The Grand View

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Location: Kansas City, MO, United States

James Byrne has been in the investment arena for 28 years. He cut his teeth on the trading desks of Wall Street in the Fixed Income Institutional Arbitrage area working on some of the largest global financial institutional sales and trading desks. Opportunity allowed a move to Kansas City Missouri some 16 years ago. He branched out and established his own company Grand Street Advisors,LLC. 10 years ago. His goal, to bring professional investment management, using the same skills learned and utilized for his institutional clientele to individual investors in a very personal and customized manner. Account Minimum Size $100,000.00 Annual Fees Equities 1% Up to the First $1 millon Fixed Income .50% Up to the first $1 million

Wednesday, August 28, 2013

New Blog And Address as The Grand View Goes Main Street

Good day. Please be advised I will no longer be posting on this website. I have a new blog titled Wall Street From Main Street. The address is : Please sign up and follow my market updates. I've posted a new update today on issues impacting the markets and investing. I hope you find it relevant and useful. Again thank you very much. Yours in pursuit of the KWAN! James

Friday, August 9, 2013

The Market And Economy Acting Powerball-ic As The Federal Reserve Readies For the Great Taper

Elizabeth Browning penned two centuries ago, “how do I love thee let me count the ways”. Had she been referring to the now four year old rally in the equity markets we just may be able to hear more noise listening to the croppy mating calls. I mean sure the little swimmers are tasty but they just don’t say a heck of a lot. Same goes for the equity market rally. It has been one of the most unloved and mistrusted that I’ve ever experienced. As the saying goes I guess, if you don’t have something nice to say, don’t say anything at all. If investors abided by that little tidbit, the silence would be deafening Where we are: JOBS. Let’s start with the big Kahuna. Non-Farm Payrolls came in weaker than the street was looking for at 162,000. The trailing twelve month average now stands at 189,000. Good, not Great. Keep in mind the monthly non-farm payroll figures are a backward looking compilation kind of like looking in the rear view mirror to what happened in the past month, but still a meaningful gauge. The real time data, weekly unemployment claims came out this morning at 333,000 up slightly from last week 328,000. Longer term the trailing four week average ticked down also to 335,500. This is excellent and continues the trend lower in claims. Institute for Supply Management Manufacturing (ISM Manufacturing). The ISM Manufacturing Index jumped by 4.5% to 55.4% in July the highest this year. Imbedded in the release was even more good news. The New Orders component increased by 6.4% to 58.3% and the Employment Index leapt 5.7% to 54.4%. Both would suggest a positive bias for the future production and new hires. Institute for Supply Management Non-Manufacturing or Services Index (ISM Services). The ISM Services Index improved 3.8% to 56%. The Activity Index moved up to 60.4% and increase of 8.7% which is the 48 consecutive month of expansion. Again the New Orders Index show significant improvement moving up 6.9% to 57.7% while the employment index dropped 1.5% to 53.2%. With all the figures presented keep in mind any reading above 50% indicates expansion or growth. Industrial Production (IP). IP improved by .3% after being flat for June. Year over year IP has moved ahead by 2%. Again another case for a good not great rate of growth. Embedded in the report we find some more positive nuggets with Automobile manufacturing increased 1.4% and home electronics up 2.2%. Business equipment as a whole showed an increased in the second quarter of 2.2% roughly half the rate of expansion from the prior quarter so we clearly see the lull in business spending reflected here. Industrial Capacity Utilization (CAP-U). Cap-U inched up .1% to 77.8. We should see continued progress in the utilization figures as auto manufacturing continues adding new lines to keep up with rising demand for newer model cars. The average age for existing cars on the road is now up over 11 years so the replacement cycle here should also portend well for future growth. At current levels there remains ample cushion to absorb any inflationary pressures building up. Housing. New home sales for June jumped to a five year high hitting an annual run rate of 497,000. Year over year this represented a 38% rise the most since January 1992. The Case Shiller Home Price Index continued showing progress rising 12.2% in the latest release. June’s existing home sales slipped some with pricing continuing higher with realtors sighting tight supplies creating bidding wars. We can see as mortgage rates begin to tick higher buyers who may have been sitting on the fence being forced in releasing the years in building pent up demand. We could continue looking at various indicators that would reflect one overriding theme, similar to hitting 5 of 6 Powerball numbers, GOOD just not GREAT. This leaves the Federal Reserve front and center yet again. Federal Reserve Chairman Bernanke, like many free marketers would prefer to begin exiting their QE program. This “good not great” environment should allow for a gradual transition from a market driven by Fed stimuli to one that allows the market to price risk and fundamentals drive performance. This transition will not be smooth. As the Fed exits their monthly $85 billion asset purchases, private investors will need to replace that capital to some degree. This can and should happen as confidence in the economy and markets entice dollars out of savings accounts and money market funds along with the acceleration of the so called Great Rotation. This so called rotation will be from investors that invested heavily in bonds and bond funds for their relative safety only to now see losses mounting in the monthly statements as interest rates rise moving money more and more aggressively into equities. Black Vultures- I have decided not to subscribe to the commonly used term Black Swan. A swan is pretty and graceful, which is nothing like the effects a so called Black Swan event would have on the markets. A Vulture is hulking and lurking and when alls said and done feasts on the remains of carcasses left behind. Now the Vulture seems a lot more appropriate when we’re discussing Wall Street, mishaps and investing. 1. The looming Black Vultures begin yet again with our fearless leadership in Washing. The mid-term elections have our polarized electorate more focused on winning seats and less on debt reduction and budget negotiations. Another virtual stalemate could derail the growing enthusiasm for equities and put the credit rating of the US in danger of another downgrade. 2. Black Vulture two could be a major Chinese bank defaulting under the weight of bad loans and a slowing Chinese economy as a whole. This would send shock waves across the credit markets and force the Peoples Bank of China (China’s Central Bank) to decide whether they institute a Too Big Too Fail policy or let it fail. Going Forward. The global economy is now in recovery mode. The EU and China recently broke back above expansion levels reflected in their respective PMI’s. China at 50.3, the Euro-zone at 50.5 and Indonesia joined the party clocking in at 50.7. One not talked about enough is our trading partner right on our border Mexico. President Nieto is taking on a monumental task of reforming their economy. President Nieto is putting renewed emphasis in education, raising taxes and opening up markets to competition in media, communication and the energy sector. Mexico is now competing and in some cases winning the war with China to become the low cost provider for labor and encouraging private investment. This has the potential to be huge in the coming decades. An able, educated workforce with a stable politico and growing middle class would create well situated consumers for US goods providing security and jobs on both sides of the border. Now, it appears the global economy is about to join the “5 out of 6 Powerball” phase of growth as the US economy begins to accelerate into third gear. Central Bankers will look to begin to remove or taper Quantitative Easing programs later on this year. Many an investor will hold their breath and we may be able to hear many a pin drop in the process. This should be replaced by the roar of the thundering herd chasing this uber-bull market to ever higher record levels as confidence grows that this economy CAN stand on its own based upon fundamentals without further Fed stimuli. We maintain our aggressive exposure to the market and will monitor both economic and market releases closely for any signals to adjust our posture. We thank you for your confidence and patience in this very challenging environment. Yours in pursuit of the KWAN.

