Posted by admin on March 8, 2012
Beware the Ides of March or Be Aware?
It makes little difference whether you have knowledge of ancient history or the writings of William Shakespeare, like most people, you probably associate the Ides of March with something negative or as a fateful date.
It was on this date, in 44 B.C. that Julius Caesar was assassinated by his contemporaries in the Roman Senate. And, some 1600 years later, Shakespeare portrayed the tragedy in one of his classic plays based on Roman history. In fact, it was Shakespeare's retelling that created great awareness of the quote: "Beware the Ides of March". In Shakespeare's play, a soothsayer warns Caesar about the danger he would soon face with these words.
However, the Ides of March wasn't always associated with Caesars fate. Prior to, the Ides of March was a festive time for people of the Roman Empire. It was a time for dancing, singing and drinking while toasting to good health, prosperity and a long life. Not so different than how our contemporary New Years Eve is celebrated each year.
The Ides of March began with the Festival of Anna Perenna - the Roman Goddess of renewal, health, plenty and for living a long life. While the origins of Anna Perenna are uncertain, her name translates as to live through a year (Anna) and to last many years (Perenna). In ancient Rome, the ides of March occurred on the first month of the Roman year when the moon was full. Before the Julian calendar, March was considered the first month of the year because that was when flowers began to bloom and newness was all around. In modern times, the ides of March corresponds with 15th day of our third month.
Given various geopolitical and economic worries emanating from and around the former Roman Empire, market participants may be concerned that we should beware the Ides of March. Maybe so, but its not certain. It is not uncommon for investors to use the immediate past to extrapolate from and forecast into the future. However, the issues plaguing the markets are not always as simple as they seem and the wiser path may be one where investors are better served to be aware.
Read on and well explore the major issues dominating the economic landscape as March presses forward.
The Market's Wall of Worry
Unlike Caesars fate, which could likely have been averted had he received greater intelligence than a soothsayers cryptic warning, today's media have been doing a good job of keeping global concerns in the forefront. However, such sensational coverage, coupled with conflicting media sooth-sayings, may be offering investors a message that appears just as mysterious or obscure as that given to Ceasar. Lets dive in and I'll try to clear away some of the noise.
One significant and potentially painful economic threat continues to be the European debt crisis. Toward the end of last year, financial market tensions over the government debt woes of Portugal, Italy, Greece and Spain (hence, the PIGS) were signaling that the Euro Union was on the precipice of a banking collapse. Then, newly appointed European Central Bank Head Mario Draghi quelled fears by injecting a trillion Euro into Europe's banks through his LTRO (long term refinancing operations) program. This was the ECBs equivalent to Quantitative Easing or money printing which prolonged the problem for the moment. The LTRO program was scheduled to end on the last day of February and Greece faces a debt payment of 14.5 billion Euros on March 20th.
Greek political leaders have been working feverishly to hammer out a debt restructuring deal beforehand and the negotiations are quite fragile. Private-sector creditors are being asked to accept a write-down of 50% or more on the face value of their investments while the ECB expects full repayment. Additionally, many of these investors purchased credit default protection (insurance) and recently learned that industry rule makers determined that a voluntary write-down of the Greek debt would not trigger the contractual terms of the insurance. Hence, they won't be able to recover any of the loss from their insurance.
There is no easy fix to Europe's debt woes and their economy is already showing signs of slowing. The greater fear is that a messy handling of these challenges will cause a severe recession and send shockwaves felt by their global trading partners. For example, Europe imports a lot of goods and services from the U.S. and China - not to mention others. If they import a lot less, we're going to feel it - maybe.
On another front, a second significant threat involves the dramatic developments between Israel and Iran. Before this, Iran was already threatening to close the Straight of Hormuz - which is a critical pathway for petroleum exports - in response to tightening economic sanctions from the U.S and European nations. There is a possibility that Israel could make good on threats to bomb Iran in a months time. Prime Minister Benjamin Netanyahu is convinced that Iran is on the verge of having nuclear weapons, which would leave Israel vulnerable to destruction. To everyone not living in or around that region, consider yourself blessed as these are serious threats; and for those in the region, you have my prayers for a peaceful resolution.
