is secularly supported by low rates. [author] => Mike Amey [legacyinterface_firm_id] => 335 [published_on] => 2014-05-29 [digest_date] => 2014-05-29 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-29 14:11:02 [created_by] => 948 [modified_on] => 2014-05-29 14:13:46 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 737 [hits] => 0 ) [3] => stdClass Object ( [legacyinterface_commentary_id] => 673 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13928 [apv_conversation_id] => [content_type] => market-commentary [title] => A Stealth Recovery [slug] => hightower_052914 [fulltext] =>

In the fall of 2010, I had written that several indicators suggested the U.S. was entering “stealth economic recovery” mode.   This “stealth” recovery coupled with low interest rates and changing demographics were going to usher us into “the age of the Dividend Darlings -- companies that pay sizeable, sustainable, and growing dividends.”  Investors would not only replace their income exposure to lower yielding bonds, but also focus on growing income in the equity market.  At the time, I alluded to “a new select group of large cap stocks” that would “resemble the Nifty Fifty” of the 1970s.  As I promptly implemented a new investment strategy with a focus on total return stocks, which have been big beneficiaries in this environment, there were also many signals that we had entered a secular bull market in equities.  In my view, not much has changed since that time.  In fact, in the near term, there is little that points to an economy in decline or an equity market headed for ‘impending doom’.  Although there is no shortage of pundits predicting the next “big correction”, I maintain that we are headed for better times (not worse) in both the economy and stock market.

 Investment strategist Richard Bernstein recently wrote, “Bear markets are made of tight liquidity, significantly deteriorating fundamentals, and investor euphoria.  Although the Fed is starting to reverse course, there are no signs yet of a significant tightening of liquidity.  Rather, the data are beginning to suggest that private sector credit growth is starting to replace the Fed as the provider of liquidity.” [i]  Although treasury yields have come down, credit spreads have tightened as well, which is significant and a potential signal of stronger growth ahead.  Market strategist Dave Rosenberg recently highlighted some improving data points that suggest the economic backdrop is not the main driver of lower treasury yields.  “Jobless claims are now below 300k for the first time since mid-2007 and we have just experienced three months straight of 200k+ payroll gains (last time that happened in the last cycle was early 2006).” [ii] Furthermore, he highlights the improvement of the Dow Jones Transport Index, which just recently hit a new high.  Again, these data points suggest a strengthening (not worsening) economy. 

As one journalist put it, “Despite calls for a big correction, some analysts say the stock market may already be correcting—it's just going sideways instead of down.” [iii]  This may be a key indicator of the strength of the equity market.  As the momentum (or “story” stocks) sold off from their peak in March, a rotation ensued in which investors sold “momentum” in order to buy large cap blue chip companies.  This rebalancing speaks to the overall health of the stock market.  Perhaps some investors are slowly realizing that one does not have to pay massive premiums to obtain growth, as the growth universe has expanded exponentially in the present bull market.  Nevertheless, while investors try to navigate the market, I continue to find opportunities.  As the American writer Gertrude Stein once said, “For a very long time everybody refuses and then almost without a pause almost everybody accepts.”

[i] Richard Bernstein. Eaton Vance. Worried about the Downside. May 2014.

[ii] David Rosenberg. Gluskinsheff. Breakfast with Dave. May 21, 2014.

[iii] Pratti Domm. CNBC. Why stocks could be in a sideways correction. May 21, 2014.

The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC.  This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower or its affiliates.  This is not an offer to buy or sell securities, and HighTower shall not in any way be liable for claims related to this writing, and makes no expressed or implied representations or warranties as to its accuracy or completeness.     

Pamela Rosenau, Managing Director and Chief Equity Market Strategist at HighTower and Chief Investment Officer at the Rosenau Group has over 30 years of experience in the financial industry. Ms. Rosenau focuses on equity portfolio management strategies. As a result of her extensive knowledge and expertise in the equity markets, she was named the Equity Market Strategist for HighTower. In addition to this role, she performs due diligence on the firm's third party research relationships and continues to add, monitor, and prune research providers where necessary. Prior to joining HighTower she worked for various sell-side firms beginning her tenure at Wertheim & Co./Schroders Plc.

Ms. Rosenau was ranked #14 in Barron's 2013 Top 100 Women Financial Advisors. She was also chosen for Barron's 2014 Top 1,200 Advisors list, ranking #52 out of all financial advisors in California. Ms. Rosenau holds series 7, 63, and 65 licenses. 
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There can be little doubt that Thomas Piketty's new book Capital in the 21st Century has struck a nerve globally. In fact, the Piketty phenomenon (the economic equivalent to Beatlemania) has in some ways become a bigger story than the ideas themselves. However, the book's popularity is not at all surprising when you consider that its central premise: how radical wealth redistribution will create a better society, has always had its enthusiastic champions (many of whom instigated revolts and revolutions). What is surprising, however, is that the absurd ideas contained in the book could captivate so many supposedly intelligent people.  

Prior to the 20th Century, the urge to redistribute was held in check only by the unassailable power of the ruling classes, and to a lesser extent by moral and practical reservations against theft. Karl Marx did an end-run around the moral objections by asserting that the rich became so only through theft, and that the elimination of private property held the key to economic growth. But the dismal results of the 20th Century's communist revolutions took the wind out of the sails of the redistributionists. After such a drubbing, bold new ideas were needed to rescue the cause. Piketty's 700 pages have apparently filled that void.

Any modern political pollster will tell you that the battle of ideas is won or lost in the first 15 seconds. Piketty's primary achievement lies not in the heft of his book, or in his analysis of centuries of income data (which has shown signs of fraying), but in conjuring a seductively simple and emotionally satisfying idea: that the rich got that way because the return on invested capital (r) is generally two to three percentage points higher annually than economic growth (g). Therefore, people with money to invest (the wealthy) will always get richer, at a faster pace, than everyone else. Free markets, therefore, are a one-way road towards ever-greater inequality.

Since Pitketty sees wealth in terms of zero sum gains (someone gets rich by making another poor) he believes that the suffering of the masses will increase until this cycle is broken by either: 1) wealth destruction that occurs during war or depression (which makes the wealthy poorer) or 2) wealth re-distribution achieved through income, wealth, or property taxes. And although Piketty seems to admire the results achieved by war and depression, he does not advocate them as matters of policy. This leaves taxes, which he believes should be raised high enough to prevent both high incomes and the potential for inherited wealth.

Before proceeding to dismantle the core of his thesis, one must marvel at the absurdity of his premise. In the book, he states "For those who work for a living, the level of inequality in the United States is probably higher than in any other society at any time in the past, anywhere in the world." Given that equality is his yardstick for economic success, this means that he believes that America is likely the worst place for a non-rich person to ever have been born. That's a very big statement. And it is true in a very limited and superficial sense. For instance, according to Forbes, Bill Gates is $78 billion richer than the poorest American. Finding another instance of that much monetary disparity may be difficult. But wealth is measured far more effectively in other ways, living standards in particular.

For instance, the wealthiest Roman is widely believed to have been Crassus, a first century BC landowner. At a time when a loaf of bread sold for ½ of a sestertius, Crassus had an estimated net worth of 200 million sestertii, or about 400 million loaves of bread. Today, in the U.S., where a loaf of bread costs about $3, Bill Gates could buy about 25 billion of them. So when measured in terms of bread, Gates is richer. But that's about the only category where that is true.

Crassus lived in a palace that would have been beyond comprehension for most Romans. He had as much exotic food and fine wines as he could stuff into his body, he had hot baths every day, and had his own staff of servants, bearers, cooks, performers, masseurs, entertainers, and musicians. His children had private tutors. If it got too hot, he was carried in a private coach to his beach homes and had his servants fan him 24 hours a day. In contrast, the poorest Romans, if they were not chained to an oar or fighting wild beasts in the arena, were likely toiling in the fields eating nothing but bread, if they were lucky. Unlike Crassus, they had no access to a varied diet, health care, education, entertainment, or indoor plumbing.

In contrast, look at how Bill Gates lives in comparison to the poorest Americans. The commodes used by both are remarkably similar, and both enjoy hot and cold running water. Gates certainly has access to better food and better health care, but Americans do not die of hunger or drop dead in the streets from disease, and they certainly have more to eat than just bread. For entertainment, Bill Gates likely turns on the TV and sees the same shows that even the poorest Americans watch, and when it gets hot he turns on the air conditioning, something that many poor Americans can also do. Certainly flipping burgers in a McDonald's is no walk in the park, but it is far better than being a galley slave. The same disparity can be made throughout history, from Kublai Khan, to Louis XIV. Monarchs and nobility achieved unimagined wealth while surrounded by abject poverty. The same thing happens today in places like North Korea, where Kim Jong-un lives in splendor while his citizens literally starve to death.

Unemployment, infirmity or disabilities are not death sentences in America as they were in many other places throughout history. In fact, it's very possible here to earn more by not working. Yet Piketty would have us believe that the inequality in the U.S. now is worse than in any other place, at any other time. If you can swallow that, I guess you are open to anything else he has to serve. 

All economists, regardless of their political orientation, acknowledge that improving productive capital is essential for economic growth. We are only as good as the tools we have. Food, clothing and shelter are so much more plentiful now than they were 200 years ago because modern capital equipment makes the processes of farming, manufacturing, and building so much more efficient and productive (despite government regulations and taxes that undermine those efficiencies). Piketty tries to show that he has moved past Marx by acknowledging the failures of state-planned economies.

But he believes that the state should place upper limits on the amount of wealth the capitalists are allowed to retain from the fruits of their efforts. To do this, he imagines income tax rates that would approach 80% on incomes over $500,000 or so, combined with an annual 10% tax on existing wealth (in all its forms: land, housing, art, intellectual property, etc.). To be effective, he argues that these confiscatory taxes should be imposed globally so that wealthy people could not shift assets around the world to avoid taxes. He admits that these transferences may not actually increase tax revenues, which could be used, supposedly, to help the lives of the poor. Instead he claims the point is simply to prevent rich people from staying that way or getting that way in the first place.

Since it would be naive to assume that the wealthy would continue to work and invest at their usual pace once they crossed over Piketty's income and wealth thresholds, he clearly believes that the economy would not suffer from their disengagement. Given the effort it takes to earn money and the value everyone places on their limited leisure time, it is likely that many entrepreneurs will simply decide that 100% effort for a 20% return is no longer worth it. Does Piketty really believe that the economy would be helped if the Steve Jobses and Bill Gateses of the world simply decided to stop working once they earned a half a million dollars?

Because he sees inherited wealth as the original economic sin, he also advocates tax policies that will put an end to it. What will this accomplish? By barring the possibility of passing on money or property to children, successful people will be much more inclined to spend on luxury services (travel and entertainment) than to save or plan for the future. While most modern economists believe that savings detract from an economy by reducing current spending, it is actually the seed capital that funds future economic growth. In addition, businesses managed for the long haul tend to offer incremental value to society. Bringing children into the family business also creates value, not just for shareholders but for customers. But Piketty would prefer that business owners pull the plug on their own companies long before they reach their potential value and before they can bring their children into the business. How exactly does this benefit society?

If income and wealth are capped, people with capital and incomes above the threshold will have no incentive to invest or make loans. After all, why take the risks when almost all the rewards would go to taxes? This means that there will be less capital available to lend to businesses and individuals. This will cause interest rates to rise, thereby dampening economic growth. Wealth taxes would exert similar upward pressure on interest rates by cutting down on the pool of capital that is available to be lent. Wealthy people will know that any unspent wealth will be taxed at 10% annually, so only investments that are likely to earn more than 10%, by a margin wide enough to compensate for the risk, would be considered. That's a high threshold.

The primary flaw in his arguments are not moral, or even computational, but logical. He notes that the return of capital is greater than economic growth, but he fails to consider how capital itself "returns" benefits for all. For instance, it's easy to see that Steve Jobs made billions by developing and selling Apple products. All you need to do is look at his bank account. But it's much harder, if not impossible, to measure the much greater benefit that everyone else received from his ideas. It only comes out if you ask the right questions. For instance, how much would someone need to pay you to voluntarily give up the Internet for a year? It's likely that most Americans would pick a number north of $10,000. This for a service that most people pay less than $80 per month (sometimes it's free with a cup of coffee). This differential is the "dark matter" that Piketty fails to see, because he doesn't even bother to look.

Somehow in his decades of research, Piketty overlooks the fact that the industrial revolution reduced the consequences of inequality. Peasants, who had been locked into subsistence farming for centuries, found themselves with stunningly improved economic prospects in just a few generations. So, whereas feudal society was divided into a few people who were stunningly rich and the masses who were miserably poor, capitalism created the middle class for the first time in history and allowed for the possibility of real economic mobility. As a by-product, some of the more successful entrepreneurs generated the largest fortunes ever measured. But for Piketty it's only the extremes that matter. That's because he, and his adherents, are more driven by envy than by a desire for success. But in the real world, where envy is inedible, living standards are the only things that matter. 

© Euro Pacific Capital

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Thailand’s imposition of martial law on May 20 came after months of protests and threats of violence between two opposing sides—the anti-government group called the People’s Democratic Reform Committee (PDRC), known as the “yellow shirts,” and the pro-government group called the United Front for Democracy against Dictation (UDD), known as the “red shirts.” The PDRC demanded for the government to step down to pave the way for an appointed government. It vowed to escalate the protests until their demands were met, while UDD and the government condemned the PDRC’s ultimatum and insisted on new elections. Risks of confrontation and violence were rising—and seemingly inevitable.

The imposition of martial law came as no surprise to us, especially given Thailand’s past record of the army’s intervention. We believe martial law could prove a temporary solution as it empowers the military to take control of the country’s security and safety and proactively prevent violence and clashes between the two opposing sides. In our view,  the Thai people will need to come together and decide on a coherent and compromised solution. We believe a resolution will eventually be reached given the resilient nature of the country.

The military coup in Thailand seemed designed to move the country out of what had developed into a political deadlock. The Thai Army now has the power to appoint a government that will likely help reform the country similar to what happened during 2006.  Of course we need to monitor the situation, particularly in the case of the “red shirts,” whose leader has now been deposed.

Thailand is in the throes of dramatic change and the recent announcement of a military coup is another indication of these changes. As we see it, the positive news is that with the introduction of military rule, the civil environment should be stabilized with no significant disruption of normal business operations. That said, it will take some time to reintroduce civil rule and this will likely require a revision of the country’s constitution acceptable to all parties, and another cycle of elections.

Our investments in Thailand, as all of our investments, are made based on a long-term view. We believe the positive drivers of long-term growth for Thailand remain in place, including a very competitive business sector and Japanese investment, as well as the potential for growth from the increasing integration of Thailand’s regions and the neighboring markets of Myanmar (also known as Burma), Cambodia and Laos into the global economic system.

The prognosis for Thailand is positive, in our view, given that direct foreign investors want stability in the country. The reality of the situation as we see it is that an elective government seems difficult to achieve today. We will have to continue to wait and see which government is installed next. During this period, we expect some ongoing short-term market volatility but we would not expect much disruption in existing company operations.

From a long-range view, we think many companies will be able to survive and prosper in Thailand. We do believe cooler heads should prevail over time, and the more positive economic trends Thailand has seen before the coup could return, including rising per-capita incomes. Thailand has a large middle class and a growing consumer population, which we believe bodes well for the economy going forward. As investors, we have been focusing on consumer goods and services, including banks and property companies, as people move to the cities and require housing.

We believe there will be continuing uncertainty in Thailand that could keep many investors at bay until there is more clarity and stability in the political environment. Tourism could likewise be affected if tensions continue to escalate. Nevertheless, we don’t believe existing company operations are likely to be greatly interrupted, and we would view declines in certain Thai stocks as an opportunity to look for selective bargains there. Many Thai corporations have historically managed to weather various bouts of political upheaval and even thrive in spite of them, proving the strength and resilience of the Thai people.

0514_Thailand_SET2002

Dr. Mobius’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risks, including possible loss of principal. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Currency rates may fluctuate significantly over short periods of time and can reduce returns.

© Franklin Templeton

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Is college worth it? It’s not an uncommon question these days, especially with soaring college costs, ballooning student debt levels and higher unemployment. But research shows that pursuing a college degree can result in far more than just a diploma.

Better Days Ahead

College isn’t cheap. The price of higher education has increased exponentially in the past couple of decades. And despite improving unemployment data, many members of the younger working-age population are without jobs. Realities like these have left many second-guessing the wisdom of going to college, but the return on investment for college graduates is pretty significant.

According to CollegeStats.org, college graduates enjoy numerous benefits, including better pay throughout their lifetimes, lower unemployment rates and more fulfilling careers than those without college degrees. Jobs requiring college degrees, on average, pay better than those that don’t, and those who make enough money to make ends meet are happier.

Life Beyond the Diploma

College graduates can look beyond the benefits of a paycheck and a career. They also enjoy stronger marriages, longer life expectancies and a better overall quality of life. College grads live an average of five years longer than those who haven’t completed high school, according to a report by the Robert Wood Johnson Foundation’s Commission to Build a Healthier America. Men see the most benefit, living an average of 6.8 years longer. College grads also have healthier lifestyles, exercising more, eating better and being more likely to avoid smoking.  

More Bang for the College Buck

Although saving for college slipped as a priority during the last global recession, investors haven’t lost complete faith in the college promise. Recent data from Sallie Mae’s annual report, “How America Saves for College,” points to a resurgence in college savings. And now that many investors have rebuilt their retirement nest eggs, they’re upping their college savings efforts. Total college savings per family are over $15,000, up from just under $12,000 last year.

This news couldn’t have come at a better time. This past tax season may have brought investors an unpleasant—and unexpected—surprise. A new Medicare surtax was implemented, which means certain investors faced up to a 4% additional tax on their net investment income.  But some items don’t count as investment income, including tax-advantaged college savings.  Forewarned is forearmed.

Higher Education Lasts a Lifetime  

A college education isn’t fleeting; a degree is for life. Although the cost of tuition and the uncertain jobs picture can be daunting, investing in a college degree now can lead to a happier, brighter future.

The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.

Christopher Thompson is Senior Managing Director and Head of the US Retail Client Group at AllianceBernstein (NYSE:AB).

© AllianceBernstein

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NEW HAVEN – The temptations of extrapolation are hard to resist. The trend exerts a powerful influence on markets, policymakers, households, and businesses. But discerning observers understand the limits of linear thinking, because they know that lines bend, or sometimes even break. That is the case today in assessing two key factors shaping the global economy: the risks associated with America’s policy gambit and the state of the Chinese economy.

Quantitative easing, or QE (the Federal Reserve’s program of monthly purchases of long-term assets), began as a noble endeavor – well timed and well articulated as the Fed’s desperate antidote to a wrenching crisis. Counterfactuals are always tricky, but it is hard to argue that the liquidity injections of late 2008 and early 2009 did not play an important role in saving the world from something far worse than the Great Recession.

The combination of product-specific funding facilities and the first round of quantitative easing sent the Fed’s balance sheet soaring to $2.3 trillion by March 2009, from its pre-crisis level of $900 billion in the summer of 2008. And the deep freeze in crisis-ravaged markets thawed.

Click here to read more.

© Project Syndicate

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Pending home sales rose by only 0.4% in April vs estimates of a 1% month-over-month gain. Pending home sales are down over 9% year-over-year. If you are living in the West or the Northeast than that decline looks great compared to fall they are experiencing in those regions. The West is down 15% year-over-year and the Northeast is down 12% year-over-year. The silver lining is that pending home sales is suggesting a gain over the coming months for existing home sales perhaps back to the 5 million annualized level. Perhaps if we continue to get a decline in bond yields like we did yesterday (the 10-year is down another 3 bps so far today) then lower mortgage rates will incentive more buyers back into the market.

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© GaveKal Capital

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Going into the holiday weekend, equity markets ended the week up with the S&P 500 gaining 1.2%.  The NASDAQ reversed the prior week’s losses, ending last week with a gain of roughly 2.3%.  Of particular note, growth stocks continued their outperformance on the quarter relative to value stocks.  The Russell 3000 Growth index was up 1.6%, exceeding the Russell 3000 Value index’s 1.0% gain.  On the quarter, growth is up 1.3% while value is up 1.0%. 

Housing data last week brought a bit more clarity to the direction of the housing market.  Existing home sales increased 1.3% in April bringing the annualized growth rate to 4.65 million units.  Despite the month-over-month jump in existing home sales, sales are still down over 13% from the July 2013 peak where the annualized growth rate stood at 5.38 million units.  

 

New home sales followed suit rising approximately 6.4% in April.  The jump from 407,000 units to 433,000 units exceeded economists’ estimations, which were calling for an increase to 425,000 units.  However, consistent with existing home sales data, new home sales data still lag their June 2013 peak of 459,000 units.  

 

Despite recent bouts of positive housing data, many are concerned with the direction of the housing market over the next 6-12 months.   Drop-offs in economic data coming out this year have been regularly rationalized as being the result of the unusually harsh winter weather in January and February.  Despite the recent uptick in April’s housing numbers, data dropped off months prior to the unanticipated severe winter weather. 

Housing economists have cited a number of factors that have contributed to the slowdown within the housing market.  Rising interest rates have been cited as a primary culprit over the preceding 18 months.  But, the U.S. 10 year has unexpectedly trended down since the beginning of the year, touching as low as 2.50%.  This has translated into less expensive home loans and, less talked about, improved psyche of underwriters and those alike who observe the movement in the 10-year rate when constructing home loans for potential homebuyers and, subsequently, further home sales growth. 

 

Outsized housing price appreciation has also been cited as a reason for the slowdown as home prices have increased roughly 25% since its bottoming out in March 2012.  Housing prices have recently slowed providing buyers with an attractive buying opportunity as evident by the recent jump in home sales. 