Sunday, July 7, 2013

With The First Half In The Books Investors Need To Strap In Cause the 2nd Half's Offering Volatility And Yet Higher Returns

Ritchie Valens implored me to “C’mon and go and do it again and again and again”. I got that tune stuck in my head for the last few months after the constant parade of Federal Reserve Governors stepped one after another to the podium in an effort to clarify our Fed Chairman Bernanke’s commentary surrounding the timing of the impending QE Tapering! The soothing Fed Governor commentary helped us recoup most of the 5% swoon and tamp down the fear factor and market volatility as we closed out the first quarter and headed into this just closed out first week of the second half. We closed out the first half of 2013 with solid returns but shaken confidence. The nervous Nellie’s and perma-bears went into hyper sale mode after the mere mention the Federal Reserve may lighten up on the size of their monthly $85 billion in asset purchases ONE DAY. US Treasury 10 year bond yields rocketed higher from 1.67% up to 2.64%. On a percentage basis that is a huge move magnified by the fact it took place in the scope of less than 2 months. This does present issues for re-hedging a trading position, for closed end bond funds that borrow short and buy long duration assets, funds of all kinds that must raise cash for investor redemptions and firms of all kinds that require a line of credit in general. The bigger worry was/is the spike in rates would dampen enthusiasm for home and automobile buyers. But let’s take a moment and think bigger picture. The rates on 15 year and 30 year mortgages stands currently at 3 3/8% and 4 ¼% respectively. I’m quite sure we all can still remember waaay back when the opportunity to lock in a mortgage at 7% was reason enough to pop the champagne corks. Which gets us to the real point, it’s not the rates themselves we’ve reached, it’s the time frame at which we achieved them. The huge move in rates saw institutional investors selling aggressively in anything bond fund/leverage related. Investors pulled out $60 billion from bond funds in June alone. One need only look at the road kill left of the large and “safe” mortgage REIT Annaly Capital Management-NLY. This mortgage REIT had/has a very attractive yield of 13% currently. But, when considering total return just take a look at the price range over the last year. The fund traded at a high of $17.75 and currently changes hands at $11.50. With rates expected to march higher from here (albeit not as aggressively as we’ve just experienced), we should see similar total rates of return for years to come along with the added bonus of dividend payout cuts. This is why we at GSA prefer individual bonds and investments. We may also experience some of the price volatility, but we have the option of holding our bonds to maturity and receiving our principal back. Bond funds have no maturity so this option of principal recapture is not available. Now, first we saw institutional investors rush for the exit signs, once individuals begin receiving their monthly statements and continue to see the losses piling up the pace of sales will pick up steam again. This shift out of bonds and into alternatives should lead to continued elevated market volatility short term. Longer term we should be able to withstand the selling as the real story is quite positive. When we actually see the trees for the forest, the Federal Reserve providing less stimuli would be in response to stronger economic growth and an economy able to stand on its own. Where we are: Leading economic Indicators (LEI). LEI rose at a modest .1% in May after April’s .8% pop. So, smoothing out the month to month volatility and looking at the three month average +.2% and +.22 for the six month average which would suggest steady if unspectacular growth going forward. The 3month results were impacted by the .3% decline which may be attributed to the as yet unknown effects, both actual and psychological of the sequester. We would expect a pick up in activity as we get deeper into the second half of 2013. Housing. Housing starts in May hit an annualized run rate of 914,000. Permits however cooled some declining 3.4% to an annualized run rate of 974,000. Still, these are the highest twelve month averages for both since 2008. Clearly the recovery is in full speed. We anticipate further progress in both permitting and new and existing home sales as fence sitters fear missing the boat on the current generational lows in mortgage rates. Nothing like higher rates to spur the buyers. Institute of Supply Management Manufacturing Index (ISM). The June ISM rebounded back to expansion mode with a 50.9 reading (anything above 50 suggests growth) up 1.9% from May’s 49 reading. Generally respondents state conditions remain good to improving. They also point to sales strength in electrical and appliances which would be supported by the strong housing numbers. Among areas of strength were the New Orders component +3.1% and exports +3.5%. There was some concern about the weakness in the employment index -1.4% and order backlog being -1.5%. So, in all better but needs monitoring. Institute of Supply Management Non-Manufacturing