These events have pushed oil prices to the highest levels seen since 2008 and U.S. prices at the pumps have been rising steadily as a result. If Israel strikes, it is believed that gas could top $5 a gallon for a time. And the impact of higher oil prices is not simply causing economic pain for only the U.S. The additional worry here is that higher energy prices rapidly translate into greater reduced consumer spending than the incremental cost. As consumers pay more for consumable petroleum products, they have less to spend on other things. But, without knowing how high prices may go up, consumers will begin to save more and spend less in an effort to prepare for the worst this is the more common initial reaction before they begin to change their energy consumption habits.
Lastly, what seems like old news, there is a continuing concern that China's growth will slow significantly this year and that their real estate bubble will burst.
I could go on and discuss issues like the U.S. government's spending and debt problems. Or, how taxes are scheduled to go up when provisions of Obama-care begin to kick in and the Bush Tax Cuts expire at the end of this year. As these issues seem to be less imminent threats to the economy today, I'm opting to just push this off as noise for now.
But, make no mistake, the Euro-zone debt and Iran issues could serve to derail the global recovery, or worse - make global economies suffer. Yet, on the other hand...
The Market's Silver Lining
As published by I.H.S. Global Insight on March 2nd:
The Federal Reserve was front and center last week. From the latest Beige Book report, we learned that committee members are receiving upbeat news from their regional business contacts. The report; covering mid-January through February; included anecdotal information that the economic recovery was firmly on track during the first months of 2012. The most significant addition to the report was that for the first time since the end of the recession, housing was said to have improved in most districts. Otherwise, consumer demand was generally healthy, although mild weather hurt sales of winter clothing and other seasonal items. Nevertheless, most at the Fed believe that the pace of economic growth should be modest this year, and unemployment high. What does this mean for policy? Currently, there are no plans to either scale back the forward rate guidance (and raise rates early) or initiate QE III at this time. ...
This past week (February 27March 2) was a heavy one with regard to data, and taken together, the news was generally upbeat, although there were a few negatives. Fourth-quarter real GDP growth was unexpectedly revised upward, from 2.8% to 3.0%. Other than stronger-than-first-estimated final sales, the biggest news in the report was an upward revision to private wage and salary growth during the final two quarters of 2011. The revised figures paint a healthier picture of consumer finances and lend more reason to believe that consumers can withstand the headwinds brought on by rising gasoline prices. Personal income rose 0.3% in January, while spending rose 0.2%; upward revisions to December show the saving rate higher than initially thought. Consumer confidence surged in February after January's dip, and is at the highest level in a year. And despite higher gasoline prices, motor vehicle sales breezed past expectations in February, notching 15.0-million units (SAAR). Not all of the data was rosy, however. Durable goods orders plunged 4.0% in January, although plummeting aircraft orders overstated the decline. Home prices fell again in the S&P/Case-Shiller index for December; the 20-city composite index was down 4.0% year on year to a decade low. The ISM manufacturing index eased to 52.4 in February on a drop in vendor performance, which measures supplier backlogs. Construction spending fell in January, but upward revisions to November and December should have positive growth implications.
Even if you don't grasp all that was reported above, you should come away with a sense that there are greater positive trends occurring in the U.S. economy than negative. Yes, growth is occurring slower than hoped for. However, the slow growth trend may actually be quite reasonable when you consider the severity of the recession experienced and what we are dealing with in the aftermath. Consumers and business investors are still working towards regaining confidence despite the worries mentioned above.
Add to this that central bankers around the globe have been flooding their economies with currency in an effort to increase demand for goods and services and to alleviate government debt challenges. In fact, we've likely never seem a time when so many central bankers have been easier [accommodative] than they are now. This type of medicine is thought to have the ability to stimulate greater economic growth but it could spur significant inflation as a result also. And, lastly, corporate profits appear to still be growing faster than the economy.
All this looks quite good to me as I am a believer that slow steady growth is more preferable to Wall Street and Main Street than rapid uncontrollable growth. Im sure the unemployed or under-employed wont see it this way as they struggle with the duress of financial instability. However, business planning becomes much easier in a slow steady growth environment. As a result, when hiring picks up, there is a greater probability that the new jobs created are more stable and longer lasting. Under a slow, steady growth scenario, business and personal financial planning becomes easier and decisions made are more soundly arrived at and deliberate.