Whatever the reason is for the recent slowdown in the housing market the consumer at large will be crucial for the health of the housing market going forward.  As reported last week, confidence among homebuilders fell in May to its lowest level since May 2013 as measured by the NAHB/Wells Fargo Housing Market index.  Consumer confidence was cited as the biggest drag on homebuilder confidence as “builders are waiting for consumers to feel more secure about their financial situation.”  Personal income growth, which comes out this week, will provide further insight behind the direction of the housing market.

The Week Ahead

This week is full of economic data with the Case-Shiller Home Price index coming out.  Also coming out is data on durable goods orders and consumer confidence.  On tap for later in the week is the second estimate of Q1 GDP, pending home sales, and personal income growth. 

Notable central bank meetings this week include the Central Bank of Brazil and the Central Bank of Egypt. 

About Fortigent

Fortigent, LLC delivers a fully integrated and customizable business-to-business outsourced wealth management solution to banks, trust companies, and independent advisory firms. Services include a comprehensive investment platform with particular expertise in alternative investments, a flexible unified managed account program, and consolidated wealth reporting. Fortigent's web-based portal interface allows access to proposal and rebalancing tools, client portfolio reporting and accounting, as well as industry articles, research papers, and other practice management and business development resources.

The information provided is general in nature and is not intended to be, and should not be construed as, investment, legal or tax advice. Fortigent makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based upon information that Fortigent considers reliable, is not guaranteed as to accuracy or completeness.

Not FDIC Insured No Bank Guarantee May Lose Value 

© Fortigent

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1. Warning: Fed Is Sitting On “Ticking Time Bomb”

2. Why Banks Hold Excess Reserves at the Fed

3. Back to the “Ticking Time Bomb” at the Fed

4. Question: Is the Fed Paying Banks Not to Lend?

5. Dinesh D’Souza to Prison, Jon Corzine Goes Scot-Free

Warning: Fed Is Sitting On “Ticking Time Bomb”

It is very rare for high-ranking Fed officials to issue dire warnings, but that’s exactly what Charles Plosser – the president of the Philadelphia Federal Reserve Bank – did last Tuesday. Mr. Plosser is very concerned about the $2.5 trillion in “excess reserves” that banks have on deposit with the Fed.

Mr. Plosser worries that if the economy strengthens as many expect, borrowing could surge and those excess reserves could pour out of the Fed and “that’s going to put [upward] pressure on inflation.” This is the“ticking time bomb” he warned about. More details to follow…

The Fed “reserve requirement” refers to the amount of cash funds that banks must have on hand each night. Banks can hold reserves either as cash in their vaults or as deposits with the Federal Reserve Bank. The amount (percentage) of the reserve requirement is set by the Fed.

If a bank doesn’t have enough cash on hand to meet its daily reserve requirement, it can borrow from other banks or at the Federal Reserve discount window. The money banks borrow or lend amongst each other to fulfill the reserve requirement is known as the Fed Funds market.

For decades, the Fed paid banks no interest on reserves held at the central bank; however, in late 2008 the Fed began paying banks 25 basis-points (0.25%) annually on deposits. Since then, excess reserves held at the Fed have exploded to a record above $2.5 trillion today.

Much of this money held at the Fed is owned by large banks and financial institutions which are designated as “primary dealers” from whom the Fed has purchased huge amounts of bonds as a part of its massive QE program. These entities have merely chosen to leave a large part of those bond proceeds on deposit with the Fed.

Excess Reserves of Depository Institutions

Excess reserves are money that banks hold over and above the reserve requirement set by the Fed. The main question is, why would banks hold sometimes huge amounts of excess reserves at the Fed for a measly 25 basis-points? You might answer that it’s because 0.25% is better than earning nothing if banks keep the reserves in their own vaults. While that’s true, there’s much more to it than that.

Why Banks Hold Excess Reserves at the Fed

Before we dig into that, let me briefly explain why the Fed decided to pay banks 0.25% interest on reserves held at the central bank. Over four decades ago, economist Milton Friedman recommended that the Fed pay interest to banks and other depository institutions on the reserves they are required to hold against their deposit liabilities.

In 2006, Congress finally granted the Fed authority to pay interest on reserve deposits, but it was not to go into effect until 2011. However, during the financial crisis, the effective date was moved up by three years through the Emergency Economic Stabilization Act of 2008.

On October 6, 2008, the Federal Reserve Board announced that it would begin paying interest on depository institutions’ reserve balances. In 2007 (pre-crisis) total required reserves held at the Fed averaged $43 billion, while excess reserves averaged only $1.9 billion.

Prior to the financial crisis, banks tried to keep excess reserves at the Fed to a minimum. This was typical for the prior 50 years when the Fed did not pay interest on reserves. Historically, banks kept excess reserves at the Fed as low as possible so that they had more money on hand to make profitable loans. The financial crisis changed all of that, and bank lending plunged!

Under normal circumstances, deposits and loans are more-or-less equal across the banking system as a whole. But since 2009 there has been a very significant change. There is a large and growing gap between loans and deposits. So what is causing this?

Banks, households and businesses have been deleveraging. That means they are paying off (or writing off) loans and not taking on more. Damaged banks don’t want to lend, struggling households don’t want to borrow and fearful businesses don’t want to invest. The combination of these three factors meant that both the supply of and the demand for loans were considerably below the levels prior to the financial crisis.

Back to the “Ticking Time Bomb” at the Fed

As I noted above, Charles Plosser, president of the Philadelphia Federal Reserve Bank recently went public with his serious concerns about the record-large $2.5 trillion in excess reserves sitting at the Fed. Mr. Plosser is also a current voting member of the Fed Open Market Committee (FOMC) which sets monetary policy. He is one of the more hawkish members of the Federal Reserve Board, meaning that he has not been a fan of the Fed’s massive QE bond buying or its zero interest rate policy (ZIRP).

To understand why Mr. Plosser would go public with his concerns about the record $2.5 trillion in excess reserves at the Fed, and possibly ruffle feathers among his Fed colleagues, we have to take into consideration how easy it is for banks to remove that money from the Fed and plug it into the economy via loans.

For one, banks have no requirement to keep any excess reserves at the Fed. If they do, they can take it out at any time they wish. Mr. Plosser knows that the Fed has attracted these massive excess reserves in large part because it pays interest on such deposits. Banks would rather earn 0.25% in a risk-free account at the Fed as opposed to nothing if they hold this cash in their vaults.

Plosser points out that these unprecedented excess reserves are currently just sitting at the Fed, basically doing nothing. Part of the reason is that demand for loans has been unusually weak amid an economic recovery that’s the slowest on record since the Great Depression.

“These reserves are not inflationary right now,” Plosser said in a meeting last Tuesday with reporters in Washington. Yet he warned that if the economic recovery strengthens as many expect, borrowing could surge and those reserves could pour out of the Fed. Plosser worries that should this happen, “that’s going to put [upward] pressure on inflation.”

If inflation moves higher, the Fed could be forced to raise interest rates earlier and higher than it would like, which could slam the breaks on the economic recovery. This is the “ticking time bomb” Mr. Plosser is worried about.

Plosser knows that the Fed has often been late in responding to inflation threats in the past. He warned: “One thing I worry about is that if we are late, in this environment, with all these excess reserves, the consequences might be more dramatic than in previous times.”  With over $2.5 trillion in excess reserves parked at the Fed, he worries that a huge amount of money could be lent into the economy, which could drive inflation above the Fed’s 2% target.

And then he went on to say: "As we continue to move closer to our 2 percent inflation goal and the labor market improves, we must be prepared to adjust policy appropriately."

And finally, he said: “Our [current] challenge is subtly different. We have to restrain the pace at which banks lend those reserves out.” [Emphasis mine.]  I’m quite surprised that he said this, but Reuters reported that this statement was part of his prepared remarks for his speech last Tuesday. So he meant to say it.

The question is: What did he mean by that? I thought a lot about that over the holiday weekend. As pointed out earlier, these excess reserves parked at the Fed can be removed whenever the banks so choose. Plosser’s statement above is potentially huge, but it has thus far received very little attention in the financial media.

Question: Is the Fed Paying Banks Not to Lend?

Here’s an unconventional thought. The Fed started paying banks 0.25% in interest at the height of the financial crisis in 2008. While the banks may have needed the money back then, they certainly don’t need it now. So one way to look at this is, the Fed is paying banks not to lend.

Could Mr. Plosser’s comment above about “restrain the pace” of bank lending mean that the Fed is considering increasing the amount of interest it will pay on reserves? I wouldn’t think so, but it’s impossible to know what he meant.

The minutes from the April 29-30 Fed Open Market Committee meeting were released last week. I read them carefully, and there was no mention of increasing the interest rate on reserves held at the Fed. So for now, we simply don’t know what Plosser meant when he said the Fed will have to “restrain the pace” of bank lending.

On a more general note, actions taken by the government often have unintended consequences. In this case, I doubt that Congress expected banks to park over $2.5 trillion in excess reserves at the Fed to earn a risk-free 25 basis-points, rather than lending that money in the economy. Yet that’s where we are.

Personally, I don’t think the Fed should pay interest on reserve deposits. Certainly not on excess reserves. If the Fed wants to reduce the $2.5 trillion in excess reserves, it could simply announce that it will phase-out such interest payments over time, and banks will get the message.

As noted earlier, Fed officials rarely make controversial statements in a vacuum. I don’t believe Plosser’s“ticking time bomb” statement last week was an accident or a rogue comment, even though it was reportedly made in the Q&A period after his prepared speech. What we don’t know is why he said it and what message it was supposed to send.

Finally, the ticking time bomb he warned about may not happen, especially if the economy continues to disappoint. Despite the much weaker than expected 1Q (only 0.1% growth), Plosser still believes the economy will grow by 3% for the year overall. For that to happen, growth must be well above 3% in the 2Q, 3Q and 4Q. I don’t believe that is very likely.

Most forecasters I read are now expecting growth of around 2% for this year. If that is the case, I don’t see banks ramping-up lending in a big way as Plosser suggests. Therefore, I don’t see a stampede of excess reserves out of the Fed. I could be wrong, of course.

Maybe Mr. Plosser will offer some clarification in one of his upcoming speeches.

I’ll stay on this and keep you posted.  

Dinesh D’Souza to Prison, Jon Corzine Goes Scot-Free

Many of you will remember that I repeatedly urged clients and readers to see Dinesh D’Souza’s 2012 movie documentary 2016: Obama’s America. The film focused on President Obama’s upbringing, his past and the origins of his far-left political ideology. It was a fascinating documentary, regardless of your political persuasion.

Yet in January of this year, D’Souza was indicted by the Feds and charged with soliciting two illegal campaign contributions for Republican Senate candidate Wendy Long who ran for the Senate in New York in 2012.

Basically, D’Souza was charged with convincing two friends to donate $10,000 each to Ms. Long’s campaign and then reimbursing them both with personal money. Last Tuesday, D’Souza pled guilty to both charges of campaign finance violations, but he continues to maintain that he was targeted by the Feds over his film documentary that was highly critical of Obama.

While his formal sentencing will not be determined until September, it is very likely that D’Souza will be sentenced to prison for 10-16 months, plus a fine up to $250,000. Since D’Souza pled guilty to the charges, I will not defend him. However, I would like to compare D’Souza’s conviction and pending prison sentence to what happened last year in the case of Jon Corzine’s legal troubles in connection with the bankruptcy of MF Global in 2011.

Corzine, you may recall, was a United States Senator from New Jersey from 2001 to 2006 and was the 54th Governor of New Jersey from 2006 to 2010. He also worked as the CEO of Goldman Sachs during the 1990s. Most recently, he was the CEO of MF Global, a commodity futures clearing firm, from 2010 to 2011.

MF Global went bankrupt in 2011, and a reported $1.5 billion in customer funds went missing. It is widely believed that MF Global, on Corzine’s watch, used customer money to pay losses on its proprietary trading. When MF Global went down, Corzine was charged by the US Commodity Futures Trading Commission (CFTC) in connection with MF’s bankruptcy.

Yet despite the MF Global charges pending against him, Corzine was reportedly one of President Obama’s top fundraising “bundlers” in his 2012 re-election effort.

So how did Corzine’s case turn out? While D’Souza is almost certainly going to prison for $20,000 in illegal campaign contributions, Corzine who oversaw the loss of some $1.5 billion in customer funds at MF Global got off scot-free!

In an announcement last summer, the Justice Department said it was dropping all charges against Corzine. After 18 months of investigation, the criminal probe into Jon Corzine was completely abandoned. The Justice Department said it found no evidence of criminal wrongdoing, even though some $1.5 billion in customer funds were lost during the same period in which Corzine was the CEO.

It is strictly forbidden for clearing firms like MF Global to co-mingle customer segregated accounts with the company’s money, which many believe happened in this $1.5 billion bankruptcy. Customers of the bankrupt firm did not get all their money back.

When the Justice Department dropped the charges last year, there was surprisingly little coverage and certainly no outrage in the media – even in a political climate where members of the Democratic Party’s base were calling for the heads of big bankers and Goldman Sachs alumni, in particular. But Corzine is an“insiders’ insider.”

Perhaps because he has very close friends in the White House, the US Senate, New Jersey and Wall Street, Corzine got a pass for his oversight of the MF Global bankruptcy and the straight-up loss of $1.5 billion of customer money that was used to pay MF’s debts.

In D’Souza’s case, he had enemies in the White House and other corridors of power, so his $20,000 campaign finance crime makes him Public Enemy #1 and he will be going to prison later this year.

Has anyone gone to prison for “Fast & Furious,” the IRS scandal, the NSA spying, etc.? NO.

All I can say is, selective enforcement of the law is a dangerous thing.

Very best regards,

Gary D. Halbert

© Halbert Wealth Management

[description] => It is very rare for high-ranking Fed officials to issue dire warnings, but that’s exactly what Charles Plosser – the president of the Philadelphia Federal Reserve Bank – did last Tuesday. Mr. Plosser is very concerned about the $2.5 trillion in “excess reserves” that banks have on deposit with the Fed. [author] => Gary Halbert [legacyinterface_firm_id] => 191 [published_on] => 2014-05-28 [digest_date] => 2014-05-28 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-28 16:19:22 [created_by] => 948 [modified_on] => 2014-05-28 16:19:33 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 732 [hits] => 0 ) [11] => stdClass Object ( [legacyinterface_commentary_id] => 668 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13923 [apv_conversation_id] => [content_type] => market-commentary [title] => Where’s Molly? [slug] => fpi_052814 [fulltext] =>

It was after midnight. While the sky was clear and the stars were sparkling, there was no moonlight as the moon was new. I walked briskly down the street, but after a long day of sales presentations and meetings, inside I was tired and dragging. On each side of me dark houses loomed. There were no street lights. 

I whistled. I called softly, not wanting to stir the neighbors, up the winding street and back, and then I retraced the trail all over again.

Occasionally I would hear a stirring, a rustling in the brush. And then a barking dog, but it only retreated as I moved closer to the sound.

Once as I walked back toward home, I heard the soft clicking sound of feet upon the roadway behind. I turned. I waited silently. I called out again, but I could see nothing.

It had been fruitless. I trudged home dispirited, but as I turned up the driveway I could hear the phone ringing. I rushed to the door and grabbed the receiver. It was now 1:30 in the morning and it was my neighbor from up the street.

“Got your dog, Jerry,” Steve said. “She was barking outside our back door. I think it’s your Molly.” Much chagrined, I hurried back down the street and collected Molly from a just-awakened friend. Apologizing profusely, I attached a lead to Molly’s collar, removed the useless electronic fence neck band from her, and silently marched the cowering dog back home.

She knew she’d done wrong, but she just couldn’t help herself.

Four days later the crime was repeated. This time it was in broad daylight, as I witnessed Molly’s arch-enemy, the brown squirrel, lure her off our property.

Molly, of course, came up empty handed (empty pawed?) in her pursuit. She then plunged into the thick brush of the wetlands, as I, in turn, pursued her. This, however, proved her undoing. The only easy exit from the wet and muddy thicket led onto the neighbor’s dock, where she was trapped (between water and a hard place) and captured.

And they say that herding cats is difficult!

Of course, this week’s analogy to the stock market should be pretty straightforward. And it works on a couple of levels.

First, the temptation to leave home is always there and some are easily lured away (“squirrel”). Investors flock to risk-managed investment strategies when the market goes through its periodic financial shocks.

In my opinion, that’s the right thing to do. These strategies are designed to minimize the otherwise out-sized stock market losses that occur every three to seven years, wreaking havoc on virtually all investor portfolios. They are meant to protect investors from their worst fears and allow them to return to the better gains normally available in stocks when the latest crisis is abated.

But as the reality of stock market losses for nearly every investor begins to fade from memory, replaced by more and more friends and neighbors enjoying short-term gains (usually just earning back what they have lost), investors are tempted to escape the disciplined bonds of risk-managed investing and take a more speculative romp on the wild side.

When stocks then take their inevitable plunge, they once again seek the safety of some boundaries, and poorer, but not necessarily wiser, the cycle is repeated.

On some level, they know they did wrong, but they just couldn’t help themselves.

That’s the long-term pattern that most investors seem to follow over the full market cycle of rally then bust. Capitulation, then over confidence, and then they return to capitulation yet again.

In the short term, it’s a similar problem, but different. Once burned, investors shy away from equities. Behavioral finance studies show that there are reasons why investors are slow to embrace a new bullish market trend.

The reason is that there is a fundamental difference in the way investors perceive probabilities for gains versus the actual odds of possible returns. For example, a given trend-following strategy may register a profitable trade 50 times out of 100. It still will make money if the gains are large while the losses are small, even though the probability for gains is break even.

Yet studies show that while the odds of a profitable trade in this example are 50%, the average investor will underweight the chance of success. On average, experiments have shown that a 50% probability is viewed as just a 42% chance. That’s just the way our human brains are wired. We overweight small probabilities (the “possibility” effect), and underweight higher probability situations (the “certainty” effect).

Similarly, Molly knows that she gets a small shock every time she crosses over the electronic fence line, yet, she underweights the probability and does it anyway. Maybe that similarity is why dogs are man’s best friend.

Friday the S&P 500 made a new all-time index record high. This occurred despite the fact that negative news stories continued to jet through the daily news cycle, mid-term elections loomed, earnings were just so-so and small cap and tech indexes had just experienced a greater than 10% correction.

Source: Bespoke Investment Group

Source: Bespoke Investment Group

Despite the advice of some (including this columnist) that the long-term up trend continues and to stay the course or, better still, buy the dips, some investors felt the need to flee to cash. Even in the face of multiple new highs this year alone, investor bullish sentiment has been mired in a middling trading range varying just 10% from top to bottom.

Bespoke Investment Group mentioned in its commentary that this has gone on for quite some time (ten weeks, to be exact) and was relatively rare. I thought I’d take a look at what had happened over history during these fairly unusual circumstances.

Source: Bespoke Investment Group

  After 10 weeks
of static bullish sentiment
  All periods
9/1987-2/2014
  1 month
later
2 months later 3 months later   1 month
later
2 months later 3 months later
Average return 1.78% 1.68% 5.52%   0.64% 1.32% 2.01%
Positive periods 26 25 27   844 875 938
Total 37 37 37   1375 1375 1375
Percent positive 70.3% 67.6% 73.0%   61.4% 63.6% 68.2
Worst loss -3.08% -8.59% -5.21%   -28.16 -34.06% -37.64

Chart: Bespoke Investment Group. Weekly data source: Pinnacle Data. Calculations by Flexible Plan Investments, Ltd.

As you can see, the occurrence of such a period of relative stability of investor bullish sentiment has been on average quite bullish in the intermediate term. The gains have been bigger than normal and they have happened more often. Also impressive is the fact that even when the market has upset the odds and retreated instead of advancing, the extent of the downturn has been moderate.

Another interesting chart that I came across this week relates to volatility. The VIX Index is often referred to as the “Fear Index” because it also expresses a view on investor sentiment. The lower the Index the less fearful of the future investors are said to be, while high readings of this option-based indicator are associated with a heightened level of fear.

As the daily chart shows, the VIX closed last week at its lowest level of the year, and, at below 12, one of its lowest levels ever. I checked the history of this relatively rare occurrence as well.

  Six month low in VIX and VIX under 12   All periods
1/1990-2/2014
  1 month
later
2 months later 3 months later   1 month
later
2 months later 3 months later
Average return 0.21% 1.78% 1.94%   0.65% 1.32% 2.02%
Positive periods 30 38 35   3629 3781 3975
Total 48 48 48   5889 5889 5889
Percent positive 62.51% 79.17% 72.92%   61.6% 64.2% 67.5
Worst loss -3.83 -4.56% -3.31%   -28.0% -38% -41%

Chart: Stockcharts.com. Daily data source: Pinnacle Data. Calculations by Flexible Plan Investments, Ltd.

Again, other than a smaller-than-average return in the first month, all of the numbers are equally bullish and the downside risk of being wrong seems limited.

The fact that interest rates continue to trend lower, seasonality remains positive, and we saw breakouts or near breakouts on most indexes last week further supports the bullish case. It would seem to overwhelm the negativity expressed by divergences at the new high in the S&P by measures of market breadth, new highs and lows, and volume, but only time will tell.

However, if you are a client of a dynamic risk-managed investment firm, while these indicators can give comfort and support if your manager is essentially bullish on the market at the present time (like we are), it’s more important that you stay the course, remain at “home,” and follow the advice given.

By quantifying the investment process, the advisor has done all of the work for you. The manager’s methodology has been designed to shift through the indicators and allow the firm to best position your account based on the strategies chosen by you for your individual suitability profile. If your advisor has a long history of success and you have chosen your advisor with care, there is no reason to “run away” when a hazard appears on the trail, or to try something new when an investment “squirrel” darts across your path.

Searching for Molly can be a pain, but finding her is always a joy.

All the best,

Jerry

P.S. – Anyone have an alternative to an invisible fence for a street-wise rescue dog that is much too curious for her own good?