Index (Services). The June ISM Services index dipped to 52.2% softening some from the prior months 53.7% but still in expansion mode. Respondents reported continued growth in sales, they interestingly noted lower revenue figures due to elevated healthcare costs and the need to monitor or reduce head count (Obamacare). They also note business is profitable but mainly due to cost cutting and streamlining so the ability to pass along higher costs to consumers is somewhat restrained. We saw expansionary levels across the board, ex-new export orders. This is not entirely unexpected as China’s economy is working through a slow patch and the EU zone appears to finally be forming a bottoming pattern. Industrial Production (IP). IP turned in an unimpressive 0% growth rate for May. Year over year IP inched forward 1.6% largely in line with past expansions. Capacity Utilization ticked down to 77.6 from 77.7. The slack in Cap U acts as a sponge in absorbing inflationary pressures should they materialize. For now, not a problem. JOBS! Yes we weren’t going to skip over this one. June’s Non-Farm payroll figure clocked in at a surprising +195,000 where most Wall Street economists had modeled a 145,000 or worse figure. The six month average for this important monthly figure is right on top of 200,000. As important, average hourly earnings increased $.10 or 2.2% over last year. So, aside from the continued yet grinding higher progress in new entrants into the labor force, they are commanding higher wages as well. This translates very positively to more consumers with increasing levels of disposable income. Even the most pessimistic/skeptical investor must concede the progress made and the positive implications. Outside the Lines. Globally. This has been our Achilles heel and is still causing the US economy to limp some. China is I believe attempting to be proactive in piercing its own asset bubble in real estate (something Chairman Greenspan identified here in the US but did nothing about). This is causing a drag on economic expansion as they attempt to simultaneously switch solely from an export driven economy to one more balanced between exports and domestic consumption. No easy task and the difficulty evidenced by the drop from 10%+ economic expansion to the current rate of 7 ½%. India, another 1 billion+ populace nation whose economy remains constrained by the shackles of cronyism, corruption and the disgusting and tolerated abuse of women, may expand at a sub-optimal 5.5% well below potential and the heyday rates of expansion of 8%+. On the up and coming the Euro-zone and United Kingdom appear to be bottoming. Spain’s unemployment rate, while still painfully high fell 2.6% recently. Also, the UK PMI Services sector index soared to 56.9 the highest level in two and a half years. On the whole the Euro-zone PMI for June jumped to 48.9 still in contraction mode but up nicely from May’s 47.7 reading. The Euro-zone and UK economy have both benefitted from the proactive steps taken by new ECB Chairman Draghi whose policy moves have depressed sovereign borrowing costs and kept bond vigilantes at bay. Going Forward: The US economy and job creation continue expanding at suboptimal paces, but both with brighter days ahead. Despite the incompetence in DC the resilience of the US worker and markets are being proven daily. They both simply need clarity surrounding taxation and policy in order to make investments and daily spending decisions. In other words we need Washington and our career politicians to get out of the way. Consumer confidence is solid. When consumers feel secure in the jobs and prospects (evidenced in the JOLTS figures and Consumer Confidence) they feel and act more confident in making big ticket purchases such as homes and automobiles which are at multi-year highs. During the depths of the financial crisis and near financial collapse the US focused on growing our export economy as domestic consumption collapsed and fear raged. That time has passed and the global economic players are now looking to Old Reliable the US consumer to do the heavy lifting again. This time it’s a bit different. One potential game changer is the US energy production boom. The US is poised to become the driving force of new energy production techniques, pricing, exporting and jobs creator, in spite of DC. Inexpensive natural gas along with a retooled auto industry and weaker dollar should help power specialty chemicals producers, global auto sales, aerospace industrials along with lessening our dependence on foreign oil. The continued boom in US exports and benefits of cheaper more reliable sources of energy should secure our position back to where we should always be, the leading economic and entrepreneurial global powerhouse. For now we maintain our aggressive posture to the market and our 2013 year end S&P 500 target remains 1704. We are reworking our S&P 500 2014 target but are not yet prepared to release them as the increased volatility in the credit markets and borrowing costs in general may impact our estimates should rates spike violently higher. Thank you again for your continued confidence in this very challenging investment environment. Yours in pursuit of the KWAN!

