Granite Group Advisors

            This morning’s economic reports out of China show a slowdown in growth in one of the fastest growing economies in the world.  Gold, already under pressure due to the fact that Cyprus might sell its gold holdings as part of its rescue process, is in the spotlight.  We see this as a correction within a longer term bull cycle.  While there has been a movement towards slowing the printing presses here in the U.S., as the fed minutes showed last week, the fundamentals of gold are still in place.  Deficit spending continues as well as the debasement of currencies across all the developed nations; therefore, we believe that gold after this correction will resume its upward movement.      

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Last week we had two economic reports that were disappointing. First, the ISM non-manufacturing index came in below estimates and then, on Friday the March job report showed that we only created 88 thousand jobs. The markets reacted negatively to both reports, but we do not believe this is the beginning of a downward trend. What is truly important is economic growth. As we have stated in the past, we are growing albeit at a slow pace. Our expectations are the that markets are ripe for an earnings-based pullback. As we begin earnings season this week, the market will begin to trade on this data. However, don’t forget we are in a fed-induced market and although we don’t expect it if we have light earnings season the Fed’s actions will temper the markets response. We do, in the longer run, believe that regardless of the most recent data, the S&P will end the year above the 1,573 high set on April 8th.

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

               With the mini crisis averted in Cyprus the world can go back to business.  While Cyprus was not a major problem, it did remind us all of the continuing problems that exist in Europe.  Most economies in Europe are not growing and many are still in recession. Cyprus, while problematic, is one of many mini crises we shall see over the next year.  European leaders have not truly addressed their problems and it is only a matter of time before another one of these issues will come to the forefront.  Here in the U.S. , the economy is showing signs of slight improvement, but from our perspective, the equity markets are technically ahead of themselves and a pull back should happen at some point.  Whether it is triggered by a crisis in Europe or the Middle East it is inevitable that something will be the catalyst to take markets lower over the next 6 months.

                 A little more than a year ago Mario Draghi announced that he would do whatever it takes to save the Euro.  That comment gave the Euro Zone time to start working on the massive debt problems that existed in those countries.  However, very little has been done to fix those problems and the Euro area woes came back into focus over the weekend.

This time, Cyprus started the problems.  Cyprus is .2% of Europe’s GDP.  The Eurozone finance chiefs called on Cyprus to fund approximately 13 billion dollar bailout by imposing  a 6.75% tax an all cash deposits up to 129,000.00 (USD) and 9.9% for any one amount above.  If this tax does not pass the fear is that two of the country’s largest banks would collapse.  Pragmatically, who cares about a country that is a small percentage of the Eurozone? The fear is that the European finance chiefs could use the same mechanism to help bail out countries like Spain and Italy.  If this becomes the way the Euro zone does business it is possible that a run on the banks could ensue.  This is what is spooking financial markets today.  

The US markets are technically in an overbought position (not fundamentally),  and this news could be used as an excuse to sell down the equity markets a bit.  Our perspective is that the European leaders will calm the waters again, however this is a long term problem that will be with us for the forseeable future.

The early data for 2013 shows that investors have been putting billions of dollars into equity investments.  Has the retail investor finally moved forward from the fear of the past and ready for risk?  The evidence so far suggests that this trend is beginning to transpire.  However, January data may be skewed due to bonus dollars and 401k contributions.  While the market is not historically expensive, it is not cheap either. Granite Group Advisors must reiterate that in a low growth environment,  one should not be expecting a massive P/E expansion, as we have been saying since 2010.  Our perspective: the market is fairly valued and market volatility will increase but if the flows into equity continue, the market may see a temporary push higher.

During the last week we have heard from many politicians about the draconian cuts in spending known as the “Sequester”.  The mandatory spending cut is 85 billion dollars for the upcoming fiscal year. The Obama Administration just completed raising revenue of 62 billion dollars.  There is no real intent from our elected officials to cut spending because we are going to be running a trillion dollar deficit again this year. The cuts are only 8% of our deficit spending and roughly 2.5% of our overall budget with most of them coming  from the defense budget. 

A better solution to minimize the impact to the defense industry, which effects the whole economy, would be to cut spending across other sectors that have less of an impact. A few examples that would have less impact would be foreign aid, farm subsidies, energy department, etc….. The “Sequester” will not achieve the goal of a balanced budget. We believe the Obama administration must cut spending, stop creating debt and pay down our obligations around the world.

 Yesterday’s action in the stock market could be a prelude of how investors  will react in the future once the Fed decides to stop supplying our monetary system its sugar.  The comment from the Fed was that they may slow or even stop purchasing our debt, the  end to quantitative easing (the sugar).

We are in a slow growth economy and normal valuation ratios would be compressed during these times but with the Fed putting the pedal to metal we have experienced a higher than normal valuation.  The expectation should be: if the Fed stops, so will the markets.  This will put the Fed into a conundrum as they need to find painless solution to the excessive monetary sugar easing. 

Hopefully, Bernanke will find a way to get out of this predicament without hurting the economy. This will not be easy and fluctuations in the markets are sure to ensue.

                Tomorrow evening our President will be giving his first State of The Union address of his new term.  The expectation is that he will be talking about the economy and ways to create jobs.  Our expectation is there will be more political jawboning and no real offering to improve the economy.  While the President has been in charge for the last four years, there has been more regulations and costs added to every corporation and entrepreneur.  The major contributor to the mild economic recovery is the continuous pumping of liquidity by the Federal Reserve.  When that stops,  the headwinds in our economy will come home to roost if the economy has not picked up on its own.  As Nancy Pelosi said this weekend “So, it is almost a false argument to say we have a spending problem. We have a budget deficit problem that we have to address.”   Denial is not a river in Egypt.

After Fridays big run up in the equity market we now find ourselves trading at roughly 14x 2013 earnings.  Many traders on Wall Street think we have come to far too fast, especially with growth hovering around 2% and we agree.  This morning European markets renewed their belief that there is still much risk in the Eurozone.  The markets needed some excuse to sell off a bit and that is what we are seeing today.  If we do sell down, our expectation is the market will be down 3-5% before we resume this uptrend we saw this January.