Disclosures

© Flexible Plan Investments

[description] => It was after midnight. While the sky was clear and the stars were sparkling, there was no moonlight as the moon was new. I walked briskly down the street, but after a long day of sales presentations and meetings, inside I was tired and dragging. On each side of me dark houses loomed. There were no street lights. [author] => Jerry Wagner [legacyinterface_firm_id] => 156 [published_on] => 2014-05-28 [digest_date] => 2014-05-28 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-28 16:23:17 [created_by] => 948 [modified_on] => 2014-05-28 16:23:26 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 733 [hits] => 0 ) [12] => stdClass Object ( [legacyinterface_commentary_id] => 669 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13924 [apv_conversation_id] => [content_type] => market-commentary [title] => A Deeper look at Corporate CapEx and Stock Buybacks [slug] => gavekal_052814 [fulltext] =>

Yesterday we analyzed here aggregate capital spending on tangibles for non-financial constituent companies in the MSCI World Index (90% of global investible market cap). We found that CapEx as a % of sales has been extremely steady over the last nine years, fluctuating in a 0.9% range. In 2013 CapEx as a % of sales, at 7.9%, registered the second highest reading over the 9 year period.

Today we thought we'd follow up that quick analysis with a deeper look at corporate use of cash flow from a variety of angles (by region, cap size, with financials, ex financials). We find that no matter how we slice and dice the data we get the same result. The total USD amount of CapEx spending as a percent of either sales or operating cash flow is currently average to above average compared to the last 9 years.

Another point on stock buybacks is the following: yes, some companies have been buying back stock. However, this is primarily a US phenomenon and the allocation of operating cash flow to buying back stock (including for the US) is well below where it was at the end of the last cycle (perhaps not the best comparison, but it is what it is). It does appear that, to a large extent, share buybacks are being financed with debt issuance, but again, not to the same degree, in aggregate, as in 2006-2008. When we break down non-financial North American stocks into two groups (the vary largest 46 and the smallest 530), we find pretty clear evidence that the financing of stock buybacks with debt is concentrated in the smaller subset of companies. The largest 46 companies have bought back a cumulative $473bn in stock from 2011-2013 and issued a cumulative $100bn in new debt. The smallest 530 companies have bought back a cumulative $433bn in stock from 2011-2013 and issued a cumulative $454bn in new debt. Needless to say, we are sure there are more productive uses of cash flow than buying back one's stock, especially at the expense of one's balance sheet.

All companies in the MSCI World Index:

image  



MSCI World ex financials:
image 
 
MSCI North America:
image 
 
North America ex financials:
image 
 
MSCI Europe:
image 
 
MSCI Europe ex financials:
image 
 
MSCI Pacific:
image
 
MSCI Pacific ex financials:
image  


Just the largest 200 companies in the MSCI World Index by market cap (50% of the MSCI World Index):
image 


Smallest 1411 companies in the MSCI World Index:
image
 
MSCI North America largest 46 companies ex financials:
image
 
MSCI North America smallest 530 companies ex financials:
image
[description] => Yesterday we analyzed aggregate capital spending on tangibles for non-financial constituent companies in the MSCI World Index (90% of global investible market cap). We found that CapEx as a % of sales has been extremely steady over the last nine years, fluctuating in a 0.9% range. In 2013 CapEx as a % of sales, at 7.9%, registered the second highest reading over the 9 year period. [author] => Team [legacyinterface_firm_id] => 173 [published_on] => 2014-05-28 [digest_date] => 2014-05-28 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-28 17:44:32 [created_by] => 948 [modified_on] => 2014-05-28 17:44:42 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 734 [hits] => 0 ) [13] => stdClass Object ( [legacyinterface_commentary_id] => 670 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13925 [apv_conversation_id] => [content_type] => market-commentary [title] => Value Offers a Cushion: Why Last Year’s Winners Are Now Losers and Vice Versa [slug] => blackrock_052814 [fulltext] =>

This year, the parts of the market that are struggling are generally those that ran up the most in 2013: biotech, internet companies, and U.S. retailers.  Conversely, some of last year’s worst performers are proving more resilient. Case in point: emerging markets.

As I write in my new weekly commentary, this trend offers a revealing snapshot into the current market environment. Let’s take a deeper look at both examples.

Retailers:  This sector rose sharply in 2013 on optimism over an economic rebound, sending valuations up by roughly 30% over the past 18 months.

Today, however, U.S. consumption is not accelerating as fast as expected, despite an economy that is improving from its first quarter slump. Growth in retail sales is sluggish, rising barely 0.2% a month, roughly half the long-term average. (The exceptions are interest-rate sensitive segments like autos, which have found support in the low interest rate environment.)

As sales have struggled, so have retailers. More evidence came last week as several retailers including Dicks Sporting Goods (DKS), Staples (SPLS), and Best Buy (BBY) reported disappointing earnings or guidance.

Bottom line: Given the lethargic nature of consumer spending, and still elevated valuations on retail stocks, we would remain cautious on retailers and other consumer discretionary companies. Instead, we would favor areas of the market like large and mega-cap companies that offer better value and a potential buffer should volatility return.

Emerging markets: EM investors have recently had to contend with a growing list of geopolitical issues. In Thailand, the army chief took control of the country, declared martial law and suspended the constitution two days later. However, investors took the event in stride — perhaps because it was Thailand’s 12th military coup since 1932 — and Thailand’s stock market only posted a small loss for the week.

Part of the reason for the measured response: EM valuations remain modest compared to developed markets. The price-to-earnings ratio for developed countries has risen nearly 40% over the past two years, while emerging markets are up a more moderate 20%. While EMs are not cheap per se, they offer relative value to developed markets, which helps explain why emerging markets have outperformed developed markets by roughly 4% so far in May.

Bottom line: The fact that EM stocks have withstood the recent geopolitical risks supports the notion that, although they can be volatile, EM equities could offer some relative value in a world in which many asset classes are fairly priced.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. 

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.

Funds that concentrate investments in a single sector will be more susceptible to factors affecting that sector and more volatile than funds that invest in many different sectors. 

iS-12591

© BlackRockhttp://www.blackrockblog.com/

[description] => A trend in markets this year has been the poor performance of last year’s stock market winners, and the resilience of some of last year’s losers. Russ takes a look at what’s behind this trend, specifically with retailers and emerging markets. [author] => Russ [legacyinterface_firm_id] => 50 [published_on] => 2014-05-28 [digest_date] => 2014-05-28 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-28 17:46:36 [created_by] => 948 [modified_on] => 2014-05-28 17:46:50 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 735 [hits] => 0 ) [14] => stdClass Object ( [legacyinterface_commentary_id] => 671 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13926 [apv_conversation_id] => [content_type] => market-commentary [title] => Europe’s Ukrainian Lifeline [slug] => prosyn_052814 [fulltext] =>

NEW YORK – Last weekend’s European Parliament election and presidential election in Ukraine produced sharply contrasting results. Europe’s voters expressed their dissatisfaction with the way that the European Union currently functions, while Ukraine’s people demonstrated their desire for association with the EU. European leaders and citizens should take this opportunity to consider what that means – and how helping Ukraine can also help Europe.

The EU was originally conceived to be an ever-closer association of sovereign states willing to pool a gradually increasing share of their sovereignty for the common good. It was a bold experiment in international governance and the rule of law, aimed at replacing nationalism and the use of force.

Unfortunately the euro crisis transformed the EU into something radically different: a relationship of creditors and debtors in which the creditor countries impose conditions that perpetuate their dominance. Given low turnout for the European Parliament election, and if support for Italian Prime Minister Matteo Renzi’s were added to the anti-EU vote on the left and the right, it could be argued that the majority of citizens are opposed to current conditions.

Click here to read more.

© Project Syndicate

[description] => Europe’s voters recently expressed their dissatisfaction with the way the EU currently functions, while Ukraine’s people demonstrated their desire for association with the EU. European leaders and citizens should take this opportunity to consider what that means – and how helping Ukraine can also help Europe. [author] => George Soros [legacyinterface_firm_id] => 345 [published_on] => 2014-05-28 [digest_date] => 2014-05-28 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-28 18:56:00 [created_by] => 948 [modified_on] => 2014-05-28 18:56:10 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 736 [hits] => 0 ) [15] => stdClass Object ( [legacyinterface_commentary_id] => 661 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13916 [apv_conversation_id] => [content_type] => market-commentary [title] => After India’s Election, Execution takes Center Stage for Debt Markets [slug] => invesco_052714 [fulltext] =>

Financial markets in India have already rallied strongly in anticipation of the overwhelming majority win by incoming Prime Minister Narendra Modi and the Bharatiya Janata Party (BJP). The country’s currency (the Indian rupee) rose 15% from its August peak, while five-year credit default swaps on the State Bank of India (SBI) tightened from a spread of 371 to 207 in the same period. We believe further upside for Indian assets in the longer term depends on the execution of the party’s campaign promises to deliver firm governance and economic- and market-friendly reforms, and to focus on growth, jobs and investment. This will include:

  • Establishing the groundwork for urgently required  infrastructure development.
  • Creating very urgently needed quality jobs for India’s rapidly growing working-age population.
  • Establishing conditions necessary to transform India into a global manufacturing hub.
  • Controlling inflation, currently at 8.6%.

Most positive for debt markets, we think, will be the likely reprieve from rating agencies on the country’s investment-grade sovereign external rating.  We think Standard & Poor’s may eventually revise its outlook on India’s BBB- rating from negative to stable once the new government demonstrates its ability to stabilize growth while maintaining the downward trajectory of its twin fiscal and current account deficits. Moody’s Investors Service, meanwhile, has indicated that an upgrade from its current Baa3 rating is a possibility in the medium to longer term.

In order to successfully placate India’s electorate while maintaining much-needed fiscal consolidation, we think the new administration will need to focus on both improving the general quality of fiscal expenditures  and taking measures to improve fiscal revenues, which stand among the lowest in Asia. Such measures could include revisiting tax reform and selling additional stakes in public sector enterprises.  Equally important, we believe, will be measures aimed at establishing clarity for long-term private investment: cutting red tape, improving transparency in environmental clearances and improving coordination between federal and state governments for large-scale projects.  No less important, we will look for signs that the incoming government will endorse highly respected Reserve Bank of India Governor Raghuram Rajan in his effort to establish credible inflation-targeting despite the necessary near-term side effects of sustained high benchmark interest rates.

During his 13-year tenure as Chief Minister of Gujarat, Mr. Modi built an impressive track record of eliminating the kind of red tape endemic in every layer of government. Nonetheless, his encouraging and much-repeated mantra of “minimum government and maximum governance” points toward what we believe will be much-needed efforts to improve what is one of the world’s worse climates for doing business, to improve the country’s woeful infrastructure and, at the same time, to institute fiscal prudence while also somehow focusing on generating the necessary higher-than-average growth given India’s demographics.

The market favorite BJP won India’s 2014 general election with the likes of a landslide not seen in 30 years. Nonetheless, we believe enforcing the same brand of elusive governance and functionality at the national level is by no means a given – markets will focus keenly on execution every step of the way.

All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is a US distributor for retail mutual funds, exchange-traded funds, institutional money market funds and unit investment trusts. 

Invesco unit investment trusts are distributed by the sponsor, Invesco Capital Markets, Inc. and broker dealers including Invesco Distributors, Inc. These Invesco entities are indirect, wholly owned subsidiaries of Invesco Ltd.

©2014 Invesco Ltd. All rights reserved.

[description] => Financial markets in India have already rallied strongly in anticipation of the overwhelming majority win by incoming Prime Minister Narendra Modi and the Bharatiya Janata Party (BJP). The country’s currency (the Indian rupee) rose 15% from its August peak, while five-year credit default swaps on the State Bank of India (SBI) tightened from a spread of 371 to 207 in the same period. [author] => Jack Deino [legacyinterface_firm_id] => 225 [published_on] => 2014-05-27 [digest_date] => 2014-05-27 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-27 12:52:07 [created_by] => 948 [modified_on] => 2014-05-27 14:22:39 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 726 [hits] => 0 ) [16] => stdClass Object ( [legacyinterface_commentary_id] => 662 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13917 [apv_conversation_id] => [content_type] => market-commentary [title] => Four Market Risks to Focus on This Summer [slug] => blackrock_052714 [fulltext] =>

Equity markets are heading into mid-year with lackluster gains. While few investors have been thrilled with this year’s performance, it could be much worse. We have yet to see a significant correction, equity markets remain within a few percentage points of all-time highs and volatility remains low.

Many clients have been asking: What could change? Or put differently, what could lead to a more severe market correction? So, I figured it was time formy annual look at the market risks that keep me up at night. While there’s a long list of things that could go wrong, here are four that I would focus on for the summer.

  1. Ukraine. There’s no way of knowing how events in Ukraine will play out, but what’s clear is that for now, the market is paying scant attention. Even during last week’s sell-off, market volatility, as measured by the VIX index, never got above 14. An escalation in Ukraine-related violence and more sanctions against Russia don’t appear to be priced into financial markets and would both likely lead to increased selling.
  2. Europe. With many of Europe’s former problem children enjoying all-time low bond yields, it seems a strange time to worry about Europe. However, while bond yields have dropped, risks remain.  Sovereign debt levels continue to climb; growth, while improving, remains anemic; and the currency zone is flirting with deflation. Outside of the economic risks, there are growing political risks. The European parliamentary elections may illustrate just how much damage has been inflicted on the region’s main political parties. For example, while economic conditions in Greece have improved – from abysmal to merely poor – the political situation has not. The government is teetering, with a razor thin two-seat majority.
  1. China. My base case scenario is a modest deceleration in the Chinese economy. So far, while the country’s economic data has been weak, it has conformed to that scenario. That said, the Chinese government is attempting a difficult balancing act: slow down the real estate market and credit expansion without cratering growth. A sharp and unexpected drop in growth would not only pose a risk to China, but with China as the world’s second largest economy, it would pose a risk to the global economy as well.
  1. U.S. Bond Market. Why worry about interest rates with bond yields at six-month lows? Because, as everyone experienced last May, with rates at these levels, bond prices can reverse violently and abruptly. I would focus on two near-term and interrelated risks related to the bond market: a change in Federal Reserve (Fed) language and aggressive selling of bond funds by retail investors. Year-to-date, investors have been piling into bond bunds. However, even a subtle shift in the Fed’s tone could quickly change that pattern. The risk of retail outflows is heightened by the fact that many recent bond buyers are desperately seeking yield rather than committing to the asset class. A turn in rates could produce a quick turn in flows. (You can read more about the potential impact of the end of easy money in a new BlackRock Investment Institute paper I co-wrote, The Disappearing Act.)

To be sure, I do expect equities to move higher over the course of the year. But as I’ve discussed previously, given last year’s extreme multiple expansion, 2014 was always going to be a more difficult year for stocks. Any of the above could quickly turn a difficult year into a bad one.

Sources: Bloomberg, BlackRock research

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.  

iS-12543

© BlackRock

[description] => What could lead to a more severe market correction? While there’s a long list of things that could go wrong in 2014, Russ lists four market risks to pay attention to this summer. [author] => Russ Koesterich [legacyinterface_firm_id] => 50 [published_on] => 2014-05-27 [digest_date] => 2014-05-27 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-27 14:40:25 [created_by] => 948 [modified_on] => 2014-05-27 14:40:40 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 727 [hits] => 0 ) [17] => stdClass Object ( [legacyinterface_commentary_id] => 663 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13918 [apv_conversation_id] => [content_type] => market-commentary [title] => Six Principles for Smart Tax Management [slug] => bernstein_052714 [fulltext] =>

It is well known that taxes began to take a bigger bite out of income for the well-off in 2013. Top marginal tax rates rose, and some exemptions and deductions were phased out. What is less well known is that investors spending from their portfolios—even those investors whose tax rates didn’t rise—may be facing higher tax bills, too.

Historically low interest rates continue to depress the tax-exempt income from municipal bonds, so many investors spending from their portfolios have to sell assets to replace lost income. Given the stock market’s terrific gains over the past five years, selling stocks generally means realizing taxable capital gains, and most investors have few or no tax-loss carryforwards left from the dark days of 2008 and early 2009 to offset those gains.

Thus, smart tax management is more important than ever. Here are six key principles to keep in mind when considering tax-related strategies for 2014. It’s not too soon to begin.

Don’t let the tax tail wag the investment dog. Maximizing after-tax investment returns within the investor’s risk and return objectives should be the goal, not minimizing taxes per se. After all, the best way to minimize taxes is to have no income. Investors who invest their entire portfolio in tax-exempt bonds may pay no tax on their investments, but they are unlikely to obtain the long-term growth they need.

Avoiding tax is permanent; deferring tax just kicks the tax can down the road—possibly to a time when tax rates may be higher. Tax-loss harvesting, while often beneficial, just defers tax to a future year. Sometimes, the transaction costs or bid-ask spreads may eat up most or all of the benefit.

Tax laws change, although not as often as it may seem. It may be prudent not to rely too much on any one tax-related investing or gifting strategy. Roth conversions, charitable remainder unitrusts, donor-advised funds and private foundations are among the often-valuable strategies with legislative risk.

Maintaining liquidity is important. Paying tax up front in a Roth IRA conversion or front-loading gifts to a 529 account may increase long-term after-tax wealth, but both strategies may leave an investor without easy access to needed funds.

Costs matter, too. Some tax-related strategies, such as a charitable remainder unitrust, require up-front or ongoing legal and accounting fees; they are generally most economical when applied to large amounts. Similarly, private foundations may maximize control over philanthropic gifts, but they are generally economical only for very large charitable programs. And today, high guarantee fees make some variable annuities unattractive.

Different taxes may require different strategies. Some strategies address federal income taxes; others address federal gift, estate and generation-skipping transfer taxes, or the many types of state and local taxes. Sometimes, a strategy that reduces one tax may increase another. It’s particularly important to watch the intersection of the income and estate tax regimes.

Every taxpayer’s goals and circum­stances are different. The state you live in, the number of dependents you have, and your tax bracket, total wealth, embedded gains and losses, and time horizon will determine whether these strategies are likely to work for you. 

Bernstein does not offer tax, legal or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decision.

Tara Thompson Popernik, CFA, CFP, is Director of Research for the Wealth Planning and Analysis Group at Bernstein Global Wealth Management, a unit of AllianceBernstein.

© AllianceBernstein

[description] => It is well known that taxes began to take a bigger bite out of income for the well-off in 2013. Top marginal tax rates rose, and some exemptions and deductions were phased out. What is less well known is that investors spending from their portfolios—even those investors whose tax rates didn’t rise—may be facing higher tax bills, too. [author] => Tara Thompson Popernik [legacyinterface_firm_id] => 20 [published_on] => 2014-05-27 [digest_date] => 2014-05-27 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-27 14:42:21 [created_by] => 948 [modified_on] => 2014-05-27 14:42:33 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 728 [hits] => 0 ) [18] => stdClass Object ( [legacyinterface_commentary_id] => 664 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13919 [apv_conversation_id] => [content_type] => market-commentary [title] => Economy Begins to Accelerate While Equities Push Higher [slug] => nuveen_052714 [fulltext] =>

U.S. equities finished higher last week as the S&P 500 advanced 1.3%, snapping a two-week losing streak and ending at a new record high.1 Markets seemed to lack conviction, but the path of least resistance appeared skewed to the upside as momentum for the economic recovery was positive. Technology and consumer discretionary sectors led the run-up, and telecommunications and utilities lagged.2 Chinese manufacturing data surprised to the upside, while concerns about traction in the U.S. housing market recovery received a modest reprieve. Now that the Fed tapering schedule seems set, investors are turning attention to the policy normalization process and a longer-term equilibrium for the fed funds rate.

Many Investors Question the Strength of the Global Recovery

A better tone for economic data provided investors with some relief that the first quarter shortfall in economic growth was a temporary setback largely due to the severe winter weather. As equities rebounded, bond yields rose.3 A relief in equity markets did not erase questions about why U.S. Treasury yields are so low. The core of the answer is that U.S. bond yields are low because growth and inflation are low as well. As the current U.S. recovery approaches the five-year mark, traction is the weakest since World War II. The economy has grown approximately half as much as the average post-war recovery, primarily as a result of deleveraging and investor caution after the major financial crisis.4

Weekly Top Themes

1. GDP for the first quarter is projected to be revised into mildly negative territory this week. In contrast, however, data that have already been released are consistent with acceleration for the second quarter.

2. Consumer interest payments continue to trend lower, which should support better consumer spending.5

3. Bank loans increased at a 10% annual rate over the last three months, and small bank loans grew at a 13% annual rate.6 Growth in bank loans should mean that Fed tapering will not be a headwind to growth.

4. A projected increase of 0.8 points is anticipated for the Manufacturing Purchasing Managers Index (PMI™) for May.7 Overall, manufacturing reports seem generally upbeat and consistent with our view that activity will pick up in the second quarter following an inventory correction.

5. In the primary elections, voters supported the Republican candidates who should create the most competition for Democrats in the November general election. This increases the odds of Republican control of the Senate.

The Big Picture

Crosscurrents in global equity markets over the last few months continue to confound many investors. Some of these currents suggest economic activity is deteriorating, such as the decline in major government bond yields and the outperformance of defensive equity sectors over cyclical sectors (a trend that is starting to reverse). On the other hand, the bounce in commodity prices and related markets, tight spreads between corporate and government bond yields and positive trends in most global equity markets are consistent with continued economic recovery. We remain constructive on economic growth and expect the decline in yields to reverse as growth increases and as investors gain clarity on the path of Fed policy. There is some risk that the Fed’s passive acceptance of lower Treasury yields might eventually spark a sharp rebound in yields, similar to what occurred last spring when the Fed hinted at tapering.

Equity valuations are less compelling than they used to be, following the strong rally over the last two years. Corporate earnings are improving, underscoring that the equity bull market is becoming more advanced. In our view, however, equities remain attractive due to a shortage of compelling alternatives. We also expect the bear market in bonds that began in August 2012 to resume and the grinding equity bull market to persist. Leadership in equities should return to cyclical sectors.