Monday, June 10, 2013

Market Update-Caution Rules Today, But No Reason For Fear

In Greek mythology it was Icarus who constructed two wings out of feathers so he could flee imprisonment. Icarus, having ignored his fathers warning, flew too close to the sun, which then melted the wax which secured his feathers resulting in him crashing into the sea below. Investors both individual and institutional, on the other hand remained overly cautious and as such underinvested in equities entering 2013 fearing the ill effects of higher capital gains and nominal tax rates. Having largely missed the gains the market provided in 2012 and being the “fiscal cliff” turned out to be more of a mole hill for the markets, investors have been playing catch up ever since. To the layman this can be evidenced by the shallow nature of any attempted sell-offs and the aggressive buying that follow immediately. The latest example is the recent 5% correction bouncing back to within 1% of all time highs after Friday’s 207 point rally in the Dow. But, first let’s get to the dete’s (that’s details in geek speak). The market has gone virtually straight up since January 1. Market technicians, myself included here, grew ever more watchful as we historians can note over and over again the market can or will go up only so far without some degree of correction (selloff). The longer the time frame and percentage gain, the higher the probability and severity of the correction….most times. I posit we are not living in normal times. We just barely survived a near global financial collapse. The life blood of capitalism, free flowing markets nearly froze, seizing the flow of corporate funding necessary for payrolls, accounts payable and quite simply utility bills to keep the lights on. The Treasury and Federal Reserve took coordinated extraordinary steps to stave off the second coming of The Great Depression. So, back to the here and now. Some nervous Investors having fled to the shore early following the old ditty of “Sell in May go away” were looking for a reason to sell and lock in gains. They looked too hard for the bogeyman under the bed and believed they finally saw one in the Federal Reserve Chairman’s statement that merely mentioned one day they would have to end their monthly $85 billion asset purchases. Thus, the choppy near 5% selloff in the various indices. To GSA, they misread or misunderstood the Feds statement as they said One Day not Today, they’d ease off their asset purchases. Thursday’s price action, being down 115 points on the Dow at one point only to finish up +80 followed by Friday’s +207 point rally suggest just such a reconsideration of current conditions, Federal Reserve policy and valuations. Now to the digits: Housing: What a comeback. Arguably the one area of the economy responsible for nearly crippling or collapsing the US is roaring back. While housing starts in April took a breather, permits, which looks to the future, boomed 14.3% suggesting an annual run rate of over 1 million new households. The highest levels since mid 2008. Leading Economic Indicators: April’s LEI reading came in at +.6 after March’s figure was slightly negative. Taken within the context of the average six months would support the current expectations of modest GDP expansion in the range of 2 ¼%-2 ¾% gaining strength later into 2013 and a stronger 2014. Industrial Production: IP is a volatile figure when looking at the month to month basis. IP fell .5% after solid gains the prior two months. The year over year figures comes in at +1.9% which again supports a good not great environment. Factory Capacity Utilization or Cap U eased to 77.8. On an historical basis this leaves ample capacity to absorb any upticks in inflationary pressures. Inflation- Consumer Price Index/Producer Price Indices both remain well anchored and are of no concern currently. The Federal Reserve continues fighting a potential deflationary spiral attempting to prop up asset prices. Nuff said. The ISM Purchasing Managers Index-Manufacturing PMI dipped to 49 below the all important 50 which suggests a contracting economy. Responders pointed to sluggish demand from the EU and China. They also point to buyers holding off in anticipation of price cuts from commodity input costs dropping. Further they point to a stall in Government project awards due to the spending cuts along with a somewhat stable environment right up until mid month where demand slacked off. On the flip side The ISM Non-manufacturing or Services Index came in at 56.5% solidly in expansion mode. We saw strength in new orders and employment. Respondents in IT spending pointed to an overall improving environment heading into the second half of the year. On the other side Healthcare professionals pointed to the sequestration and Obamacare as “having a strong negative impact on business”. So, a very positive reading but worth watching for any weakness. JOBS: Friday’s non-farm payrolls came in at +175,000. At best a simmer not a boil. The economy is operating back in the Goldilocks zone. Not too hot, not too cold to put the Feds hand to adjust their Quantitative Easing program just yet. I look for more of the same until we get to the third or fourth quarter. Going forward: The Federal Reserve has been and continues to be the most transparent ever in telegraphing policy moves. Recent commentary surrounding the eventual tampering of asset purchases provided a terrific buying opportunity for the brave and or underinvested. The most recent economic data suggests we’re experiencing a slow patch amid continued economic expansion. Europe is on the mend, China while slowing is also continuing on the path towards greater domestic consumption and less reliance on an export driven economy. The picture for US corporate earnings and revenues appear much more favorable as the inflation outlook remain tame, monetary policy favorable and a gradually improving jobs market gains momentum into year end and out to 2014. We now look for S&P 500 earnings of $110 share. Attaching a 15.5x price/earnings multiple brings us to our new year end target of 1705. At this point we at GSA believe our 2013 target is conservative and see reason for considerable optimism for 2014. Housing and Autos, which dragged us into this near financial abyss are now releasing some pent up demand accumulated over the dark days of the near collapse. The current low interest rate environment should continue to support sales going forward. So, Automobile sales along with Construction and home sales should help lead us out of the current sluggish patch the economy has hit. We remain constructive and maintain our aggressive exposure to the markets but will be wary for any potential Canary’s in the coal mine Thank you for your continued support and confidence in these very challenging times. Yours in pursuit of the KWAN.