Under a slow growth scenario, investing becomes easier as well. Investors can focus on evaluating trends, finding value and more easily assess their risk taking. Oh what a wonderful dream it would be to once again not be subject to the headline news wealth roller-coaster effect. It seems that many investment decisions are being made these days based upon the latest news headline.
Beware or Be Aware?
As we approach the Ides of March, it is important to understand that we have a number of macroeconomic forces opposing each other. And using the coiled spring analogy, the spring is being compressed tighter and tighter. Slow steady growth is pushing from the bottom up; and geopolitical worries are pushing from the top down. Unfortunately, its quite a challenge to be certain which force will overcome the other from moment to moment.
On a positive note, slow economic growth is applying steady incremental force from below. However, as geopolitical events unfold, they pose the challenge of potentially applying strong and rapid downward pressure. The Ides of March brings two events to remain aware of: The Greek debt refunding on or prior to March 20th; and the developing situation between Iran and Israel. While both geopolitical concerns represent long-term challenges, there are also short-term hurdles and outcomes to be observed in March.
In my previous article, "It's a Bah! Humbug! Market This Year", I set out to explain the market volatility experienced at the end of last year discussing the concept of how risk premium plays a role. If you missed the article, it remains available for viewing from our website. But, to summarize: More often than not, market prices are based upon a long-term view of its expected future cash flows. And, the risk premium represents the extra return investors demand to be compensated for the risk that the expected future cash flows may not materialize as projected. Simply put, if the risk premium rises rapidly, market prices drop just as fast.
As an investor and a fiduciary, I'm more optimistic than concerned - but not so optimistic to be all-in. So, my own strategy is to be aware and follow the headlines. Whats yours?
ELF's Outlook and Performance
For the first two months of this year, our portfolios ranged from 50% to 60% invested with the remainder in cash. A small portion has been positioned a volatility hedge - as volatility increases, so does its value. The hedge may not be perfect, but will likely offer some protection against negative event risk. In that same time period, U.S. and global market indices rose significantly as optimism overcame worry. And, despite holding such high levels of cash and the volatility hedge, our asset allocation selections still allowed us to participate in most of the run.
Our portfolio clients ended the month of February up 2.27%. Here are some comparative numbers for you to review:
For disclosure purposes, past performance is not necessarily indicative of future results and ELF Capital Management LLC (ELF), formerly Hoffman White & Kaelber Financial Services LLC, cannot guarantee the success of its services. There is a chance that investments managed by ELF may lose a substantial amount of their initial value.
ELF is an independent discretionary investment management firm established in February 2003. ELF manages a strategic allocation of primarily exchange-traded index funds (ETFs), and may invest in other carefully selected securities. ELF may also employ hedging techniques, through the use of short positions and options. ELF manages individual portfolio accounts for both individual and business clients.
The ELF ETF Strategy returns presented herein represents a composite of actual results from all client portfolios managed by ELF. Currently, it is the only composite presented by ELF and separate client account portfolio positions are substantially similar, except as may be modified for retirement plan accounts and accounts with net equity of $60,000 or less. There is no minimum account size for inclusion into ELFs ETF Strategy composite and accounts with net equity of $60,000 or less have a tendency to downwardly skew the combined results.
ELF's performance data presented herein includes the reinvestment of dividends and capital gains; as well, ELF's ETF Strategy composite returns are presented after deducting actual management fees, transaction costs or other expenses, if any. ELF charges an annual investment management fee as follows: 1.25% on the first $250,000; 1.00% on the next $750,000; 0.95% on the next $4,000,000; and, 0.75% thereafter.
Broad market index information provided is solely for the purpose of comparison. This index data was obtained from third party sources believed reliable; however, ELF does not guaranty its accuracy. An investment account managed by ELF should not be construed as an investment in an index or in a program that seeks to replicate any index. In most cases, investors choose a market index having comparable characteristics to their portfolio as a benchmark. An ETF is a security that tracks an index benchmark or components thereof. As ELF actively manages a strategic allocation of primarily ETFs, selecting a comparable benchmark poses significant challenges. Over time, the broad market indices provided above may exhibit more, similar or less variability of returns and risk than ELFs strategic allocation. As well, the broad market index information provided above reflects gross returns and have not been reduced by any estimated fees or expenses that a person might incur in trying to replicate an index.
Copyright 2012 ELF Capital Management, LLC. All rights reserved.