1 Source: Morningstar Direct, as of 5/23/14. 2 Source: FactSet, as of 5/23/14. 3 Source: Morningstar Direct and Bloomberg, as of 5/23/14. 4 Source: Congressional Budget Office, “What Accounts for the Slow Growth of the Economy After the Recession?” November 2012, http://www.cbo.gov; Bureau of Economic Analysis, “Gross Domestic Product - Percent Change from Preceding Period,” 1930 - March 2014, http://bea.gov/national/index.htm#gdp. 5 Source: Federal Reserve Bank of Philadelphia, “Interest Paid by Consumers,” as of 12/31/13, most recent data available, http://www.phil.frb.org/researchand-data/real-time-center/real-time-data/data-files/PINTPAID/ 6 Source: Board of Governors of the Federal Reserve System, “Assets and Liabilities of Commercial Banks in the United States (Weekly), May 23, 2014, http://www.federalreserve.gov/releases/h8/current/ 7 Source: April 2014 Manufacturing ISM Report On Business,® May 1, 2014, http://www.ism.ws/ismreport/mfgrob.cfm.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. Euro STOXX 50 Index is Europe’s leading Blue-chip index for the Eurozone and covers 50 stocks from 12 Eurozone countries. FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. Deutsche Borse AG German Stock Index (DAX Index) is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. FTSE MIB Index is an index of the 40 most liquid and capitalized stocks listed on the Borsa Italiana. Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. Hong Kong Hang Seng Index is a free-float capitalization-weighted index of selection of companies from the Stock Exchange of Hong Kong. Shanghai Stock Exchange Composite is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The MSCI World Index ex-U.S. is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets minus the United States. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

RISKS AND OTHER IMPORTANT CONSIDERATIONS

The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Noninvestment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Past performance is no guarantee of future results.

Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.

©2014 Nuveen Investments, Inc. All rights reserved.

GPE-BDCOMM4-0514P 1338-INV-W05/15

[description] => U.S. equities finished higher last week as the S&P 500 advanced 1.3%, snapping a two-week losing streak and ending at a new record high. Markets seemed to lack conviction, but the path of least resistance appeared skewed to the upside as momentum for the economic recovery was positive. [author] => Robert Doll [legacyinterface_firm_id] => 320 [published_on] => 2014-05-27 [digest_date] => 2014-05-27 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-27 17:16:18 [created_by] => 948 [modified_on] => 2014-05-27 17:22:48 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 729 [hits] => 0 ) [19] => stdClass Object ( [legacyinterface_commentary_id] => 665 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13920 [apv_conversation_id] => [content_type] => market-commentary [title] => Is Gold Signaling A Move Higher in TIPS? [slug] => gavekal_052714 [fulltext] =>

For the last decade, TIPS yields and gold have had a negative 88% correlation.  The logic is simple enough: since gold doesn't generate any income, falling TIPS rates reduce the opportunity cost of holding gold.  We can see this play out in the charts below.  In early 2008, the peak in gold was accompanied by a trough in TIPS yields, and then later in 2008, the trough in gold was accompanied by a rise in TIPS yields. 

On December 10, 2012 TIPS yields bottomed at -.87%, and this began the slide in gold from $1700/oz. to just under $1250/oz. by the end of 2013.  Since the beginning of the year, 10 year TIPS yields have fallen from 75bps to 32bps, yet gold prices are mostly unchanged. 

image

Gold is down about 2% today, falling under $1270/oz for the first time since February.  In the chart below, we transform the time series chart above to a scatterplot that illustrates the relationship without regard to time.  There is not a single data point in the last decade where gold is below $1290/oz. with TIPS rates at or below 35bps. The breakdown in gold could suggest that the trend toward falling TIPS yields may be set to reverse. 

image

© GaveKal Capital

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[0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [cookie] => JInputCookie Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [files] => JInputFiles Object ( [decodedData:protected] => Array ( ) [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( [get] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [view] => commentaries [start] => 1760 ) [inputs:protected] => Array ( ) ) [post] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [cookie] => JInputCookie Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [files] => JInputFiles Object ( [decodedData:protected] => Array ( ) [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [env] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [request] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [view] => commentaries [start] => 1760 [limitstart] => 1760 [option] => com_legacyinterface [Itemid] => 616 ) [inputs:protected] => Array ( ) ) [server] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [HTTP_AUTHORIZATION] => [HTTP_CACHE_CONTROL] => no-cache [HTTP_CONNECTION] => Keep-Alive [HTTP_PRAGMA] => no-cache [HTTP_ACCEPT] => */* [HTTP_ACCEPT_ENCODING] => gzip, deflate [HTTP_FROM] => bingbot(at)microsoft.com [HTTP_HOST] => 54.225.85.205 [HTTP_IF_MODIFIED_SINCE] => Thu, 26 Apr 2018 21:57:19 GMT [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm) [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => 54.225.85.205 [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 157.55.39.42 [DOCUMENT_ROOT] => /var/www/html/apcms [REQUEST_SCHEME] => http [CONTEXT_PREFIX] => [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms [SERVER_ADMIN] => ben@hubtech.tv [SCRIPT_FILENAME] => /var/www/html/apcms/index.php [REMOTE_PORT] => 22879 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => view=commentaries&start=1760 [REQUEST_URI] => /?view=commentaries&start=1760 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1526899007.449 [REQUEST_TIME] => 1526899007 ) [inputs:protected] => Array ( ) ) [session] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [__default] => Array ( [session.counter] => 1 [session.timer.start] => 1526899007 [session.timer.last] => 1526899007 [session.timer.now] => 1526899007 [session.client.browser] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm) [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 1760 [filter_order] => published_on [filter_order_Dir] => desc ) ) ) ) [user] => JUser Object ( [isRoot:protected] => [id] => 0 [name] => [username] => [email] => [password] => [password_clear] => [block] => [sendEmail] => 0 [registerDate] => [lastvisitDate] => [activation] => [params] => [groups] => Array ( [0] => 9 ) [guest] => 1 [lastResetTime] => [resetCount] => [requireReset] => [_params:protected] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( ) ) [_authGroups:protected] => Array ( [0] => 1 ) [_authLevels:protected] => Array ( [0] => 1 [1] => 1 ) [_authActions:protected] => [_errorMsg:protected] => [_errors:protected] => Array ( ) [aid] => 0 ) ) ) [inputs:protected] => Array ( ) ) [jrequest] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) ) ) [env] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [request] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [view] => commentaries [start] => 1760 [limitstart] => 1760 [option] => com_legacyinterface [Itemid] => 616 ) [inputs:protected] => Array ( ) ) [server] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [HTTP_AUTHORIZATION] => [HTTP_CACHE_CONTROL] => no-cache [HTTP_CONNECTION] => Keep-Alive [HTTP_PRAGMA] => no-cache [HTTP_ACCEPT] => */* [HTTP_ACCEPT_ENCODING] => gzip, deflate [HTTP_FROM] => bingbot(at)microsoft.com [HTTP_HOST] => 54.225.85.205 [HTTP_IF_MODIFIED_SINCE] => Thu, 26 Apr 2018 21:57:19 GMT [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm) [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => 54.225.85.205 [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 157.55.39.42 [DOCUMENT_ROOT] => /var/www/html/apcms [REQUEST_SCHEME] => http [CONTEXT_PREFIX] => [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms [SERVER_ADMIN] => ben@hubtech.tv [SCRIPT_FILENAME] => /var/www/html/apcms/index.php [REMOTE_PORT] => 22879 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => view=commentaries&start=1760 [REQUEST_URI] => /?view=commentaries&start=1760 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1526899007.449 [REQUEST_TIME] => 1526899007 ) [inputs:protected] => Array ( ) ) [session] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [__default] => Array ( [session.counter] => 1 [session.timer.start] => 1526899007 [session.timer.last] => 1526899007 [session.timer.now] => 1526899007 [session.client.browser] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm) [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 1760 [filter_order] => published_on [filter_order_Dir] => desc ) ) ) ) [user] => JUser Object ( [isRoot:protected] => [id] => 0 [name] => [username] => [email] => [password] => [password_clear] => [block] => [sendEmail] => 0 [registerDate] => [lastvisitDate] => [activation] => [params] => [groups] => Array ( [0] => 9 ) [guest] => 1 [lastResetTime] => [resetCount] => [requireReset] => [_params:protected] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( ) ) [_authGroups:protected] => Array ( [0] => 1 ) [_authLevels:protected] => Array ( [0] => 1 [1] => 1 ) [_authActions:protected] => [_errorMsg:protected] => [_errors:protected] => Array ( ) [aid] => 0 ) ) ) [inputs:protected] => Array ( ) ) [jrequest] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) ) ) [files] => JInputFiles Object ( [decodedData:protected] => Array ( ) [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [env] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [request] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [view] => commentaries [start] => 1760 [limitstart] => 1760 [option] => com_legacyinterface [Itemid] => 616 ) [inputs:protected] => 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- Blame the central banks

- Six factors supporting the tax-exempt market

- Beware of the "de minimis" tax threat

- Update on municipal credits in the news 

Rarely do the financial markets provide the double treat of simultaneously rising equity valuations and falling bond yields.  Almost midway through the second quarter of 2014, key stock indices reached new all-time highs while global bond yields have retreated to levels not seen in over six months. Something has to give: either stock prices retreat or yields rise. Right? At least this is the popular assumption supported by classic economic rationale for a normal investment environment. 

But all is not normal according to the markets.  If it were, then stocks should continue their ascent and bond yields should be on an upward trajectory due to strengthening global economies, just as the consensus predicted at the start of the year.  Why is this not happening? The heavy hand of global central banks continues to play the leading role in the economic recovery story.  Assurances by the Fed's chair that the U.S. central bank will "remain accommodative"  for an unspecified period has buoyed both domestic equity and fixed income markets.  Persistent low inflation and an uneven labor market recovery are worrisome.  Internationally, the picture is equally cloudy.  The precipitous decline in Eurozone bond yields is likely a reflection of even greater economic recovery skepticism in Europe than in the U.S.  Sluggish growth in Japan and many emerging economies (i.e., China) will likely sustain accommodative monetary policies around the world.  A significant rise in global interest rates appears unlikely any time soon in our view. 

We have identified a number of factors likely to be supportive of the tax-exempt market over the near-term.

1. Municipal bond yields are attractive based on historical relationships relative to U.S. Treasuries.  The comparative "cheapness" broadens the potential investor base on a taxable- equivalent basis. Sustained investor demand for government debt could be a market prop going forward.

2. Municipal bond new-issuance is contracting.  Net supply is estimated to be $24 billion (8%) lower by street estimates versus 2013.

3. Retail demand is increasing. According to Lipper Analytics, $1.78 billion of inflows have gone into tax-exempt funds YTD (through May 7), with most of the purchasing occurring in recent weeks.

4. The "capitulation" trade might be unfolding.  Dramatic declines in global bond yields since the beginning of the month suggest investors might be throwing in the towel on the expectation for both rising rates and stock prices. While still too early to tell, the old stock adage, "sell in May and go away" might be unfolding once again in 2014.

5. The peak municipal market reinvestment period is approaching.  Historically, the largest reinvestment of coupons and maturing bonds occurs in the months of June-August.  According to JP Morgan, $10 billion will need to be reinvested this summer, equivalent to two-months of new tax-exempt issuance.

6. Property and casualty insurers will likely increase buying of tax-exempt debt due to the roll-off of tax loss carry forwards incurred during the financial crisis and the need to reinvest the maturity  proceeds of significant bond purchases made between 2004 and 2008. 

The move to lower tax-exempt rates over the past several months has initiated a move by new-issue underwriters to issue bonds bearing lower coupons.  Potentially, this could impact liquidity and adversely impact the pricing of these securities should they become subject to the "de minimis" tax. Investors should be cognizant.  We prefer the purchase of premium to discount bonds. 

Source: SMC FIM and Thomson Reuters 

Credit update:                                                                 

Puerto Rico and Detroit 

The news out of Puerto Rico continues to be mixed.  On the positive side, the unemployment rate on the island continues to decline.  Governor Padilla has announced a $6.9 billion balanced budget proposal for 2015 that calls for $1.4 billion in spending cuts and no deficit financing.  While the proposal is light on specifics, a combination of economic growth initiatives and austerity measures are proposed. No layoffs or new taxes are anticipated. Notably absent from the plan is any discussion of a possible restructuring of the Commonwealth or any of its agencies, although the government announced that it had recently hired a restructuring specialist. 

Negative news has come from the Puerto Rico Supreme Court, which struck down many cost-saving reforms legislated last year to address the high pension costs embedded in the Teachers' Retirement System.  In addition, the Commonwealth reported an anemic 0.1% growth rate in the first quarter.  Although the economy is still contracting, it is doing so at a decelerating rate.  Adding to the negative news, the government's revenues were 4.4% below projections through April. By comparison, revenues through March had been 1.25% above projections. 

In recent weeks Detroit has made progress toward an exit from bankruptcy by striking deals with pensioners and unlimited-tax general obligation bondholders (UTGO).  The feasibility and final outcome of Detroit's bankruptcy plan remains highly debatable.  To address this question, the presiding bankruptcy judge has engaged a municipal finance expert witness and a court consultant.  A trial on the final plan is now scheduled to begin in late July. 

The tentative settlement with the UTGO bondholders would have the City pay 74 cents on the dollar or approximately $388 million on allowed aggregate claims.  The judge has ordered mediation sessions between the City and its creditors to continue.  If the City is unable to settle with its remaining creditors, it could consider asking the court for a "cram down". A cram down would allow for confirmation of a plan of adjustment without the agreement of creditors. 

 

Disclosures 

The information provided in this commentary is not intended to be a complete summary of all available data. Certain information contained herein has been obtained from published sources and/or prepared by sources outside SMC Fixed Income Management (“SMC FIM”), a division of Spring Mountain Capital, LP, and certain information contained herein may not be updated through the date hereof. While such sources are believed to be reliable, no representations are made as to the accuracy or completeness thereof by SMC FIM or any of their respective affiliates, directors, officers, employees, partners, members or shareholders, and none of the former assumes any responsibility for the accuracy or completeness of such information. Nothing contained herein shall be relied upon as a promise or representation as to past or future performance. 

This commentary does not constitute an offer to sell or a solicitation of an offer to purchase securities, or any other product sponsored or advised by SMC FIM or its affiliates, nor does it constitute an offer or a solicitation to otherwise provide investment advisory services.  It should not be assumed that any of the security transactions listed were or will prove to be profitable, or that the investment recommendations we make in the future will be profitable.   

Statements contained in this commentary that are not historic facts are based on current expectations, estimates, projections, opinions and beliefs of SMC FIM. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Unless specified, any views reflected herein are those of SMC FIM and are subject to change without notice. SMC FIM is not under any obligation to update or keep current the information contained herein. 

This commentary does not take into account any particular investor's investment objectives or tolerance for risk. The information contained in this commentary is presented solely with respect to the date of its preparation, or as of such earlier date specified in it, and may be changed or updated at any time without notice to any of the recipients of it (whether or not some other recipients receive changes or updates to the information in it). 

No assurances can be made that any aims, assumptions, expectations, and/or objectives described in this commentary will be realized. None of the authors, SMC FIM, or any shareholders, partners, members, managers, directors, principals, personnel, trustees, or agents of any of the foregoing shall be liable for any errors (to the fullest extent permitted by law and in the absence of willful misconduct) in the information, beliefs, and/or opinions included in this commentary or for the consequences of relying on such information, beliefs, or opinions. 

Neither this commentary, nor any of the contents hereof, may be reproduced or used for any other purpose, or transmitted or disclosed in whole or in part to any third parties, in each case without the prior written consent of SMC FIM.

Copyright © 2014 Spring Mountain Capital, LP.  All rights reserved.

 

[description] => Rarely do the financial markets provide the double treat of simultaneously rising equity valuations and falling bond yields. Almost midway through the second quarter of 2014, key stock indices reached new all-time highs while global bond yields have retreated to levels not seen in over six months. Something has to give: either stock prices retreat or yields rise. Right? At least this is the popular assumption supported by classic economic rationale for a normal investment environment. [author] => Michael Smith, Bob Meyer [legacyinterface_firm_id] => 484 [published_on] => 2014-05-30 [digest_date] => 2014-05-30 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-30 20:15:33 [created_by] => 948 [modified_on] => 2014-05-30 20:24:50 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 756 [hits] => 0 ) [1] => stdClass Object ( [legacyinterface_commentary_id] => 692 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13947 [apv_conversation_id] => [content_type] => market-commentary [title] => Weekly Economic Commentary [slug] => nt_053014 [fulltext] =>
I recently returned from my annual tour of our offices in the Asia-Pacific region. Two weeks, eight cities, 54 hours in flight and one suitcase. When I got home, my clothes burst out of the bag and marched into the washing machine on their own.

The schedule sounds grueling, but the quality of the conversations kept my energy at a very high level throughout. It’s always good to get a close-up of key markets to complement the wide-angle view one gets from a distance. Following are some impressions and themes that emerged from the dozens of meetings that took place during the journey.
  • The biggest question I took to Asia was whether China was headed for a hard landing. Those concerns were echoed loudly by clients in New Zealand and Australia. But as I got closer to the Chinese border, there was considerably more confidence that the challenges facing Beijing are manageable. 

    Australia and New Zealand have felt the impact of China’s slowing manufacturing sector, and those I spoke with in those countries asked tough questions about the country’s financial stability. To most Asians, however, the downshift in Chinese economic growth seems quite normal. They noted that recent readings on Chinese activity seem to be stabilizing, and they contended that the transition to a more sustainable level and composition of growth is being carefully choreographed. 

     

    Chinese real estate construction clearly has slowed,, and Chinese real estate prices are declining in some areas. Officials there are very much aware of this situation and understand how it might progress. (They are students of the U.S. experience of a decade ago.) They have immense reserves that could be used to fill any cracks that might emerge in their financial system. 

    I was reminded that China has dealt with a series of developing pains successfully over the past three decades and that policy-setting is not hindered by the messiness of multi-party politics. The current economic strategy combines selective short-term stimulus with long-term reform. 

    I left somewhat reassured but still wary. I remember analysts in the United States (including me) calming foreign observers in the midst of our housing boom, suggesting that the challenge was both well-understood by American policy-makers and manageable in scale. Those proved to be famous last words. 

  • The trip coincided with the one-year anniversary of Ben Bernanke’s hint that the Federal Reserve might begin tapering its asset purchases. That statement triggered very sharp market reactions that were particularly acute for some emerging markets. 

    After several months of malaise, equity markets in emerging Asia have recovered somewhat. Capital flows have resumed, and economic prospects seem solid. 

     

    Emerging Asian economies have held the lessons of their 1997-98 crisis closely, and the discipline borne of that experience has encouraged investors. This stands in contrast to some emerging markets elsewhere in the world that seem to make the same errors repeatedly. 

  • Tensions in Southeast Asia have escalated. Vietnam and China are in conflict over an oil-drilling rig that is anchored in disputed waters; a coup d’état placed the military in control of Thailand; and the sparring between Japan and China shows no sign of abating. I would agree with those who see Asia as a tremendously exciting place for economic development. But regional conflict there has deep historical roots and tends to resurface periodically. Investors will have to roll with those punches. 

    Within countries, the politics of inequality are thick. Developing countries progress unevenly at first (and sometimes for a long while afterward), and the resulting extremes of fortune can destabilize governments. Support for the market mechanism is often a casualty of regime change. 

  • Everywhere I went, there were complaints about housing. Foreign buyers, bearing cash, have been snapping up property at high prices. This has raised concerns over the stability of values and the accessibility of the market to native first-time homebuyers. 


    To curb the enthusiasm, policy-makers in a number of countries have been raising down-payment requirements and tightening lending standards. But these measures matter little to cash buyers. More recently, Singapore and Hong Kong (among others) have increased taxes on the most-expensive properties. 

    Nonetheless, investors continue to flock in. To many of them, purchasing property in foreign capitals diversifies their portfolios across asset classes and currencies. It also serves as a hedge against a significant financial correction or harsher regulation at home. 

    This situation should serve as a cautionary tale for those who would like to apply macro-prudential tools to control financial excess. Cooling overheated markets is a very difficult thing to do. 

  • Australia should be the economic envy of the developed world: no recessions in 22 years; AAA-rated credit; a diverse industrial base; normal levels of interest rates; and very modest levels of national debt. And yet when the Treasurer announced the annual budget earlier this month, he made it seem like the country was on the road to ruin. 

Budget night in Australia is a major event, which prompts many subsequent days and nights of televised debate. (Imagine Americans tearing themselves away from reality shows to debate the nation’s finances… not going to happen.) Wrapped in the discussion of revenue and expense are issues related to education, infrastructure, health, the environment and retirement. 

The last item was the subject of the most angst: Australia faces mounting bills for its aging population, and it needs to address them now while they are still manageable. Encouraging people to work longer, indexing benefits to need, and promoting saving were among the planks in the platform. Kudos to Treasurer Joe Hockey for daring to tackle this challenge publicly; we could use some of that kind of initiative here in the United States. 

The compensation for all of the travel time was some really good food. Barramundi with a view of the Sydney opera house; seafood stew looking out over Hong Kong harbor; lamb with cumin in Beijing; whole fish with red curry in Kuala Lumpur; and Christine’s salad with oranges, walnuts and pomegranate seeds in Balnarring were among the many highlights. I send thanks to my gracious hosts for sharing their ideas, their company and their cuisine. 

My body clock is still centered somewhere between China and Chicago, so I’ve been a little slow at times this week. My partners say that they hardly notice the difference from my normal level of engagement. I’m not sure whether they’re being supportive or snide, but I am looking forward to a little rest this weekend. 

EU Elections: Ripple or Sea Change?

Last weekend’s European Parliament (EP) election generated reams of headlines about a “political earthquake,” yet virtually no market reaction. It’s possible that investors noted that the more-moderate blocs will continue to dominate the legislature. But it’s probable that, like most of the voters, they still don’t see the EP as having much real power. Although little may seem to change in the near term, the surge in support for right-wing populist parties will have an impact on various national political scenes and negative longer term economic and policy consequences at the EU level. 