Sunday, April 14, 2013

With The First Quarter Closed Out Some Wonder if It's "Time To "Sell In May Go Away?" Maybe Not This Year

As Charles Dickens so eloquently stated, “It was the best of times, it was the worst of times”. He could very well have been referring to the just closed first quarter market returns. The best of times. The market had a first quarter for the record books. The Dow and S&P 500 both reached new closing all time highs. Both the Dow and S&P 500 notched better than 9% returns with broad based participation. The economy also continues flashing signs of recovery from its nearly four year slumber. The worst of times. As Britney Spears chirped, oops they did it again. Hedge funds, after turning in a dismal 4% average return for calendar 2012, continued underweight equities entering 2013. They remained convinced the market was wrong to be rallying and waited for the resumption of the secular bear market to begin taking us down anywhere from 10% to 50% depending on which Yogi or Boo-Boo you listened to. A man much wiser than myself told me something many many (is that enough many's) years ago as I was beginning my career on Wall Street that stuck with me to this day. After a fairly volatile day in the market and realizing I had positioned myself short as the market rallied fiercely, a friend came to me after the close and asked how I felt about the market. I responded I still did not like the market and rattled off a few quick strong points to support my stance. He nodded and acknowledged my incredibly insightful remarks then said, “If your opinion is wrong, lose your opinion”. His point being I could have been correct in my talking points and thought process, but the market was going against me. So, don’t be proud or stubborn and don’t fightit. Hedge Fund managers have been on a terrible run under performing the markets for a few years running and need a dose of humility. They don’t need to be rip roaring, thundering herd bulls, but they’ll need to at least get neutral to their benchmarks as investors will increasingly be taking their monies elsewhere. We can see some evidence of these managers taking on risk simply by watching intra-day trading activity. Friday was a great example of buying dips. Early Friday the market sold off sharply in the wake of some soft job figures, a bid began surfacing amid the softness. Before the day ended the market had rallied over 130 points off the lows. Where we are: After such a near uninterrupted rally out of the gates in 2013 it would not be out of the question to see a 5%-10% correction. There remain concerns surrounding the effects of the elimination of the 2% payroll tax holiday and the so called sequestrations mandated $85 Billion in spending cuts. Also lingering out there is this little program initiated by the Federal Reserve, Quantitative Easing or QE. QE is the Feds program to purchase $85 billion in treasury and mortgage backed securities. But when it comes to where we are the devil is in the details so here we go: Leading Economic Indicators-LEI. LEI rose .5% in February after having risen .5% in January and .4% in December. This positive three month trend suggests a continued “Goldi-locks” recovery. Not too fast to ignite a bout of hyper inflation forcing the Federal Reserve to shift policy. And not too slow to push our fearless leaders in DC to abandon austerity and embark on another round of fiscal stimulus budget busting spending. Industrial Production-IP. IP rose .7% after being unchanged in January. There was reasonable strength across the index as Manufacturing output rose .8% and utilities output rose 1.6%. The capacity utilization remained stable and rose to 79.6% a bit below the 30 year average but the best figure since March 2008. This slack in capacity utilization should act as a buffer against any inflationary pressures arising. Housing. Housing continues to make solid gains. We’re not yet back to the levels seen before the great recession but nor should we be. Sales of single family homes in February came in at a 411,000 annual run rate. That is below January’s 431,000 but a solid 23% gain year over year. Total existing home sales came in at 4.98 million annual run rate up from January’s 4.94 million and up 10.2% year over year. Clearly this is a positive development in housing and we should cease to see this all important sector of the economy be a drag to GDP Employment. The cheers coming from investors after February’s non-farm payroll figure of 236,000 were hushed when March’s figures were announced this past Friday at 88,000. No way to couch this one, it stinks. We were expecting a numbers closer to 175,000-190,000 especially when we were able to look at the real time jobs figures, the weekly unemployment claims which had dropped smartly in the survey weeks. The surprise as I see it came from retail. Think restaurants, shopping malls, Macy’s, JC Penny’s etc and were responsible for a negative 24,000 jobs eliminated when we were looking for an add from the group. The Post office also contracted by 11,000 jobs due to attrition, no real firings. Taken in context with the three month average and we see the US jobs markets just about at the average for this recovery of 175,000. Still, questions now surface regarding the effects of the 2% payroll tax effects on consumers discretionary spending and the still to be felt effects of the so-called sequestration. US Purchasing Managers Manufacturing Index-PMI. PMI for March contracted to 51.3 from February’s 54.2 and January’s 53.1. A reading above 50 still suggests a growing/expanding economy. Survey respondents paint a mixed picture. Wood products pointed to very strong demand along with automotives, furniture, food, beverage and tobacco. On the flip side there appeared to be some softness in computers and electronic along with the energy sector being in stall mode as they await any new policy and/or regulations. As we dig further, the data show some weakness in the new orders and inventory categories while we see a bounce in employment, deliveries and exports. The Non-Manufacturing or services sector PMI registered 54.4 down from February’s 56 but still in expansion mode. Again the respondents paint a mixed picture of cautious growth. Going Forward:. The US market is surely on firmer footing than last we reached such lofty levels on the various market indices. Revenues and earnings are stronger, leverage is down, corporate balance sheets are pristine and headcounts remain lean and mean. The market multiple back then too were stretched at closer to 20 than today’s 14 ½ which is below the 15 ½ thirty year average. The domestic economy remains in Jekyll & Hyde mode. Mild mannered recovery mode by day, 88,000 jobs growth chases you down a dark deserted alley to strip you of your ill gotten profits at night. Domestically the Fed Chairman Bernanke has got our back thank goodness. Like his policies or not ( I don’t) but due to the lack of backbone, will or just a desire to keep their cushy jobs in DC the Federal Reserve is the only reason we have even a modest economic recovery. Without Chairman Bernanke perhaps perma-bear Muriel Roubini may have been proven correct in his constant calls for Dow 3,000. There remain many headwinds and potential pitfalls. The Euro-zone crisis simply will not go away. The EU has found its own Chairman Bernanke in Mario Draghi vowing to do whatever is necessary to save the EU. Chairman Draghi has been successful dousing the fears of financial contagion in Spain and Italy while helping to orchestrate the bailout of Greece and Portugal along the way and sending bond vigilantes running for cover. China and India continue to attempt to jump start their domestic economy while stoking domestic demand from their respective populace. The Bank of Japan joined the other global central bankers in the race to de-base their currencies. Chairman Shinzo Abe even one upped Chairman Bernanke vowing to do whatever’s necessary while buying treasury’s, mortgages, REIT’s and Equities in order to finally break the deflationary forces gripping the third largest economy for over twenty years. This unprecedented show of unified liquidity force should push asset prices to even loftier levels. Again, I don’t like or agree with this massive printing and debasing of currencies, but for now, I’ll be keeping my opinion at bay, as I’d rather make money than be right…..for now. We maintain our aggressive posture to the markets with an eye towards earnings season and upcoming budget negotiations to act as the near term catalyst to drive the markets. Expectations for both have been guided down so outperformance should be simple enough. Should earnings and revenues come in on the light side or budget negotiations not get off the ground, we may move aggressively to adjust our cash positions and be in contact immediately. I thank you again for your patience and confidence in these very challenging times. Yours in pursuit of the KWAN. James

