We are full

We hope you had a great Thanksgiving with family and friends! Like us, we hope you are stuffed, as we believe the S&P valuations are as well.

We sent an email to private and retirement plan clients on the Wednesday morning after the election.  It was titled “Don’t Panic” and outlined the reasons for a buying opportunity. The Trump-effect of new stimulus has taken the S&P 500 to new highs. Pragmatically, all the Trump policies would not come into play for a while. At almost 17 times 2017 forward earnings with the long run average of 15, this would suggest the markets are stuffed.  A pull back of greater than 5% would be viewed as a better entry point.

Please feel free to call us at (203)210-7814 with any questions.

Pre-election jitters…

Since our July blog we have been cautious on the market. The market has moved down about 3-4% since the end of July. The elections have everyone spooked. The markets hate uncertainty.  The Trump presidency is perceived as such uncertainty, whereas a Clinton presidency is seen as the devil you know. Here is the secret: the Fed is in charge and not a President or a Presidential election. An election’s effect on the markets is only in the short term. There are only two Presidents that we are aware of, that have affected our GDP due to their policies; but that is for another discussion.

If Donald wins, the markets expect a sell off, and if Hillary wins a mild positive reaction is expected. Of course, these are very short term, knee jerk reactions. While this might seem concerning, we would get ready to buy on a significant move to downside. Here’s why: market valuations have gone from expensive to fairly valued, so we believe that any sharp selloff would be a good time to add to positions.

Here are some good reasons:

  • ISM and PMI have been positive
  • Rates are staying low ( range of 1.9-2% 10yr is still low, currently 1.83)
  • Demographics will start turning to consumption within a few years as millennials and echo boom kids begin buying stuff
  • There is a lot of cash on the sideline

We are not saying buy today. We are saying that if there is a big sell off, it would present a more reasonable entry point. We are currently at 15.8 times 2017 earnings.

Good luck, call us with questions.

It’s all about employment

It’s all about employment. The market is extremely focused on this Friday’s payroll numbers. This focus is on the payroll because it will dictate what the Fed should do with interest rates.  This week, the 10yr treasury yield climbed from 1.53% to 1.68%, meaning the markets think the Fed is finally ready to raise rates. Some market pundits are calling for a yield of 2% on the 10yr treasury by year end, however we do not see it happening that quickly.  If the numbers come in stronger than expected, it will likely cause the Fed to raise rates by the end of the year. This would clearly be a negative for bond holders, and should put downward pressure on stock prices. If the numbers do not exceed expectations, then the artificially low 10yr treasury yield will most likely trade in a narrow range. In either case, the valuations are full.

Rumors…

Our latest post was on July 28th , and our convictions have not changed. The market is still ahead of itself.   So why should you hear from us today? Because of the market rumors about Deutsche Bank’s credit lines.  Whether the rumors are true or not, they are impacting the equity markets today. If true, we do not expect another Bear Stearns-like selloff.  A selloff will still hurt, but most other banks are much healthier today than in 2008.

If there is a 5-10% or greater selloff due to a DB related incident, we would think that would present a buying opportunity. Be patient, be prudent. We shall see………………………Call us with questions

Nowhere else to go? Or is there?

We haven’t posted in a while, because we wanted to let the market run. The Fed induced a low 10yr yield; investor attitude is “there is nowhere else go”  and the S&P valuations are too high for our comfort.

Having no other option is not a fundamental, but an artificial reason to invest. We would be cautious with putting new money to work until a better entry point presents itself. We want to be clear that we are not calling for a correction, but we think the market is ahead of itself. Either the earnings catch up to the market or the market catches up to the earnings. We think the later.

You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

The U.K. leaves

Overnight the U.K voted to leave the European Union. The so called Brexit vote has sent equity markets into complete turmoil as investors around the world are trying to reprice risk. It is important to not panic as although this is a shock this is not the end of the world.

The exit itself will take time to work through and central bankers around the world are taking measures to protect liquidity and stabilize markets. The longer term risk is the complete unwinding of the European Union. As we travel through all this uncertainty it is important to remain calm and look for opportunities rather than being fearful.

Low yields

The 10 yr treasury yield has been going lower this week with a low hit this morning of 1.63%. There are many factors contributing to the drop in yields. One major factor is  that most long term government bond yields around the globe are trading with negative yields, which  makes our current yield of 1.63% very attractive.  The fed seems to be ready to raise rates so this phenomena may seem a bit odd, because normally interest rates go up when the fed raises rates.  We believe that these conditions will eventually come to pass but lower yields for longer seem to be the rue of the day.

One area that may help push yields higher in the coming years is inflation.  With the increase in labor costs, we should see an increase in inflation albeit at a moderate amount.  Presently, labor costs are surpassing expectations and this should put enough pressure on the Fed to raise interest rates. If that scenario persists, we will eventually see bond prices fall and yields going back up. If you are a risk averse investor and currently have a portfolio of bonds we would suggest staying the course; however, if you are invested in a bond mutual fund it might be time to consider reducing your position.

The Sohn Conference

Yesterday we attended the Sohn Conference. The foundation was started in memory of Ira Sohn who passed away from cancer years ago. The organization has contributed over $65 million to cancer research. Many of the speakers are legendary hedge fund managers. They include the likes of David Einhorn, Jeffrey Gundlach, Stanley Druckenmiller and many more. It is considered one of the top investment conferences in the world.
Every year the conference brings together top ideas from general equity and fixed income views. They are smart, enthusiastic and more right than wrong. Every year they were excited, last year there was body language that was neither bullish or bearish. This year we noticed a big difference, they were negative. Gundlach was still espousing how the fed cannot afford to raise rates with lower GDP forecasts. Druckenmiller was downright bearish with his best pick being gold. Unlike last year, where complacency made us nervous, this year, they spooked us.
Granite Group still believes the stock markets to be overvalued in the short term. Will they be higher next year, we believe so, but not by much. Will interest rates be higher next year, yes, but not by much. So what to do? We are looking for a catalyst to take the market one way or another, but in the meantime, be patient. Wait for weakness in equity markets to add to positions and strength in yields before adding to bond positions.
As always please feel free to call us directly with questions.

Fear of Missing Out

In our thoughts, the panic buying in the short term has driven market valuations to unreasonable levels when looking at the fundamental and economic growth rates. When 35%-40% of the DOW stocks are trading at or above their 12 months price targets, that gives us pause . Investors have a Fear of Missing Out and that is not a sound or fundamental investment philosophy.

You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

Earnings Season

As we entered earnings season last night with Alcoa reporting, we were reminded by all those who talk about markets, that this is going to be a very ugly earning season. Alcoa did not disappoint, as revenue  and guidance came in weaker than expected. The S&P is now trading at an amazing 17 times this year’s earnings estimates. One could extrapolate that with markets trading at a premium to historical averages, that a pullback would be reasonable..

 

On the positive side, the weakening of the U.S. dollar and the stabilization of commodity prices would help US companies as it makes our products less expensive for foreign companies to purchase.  The effects will not be felt until probably 3rd quarter of 2016.

 

The dim forward view on global growth this morning by the IMF and the high S&P valuation does not  provide a catalyst for higher stock prices.

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