Another grand coalition of moderate center-left and center-right parties will dominate the next parliament. However, the final tally across all 28 countries saw aggregate support for euro-sceptic parties roughly double to about 20%, giving these parties 141 of the 751 seats. The combination of low turnout (43%) and a proportional representation voting system helped boost support for the extremists. Voters are also much more inclined to support fringe parties in an election that they see as less important to their daily lives. 

It was in countries such as France and the Netherlands – where the impact of the 2008-09 recession still bites – that voters used the EP elections to vent their frustration. Economic performance across Europe remains very uneven, and very tough fiscal choices lie ahead. 

 

At the national level, the big winner was Italian Prime Minister Matteo Renzi. His Democratic Party won a resounding 41% of that country’s EP vote, compared with just 21% for the left-populist Five-Star Movement. After only a few months in office, Renzi effectively has a renewed mandate to keep pushing for economic and political reform. 

The biggest “loser” was French President François Hollande. Already plummeting in national opinion polls, his party was pushed into third place while support for the far-right Front National (FN) surged to 25%. The FN has only two deputies in the national parliament, but its showing in the European vote will further undermine an already-weak administration and make it harder to gather support for his government’s tentative reform program. 

By contrast, Chancellor Angela Merkel’s conservatives claimed first place in Germany’s EP vote, while the euro-sceptic AfD won just 7%. Already at odds on a number of fronts, the EP election has further driven a wedge between Germany and France, the Union’s two pillars.. 

None of the euro-sceptics elected to the EP last weekend will have any direct say in their respective national parliaments. But claiming seats at the EP gives euro-sceptic parties access to more funding and raises their profile at the national level. The results will also shift the national political discourse to the right in countries such as France, Netherlands, Denmark and the United Kingdom, where we can expect to see renewed debates about immigration and welfare policies. 

So what does all this mean for the EU? For the next few months, policy-making will slow even more than is usual after a parliamentary vote. The new European Commission (the EU’s executive arm) must be appointed, along with a new Commission president. The EP is already showing signs of pushing back against the practice of positions being filled through back-room horse-trading among national governments. This could lead to a prolonged stalemate over appointments, which will hardly endear the European politicians to the voters. 

To function as a true Union and unleash their full competitive potential, the 28 countries need a more unified approach to policy-making that tackles the rigid labor and product markets still plaguing some members and begins to reduce chronic high unemployment. The results of this election will likely have the opposite effect. Although elected to a European parliament, the various representatives are beholden to national electorates and national party organizations. A lot of them will now be even more leery of advocating anything that voters back home will see as “more Europe.” They will certainly be in no hurry to propose changes that would need ratification by national parliaments. 

All of which suggests that any new reform proposals will be delayed until at least the end of this year; that moves toward increased fiscal integration will slow even further; and that completion of banking sector reforms could be delayed. Ultimately, it means that the European Central Bank will continue to be the only European institution capable of undertaking meaningful actions. 

The EU did not fall apart in 2009-11, and it will not as a result of these elections. But it will continue to muddle through with ad-hoc responses to crises. Meaningful policy change will continue to occur mostly at the national level – which means some countries (Germany, Netherlands, Sweden, the United Kingdom) will continue to have more competitive economies while others may be left behind.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
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  • We see the UK experiencing a very traditional monetary cycle involving lower mortgage rates, higher house prices and then – hopefully – higher transactions. 
  • The Bank of England can address rising house prices either by raising financing costs via the banking system or by raising interest rates. Markets will watch BoE activity closely. 
  • Our expectation is for a gradual and modest interest rate cycle, with low rates in the UK economy for years to come. Housing may be an overvalued asset, but one that is secularly supported by low rates.

As many of us are aware, there are two most British of conversations – the weather and house prices. Maybe it is because we have just experienced the​ wettest winter since records began in 1910 (according to the UK National Weather Service), or maybe it is because house prices have experien​ced a remarkable renaissance. Once again, the whole nation appears to be focused on the performance of the UK housing market. Jon Cunliffe, the recently appointed Deputy Governor for Financial Stability at the Bank of England (BoE), called housing “the brightest light” on the risk dashboard of the Financial Policy Committee (FPC), while the vast majority of questions at the BoE’s May 2014 Inflation Report press conference centred around the prospects of a bubble having developed in the UK housing market. With that in mind, what is the state of the UK housing market? And, more importantly, what are its investment implications?

Prices are rising faster than volumes
As most readers are aware, UK house prices have been rising strongly for much of the last 12 months, with increases of 10% now common across major house price indices (see Figure 1).

 
We also know that over the long run, house prices cannot continually outpace the rise in household earnings. Given average weekly earnings growth of 1.7% at the time of writing (UK Office of National Statistics as of March 2014), the first obvious point to note is that 10% house price growth cannot be sustained without something truly remarkable happening to average earnings (and frankly, if average earnings were growing at 10%, that would likely present up an even bigger set of problems).

What started it? And, importantly, is it sustainable?
While there is much debate about the cause of the turnaround in the UK housing market, its seems pretty clear that a combination of falling mortgage rates, less systemic risk from Europe and the UK government’s “Help to Buy” scheme have all contributed to the improvement in the housing market (see Figure 2). Although the “Funding for Lending Scheme” at the BoE has also been cited by some as a key stimulant, we believe this has been a less powerful factor than the other reasons we have cited.

 
Indeed, the most recent decline in UK mortgage rates commenced in Q3 2012, shortly after the pinnacle of the eurozone debt crisis and coincident with the subsequent fall in bank funding costs across Europe, including the UK. There are a number of fascinating aspects to Figure 2, some of which we will return to later. For now, let it suffice that we appear to be going through a very traditional monetary cycle involving lower mortgage rates, higher house prices and then – hopefully – higher transactions, greater house building and a growth handoff to the business sector (via higher investment spending, rising productivity and then real wage growth).

To date, the improvement in housing transactions in the UK has been very disappointing, with volumes still barely at levels consistent with previous cycle lows; there is certainly ample scope for transactions to rise. To make the recovery more sustainable, we would need to see higher volumes (and lower price rises would be most welcome). Unfortunately, until the banking system is fully recapitalised, and therefore able to provide additional financing for (risky) new home building, it is hard to see a rapid acceleration in UK housing transactions. This should be a warning to us all. Without a fully rehealed banking system, and absent a government programme to significantly increase social housing projects, it remains likely that prices will continue to take the lion’s share of the improvement in UK housing sentiment.

Are valuations stretched?
There are a number of ways to look at valuations, including house price/earnings ratios, the cost of owning a house compared to renting and housing affordability indices (comparing the proportion of earnings needed to service a mortgage being amongst the most popular indices). We believe that the simple combination of a house price/earnings ratio and an assessment of affordability provides you with enough information to make a reasonable assessment of the current state of the UK housing market.

For starters, the average house currently costs just under five times average earnings.     Figure 3 may suggest that this is not too bad; however, just pause for a moment before drawing that conclusion. For example, current levels are commensurate with the peak ratio seen ahead of the prior UK housing boom in the late 1980s, and we are still some 16% above the average UK house price/earnings ratio of the last 30 years.

 
It is also pretty clear why house prices are rising – mortgage costs as a percentage of disposable income remain low. Mortgage payments on a typical repayment mortgage are just under 30% of disposable income, and have rarely been lower. In short, house prices in the UK are going up because the cost of servicing the debt has been coming down (see Figure 4).

 
What happens when rates start to rise?
All of this raises the obvious question – if house prices are rising as a result of low borrowing costs and improved access to mortgage financing, what happens when those factors reverse? Interestingly, we now have policy tools available to the BoE that can address both of those aspects of housing finance. As part of its tool kit, the FPC has the ability to raise the cost of providing mortgage finance via the banking system, which would in turn restrict supply (and possibly the price). Meanwhile, the Monetary Policy Committee (MPC) retains the blunter tool of raising interest rates. In BoE parlance, the FPC is the “first line of defence”, while the MPC is the “second line of defence”. That basically means we should expect the FPC to try to tighten up access to mortgage financing first before the MPC acts to raise interest rates (which has a broader effect across the economy).

While the activity of the FPC in the months and quarters ahead will undoubtedly prove fascinating, particularly for those interested in both the housing market and the broader markets, it is the activity at the MPC that will prove the most interesting. It is here that we would like to take you back to Figure 2, showing UK mortgage rates alongside the UK swap rate, which you can think of as a broad proxy for the current cost of funds to the banking system. Prior to the global financial crisis, the cost of funds to the banking system equated to the interest rate available on a 75% loan-to-value mortgage. In contrast, post-crisis we have seen mortgage rates come down by much less than swap rates. Given this development, and the fact that house prices look high relative to long-term metrics, it seems sensible to believe BoE Governor Mark Carney’s repeated statements along the lines of “any hikes in official interest rates will be gradual and will have a much lower terminal point than those seen before the crisis”.

New Neutral rates will be a part of the UK environment for years to come
As my colleagues Bill Gross and Richard Clarida elaborated in PIMCO’s recently published May 2014 Secular Outlook, “The New Neutral”, we expect secularly low official interest rates to support growth given continued high levels of aggregate debt. This will most certainly include the UK, where gross levels of debt remain high, the banking system remains under regulatory pressure and the savings rate remains low. As we have seen in the last 12 months, that does not preclude an economic recovery; but it does strongly suggest that the interest rate cycle will be modest and that low rates will be a characteristic of the UK economy for years to come. So, to answer the initial question – do we believe there is a housing bubble? No. An overvalued asset that will be secularly supported by low policy rates? Yes.

As for our view of the broader investment implications, while the UK bond market will go through its usual cycle, investors should get used to low rates for the foreseeable future. Credit selection and “spread product” will remain supported by benign underlying interest rates and a gradually healing economy, while inflation will be underpinned by modest (but respectable) domestic and global aggregate demand.

As with the global market, mid- to low-single-digit total returns for bonds look likely, which together with any PIMCO alpha should be sufficient to create the potential for a relatively attractive real return. It may not sound like much, but for a fairly low risk asset in an economy likely to grow at 2%–2.5% in real terms over the secular horizon, this is not such a bad deal.


All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investme​nts may be worth more or less than the original cost when redeemed. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world.

©2014, PIMCO. ​

[description] => We see the UK experiencing a very traditional monetary cycle involving lower mortgage rates, higher house prices and then – hopefully – higher transactions. The Bank of England can address rising house prices either by raising financing costs via the banking system or by raising interest rates. Markets will watch BoE activity closely. Our expectation is for a gradual and modest interest rate cycle, with low rates in the UK economy for years to come. Housing may be an overvalued asset, but one that is secularly supported by low rates. [author] => Mike Amey [legacyinterface_firm_id] => 335 [published_on] => 2014-05-29 [digest_date] => 2014-05-29 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-29 14:11:02 [created_by] => 948 [modified_on] => 2014-05-29 14:13:46 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 737 [hits] => 0 ) [3] => stdClass Object ( [legacyinterface_commentary_id] => 673 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13928 [apv_conversation_id] => [content_type] => market-commentary [title] => A Stealth Recovery [slug] => hightower_052914 [fulltext] =>

In the fall of 2010, I had written that several indicators suggested the U.S. was entering “stealth economic recovery” mode.   This “stealth” recovery coupled with low interest rates and changing demographics were going to usher us into “the age of the Dividend Darlings -- companies that pay sizeable, sustainable, and growing dividends.”  Investors would not only replace their income exposure to lower yielding bonds, but also focus on growing income in the equity market.  At the time, I alluded to “a new select group of large cap stocks” that would “resemble the Nifty Fifty” of the 1970s.  As I promptly implemented a new investment strategy with a focus on total return stocks, which have been big beneficiaries in this environment, there were also many signals that we had entered a secular bull market in equities.  In my view, not much has changed since that time.  In fact, in the near term, there is little that points to an economy in decline or an equity market headed for ‘impending doom’.  Although there is no shortage of pundits predicting the next “big correction”, I maintain that we are headed for better times (not worse) in both the economy and stock market.

 Investment strategist Richard Bernstein recently wrote, “Bear markets are made of tight liquidity, significantly deteriorating fundamentals, and investor euphoria.  Although the Fed is starting to reverse course, there are no signs yet of a significant tightening of liquidity.  Rather, the data are beginning to suggest that private sector credit growth is starting to replace the Fed as the provider of liquidity.” [i]  Although treasury yields have come down, credit spreads have tightened as well, which is significant and a potential signal of stronger growth ahead.  Market strategist Dave Rosenberg recently highlighted some improving data points that suggest the economic backdrop is not the main driver of lower treasury yields.  “Jobless claims are now below 300k for the first time since mid-2007 and we have just experienced three months straight of 200k+ payroll gains (last time that happened in the last cycle was early 2006).” [ii] Furthermore, he highlights the improvement of the Dow Jones Transport Index, which just recently hit a new high.  Again, these data points suggest a strengthening (not worsening) economy. 

As one journalist put it, “Despite calls for a big correction, some analysts say the stock market may already be correcting—it's just going sideways instead of down.” [iii]  This may be a key indicator of the strength of the equity market.  As the momentum (or “story” stocks) sold off from their peak in March, a rotation ensued in which investors sold “momentum” in order to buy large cap blue chip companies.  This rebalancing speaks to the overall health of the stock market.  Perhaps some investors are slowly realizing that one does not have to pay massive premiums to obtain growth, as the growth universe has expanded exponentially in the present bull market.  Nevertheless, while investors try to navigate the market, I continue to find opportunities.  As the American writer Gertrude Stein once said, “For a very long time everybody refuses and then almost without a pause almost everybody accepts.”

[i] Richard Bernstein. Eaton Vance. Worried about the Downside. May 2014.

[ii] David Rosenberg. Gluskinsheff. Breakfast with Dave. May 21, 2014.

[iii] Pratti Domm. CNBC. Why stocks could be in a sideways correction. May 21, 2014.

The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC.  This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower or its affiliates.  This is not an offer to buy or sell securities, and HighTower shall not in any way be liable for claims related to this writing, and makes no expressed or implied representations or warranties as to its accuracy or completeness.     

Pamela Rosenau, Managing Director and Chief Equity Market Strategist at HighTower and Chief Investment Officer at the Rosenau Group has over 30 years of experience in the financial industry. Ms. Rosenau focuses on equity portfolio management strategies. As a result of her extensive knowledge and expertise in the equity markets, she was named the Equity Market Strategist for HighTower. In addition to this role, she performs due diligence on the firm's third party research relationships and continues to add, monitor, and prune research providers where necessary. Prior to joining HighTower she worked for various sell-side firms beginning her tenure at Wertheim & Co./Schroders Plc.

Ms. Rosenau was ranked #14 in Barron's 2013 Top 100 Women Financial Advisors. She was also chosen for Barron's 2014 Top 1,200 Advisors list, ranking #52 out of all financial advisors in California. Ms. Rosenau holds series 7, 63, and 65 licenses. 
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There can be little doubt that Thomas Piketty's new book Capital in the 21st Century has struck a nerve globally. In fact, the Piketty phenomenon (the economic equivalent to Beatlemania) has in some ways become a bigger story than the ideas themselves. However, the book's popularity is not at all surprising when you consider that its central premise: how radical wealth redistribution will create a better society, has always had its enthusiastic champions (many of whom instigated revolts and revolutions). What is surprising, however, is that the absurd ideas contained in the book could captivate so many supposedly intelligent people.  

Prior to the 20th Century, the urge to redistribute was held in check only by the unassailable power of the ruling classes, and to a lesser extent by moral and practical reservations against theft. Karl Marx did an end-run around the moral objections by asserting that the rich became so only through theft, and that the elimination of private property held the key to economic growth. But the dismal results of the 20th Century's communist revolutions took the wind out of the sails of the redistributionists. After such a drubbing, bold new ideas were needed to rescue the cause. Piketty's 700 pages have apparently filled that void.

Any modern political pollster will tell you that the battle of ideas is won or lost in the first 15 seconds. Piketty's primary achievement lies not in the heft of his book, or in his analysis of centuries of income data (which has shown signs of fraying), but in conjuring a seductively simple and emotionally satisfying idea: that the rich got that way because the return on invested capital (r) is generally two to three percentage points higher annually than economic growth (g). Therefore, people with money to invest (the wealthy) will always get richer, at a faster pace, than everyone else. Free markets, therefore, are a one-way road towards ever-greater inequality.

Since Pitketty sees wealth in terms of zero sum gains (someone gets rich by making another poor) he believes that the suffering of the masses will increase until this cycle is broken by either: 1) wealth destruction that occurs during war or depression (which makes the wealthy poorer) or 2) wealth re-distribution achieved through income, wealth, or property taxes. And although Piketty seems to admire the results achieved by war and depression, he does not advocate them as matters of policy. This leaves taxes, which he believes should be raised high enough to prevent both high incomes and the potential for inherited wealth.

Before proceeding to dismantle the core of his thesis, one must marvel at the absurdity of his premise. In the book, he states "For those who work for a living, the level of inequality in the United States is probably higher than in any other society at any time in the past, anywhere in the world." Given that equality is his yardstick for economic success, this means that he believes that America is likely the worst place for a non-rich person to ever have been born. That's a very big statement. And it is true in a very limited and superficial sense. For instance, according to Forbes, Bill Gates is $78 billion richer than the poorest American. Finding another instance of that much monetary disparity may be difficult. But wealth is measured far more effectively in other ways, living standards in particular.

For instance, the wealthiest Roman is widely believed to have been Crassus, a first century BC landowner. At a time when a loaf of bread sold for ½ of a sestertius, Crassus had an estimated net worth of 200 million sestertii, or about 400 million loaves of bread. Today, in the U.S., where a loaf of bread costs about $3, Bill Gates could buy about 25 billion of them. So when measured in terms of bread, Gates is richer. But that's about the only category where that is true.

Crassus lived in a palace that would have been beyond comprehension for most Romans. He had as much exotic food and fine wines as he could stuff into his body, he had hot baths every day, and had his own staff of servants, bearers, cooks, performers, masseurs, entertainers, and musicians. His children had private tutors. If it got too hot, he was carried in a private coach to his beach homes and had his servants fan him 24 hours a day. In contrast, the poorest Romans, if they were not chained to an oar or fighting wild beasts in the arena, were likely toiling in the fields eating nothing but bread, if they were lucky. Unlike Crassus, they had no access to a varied diet, health care, education, entertainment, or indoor plumbing.

In contrast, look at how Bill Gates lives in comparison to the poorest Americans. The commodes used by both are remarkably similar, and both enjoy hot and cold running water. Gates certainly has access to better food and better health care, but Americans do not die of hunger or drop dead in the streets from disease, and they certainly have more to eat than just bread. For entertainment, Bill Gates likely turns on the TV and sees the same shows that even the poorest Americans watch, and when it gets hot he turns on the air conditioning, something that many poor Americans can also do. Certainly flipping burgers in a McDonald's is no walk in the park, but it is far better than being a galley slave. The same disparity can be made throughout history, from Kublai Khan, to Louis XIV. Monarchs and nobility achieved unimagined wealth while surrounded by abject poverty. The same thing happens today in places like North Korea, where Kim Jong-un lives in splendor while his citizens literally starve to death.

Unemployment, infirmity or disabilities are not death sentences in America as they were in many other places throughout history. In fact, it's very possible here to earn more by not working. Yet Piketty would have us believe that the inequality in the U.S. now is worse than in any other place, at any other time. If you can swallow that, I guess you are open to anything else he has to serve. 

All economists, regardless of their political orientation, acknowledge that improving productive capital is essential for economic growth. We are only as good as the tools we have. Food, clothing and shelter are so much more plentiful now than they were 200 years ago because modern capital equipment makes the processes of farming, manufacturing, and building so much more efficient and productive (despite government regulations and taxes that undermine those efficiencies). Piketty tries to show that he has moved past Marx by acknowledging the failures of state-planned economies.

But he believes that the state should place upper limits on the amount of wealth the capitalists are allowed to retain from the fruits of their efforts. To do this, he imagines income tax rates that would approach 80% on incomes over $500,000 or so, combined with an annual 10% tax on existing wealth (in all its forms: land, housing, art, intellectual property, etc.). To be effective, he argues that these confiscatory taxes should be imposed globally so that wealthy people could not shift assets around the world to avoid taxes. He admits that these transferences may not actually increase tax revenues, which could be used, supposedly, to help the lives of the poor. Instead he claims the point is simply to prevent rich people from staying that way or getting that way in the first place.

Since it would be naive to assume that the wealthy would continue to work and invest at their usual pace once they crossed over Piketty's income and wealth thresholds, he clearly believes that the economy would not suffer from their disengagement. Given the effort it takes to earn money and the value everyone places on their limited leisure time, it is likely that many entrepreneurs will simply decide that 100% effort for a 20% return is no longer worth it. Does Piketty really believe that the economy would be helped if the Steve Jobses and Bill Gateses of the world simply decided to stop working once they earned a half a million dollars?

Because he sees inherited wealth as the original economic sin, he also advocates tax policies that will put an end to it. What will this accomplish? By barring the possibility of passing on money or property to children, successful people will be much more inclined to spend on luxury services (travel and entertainment) than to save or plan for the future. While most modern economists believe that savings detract from an economy by reducing current spending, it is actually the seed capital that funds future economic growth. In addition, businesses managed for the long haul tend to offer incremental value to society. Bringing children into the family business also creates value, not just for shareholders but for customers. But Piketty would prefer that business owners pull the plug on their own companies long before they reach their potential value and before they can bring their children into the business. How exactly does this benefit society?