Friday, February 15, 2013

January Surprises As The Fiscal Cliff More Bark Than Bite

Forget about " A September to Remember" for those shunning equities in January that just plain stings. The S&P 500 advanced an impressive 5.2% as fear of the fiscal cliff faded into memory. Once again our fearless leaders dragged us into the 11th hour before they agreed upon a compromise that was on the table eight months earlier. The temporary Bush tax cuts became permanent for most taxpayers and now appropriate policy once they could be re-branded. Of course the heavy lifting on the titanic budget deficit was postponed until the arguments can be framed out to blame the other party when entitlement program cuts and raising taxes need be introduced. Once again both parties utilized scare tactics using the media as their podiums to galvanize their bases that the "Fiscal Cliff" would cripple the country. The recent announcement that fourth quarter GDP fell -.1% after expanding +3.1% in the third quarter seems to support those threats. Time to pull back the curtain and shed some light on what really happened. Two main detractors to fourth quarter GDP, 1.Defense Spending -22%. Many government agencies sensing the upcoming budget cuts exhausted funding in a "use it or lose it" mindset in the third quarter. 2. Inventories inventories inventories. This is where policy effected corporate behavior. The uncertainty surrounding the onslaught of tax hikes combined with the sun-setting of Bush tax cuts and the expiration of the 2% reduction of the payroll tax cut lead many retailers to draw down existing inventories leaving the shelves barren due to lack of reinvestment. Combined these two events accounted for nearly -2.6 percent negative growth. Then an interesting thing happened on 12/31/12 at 12:59:59 a compromise was reached to extend the current tax rates (no longer referred to as Bush tax cuts) for 99% of ordinary folks. You can see the results in the market. January had its best start in 30+ years. The message should be loud and clear to all, the US economy is itching to spread its wings and take flight again, Washington just need to get out of the way! What's happening! Jobs: Let's start with the most important factor, employment. The real time indicator for job creation/destruction is weekly unemployment claims. Weekly Claims have moved down from a previous range of 160,000-185,000 to 130,000-155,000 range as hirings ramped up to meet improving demand. The monthly numbers, Non-Farm Payroll grew by a not too impressive 157,000 for January. However, the revisions to December and November added an additional 127,000 jobs for a three month average of 200,000. We're clearly heading in the right direction. Housing: We're not ready to pop the corks but housing appears to officially have bottomed and should no longer be a drag to the economic output and job creation in general. The housing market index continued to hold at its best levels since 2006. In December housing starts increased 12.1% to an annual run rate of 954,000. Home prices as measured by the Case/Shiller Index rose 5.5%. Lastly, building permits which is a forward looking indicator grew +.3% to a 903,000 annual run rate. So we note a continuation of the trend. Leading Economic Indicators: LEI came in at +.5% the best showing in three months. The gains reflect strength in the labor market, low interest rates and gains in stock prices. When we factor in the rebound in housing/construction it would continue to support the bullish thesis. Institute for Supply Management: ISM releases their reports for both Manufacturing and Non-Manufacturing (referred to as the services measure). We received good news on both fronts suggesting the economy is expanding on all fronts. ISM Manufacturing came in at 53.1% in January vs 50.2 in December (a number above 50 suggests an expanding economy). The new orders component posted a 3.6% increase to 53.3%. Also impressing the masses, the employment component accelerated + 2.1% to a 54 reading. The ISM Non-Manufacturing eased a bit to 55.2 vs 55.7 however once again we see strength in the employment component as it leapt to a 7 year high of 57.5. Back to 4th Quarter GDP and why we maintain our bullish posture in the face of the negative report. 1. Consumer spending and income. The GDP reports shows consumers after tax income rose 6.8% the fastest pace since the recession. 2. Business investment rose 8.4% 3. Home building. Home construction rose at at 15.3% annual rate 4. Inventories. They were drawn down by strong sales and an unwillingness by retailers to restock. They'll need to be rebuilt. 5. Government spending reduced GDP by 1.3% Forward: The equity market sprung out of the gates in January but we believe some of the gains were a give back from the December Fiscal Cliff Fright that saw some investor liquidations ahead of potential higher capital gains and income taxes. Global Central banks have the spigots wide open and are flooding the banking system and financial markets with unprecedented amounts of stimuli and liquidity. The good thing is markets are responding. The challenge will come when those same spigots need to begin to lessen the flow and whether the economy and markets can stand on their own. The current results are promising. The US economy is, arguably about to re-accelerate (IF DC gets out of the way) and China's economy has resumed expansion mode. The EU has been stabilized, India is liberalizing it's economy, Brazil, Mexico and emerging markets in general are gaining traction which all bodes well for global trade as a rising tide lifts all boats. While trading should remain volatile, overall the trend remains positive and our year end target for the S&P 500 remains in tact and most likely overly conservative and will need to be updated as the resolution and details of the budget debate come to light. For now we maintain our aggressive posture to the markets but are on alert for any changes to policy or geopolitical events and will be in contact immediately should any changes be necessary. Thank you again for your confidence and patience in these challenging times. Yours in pursuit of the KWAN! James

Tuesday, January 8, 2013

Grand Street Advisors 2013 Outlook

The markets put in a very respectable performance in 2012 catching most professional investors off guard and missing the move as 85% of hedge funds underperformed the S&P 500. Many spent much too much time looking for the black swan event that would send our economy reeling and markets swooning. It just never fully materialized. I guess we had many a tan swan though. There was the near Greek debt default. We were kept on the edge of our seats by the threat of a full scale bailout of Spain and Italy. The Middle East was set ablaze once again by rocket fire between Israel and the Palestinians as well as the raging ongoing civil war in Syria that has claimed over 100,000 lives. These events all paled in comparison to the paralyzing effect the juvenile politicking in DC had on the markets which severely hampered any progress on sculpting a credible budget deal. Who could really blame investors as they were in a position of the unknown. It's like going to a jump rope contest with a baseball bat and glove. You'll probably get a bunch of meaningless hits, but you won't win any double dutch trophies. Where We Are: The US economy has proven remarkably resilient in the face of uneven global growth and widespread fiscal uncertainty. Monetary policy has become the primary tool utilized to stimulate global growth and reflate assets these days in the face of social unrest and total political unwillingness to balance budgets and cut spending. < b>Retail Sales: December Retail Sales rose 4.8% after experienced a .6% swing in November from October's -.3% with notable strength in Automobiles which ended 2012 at a 15.5 million annual run rate. Building materials store sales were also robust rising 1.6% a direct beneficiary of the devastating storm, Hurricane Sandy. December's figures showed strength in high end Nordstom's, Macy's and also Costco. Laggards such as Target and Victoria's Secrets pointed to 24 hour fiscal cliff coverage damping consumer enthusiasm. Still many remained optimistic of a bump in sales post Christmas as those of us who weren't too naughty received gift cards that would send them scurrying to the mall to redeem. Inflation: The inflation rate for 2012 clocked in at a very tame 1.8% as measured by the consumer price index (CPI) a clear beneficiary of slack in employment, spare manufacturing capacity and rising productivity. One thing I'm growing more concerned about is how much these continued productivity gains are actually a result of the increase in the unofficial workweek. How many times have we all taken home some paperwork to catch up and how often have we checked and responded to "a few" emails? These are unreported and unpaid hours that cut away at our quality of life and as such cannot, will not and should not go on. That's for another discussion though. Industrial Production: Industrial Production staged a nice showing coming in at +1.1% a direct beneficiary from Hurricane Sandy. This disaster will benefit all major sectors of our economy for many quarters to come. Aside from the natural pent up demand that developed due to the recession over the years, Sandy's swells swamped and totaled thousands more automobiles that need to be replaced. Homes were leveled and businesses shuttered. Auto production popped 4.5% to end 2012 and should remain strong for 2013 as the general economy continues to heal. The housing industry already clearly in recovery will get an additional Sandy jolt which should help, building materials providers, appliance manufacturers and generally all ancillary industries with exposure to the sector. Hello GE, Home Depot and United Rentals. Good news for inflation hawks Factory Capacity Utilization rebounded .7% to 78.4 which still is 1.9% below its forty year average. Employment: We just received our first Non-Farm Payroll figures in 2013 with December coming in at +155,000 and the unemployment rate ticking up to 7.8% with the workweek +.1 and hourly earning up a not too shabby +.06. Good not great but enough to keep the trend in tact. I would anticipate a gradual acceleration in job creation after DC muddles through all the pre-posturing and threatening to finally forge a budget deal. Key drivers will be in automobiles manufacturing, health care and construction. If only Obama's EPA would embrace the energy sector and regulate "fracking" instead of threatening to outlaw the process we could see a surge in production, a spike in high paying jobs and along the way pushing us further towards our goal of energy independence. One can dream can't one? GDP: GDP most likely finished up 2012 at 2%-2.2%. Fairly lackluster considering we just closed out the fourth year after the recession ended in the summer of 2009. When we consider all monetary and stimulative programs from the Federal Reserve and D.C, it points to just how severe the recession was. 2013 should provide more of the same with weakness in the upfront month overcome with a re-acceleration in the back end of the year bringing growth to a estimated range of 2 1/4%-2 1/2%. This is of course all predicated upon DC doing the job they