If income and wealth are capped, people with capital and incomes above the threshold will have no incentive to invest or make loans. After all, why take the risks when almost all the rewards would go to taxes? This means that there will be less capital available to lend to businesses and individuals. This will cause interest rates to rise, thereby dampening economic growth. Wealth taxes would exert similar upward pressure on interest rates by cutting down on the pool of capital that is available to be lent. Wealthy people will know that any unspent wealth will be taxed at 10% annually, so only investments that are likely to earn more than 10%, by a margin wide enough to compensate for the risk, would be considered. That's a high threshold.

The primary flaw in his arguments are not moral, or even computational, but logical. He notes that the return of capital is greater than economic growth, but he fails to consider how capital itself "returns" benefits for all. For instance, it's easy to see that Steve Jobs made billions by developing and selling Apple products. All you need to do is look at his bank account. But it's much harder, if not impossible, to measure the much greater benefit that everyone else received from his ideas. It only comes out if you ask the right questions. For instance, how much would someone need to pay you to voluntarily give up the Internet for a year? It's likely that most Americans would pick a number north of $10,000. This for a service that most people pay less than $80 per month (sometimes it's free with a cup of coffee). This differential is the "dark matter" that Piketty fails to see, because he doesn't even bother to look.

Somehow in his decades of research, Piketty overlooks the fact that the industrial revolution reduced the consequences of inequality. Peasants, who had been locked into subsistence farming for centuries, found themselves with stunningly improved economic prospects in just a few generations. So, whereas feudal society was divided into a few people who were stunningly rich and the masses who were miserably poor, capitalism created the middle class for the first time in history and allowed for the possibility of real economic mobility. As a by-product, some of the more successful entrepreneurs generated the largest fortunes ever measured. But for Piketty it's only the extremes that matter. That's because he, and his adherents, are more driven by envy than by a desire for success. But in the real world, where envy is inedible, living standards are the only things that matter. 

© Euro Pacific Capital

[description] => There can be little doubt that Thomas Piketty's new book Capital in the 21st Century has struck a nerve globally. In fact, the Piketty phenomenon (the economic equivalent to Beatlemania) has in some ways become a bigger story than the ideas themselves. [author] => Peter Schiff [legacyinterface_firm_id] => 137 [published_on] => 2014-05-29 [digest_date] => 2014-05-29 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-29 14:19:52 [created_by] => 948 [modified_on] => 2014-05-29 14:20:02 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 739 [hits] => 0 ) [5] => stdClass Object ( [legacyinterface_commentary_id] => 675 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13930 [apv_conversation_id] => [content_type] => market-commentary [title] => Thailand’s Tensions, and Resilience [slug] => franklin_052914 [fulltext] =>

Thailand’s imposition of martial law on May 20 came after months of protests and threats of violence between two opposing sides—the anti-government group called the People’s Democratic Reform Committee (PDRC), known as the “yellow shirts,” and the pro-government group called the United Front for Democracy against Dictation (UDD), known as the “red shirts.” The PDRC demanded for the government to step down to pave the way for an appointed government. It vowed to escalate the protests until their demands were met, while UDD and the government condemned the PDRC’s ultimatum and insisted on new elections. Risks of confrontation and violence were rising—and seemingly inevitable.

The imposition of martial law came as no surprise to us, especially given Thailand’s past record of the army’s intervention. We believe martial law could prove a temporary solution as it empowers the military to take control of the country’s security and safety and proactively prevent violence and clashes between the two opposing sides. In our view,  the Thai people will need to come together and decide on a coherent and compromised solution. We believe a resolution will eventually be reached given the resilient nature of the country.

The military coup in Thailand seemed designed to move the country out of what had developed into a political deadlock. The Thai Army now has the power to appoint a government that will likely help reform the country similar to what happened during 2006.  Of course we need to monitor the situation, particularly in the case of the “red shirts,” whose leader has now been deposed.

Thailand is in the throes of dramatic change and the recent announcement of a military coup is another indication of these changes. As we see it, the positive news is that with the introduction of military rule, the civil environment should be stabilized with no significant disruption of normal business operations. That said, it will take some time to reintroduce civil rule and this will likely require a revision of the country’s constitution acceptable to all parties, and another cycle of elections.

Our investments in Thailand, as all of our investments, are made based on a long-term view. We believe the positive drivers of long-term growth for Thailand remain in place, including a very competitive business sector and Japanese investment, as well as the potential for growth from the increasing integration of Thailand’s regions and the neighboring markets of Myanmar (also known as Burma), Cambodia and Laos into the global economic system.

The prognosis for Thailand is positive, in our view, given that direct foreign investors want stability in the country. The reality of the situation as we see it is that an elective government seems difficult to achieve today. We will have to continue to wait and see which government is installed next. During this period, we expect some ongoing short-term market volatility but we would not expect much disruption in existing company operations.

From a long-range view, we think many companies will be able to survive and prosper in Thailand. We do believe cooler heads should prevail over time, and the more positive economic trends Thailand has seen before the coup could return, including rising per-capita incomes. Thailand has a large middle class and a growing consumer population, which we believe bodes well for the economy going forward. As investors, we have been focusing on consumer goods and services, including banks and property companies, as people move to the cities and require housing.

We believe there will be continuing uncertainty in Thailand that could keep many investors at bay until there is more clarity and stability in the political environment. Tourism could likewise be affected if tensions continue to escalate. Nevertheless, we don’t believe existing company operations are likely to be greatly interrupted, and we would view declines in certain Thai stocks as an opportunity to look for selective bargains there. Many Thai corporations have historically managed to weather various bouts of political upheaval and even thrive in spite of them, proving the strength and resilience of the Thai people.

0514_Thailand_SET2002

Dr. Mobius’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risks, including possible loss of principal. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Currency rates may fluctuate significantly over short periods of time and can reduce returns.

© Franklin Templeton

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Is college worth it? It’s not an uncommon question these days, especially with soaring college costs, ballooning student debt levels and higher unemployment. But research shows that pursuing a college degree can result in far more than just a diploma.

Better Days Ahead

College isn’t cheap. The price of higher education has increased exponentially in the past couple of decades. And despite improving unemployment data, many members of the younger working-age population are without jobs. Realities like these have left many second-guessing the wisdom of going to college, but the return on investment for college graduates is pretty significant.

According to CollegeStats.org, college graduates enjoy numerous benefits, including better pay throughout their lifetimes, lower unemployment rates and more fulfilling careers than those without college degrees. Jobs requiring college degrees, on average, pay better than those that don’t, and those who make enough money to make ends meet are happier.

Life Beyond the Diploma

College graduates can look beyond the benefits of a paycheck and a career. They also enjoy stronger marriages, longer life expectancies and a better overall quality of life. College grads live an average of five years longer than those who haven’t completed high school, according to a report by the Robert Wood Johnson Foundation’s Commission to Build a Healthier America. Men see the most benefit, living an average of 6.8 years longer. College grads also have healthier lifestyles, exercising more, eating better and being more likely to avoid smoking.  

More Bang for the College Buck

Although saving for college slipped as a priority during the last global recession, investors haven’t lost complete faith in the college promise. Recent data from Sallie Mae’s annual report, “How America Saves for College,” points to a resurgence in college savings. And now that many investors have rebuilt their retirement nest eggs, they’re upping their college savings efforts. Total college savings per family are over $15,000, up from just under $12,000 last year.

This news couldn’t have come at a better time. This past tax season may have brought investors an unpleasant—and unexpected—surprise. A new Medicare surtax was implemented, which means certain investors faced up to a 4% additional tax on their net investment income.  But some items don’t count as investment income, including tax-advantaged college savings.  Forewarned is forearmed.

Higher Education Lasts a Lifetime  

A college education isn’t fleeting; a degree is for life. Although the cost of tuition and the uncertain jobs picture can be daunting, investing in a college degree now can lead to a happier, brighter future.

The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.

Christopher Thompson is Senior Managing Director and Head of the US Retail Client Group at AllianceBernstein (NYSE:AB).

© AllianceBernstein

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NEW HAVEN – The temptations of extrapolation are hard to resist. The trend exerts a powerful influence on markets, policymakers, households, and businesses. But discerning observers understand the limits of linear thinking, because they know that lines bend, or sometimes even break. That is the case today in assessing two key factors shaping the global economy: the risks associated with America’s policy gambit and the state of the Chinese economy.

Quantitative easing, or QE (the Federal Reserve’s program of monthly purchases of long-term assets), began as a noble endeavor – well timed and well articulated as the Fed’s desperate antidote to a wrenching crisis. Counterfactuals are always tricky, but it is hard to argue that the liquidity injections of late 2008 and early 2009 did not play an important role in saving the world from something far worse than the Great Recession.

The combination of product-specific funding facilities and the first round of quantitative easing sent the Fed’s balance sheet soaring to $2.3 trillion by March 2009, from its pre-crisis level of $900 billion in the summer of 2008. And the deep freeze in crisis-ravaged markets thawed.

Click here to read more.

© Project Syndicate

[description] => It is often said that a crisis should never be wasted: Politicians, policymakers, and regulators should embrace the moment of deep distress and take on the heavy burden of structural repair. China seems to be doing that; America is not. [author] => Stephen Roach [legacyinterface_firm_id] => 345 [published_on] => 2014-05-29 [digest_date] => 2014-05-29 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-29 15:53:48 [created_by] => 948 [modified_on] => 2014-05-29 15:53:58 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 742 [hits] => 0 ) [8] => stdClass Object ( [legacyinterface_commentary_id] => 678 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13933 [apv_conversation_id] => [content_type] => market-commentary [title] => Pending Home Sales Can't Blame The Weather For The Latest Miss [slug] => gavekal_052914 [fulltext] =>

Pending home sales rose by only 0.4% in April vs estimates of a 1% month-over-month gain. Pending home sales are down over 9% year-over-year. If you are living in the West or the Northeast than that decline looks great compared to fall they are experiencing in those regions. The West is down 15% year-over-year and the Northeast is down 12% year-over-year. The silver lining is that pending home sales is suggesting a gain over the coming months for existing home sales perhaps back to the 5 million annualized level. Perhaps if we continue to get a decline in bond yields like we did yesterday (the 10-year is down another 3 bps so far today) then lower mortgage rates will incentive more buyers back into the market.

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© GaveKal Capital

[description] => Pending home sales rose by only 0.4% in April vs estimates of a 1% month-over-month gain. Pending home sales are down over 9% year-over-year. If you are living in the West or the Northeast than that decline looks great compared to fall they are experiencing in those regions. [author] => Team [legacyinterface_firm_id] => 173 [published_on] => 2014-05-29 [digest_date] => 2014-05-29 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-29 16:53:43 [created_by] => 948 [modified_on] => 2014-05-29 16:53:59 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 743 [hits] => 0 ) [9] => stdClass Object ( [legacyinterface_commentary_id] => 666 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13921 [apv_conversation_id] => [content_type] => market-commentary [title] => Home Sales Gain: Now Where? [slug] => fortigent_052814 [fulltext] =>

Going into the holiday weekend, equity markets ended the week up with the S&P 500 gaining 1.2%.  The NASDAQ reversed the prior week’s losses, ending last week with a gain of roughly 2.3%.  Of particular note, growth stocks continued their outperformance on the quarter relative to value stocks.  The Russell 3000 Growth index was up 1.6%, exceeding the Russell 3000 Value index’s 1.0% gain.  On the quarter, growth is up 1.3% while value is up 1.0%. 

Housing data last week brought a bit more clarity to the direction of the housing market.  Existing home sales increased 1.3% in April bringing the annualized growth rate to 4.65 million units.  Despite the month-over-month jump in existing home sales, sales are still down over 13% from the July 2013 peak where the annualized growth rate stood at 5.38 million units.  

 

New home sales followed suit rising approximately 6.4% in April.  The jump from 407,000 units to 433,000 units exceeded economists’ estimations, which were calling for an increase to 425,000 units.  However, consistent with existing home sales data, new home sales data still lag their June 2013 peak of 459,000 units.  

 

Despite recent bouts of positive housing data, many are concerned with the direction of the housing market over the next 6-12 months.   Drop-offs in economic data coming out this year have been regularly rationalized as being the result of the unusually harsh winter weather in January and February.  Despite the recent uptick in April’s housing numbers, data dropped off months prior to the unanticipated severe winter weather. 

Housing economists have cited a number of factors that have contributed to the slowdown within the housing market.  Rising interest rates have been cited as a primary culprit over the preceding 18 months.  But, the U.S. 10 year has unexpectedly trended down since the beginning of the year, touching as low as 2.50%.  This has translated into less expensive home loans and, less talked about, improved psyche of underwriters and those alike who observe the movement in the 10-year rate when constructing home loans for potential homebuyers and, subsequently, further home sales growth. 

 

Outsized housing price appreciation has also been cited as a reason for the slowdown as home prices have increased roughly 25% since its bottoming out in March 2012.  Housing prices have recently slowed providing buyers with an attractive buying opportunity as evident by the recent jump in home sales. 

Whatever the reason is for the recent slowdown in the housing market the consumer at large will be crucial for the health of the housing market going forward.  As reported last week, confidence among homebuilders fell in May to its lowest level since May 2013 as measured by the NAHB/Wells Fargo Housing Market index.  Consumer confidence was cited as the biggest drag on homebuilder confidence as “builders are waiting for consumers to feel more secure about their financial situation.”  Personal income growth, which comes out this week, will provide further insight behind the direction of the housing market.

The Week Ahead

This week is full of economic data with the Case-Shiller Home Price index coming out.  Also coming out is data on durable goods orders and consumer confidence.  On tap for later in the week is the second estimate of Q1 GDP, pending home sales, and personal income growth. 

Notable central bank meetings this week include the Central Bank of Brazil and the Central Bank of Egypt. 

About Fortigent

Fortigent, LLC delivers a fully integrated and customizable business-to-business outsourced wealth management solution to banks, trust companies, and independent advisory firms. Services include a comprehensive investment platform with particular expertise in alternative investments, a flexible unified managed account program, and consolidated wealth reporting. Fortigent's web-based portal interface allows access to proposal and rebalancing tools, client portfolio reporting and accounting, as well as industry articles, research papers, and other practice management and business development resources.

The information provided is general in nature and is not intended to be, and should not be construed as, investment, legal or tax advice. Fortigent makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based upon information that Fortigent considers reliable, is not guaranteed as to accuracy or completeness.

Not FDIC Insured No Bank Guarantee May Lose Value 

© Fortigent

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1. Warning: Fed Is Sitting On “Ticking Time Bomb”

2. Why Banks Hold Excess Reserves at the Fed

3. Back to the “Ticking Time Bomb” at the Fed

4. Question: Is the Fed Paying Banks Not to Lend?

5. Dinesh D’Souza to Prison, Jon Corzine Goes Scot-Free

Warning: Fed Is Sitting On “Ticking Time Bomb”

It is very rare for high-ranking Fed officials to issue dire warnings, but that’s exactly what Charles Plosser – the president of the Philadelphia Federal Reserve Bank – did last Tuesday. Mr. Plosser is very concerned about the $2.5 trillion in “excess reserves” that banks have on deposit with the Fed.

Mr. Plosser worries that if the economy strengthens as many expect, borrowing could surge and those excess reserves could pour out of the Fed and “that’s going to put [upward] pressure on inflation.” This is the“ticking time bomb” he warned about. More details to follow…

The Fed “reserve requirement” refers to the amount of cash funds that banks must have on hand each night. Banks can hold reserves either as cash in their vaults or as deposits with the Federal Reserve Bank. The amount (percentage) of the reserve requirement is set by the Fed.

If a bank doesn’t have enough cash on hand to meet its daily reserve requirement, it can borrow from other banks or at the Federal Reserve discount window. The money banks borrow or lend amongst each other to fulfill the reserve requirement is known as the Fed Funds market.

For decades, the Fed paid banks no interest on reserves held at the central bank; however, in late 2008 the Fed began paying banks 25 basis-points (0.25%) annually on deposits. Since then, excess reserves held at the Fed have exploded to a record above $2.5 trillion today.

Much of this money held at the Fed is owned by large banks and financial institutions which are designated as “primary dealers” from whom the Fed has purchased huge amounts of bonds as a part of its massive QE program. These entities have merely chosen to leave a large part of those bond proceeds on deposit with the Fed.

Excess Reserves of Depository Institutions

Excess reserves are money that banks hold over and above the reserve requirement set by the Fed. The main question is, why would banks hold sometimes huge amounts of excess reserves at the Fed for a measly 25 basis-points? You might answer that it’s because 0.25% is better than earning nothing if banks keep the reserves in their own vaults. While that’s true, there’s much more to it than that.

Why Banks Hold Excess Reserves at the Fed

Before we dig into that, let me briefly explain why the Fed decided to pay banks 0.25% interest on reserves held at the central bank. Over four decades ago, economist Milton Friedman recommended that the Fed pay interest to banks and other depository institutions on the reserves they are required to hold against their deposit liabilities.

In 2006, Congress finally granted the Fed authority to pay interest on reserve deposits, but it was not to go into effect until 2011. However, during the financial crisis, the effective date was moved up by three years through the Emergency Economic Stabilization Act of 2008.

On October 6, 2008, the Federal Reserve Board announced that it would begin paying interest on depository institutions’ reserve balances. In 2007 (pre-crisis) total required reserves held at the Fed averaged $43 billion, while excess reserves averaged only $1.9 billion.

Prior to the financial crisis, banks tried to keep excess reserves at the Fed to a minimum. This was typical for the prior 50 years when the Fed did not pay interest on reserves. Historically, banks kept excess reserves at the Fed as low as possible so that they had more money on hand to make profitable loans. The financial crisis changed all of that, and bank lending plunged!

Under normal circumstances, deposits and loans are more-or-less equal across the banking system as a whole. But since 2009 there has been a very significant change. There is a large and growing gap between loans and deposits. So what is causing this?

Banks, households and businesses have been deleveraging. That means they are paying off (or writing off) loans and not taking on more. Damaged banks don’t want to lend, struggling households don’t want to borrow and fearful businesses don’t want to invest. The combination of these three factors meant that both the supply of and the demand for loans were considerably below the levels prior to the financial crisis.

Back to the “Ticking Time Bomb” at the Fed

As I noted above, Charles Plosser, president of the Philadelphia Federal Reserve Bank recently went public with his serious concerns about the record-large $2.5 trillion in excess reserves sitting at the Fed. Mr. Plosser is also a current voting member of the Fed Open Market Committee (FOMC) which sets monetary policy. He is one of the more hawkish members of the Federal Reserve Board, meaning that he has not been a fan of the Fed’s massive QE bond buying or its zero interest rate policy (ZIRP).

To understand why Mr. Plosser would go public with his concerns about the record $2.5 trillion in excess reserves at the Fed, and possibly ruffle feathers among his Fed colleagues, we have to take into consideration how easy it is for banks to remove that money from the Fed and plug it into the economy via loans.

For one, banks have no requirement to keep any excess reserves at the Fed. If they do, they can take it out at any time they wish. Mr. Plosser knows that the Fed has attracted these massive excess reserves in large part because it pays interest on such deposits. Banks would rather earn 0.25% in a risk-free account at the Fed as opposed to nothing if they hold this cash in their vaults.

Plosser points out that these unprecedented excess reserves are currently just sitting at the Fed, basically doing nothing. Part of the reason is that demand for loans has been unusually weak amid an economic recovery that’s the slowest on record since the Great Depression.

“These reserves are not inflationary right now,” Plosser said in a meeting last Tuesday with reporters in Washington. Yet he warned that if the economic recovery strengthens as many expect, borrowing could surge and those reserves could pour out of the Fed. Plosser worries that should this happen, “that’s going to put [upward] pressure on inflation.”

If inflation moves higher, the Fed could be forced to raise interest rates earlier and higher than it would like, which could slam the breaks on the economic recovery. This is the “ticking time bomb” Mr. Plosser is worried about.

Plosser knows that the Fed has often been late in responding to inflation threats in the past. He warned: “One thing I worry about is that if we are late, in this environment, with all these excess reserves, the consequences might be more dramatic than in previous times.”  With over $2.5 trillion in excess reserves parked at the Fed, he worries that a huge amount of money could be lent into the economy, which could drive inflation above the Fed’s 2% target.

And then he went on to say: "As we continue to move closer to our 2 percent inflation goal and the labor market improves, we must be prepared to adjust policy appropriately."

And finally, he said: “Our [current] challenge is subtly different. We have to restrain the pace at which banks lend those reserves out.” [Emphasis mine.]  I’m quite surprised that he said this, but Reuters reported that this statement was part of his prepared remarks for his speech last Tuesday. So he meant to say it.

The question is: What did he mean by that? I thought a lot about that over the holiday weekend. As pointed out earlier, these excess reserves parked at the Fed can be removed whenever the banks so choose. Plosser’s statement above is potentially huge, but it has thus far received very little attention in the financial media.

Question: Is the Fed Paying Banks Not to Lend?

Here’s an unconventional thought. The Fed started paying banks 0.25% in interest at the height of the financial crisis in 2008. While the banks may have needed the money back then, they certainly don’t need it now. So one way to look at this is, the Fed is paying banks not to lend.

Could Mr. Plosser’s comment above about “restrain the pace” of bank lending mean that the Fed is considering increasing the amount of interest it will pay on reserves? I wouldn’t think so, but it’s impossible to know what he meant.

The minutes from the April 29-30 Fed Open Market Committee meeting were released last week. I read them carefully, and there was no mention of increasing the interest rate on reserves held at the Fed. So for now, we simply don’t know what Plosser meant when he said the Fed will have to “restrain the pace” of bank lending.

On a more general note, actions taken by the government often have unintended consequences. In this case, I doubt that Congress expected banks to park over $2.5 trillion in excess reserves at the Fed to earn a risk-free 25 basis-points, rather than lending that money in the economy. Yet that’s where we are.

Personally, I don’t think the Fed should pay interest on reserve deposits. Certainly not on excess reserves. If the Fed wants to reduce the $2.5 trillion in excess reserves, it could simply announce that it will phase-out such interest payments over time, and banks will get the message.