all were elected to do and not pushing us to the brink yet again. We are not overly confident this will be accomplished when we take into account this will be the third year in a row our fearless leaders have stale-mated us right up to the very last hour before reaching a deal. Monetary Policy: Domestic monetary policy will continue to be anchored at zero until the official unemployment rate hits 6 1/2%. This is the clearest sign ever from Federal Reserve policy makers. This clarity surrounding policy is very important when making long term investment decisions. Kudos to the Chairman for being so bold. The Federal Reserve's Quantitative Easing programs are not however tied to the employment figure. The Federal Reserve has sent a signal to the markets they will continue to purchase via QE, US Treasuries and Mortgage backed securities to help support housing and employment. The initial take was this program would go through 2013 and into 2014 at a minimum. We are not as confident the Fed will stay the course if we see continued progress in housing and the size of the Fed's balance sheet becomes problematic from the market participants perspective. For now it's steady as she goes with Bernanke's zero interest rate policy and monthly asset purchases of $85 billion which should continue to support markets along with the continued rebound in housing and construction. Black Swans: 1.An Inflation spike forces the Federal Reserve to reverse course sooner than stated causing a spike in borrowing costs and stymieing the housing and construction expansion sending markets reeling. This very real fear would be the result of years of printing money by all global central banks. 2. The failure of a major European financial institution reigniting fears of contagion sending the EU economy into a tailspin creating yet another drag on global growth. Many of Europe's large financial institutions still need to take write downs, sells assets and raise capital to shore up their balance sheets. Progress is being made, but the glacial pace needs to quicken. 3. Syria. In a last gasp move at preserving power Syria launches a preemptive attack on Israel causing a strong response. This may open the door for Syria's lone ally in the area Iran to enter the fray igniting the whole Middle East testing alliances and potentially dragging the US into yet another war with foes and allies uncertain. 4. Not so Black Swan: Washington continues to embarrass themselves in a spectacular show of ineptitude from both sides of the aisle not seen since the summer of 2011's debt ceiling debacle causing yet another credit downgrade investor uncertainty and sharp market correction. Going Forward: The US economy can and should do better as we get deeper into the new year. We simply need Washington to get out of the way. We look for exports to re-accelerate as Central Bank policy and stimulus programs in China, India, Brazil, Australia, Japan and Korea start to show meaningful traction. We also look for the EU periphery economies to begin a basing pattern as, ex-Greece most countries already have taken aggressive steps to right size government spending, pare back bloated government payrolls and liberalize private employment regulations. We look for continued progress in construction and housing as patient buyers are pulled off the sidelines with the looming threat of rising borrowing costs along with the pain of the recession falling further in the rear view mirror. We look for inflation to remain well contained in the 2%-2 1/4% range as commodity input prices come under pressure. We look for a rise in borrowing costs in the mid to late 2013 with mortgage rates climbing above 4% and 10 year treasury yields climbing to 2 1/2%-2 3/4% as the global growth story takes hold. Our year end target range for the S&P 500 is 1575-1620 which assumes earning of $105-$108 per share and utilizing a 15 multiple which implies a 10 1/2 % - 13 1/2% gain. In closing Americans needs a reality check when it comes to our perennial budget deficits and ballooning debt. There are some in Washington that would have us believe this can continue ad infinitum. This is clearly deceptive and outrageous much like the person that jumps from a 100 story building that believes he is flying right up to the time he hits the pavement. We as Americans need to ditch our party colors and encourage our elected officials to make the tough decision to cut spending, if not for ourselves for the children and future generations. That being said, as stated above we believe 2013 should be a very good year as long as DC gets out of the way. It therefore is a year where we don't believe we need to over complicate things. Keep our strong commitment to the market while buying good solid companies. As Warren Buffet stated long ago, " Invest in company's any idiot can run because eventually one will". We'll be on alert for any changes to Policy, in market sentiment or economic data that may change our view and be in contact to adjust our strategy and commitment to the markets. We thank you again for your patience and confidence in the very challenging times. Yours in pursuit of the KWAN.