As noted earlier, Fed officials rarely make controversial statements in a vacuum. I don’t believe Plosser’s“ticking time bomb” statement last week was an accident or a rogue comment, even though it was reportedly made in the Q&A period after his prepared speech. What we don’t know is why he said it and what message it was supposed to send.

Finally, the ticking time bomb he warned about may not happen, especially if the economy continues to disappoint. Despite the much weaker than expected 1Q (only 0.1% growth), Plosser still believes the economy will grow by 3% for the year overall. For that to happen, growth must be well above 3% in the 2Q, 3Q and 4Q. I don’t believe that is very likely.

Most forecasters I read are now expecting growth of around 2% for this year. If that is the case, I don’t see banks ramping-up lending in a big way as Plosser suggests. Therefore, I don’t see a stampede of excess reserves out of the Fed. I could be wrong, of course.

Maybe Mr. Plosser will offer some clarification in one of his upcoming speeches.

I’ll stay on this and keep you posted.  

Dinesh D’Souza to Prison, Jon Corzine Goes Scot-Free

Many of you will remember that I repeatedly urged clients and readers to see Dinesh D’Souza’s 2012 movie documentary 2016: Obama’s America. The film focused on President Obama’s upbringing, his past and the origins of his far-left political ideology. It was a fascinating documentary, regardless of your political persuasion.

Yet in January of this year, D’Souza was indicted by the Feds and charged with soliciting two illegal campaign contributions for Republican Senate candidate Wendy Long who ran for the Senate in New York in 2012.

Basically, D’Souza was charged with convincing two friends to donate $10,000 each to Ms. Long’s campaign and then reimbursing them both with personal money. Last Tuesday, D’Souza pled guilty to both charges of campaign finance violations, but he continues to maintain that he was targeted by the Feds over his film documentary that was highly critical of Obama.

While his formal sentencing will not be determined until September, it is very likely that D’Souza will be sentenced to prison for 10-16 months, plus a fine up to $250,000. Since D’Souza pled guilty to the charges, I will not defend him. However, I would like to compare D’Souza’s conviction and pending prison sentence to what happened last year in the case of Jon Corzine’s legal troubles in connection with the bankruptcy of MF Global in 2011.

Corzine, you may recall, was a United States Senator from New Jersey from 2001 to 2006 and was the 54th Governor of New Jersey from 2006 to 2010. He also worked as the CEO of Goldman Sachs during the 1990s. Most recently, he was the CEO of MF Global, a commodity futures clearing firm, from 2010 to 2011.

MF Global went bankrupt in 2011, and a reported $1.5 billion in customer funds went missing. It is widely believed that MF Global, on Corzine’s watch, used customer money to pay losses on its proprietary trading. When MF Global went down, Corzine was charged by the US Commodity Futures Trading Commission (CFTC) in connection with MF’s bankruptcy.

Yet despite the MF Global charges pending against him, Corzine was reportedly one of President Obama’s top fundraising “bundlers” in his 2012 re-election effort.

So how did Corzine’s case turn out? While D’Souza is almost certainly going to prison for $20,000 in illegal campaign contributions, Corzine who oversaw the loss of some $1.5 billion in customer funds at MF Global got off scot-free!

In an announcement last summer, the Justice Department said it was dropping all charges against Corzine. After 18 months of investigation, the criminal probe into Jon Corzine was completely abandoned. The Justice Department said it found no evidence of criminal wrongdoing, even though some $1.5 billion in customer funds were lost during the same period in which Corzine was the CEO.

It is strictly forbidden for clearing firms like MF Global to co-mingle customer segregated accounts with the company’s money, which many believe happened in this $1.5 billion bankruptcy. Customers of the bankrupt firm did not get all their money back.

When the Justice Department dropped the charges last year, there was surprisingly little coverage and certainly no outrage in the media – even in a political climate where members of the Democratic Party’s base were calling for the heads of big bankers and Goldman Sachs alumni, in particular. But Corzine is an“insiders’ insider.”

Perhaps because he has very close friends in the White House, the US Senate, New Jersey and Wall Street, Corzine got a pass for his oversight of the MF Global bankruptcy and the straight-up loss of $1.5 billion of customer money that was used to pay MF’s debts.

In D’Souza’s case, he had enemies in the White House and other corridors of power, so his $20,000 campaign finance crime makes him Public Enemy #1 and he will be going to prison later this year.

Has anyone gone to prison for “Fast & Furious,” the IRS scandal, the NSA spying, etc.? NO.

All I can say is, selective enforcement of the law is a dangerous thing.

Very best regards,

Gary D. Halbert

© Halbert Wealth Management

[description] => It is very rare for high-ranking Fed officials to issue dire warnings, but that’s exactly what Charles Plosser – the president of the Philadelphia Federal Reserve Bank – did last Tuesday. Mr. Plosser is very concerned about the $2.5 trillion in “excess reserves” that banks have on deposit with the Fed. [author] => Gary Halbert [legacyinterface_firm_id] => 191 [published_on] => 2014-05-28 [digest_date] => 2014-05-28 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-28 16:19:22 [created_by] => 948 [modified_on] => 2014-05-28 16:19:33 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 732 [hits] => 0 ) [11] => stdClass Object ( [legacyinterface_commentary_id] => 668 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13923 [apv_conversation_id] => [content_type] => market-commentary [title] => Where’s Molly? [slug] => fpi_052814 [fulltext] =>

It was after midnight. While the sky was clear and the stars were sparkling, there was no moonlight as the moon was new. I walked briskly down the street, but after a long day of sales presentations and meetings, inside I was tired and dragging. On each side of me dark houses loomed. There were no street lights. 

I whistled. I called softly, not wanting to stir the neighbors, up the winding street and back, and then I retraced the trail all over again.

Occasionally I would hear a stirring, a rustling in the brush. And then a barking dog, but it only retreated as I moved closer to the sound.

Once as I walked back toward home, I heard the soft clicking sound of feet upon the roadway behind. I turned. I waited silently. I called out again, but I could see nothing.

It had been fruitless. I trudged home dispirited, but as I turned up the driveway I could hear the phone ringing. I rushed to the door and grabbed the receiver. It was now 1:30 in the morning and it was my neighbor from up the street.

“Got your dog, Jerry,” Steve said. “She was barking outside our back door. I think it’s your Molly.” Much chagrined, I hurried back down the street and collected Molly from a just-awakened friend. Apologizing profusely, I attached a lead to Molly’s collar, removed the useless electronic fence neck band from her, and silently marched the cowering dog back home.

She knew she’d done wrong, but she just couldn’t help herself.

Four days later the crime was repeated. This time it was in broad daylight, as I witnessed Molly’s arch-enemy, the brown squirrel, lure her off our property.

Molly, of course, came up empty handed (empty pawed?) in her pursuit. She then plunged into the thick brush of the wetlands, as I, in turn, pursued her. This, however, proved her undoing. The only easy exit from the wet and muddy thicket led onto the neighbor’s dock, where she was trapped (between water and a hard place) and captured.

And they say that herding cats is difficult!

Of course, this week’s analogy to the stock market should be pretty straightforward. And it works on a couple of levels.

First, the temptation to leave home is always there and some are easily lured away (“squirrel”). Investors flock to risk-managed investment strategies when the market goes through its periodic financial shocks.

In my opinion, that’s the right thing to do. These strategies are designed to minimize the otherwise out-sized stock market losses that occur every three to seven years, wreaking havoc on virtually all investor portfolios. They are meant to protect investors from their worst fears and allow them to return to the better gains normally available in stocks when the latest crisis is abated.

But as the reality of stock market losses for nearly every investor begins to fade from memory, replaced by more and more friends and neighbors enjoying short-term gains (usually just earning back what they have lost), investors are tempted to escape the disciplined bonds of risk-managed investing and take a more speculative romp on the wild side.

When stocks then take their inevitable plunge, they once again seek the safety of some boundaries, and poorer, but not necessarily wiser, the cycle is repeated.

On some level, they know they did wrong, but they just couldn’t help themselves.

That’s the long-term pattern that most investors seem to follow over the full market cycle of rally then bust. Capitulation, then over confidence, and then they return to capitulation yet again.

In the short term, it’s a similar problem, but different. Once burned, investors shy away from equities. Behavioral finance studies show that there are reasons why investors are slow to embrace a new bullish market trend.

The reason is that there is a fundamental difference in the way investors perceive probabilities for gains versus the actual odds of possible returns. For example, a given trend-following strategy may register a profitable trade 50 times out of 100. It still will make money if the gains are large while the losses are small, even though the probability for gains is break even.

Yet studies show that while the odds of a profitable trade in this example are 50%, the average investor will underweight the chance of success. On average, experiments have shown that a 50% probability is viewed as just a 42% chance. That’s just the way our human brains are wired. We overweight small probabilities (the “possibility” effect), and underweight higher probability situations (the “certainty” effect).

Similarly, Molly knows that she gets a small shock every time she crosses over the electronic fence line, yet, she underweights the probability and does it anyway. Maybe that similarity is why dogs are man’s best friend.

Friday the S&P 500 made a new all-time index record high. This occurred despite the fact that negative news stories continued to jet through the daily news cycle, mid-term elections loomed, earnings were just so-so and small cap and tech indexes had just experienced a greater than 10% correction.

Source: Bespoke Investment Group

Source: Bespoke Investment Group

Despite the advice of some (including this columnist) that the long-term up trend continues and to stay the course or, better still, buy the dips, some investors felt the need to flee to cash. Even in the face of multiple new highs this year alone, investor bullish sentiment has been mired in a middling trading range varying just 10% from top to bottom.

Bespoke Investment Group mentioned in its commentary that this has gone on for quite some time (ten weeks, to be exact) and was relatively rare. I thought I’d take a look at what had happened over history during these fairly unusual circumstances.

Source: Bespoke Investment Group

  After 10 weeks
of static bullish sentiment
  All periods
9/1987-2/2014
  1 month
later
2 months later 3 months later   1 month
later
2 months later 3 months later
Average return 1.78% 1.68% 5.52%   0.64% 1.32% 2.01%
Positive periods 26 25 27   844 875 938
Total 37 37 37   1375 1375 1375
Percent positive 70.3% 67.6% 73.0%   61.4% 63.6% 68.2
Worst loss -3.08% -8.59% -5.21%   -28.16 -34.06% -37.64

Chart: Bespoke Investment Group. Weekly data source: Pinnacle Data. Calculations by Flexible Plan Investments, Ltd.

As you can see, the occurrence of such a period of relative stability of investor bullish sentiment has been on average quite bullish in the intermediate term. The gains have been bigger than normal and they have happened more often. Also impressive is the fact that even when the market has upset the odds and retreated instead of advancing, the extent of the downturn has been moderate.

Another interesting chart that I came across this week relates to volatility. The VIX Index is often referred to as the “Fear Index” because it also expresses a view on investor sentiment. The lower the Index the less fearful of the future investors are said to be, while high readings of this option-based indicator are associated with a heightened level of fear.

As the daily chart shows, the VIX closed last week at its lowest level of the year, and, at below 12, one of its lowest levels ever. I checked the history of this relatively rare occurrence as well.

  Six month low in VIX and VIX under 12   All periods
1/1990-2/2014
  1 month
later
2 months later 3 months later   1 month
later
2 months later 3 months later
Average return 0.21% 1.78% 1.94%   0.65% 1.32% 2.02%
Positive periods 30 38 35   3629 3781 3975
Total 48 48 48   5889 5889 5889
Percent positive 62.51% 79.17% 72.92%   61.6% 64.2% 67.5
Worst loss -3.83 -4.56% -3.31%   -28.0% -38% -41%

Chart: Stockcharts.com. Daily data source: Pinnacle Data. Calculations by Flexible Plan Investments, Ltd.

Again, other than a smaller-than-average return in the first month, all of the numbers are equally bullish and the downside risk of being wrong seems limited.

The fact that interest rates continue to trend lower, seasonality remains positive, and we saw breakouts or near breakouts on most indexes last week further supports the bullish case. It would seem to overwhelm the negativity expressed by divergences at the new high in the S&P by measures of market breadth, new highs and lows, and volume, but only time will tell.

However, if you are a client of a dynamic risk-managed investment firm, while these indicators can give comfort and support if your manager is essentially bullish on the market at the present time (like we are), it’s more important that you stay the course, remain at “home,” and follow the advice given.

By quantifying the investment process, the advisor has done all of the work for you. The manager’s methodology has been designed to shift through the indicators and allow the firm to best position your account based on the strategies chosen by you for your individual suitability profile. If your advisor has a long history of success and you have chosen your advisor with care, there is no reason to “run away” when a hazard appears on the trail, or to try something new when an investment “squirrel” darts across your path.

Searching for Molly can be a pain, but finding her is always a joy.

All the best,

Jerry

P.S. – Anyone have an alternative to an invisible fence for a street-wise rescue dog that is much too curious for her own good?

Disclosures

© Flexible Plan Investments

[description] => It was after midnight. While the sky was clear and the stars were sparkling, there was no moonlight as the moon was new. I walked briskly down the street, but after a long day of sales presentations and meetings, inside I was tired and dragging. On each side of me dark houses loomed. There were no street lights. [author] => Jerry Wagner [legacyinterface_firm_id] => 156 [published_on] => 2014-05-28 [digest_date] => 2014-05-28 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-28 16:23:17 [created_by] => 948 [modified_on] => 2014-05-28 16:23:26 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 733 [hits] => 0 ) [12] => stdClass Object ( [legacyinterface_commentary_id] => 669 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13924 [apv_conversation_id] => [content_type] => market-commentary [title] => A Deeper look at Corporate CapEx and Stock Buybacks [slug] => gavekal_052814 [fulltext] =>

Yesterday we analyzed here aggregate capital spending on tangibles for non-financial constituent companies in the MSCI World Index (90% of global investible market cap). We found that CapEx as a % of sales has been extremely steady over the last nine years, fluctuating in a 0.9% range. In 2013 CapEx as a % of sales, at 7.9%, registered the second highest reading over the 9 year period.

Today we thought we'd follow up that quick analysis with a deeper look at corporate use of cash flow from a variety of angles (by region, cap size, with financials, ex financials). We find that no matter how we slice and dice the data we get the same result. The total USD amount of CapEx spending as a percent of either sales or operating cash flow is currently average to above average compared to the last 9 years.

Another point on stock buybacks is the following: yes, some companies have been buying back stock. However, this is primarily a US phenomenon and the allocation of operating cash flow to buying back stock (including for the US) is well below where it was at the end of the last cycle (perhaps not the best comparison, but it is what it is). It does appear that, to a large extent, share buybacks are being financed with debt issuance, but again, not to the same degree, in aggregate, as in 2006-2008. When we break down non-financial North American stocks into two groups (the vary largest 46 and the smallest 530), we find pretty clear evidence that the financing of stock buybacks with debt is concentrated in the smaller subset of companies. The largest 46 companies have bought back a cumulative $473bn in stock from 2011-2013 and issued a cumulative $100bn in new debt. The smallest 530 companies have bought back a cumulative $433bn in stock from 2011-2013 and issued a cumulative $454bn in new debt. Needless to say, we are sure there are more productive uses of cash flow than buying back one's stock, especially at the expense of one's balance sheet.

All companies in the MSCI World Index:

image  



MSCI World ex financials:
image 
 
MSCI North America:
image 
 
North America ex financials:
image 
 
MSCI Europe:
image 
 
MSCI Europe ex financials:
image 
 
MSCI Pacific:
image
 
MSCI Pacific ex financials:
image  


Just the largest 200 companies in the MSCI World Index by market cap (50% of the MSCI World Index):
image 


Smallest 1411 companies in the MSCI World Index:
image
 
MSCI North America largest 46 companies ex financials:
image
 
MSCI North America smallest 530 companies ex financials:
image
[description] => Yesterday we analyzed aggregate capital spending on tangibles for non-financial constituent companies in the MSCI World Index (90% of global investible market cap). We found that CapEx as a % of sales has been extremely steady over the last nine years, fluctuating in a 0.9% range. In 2013 CapEx as a % of sales, at 7.9%, registered the second highest reading over the 9 year period. [author] => Team [legacyinterface_firm_id] => 173 [published_on] => 2014-05-28 [digest_date] => 2014-05-28 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-28 17:44:32 [created_by] => 948 [modified_on] => 2014-05-28 17:44:42 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 734 [hits] => 0 ) [13] => stdClass Object ( [legacyinterface_commentary_id] => 670 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13925 [apv_conversation_id] => [content_type] => market-commentary [title] => Value Offers a Cushion: Why Last Year’s Winners Are Now Losers and Vice Versa [slug] => blackrock_052814 [fulltext] =>

This year, the parts of the market that are struggling are generally those that ran up the most in 2013: biotech, internet companies, and U.S. retailers.  Conversely, some of last year’s worst performers are proving more resilient. Case in point: emerging markets.

As I write in my new weekly commentary, this trend offers a revealing snapshot into the current market environment. Let’s take a deeper look at both examples.

Retailers:  This sector rose sharply in 2013 on optimism over an economic rebound, sending valuations up by roughly 30% over the past 18 months.

Today, however, U.S. consumption is not accelerating as fast as expected, despite an economy that is improving from its first quarter slump. Growth in retail sales is sluggish, rising barely 0.2% a month, roughly half the long-term average. (The exceptions are interest-rate sensitive segments like autos, which have found support in the low interest rate environment.)

As sales have struggled, so have retailers. More evidence came last week as several retailers including Dicks Sporting Goods (DKS), Staples (SPLS), and Best Buy (BBY) reported disappointing earnings or guidance.

Bottom line: Given the lethargic nature of consumer spending, and still elevated valuations on retail stocks, we would remain cautious on retailers and other consumer discretionary companies. Instead, we would favor areas of the market like large and mega-cap companies that offer better value and a potential buffer should volatility return.

Emerging markets: EM investors have recently had to contend with a growing list of geopolitical issues. In Thailand, the army chief took control of the country, declared martial law and suspended the constitution two days later. However, investors took the event in stride — perhaps because it was Thailand’s 12th military coup since 1932 — and Thailand’s stock market only posted a small loss for the week.

Part of the reason for the measured response: EM valuations remain modest compared to developed markets. The price-to-earnings ratio for developed countries has risen nearly 40% over the past two years, while emerging markets are up a more moderate 20%. While EMs are not cheap per se, they offer relative value to developed markets, which helps explain why emerging markets have outperformed developed markets by roughly 4% so far in May.

Bottom line: The fact that EM stocks have withstood the recent geopolitical risks supports the notion that, although they can be volatile, EM equities could offer some relative value in a world in which many asset classes are fairly priced.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. 

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.

Funds that concentrate investments in a single sector will be more susceptible to factors affecting that sector and more volatile than funds that invest in many different sectors. 

iS-12591

© BlackRockhttp://www.blackrockblog.com/

[description] => A trend in markets this year has been the poor performance of last year’s stock market winners, and the resilience of some of last year’s losers. Russ takes a look at what’s behind this trend, specifically with retailers and emerging markets. [author] => Russ [legacyinterface_firm_id] => 50 [published_on] => 2014-05-28 [digest_date] => 2014-05-28 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-28 17:46:36 [created_by] => 948 [modified_on] => 2014-05-28 17:46:50 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 735 [hits] => 0 ) [14] => stdClass Object ( [legacyinterface_commentary_id] => 671 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13926 [apv_conversation_id] => [content_type] => market-commentary [title] => Europe’s Ukrainian Lifeline [slug] => prosyn_052814 [fulltext] =>

NEW YORK – Last weekend’s European Parliament election and presidential election in Ukraine produced sharply contrasting results. Europe’s voters expressed their dissatisfaction with the way that the European Union currently functions, while Ukraine’s people demonstrated their desire for association with the EU. European leaders and citizens should take this opportunity to consider what that means – and how helping Ukraine can also help Europe.

The EU was originally conceived to be an ever-closer association of sovereign states willing to pool a gradually increasing share of their sovereignty for the common good. It was a bold experiment in international governance and the rule of law, aimed at replacing nationalism and the use of force.

Unfortunately the euro crisis transformed the EU into something radically different: a relationship of creditors and debtors in which the creditor countries impose conditions that perpetuate their dominance. Given low turnout for the European Parliament election, and if support for Italian Prime Minister Matteo Renzi’s were added to the anti-EU vote on the left and the right, it could be argued that the majority of citizens are opposed to current conditions.

Click here to read more.

© Project Syndicate

[description] => Europe’s voters recently expressed their dissatisfaction with the way the EU currently functions, while Ukraine’s people demonstrated their desire for association with the EU. European leaders and citizens should take this opportunity to consider what that means – and how helping Ukraine can also help Europe. [author] => George Soros [legacyinterface_firm_id] => 345 [published_on] => 2014-05-28 [digest_date] => 2014-05-28 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-28 18:56:00 [created_by] => 948 [modified_on] => 2014-05-28 18:56:10 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 736 [hits] => 0 ) [15] => stdClass Object ( [legacyinterface_commentary_id] => 661 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13916 [apv_conversation_id] => [content_type] => market-commentary [title] => After India’s Election, Execution takes Center Stage for Debt Markets [slug] => invesco_052714 [fulltext] =>

Financial markets in India have already rallied strongly in anticipation of the overwhelming majority win by incoming Prime Minister Narendra Modi and the Bharatiya Janata Party (BJP). The country’s currency (the Indian rupee) rose 15% from its August peak, while five-year credit default swaps on the State Bank of India (SBI) tightened from a spread of 371 to 207 in the same period. We believe further upside for Indian assets in the longer term depends on the execution of the party’s campaign promises to deliver firm governance and economic- and market-friendly reforms, and to focus on growth, jobs and investment. This will include:

  • Establishing the groundwork for urgently required  infrastructure development.
  • Creating very urgently needed quality jobs for India’s rapidly growing working-age population.
  • Establishing conditions necessary to transform India into a global manufacturing hub.
  • Controlling inflation, currently at 8.6%.

Most positive for debt markets, we think, will be the likely reprieve from rating agencies on the country’s investment-grade sovereign external rating.  We think Standard & Poor’s may eventually revise its outlook on India’s BBB- rating from negative to stable once the new government demonstrates its ability to stabilize growth while maintaining the downward trajectory of its twin fiscal and current account deficits. Moody’s Investors Service, meanwhile, has indicated that an upgrade from its current Baa3 rating is a possibility in the medium to longer term.

In order to successfully placate India’s electorate while maintaining much-needed fiscal consolidation, we think the new administration will need to focus on both improving the general quality of fiscal expenditures  and taking measures to improve fiscal revenues, which stand among the lowest in Asia. Such measures could include revisiting tax reform and selling additional stakes in public sector enterprises.  Equally important, we believe, will be measures aimed at establishing clarity for long-term private investment: cutting red tape, improving transparency in environmental clearances and improving coordination between federal and state governments for large-scale projects.  No less important, we will look for signs that the incoming government will endorse highly respected Reserve Bank of India Governor Raghuram Rajan in his effort to establish credible inflation-targeting despite the necessary near-term side effects of sustained high benchmark interest rates.

During his 13-year tenure as Chief Minister of Gujarat, Mr. Modi built an impressive track record of eliminating the kind of red tape endemic in every layer of government. Nonetheless, his encouraging and much-repeated mantra of “minimum government and maximum governance” points toward what we believe will be much-needed efforts to improve what is one of the world’s worse climates for doing business, to improve the country’s woeful infrastructure and, at the same time, to institute fiscal prudence while also somehow focusing on generating the necessary higher-than-average growth given India’s demographics.

The market favorite BJP won India’s 2014 general election with the likes of a landslide not seen in 30 years. Nonetheless, we believe enforcing the same brand of elusive governance and functionality at the national level is by no means a given – markets will focus keenly on execution every step of the way.

All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is a US distributor for retail mutual funds, exchange-traded funds, institutional money market funds and unit investment trusts. 

Invesco unit investment trusts are distributed by the sponsor, Invesco Capital Markets, Inc. and broker dealers including Invesco Distributors, Inc. These Invesco entities are indirect, wholly owned subsidiaries of Invesco Ltd.

©2014 Invesco Ltd. All rights reserved.

[description] => Financial markets in India have already rallied strongly in anticipation of the overwhelming majority win by incoming Prime Minister Narendra Modi and the Bharatiya Janata Party (BJP). The country’s currency (the Indian rupee) rose 15% from its August peak, while five-year credit default swaps on the State Bank of India (SBI) tightened from a spread of 371 to 207 in the same period. [author] => Jack Deino [legacyinterface_firm_id] => 225 [published_on] => 2014-05-27 [digest_date] => 2014-05-27 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-27 12:52:07 [created_by] => 948 [modified_on] => 2014-05-27 14:22:39 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 726 [hits] => 0 ) [16] => stdClass Object ( [legacyinterface_commentary_id] => 662 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13917 [apv_conversation_id] => [content_type] => market-commentary [title] => Four Market Risks to Focus on This Summer [slug] => blackrock_052714 [fulltext] =>

Equity markets are heading into mid-year with lackluster gains. While few investors have been thrilled with this year’s performance, it could be much worse. We have yet to see a significant correction, equity markets remain within a few percentage points of all-time highs and volatility remains low.

Many clients have been asking: What could change? Or put differently, what could lead to a more severe market correction? So, I figured it was time formy annual look at the market risks that keep me up at night. While there’s a long list of things that could go wrong, here are four that I would focus on for the summer.

  1. Ukraine. There’s no way of knowing how events in Ukraine will play out, but what’s clear is that for now, the market is paying scant attention. Even during last week’s sell-off, market volatility, as measured by the VIX index, never got above 14. An escalation in Ukraine-related violence and more sanctions against Russia don’t appear to be priced into financial markets and would both likely lead to increased selling.
  2. Europe. With many of Europe’s former problem children enjoying all-time low bond yields, it seems a strange time to worry about Europe. However, while bond yields have dropped, risks remain.  Sovereign debt levels continue to climb; growth, while improving, remains anemic; and the currency zone is flirting with deflation. Outside of the economic risks, there are growing political risks. The European parliamentary elections may illustrate just how much damage has been inflicted on the region’s main political parties. For example, while economic conditions in Greece have improved – from abysmal to merely poor – the political situation has not. The government is teetering, with a razor thin two-seat majority.
  1. China. My base case scenario is a modest deceleration in the Chinese economy. So far, while the country’s economic data has been weak, it has conformed to that scenario. That said, the Chinese government is attempting a difficult balancing act: slow down the real estate market and credit expansion without cratering growth. A sharp and unexpected drop in growth would not only pose a risk to China, but with China as the world’s second largest economy, it would pose a risk to the global economy as well.
  1. U.S. Bond Market. Why worry about interest rates with bond yields at six-month lows? Because, as everyone experienced last May, with rates at these levels, bond prices can reverse violently and abruptly. I would focus on two near-term and interrelated risks related to the bond market: a change in Federal Reserve (Fed) language and aggressive selling of bond funds by retail investors. Year-to-date, investors have been piling into bond bunds. However, even a subtle shift in the Fed’s tone could quickly change that pattern. The risk of retail outflows is heightened by the fact that many recent bond buyers are desperately seeking yield rather than committing to the asset class. A turn in rates could produce a quick turn in flows. (You can read more about the potential impact of the end of easy money in a new BlackRock Investment Institute paper I co-wrote, The Disappearing Act.)

To be sure, I do expect equities to move higher over the course of the year. But as I’ve discussed previously, given last year’s extreme multiple expansion, 2014 was always going to be a more difficult year for stocks. Any of the above could quickly turn a difficult year into a bad one.

Sources: Bloomberg, BlackRock research

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.  

iS-12543

© BlackRock

[description] => What could lead to a more severe market correction? While there’s a long list of things that could go wrong in 2014, Russ lists four market risks to pay attention to this summer. [author] => Russ Koesterich [legacyinterface_firm_id] => 50 [published_on] => 2014-05-27 [digest_date] => 2014-05-27 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-27 14:40:25 [created_by] => 948 [modified_on] => 2014-05-27 14:40:40 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 727 [hits] => 0 ) [17] => stdClass Object ( [legacyinterface_commentary_id] => 663 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13918 [apv_conversation_id] => [content_type] => market-commentary [title] => Six Principles for Smart Tax Management [slug] => bernstein_052714 [fulltext] =>

It is well known that taxes began to take a bigger bite out of income for the well-off in 2013. Top marginal tax rates rose, and some exemptions and deductions were phased out. What is less well known is that investors spending from their portfolios—even those investors whose tax rates didn’t rise—may be facing higher tax bills, too.

Historically low interest rates continue to depress the tax-exempt income from municipal bonds, so many investors spending from their portfolios have to sell assets to replace lost income. Given the stock market’s terrific gains over the past five years, selling stocks generally means realizing taxable capital gains, and most investors have few or no tax-loss carryforwards left from the dark days of 2008 and early 2009 to offset those gains.

Thus, smart tax management is more important than ever. Here are six key principles to keep in mind when considering tax-related strategies for 2014. It’s not too soon to begin.

Don’t let the tax tail wag the investment dog. Maximizing after-tax investment returns within the investor’s risk and return objectives should be the goal, not minimizing taxes per se. After all, the best way to minimize taxes is to have no income. Investors who invest their entire portfolio in tax-exempt bonds may pay no tax on their investments, but they are unlikely to obtain the long-term growth they need.

Avoiding tax is permanent; deferring tax just kicks the tax can down the road—possibly to a time when tax rates may be higher. Tax-loss harvesting, while often beneficial, just defers tax to a future year. Sometimes, the transaction costs or bid-ask spreads may eat up most or all of the benefit.

Tax laws change, although not as often as it may seem. It may be prudent not to rely too much on any one tax-related investing or gifting strategy. Roth conversions, charitable remainder unitrusts, donor-advised funds and private foundations are among the often-valuable strategies with legislative risk.

Maintaining liquidity is important. Paying tax up front in a Roth IRA conversion or front-loading gifts to a 529 account may increase long-term after-tax wealth, but both strategies may leave an investor without easy access to needed funds.

Costs matter, too. Some tax-related strategies, such as a charitable remainder unitrust, require up-front or ongoing legal and accounting fees; they are generally most economical when applied to large amounts. Similarly, private foundations may maximize control over philanthropic gifts, but they are generally economical only for very large charitable programs. And today, high guarantee fees make some variable annuities unattractive.

Different taxes may require different strategies. Some strategies address federal income taxes; others address federal gift, estate and generation-skipping transfer taxes, or the many types of state and local taxes. Sometimes, a strategy that reduces one tax may increase another. It’s particularly important to watch the intersection of the income and estate tax regimes.

Every taxpayer’s goals and circum­stances are different. The state you live in, the number of dependents you have, and your tax bracket, total wealth, embedded gains and losses, and time horizon will determine whether these strategies are likely to work for you. 

Bernstein does not offer tax, legal or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decision.

Tara Thompson Popernik, CFA, CFP, is Director of Research for the Wealth Planning and Analysis Group at Bernstein Global Wealth Management, a unit of AllianceBernstein.

© AllianceBernstein

[description] => It is well known that taxes began to take a bigger bite out of income for the well-off in 2013. Top marginal tax rates rose, and some exemptions and deductions were phased out. What is less well known is that investors spending from their portfolios—even those investors whose tax rates didn’t rise—may be facing higher tax bills, too. [author] => Tara Thompson Popernik [legacyinterface_firm_id] => 20 [published_on] => 2014-05-27 [digest_date] => 2014-05-27 [access] => 1 [ordering] => 0 [post_to_apviewpoint] => 0 [post_to_rss] => 1 [post_to_legacy_database] => 1 [enabled] => 1 [created_on] => 2014-05-27 14:42:21 [created_by] => 948 [modified_on] => 2014-05-27 14:42:33 [modified_by] => 948 [checked_out_time] => 0000-00-00 00:00:00 [checked_out] => 0 [asset_id] => 728 [hits] => 0 ) [18] => stdClass Object ( [legacyinterface_commentary_id] => 664 [legacyinterface_template_id] => 9 [legacyinterface_record_id] => 13919 [apv_conversation_id] => [content_type] => market-commentary [title] => Economy Begins to Accelerate While Equities Push Higher [slug] => nuveen_052714 [fulltext] =>

U.S. equities finished higher last week as the S&P 500 advanced 1.3%, snapping a two-week losing streak and ending at a new record high.1 Markets seemed to lack conviction, but the path of least resistance appeared skewed to the upside as momentum for the economic recovery was positive. Technology and consumer discretionary sectors led the run-up, and telecommunications and utilities lagged.2 Chinese manufacturing data surprised to the upside, while concerns about traction in the U.S. housing market recovery received a modest reprieve. Now that the Fed tapering schedule seems set, investors are turning attention to the policy normalization process and a longer-term equilibrium for the fed funds rate.

Many Investors Question the Strength of the Global Recovery

A better tone for economic data provided investors with some relief that the first quarter shortfall in economic growth was a temporary setback largely due to the severe winter weather. As equities rebounded, bond yields rose.3 A relief in equity markets did not erase questions about why U.S. Treasury yields are so low. The core of the answer is that U.S. bond yields are low because growth and inflation are low as well. As the current U.S. recovery approaches the five-year mark, traction is the weakest since World War II. The economy has grown approximately half as much as the average post-war recovery, primarily as a result of deleveraging and investor caution after the major financial crisis.4

Weekly Top Themes

1. GDP for the first quarter is projected to be revised into mildly negative territory this week. In contrast, however, data that have already been released are consistent with acceleration for the second quarter.

2. Consumer interest payments continue to trend lower, which should support better consumer spending.5

3. Bank loans increased at a 10% annual rate over the last three months, and small bank loans grew at a 13% annual rate.6 Growth in bank loans should mean that Fed tapering will not be a headwind to growth.

4. A projected increase of 0.8 points is anticipated for the Manufacturing Purchasing Managers Index (PMI™) for May.7 Overall, manufacturing reports seem generally upbeat and consistent with our view that activity will pick up in the second quarter following an inventory correction.

5. In the primary elections, voters supported the Republican candidates who should create the most competition for Democrats in the November general election. This increases the odds of Republican control of the Senate.

The Big Picture

Crosscurrents in global equity markets over the last few months continue to confound many investors. Some of these currents suggest economic activity is deteriorating, such as the decline in major government bond yields and the outperformance of defensive equity sectors over cyclical sectors (a trend that is starting to reverse). On the other hand, the bounce in commodity prices and related markets, tight spreads between corporate and government bond yields and positive trends in most global equity markets are consistent with continued economic recovery. We remain constructive on economic growth and expect the decline in yields to reverse as growth increases and as investors gain clarity on the path of Fed policy. There is some risk that the Fed’s passive acceptance of lower Treasury yields might eventually spark a sharp rebound in yields, similar to what occurred last spring when the Fed hinted at tapering.

Equity valuations are less compelling than they used to be, following the strong rally over the last two years. Corporate earnings are improving, underscoring that the equity bull market is becoming more advanced. In our view, however, equities remain attractive due to a shortage of compelling alternatives. We also expect the bear market in bonds that began in August 2012 to resume and the grinding equity bull market to persist. Leadership in equities should return to cyclical sectors.

1 Source: Morningstar Direct, as of 5/23/14. 2 Source: FactSet, as of 5/23/14. 3 Source: Morningstar Direct and Bloomberg, as of 5/23/14. 4 Source: Congressional Budget Office, “What Accounts for the Slow Growth of the Economy After the Recession?” November 2012, http://www.cbo.gov; Bureau of Economic Analysis, “Gross Domestic Product - Percent Change from Preceding Period,” 1930 - March 2014, http://bea.gov/national/index.htm#gdp. 5 Source: Federal Reserve Bank of Philadelphia, “Interest Paid by Consumers,” as of 12/31/13, most recent data available, http://www.phil.frb.org/researchand-data/real-time-center/real-time-data/data-files/PINTPAID/ 6 Source: Board of Governors of the Federal Reserve System, “Assets and Liabilities of Commercial Banks in the United States (Weekly), May 23, 2014, http://www.federalreserve.gov/releases/h8/current/ 7 Source: April 2014 Manufacturing ISM Report On Business,® May 1, 2014, http://www.ism.ws/ismreport/mfgrob.cfm.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. Euro STOXX 50 Index is Europe’s leading Blue-chip index for the Eurozone and covers 50 stocks from 12 Eurozone countries. FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. Deutsche Borse AG German Stock Index (DAX Index) is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. FTSE MIB Index is an index of the 40 most liquid and capitalized stocks listed on the Borsa Italiana. Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. Hong Kong Hang Seng Index is a free-float capitalization-weighted index of selection of companies from the Stock Exchange of Hong Kong. Shanghai Stock Exchange Composite is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The MSCI World Index ex-U.S. is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets minus the United States. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

RISKS AND OTHER IMPORTANT CONSIDERATIONS

The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Noninvestment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Past performance is no guarantee of future results.

Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.

©2014 Nuveen Investments, Inc. All rights reserved.

GPE-BDCOMM4-0514P 1338-INV-W05/15

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For the last decade, TIPS yields and gold have had a negative 88% correlation.  The logic is simple enough: since gold doesn't generate any income, falling TIPS rates reduce the opportunity cost of holding gold.  We can see this play out in the charts below.  In early 2008, the peak in gold was accompanied by a trough in TIPS yields, and then later in 2008, the trough in gold was accompanied by a rise in TIPS yields. 

On December 10, 2012 TIPS yields bottomed at -.87%, and this began the slide in gold from $1700/oz. to just under $1250/oz. by the end of 2013.  Since the beginning of the year, 10 year TIPS yields have fallen from 75bps to 32bps, yet gold prices are mostly unchanged. 

image

Gold is down about 2% today, falling under $1270/oz for the first time since February.  In the chart below, we transform the time series chart above to a scatterplot that illustrates the relationship without regard to time.  There is not a single data point in the last decade where gold is below $1290/oz. with TIPS rates at or below 35bps. The breakdown in gold could suggest that the trend toward falling TIPS yields may be set to reverse. 

image

© GaveKal Capital

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Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [view] => commentaries [start] => 1760 ) [inputs:protected] => Array ( ) ) [post] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [cookie] => JInputCookie Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [files] => JInputFiles Object ( [decodedData:protected] => Array ( ) [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( [get] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [view] => commentaries [start] => 1760 ) [inputs:protected] => Array ( ) ) [post] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [cookie] => JInputCookie Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [files] => JInputFiles Object ( [decodedData:protected] => Array ( ) [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [env] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [request] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [view] => commentaries [start] => 1760 [limitstart] => 1760 [option] => com_legacyinterface [Itemid] => 616 ) [inputs:protected] => Array ( ) ) [server] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [HTTP_AUTHORIZATION] => [HTTP_CACHE_CONTROL] => no-cache [HTTP_CONNECTION] => Keep-Alive [HTTP_PRAGMA] => no-cache [HTTP_ACCEPT] => */* [HTTP_ACCEPT_ENCODING] => gzip, deflate [HTTP_FROM] => bingbot(at)microsoft.com [HTTP_HOST] => 54.225.85.205 [HTTP_IF_MODIFIED_SINCE] => Thu, 26 Apr 2018 21:57:19 GMT [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm) [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => 54.225.85.205 [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 157.55.39.42 [DOCUMENT_ROOT] => /var/www/html/apcms [REQUEST_SCHEME] => http [CONTEXT_PREFIX] => [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms [SERVER_ADMIN] => ben@hubtech.tv [SCRIPT_FILENAME] => /var/www/html/apcms/index.php [REMOTE_PORT] => 22879 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => view=commentaries&start=1760 [REQUEST_URI] => /?view=commentaries&start=1760 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1526899007.449 [REQUEST_TIME] => 1526899007 ) [inputs:protected] => Array ( ) ) [session] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [__default] => Array ( [session.counter] => 1 [session.timer.start] => 1526899007 [session.timer.last] => 1526899007 [session.timer.now] => 1526899007 [session.client.browser] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm) [registry] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( [com_legacyinterface] => stdClass Object ( [commentaries] => stdClass Object ( [limitstart] => 1760 [filter_order] => published_on [filter_order_Dir] => desc ) ) ) ) [user] => JUser Object ( [isRoot:protected] => [id] => 0 [name] => [username] => [email] => [password] => [password_clear] => [block] => [sendEmail] => 0 [registerDate] => [lastvisitDate] => [activation] => [params] => [groups] => Array ( [0] => 9 ) [guest] => 1 [lastResetTime] => [resetCount] => [requireReset] => [_params:protected] => Joomla\Registry\Registry Object ( [data:protected] => stdClass Object ( ) ) [_authGroups:protected] => Array ( [0] => 1 ) [_authLevels:protected] => Array ( [0] => 1 [1] => 1 ) [_authActions:protected] => [_errorMsg:protected] => [_errors:protected] => Array ( ) [aid] => 0 ) ) ) [inputs:protected] => Array ( ) ) [jrequest] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) ) ) [env] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( ) [inputs:protected] => Array ( ) ) [request] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [view] => commentaries [start] => 1760 [limitstart] => 1760 [option] => com_legacyinterface [Itemid] => 616 ) [inputs:protected] => Array ( ) ) [server] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [HTTP_AUTHORIZATION] => [HTTP_CACHE_CONTROL] => no-cache [HTTP_CONNECTION] => Keep-Alive [HTTP_PRAGMA] => no-cache [HTTP_ACCEPT] => */* [HTTP_ACCEPT_ENCODING] => gzip, deflate [HTTP_FROM] => bingbot(at)microsoft.com [HTTP_HOST] => 54.225.85.205 [HTTP_IF_MODIFIED_SINCE] => Thu, 26 Apr 2018 21:57:19 GMT [HTTP_USER_AGENT] => Mozilla/5.0 (compatible; bingbot/2.0; +http://www.bing.com/bingbot.htm) [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [SERVER_SIGNATURE] => [SERVER_SOFTWARE] => Apache/2.4.16 (Amazon) PHP/5.5.31 [SERVER_NAME] => 54.225.85.205 [SERVER_ADDR] => 10.28.13.29 [SERVER_PORT] => 80 [REMOTE_ADDR] => 157.55.39.42 [DOCUMENT_ROOT] => /var/www/html/apcms [REQUEST_SCHEME] => http [CONTEXT_PREFIX] => [CONTEXT_DOCUMENT_ROOT] => /var/www/html/apcms [SERVER_ADMIN] => ben@hubtech.tv [SCRIPT_FILENAME] => /var/www/html/apcms/index.php [REMOTE_PORT] => 22879 [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.1 [REQUEST_METHOD] => GET [QUERY_STRING] => view=commentaries&start=1760 [REQUEST_URI] => /?view=commentaries&start=1760 [SCRIPT_NAME] => /index.php [PHP_SELF] => /index.php [REQUEST_TIME_FLOAT] => 1526899007.449 [REQUEST_TIME] => 1526899007 ) [inputs:protected] => Array ( ) ) [session] => JInput Object ( [options:protected] => Array ( ) [filter:protected] => JFilterInput Object ( [tagsArray] => Array ( ) [attrArray] => Array ( ) [tagsMethod] => 0 [attrMethod] => 0 [xssAuto] => 1 [tagBlacklist] => Array ( [0] => applet [1] => body [2] => bgsound [3] => base [4] => basefont [5] => embed [6] => frame [7] => frameset [8] => head [9] => html [10] => id [11] => iframe [12] => ilayer [13] => layer [14] => link [15] => meta [16] => name [17] => object [18] => script [19] => style [20] => title [21] => xml ) [attrBlacklist] => Array ( [0] => action [1] => background [2] => codebase [3] => dynsrc [4] => lowsrc ) ) [data:protected] => Array ( [__default] => Array ( [session.counter] => 1 [session.timer.start] => 1526899007 [session.timer.last] => 1526899007 [session.timer.now] => 1526899007 [session.client.browser]