Granite Group Advisors

On Friday, the technical break to the downside, below 1972, was worrisome. The next resistance level is 1925. Today the markets are significantly trading down because of weak global commodity news. There is no real major US economic news that warrants the predicted US selloff other than trading down in sympathy. As usual, markets overreact. The markets are not expensive nor are they cheap. As we mentioned on August 24^th, the markets were a good entry point based on 2016 earnings.  Again, we think if the markets really get hurt from here, this would be a another good entry point. The lesson is: be patient, be prudent and do not pay too much attention to the talking heads.

Please call us directly with any questions.  You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

As a follow-up to our August 21^st and 24^th blogs, we believe the markets have properly reset the valuation levels. The average market multiple for the S&P 500 is 14.1 times earnings. Before all the recent market volatility, the markets were close to 18 times earnings; slightly expensive given the US economy’s slow growth (see May and June blogs). The market is now trading at roughly 15 times 2016 earnings. That is not expensive, nor is it dirt cheap.

The real question is: What is the correct market multiple? Granite Group believes that 15-16 times forward earnings is about correct when taking into account the low interest rates and current growth forecast. If Granite Group is correct and the markets trade at 15.5 times forward numbers, that would imply an approximate S&P target of 2015 in the next couple of quarters and eventually, 2250 based on 2017 earnings. The S&P 500 is at about 1950, the potential upside to the S&P target is about 3.3% and eventually 15% barring any unforeseen events.

Please call us directly with any questions.  You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

Recently, Calpers, the largest retirement system in the country, announced that they are contemplating their allocation to stocks and bonds. We are always surprised at how frequently large entities and individuals make huge shifts in allocation policies. The big shifts from one asset class to another asset class is generally called performance chasing.  When an entity or individual makes a decision to shift assets from underperforming to out-performing, they are making  one of the oldest mistakes in history.  Granite Group encourages clients to take a hard look at how much risk a client really wants to take and stick with it. Many investors change their thinking based upon seeing outsized returns in an asset class that they are not invested in.  This makes sense emotionally, but not fundamentally. The reason is simple:  your risk is how you really want to invest.  Outside forces can change your thinking in the short term, but not the long term.  Investing with a customized risk profile is a long term game and should be played with consistency.  It’s all about discipline. We can never use the word guarantee, but in this case, we can guarantee that constant reallocation will lead to higher risk and lower returns. The only thing consistent about repetitive reallocation is inconsistency.

This may be self-serving, but if you are looking for an advocate that will customize investments according to specific risk requirements, please feel free to call us directly.  You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

As the US markets get ready to gap lower this morning, we want to reiterate our Catch a Falling Knife blog from Friday. On Friday, the markets broke several short term resistance levels all in one day. Support levels become meaningful if broken. As we said on Friday, a breach below the October 2014 low in the mid 1800’s would be frustrating. The historical S&P average is 14 times earnings. We are not far off from the average. We can never quantify market hype, but this is starting to feel like “capitulation” because of the sharp selloff in such a short period time.

European markets are now below the levels that were reached before the quantitative earnings announcement last fall. The emerging markets are at the cheapest levels in years. The US markets, including this morning’s rout will put valuations back to a reasonable level. Nobody can catch a falling knife perfectly, but if a person has a risk appetite, the markets are at a much better entry point today than they were 6 months ago.

We have been warning all year that markets have been fairly valued to fully valued with certain buying points on dips. Technically, the markets are oversold, but yesterday’s break of the S&P below 2040 is a milestone. The next support levels are 2011, 1990 and then 1972. That is 1.2%, 2.2% and 3.1% lower from yesterday’s close. The ultimate break would be the October 2014 low of 1848 which would be 9% lower. (We think that would be tough to get to) Fundamentally, investors should focus on 2016. If we look at the estimates for 2016 earnings, the market would be trading at 15.5 times earnings, which no longer implies an expensive market. For 2017 , the markets are trading at roughly 14 times estimated earnings, which is the long run average.

The old expression of “Don’t catch a falling knife” seems to come into play with market downturns. However, at this point, we would leg in on further weakness. The technical break yesterday is not good, but fundamentally, it does present a buying opportunity. As per our 12/31/2014 quarterly commentary, we were looking for single digit returns for 2015 and 2016. We still believe that is fundamentally intact. Please feel free to call us.

Early this year, pundits were talking about how the equity bull market would continue, but that thought has seemed to vanish.  Europe and Japan continue to stimulate their economies in the form of quantitative easing, but in a surprise move this morning, news broke that China was deliberately devaluing its currency. This news has taken the markets lower,  as  the idea that the world economic slowdown has taken hold.

The US GDP numbers for the first half already showed signs of a slowdown  and the US had been the nicest house in a bad neighborhood.  During the last month or so, the markets have pulled back; with some indexes negative on the year (especially in Emerging Markets which are more commodity oriented).  At the moment, Granite Group believes the Fed is set to raise rates.  This will surely make our currency even stronger,  and the stage is set for a global slowdown. Time will tell, but one thing is for sure, a strong dollar will continue to hurt our economy.

Please feel free to call us directly.  You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

We are several years into the Greek crisis and not too much has changed since it started.  While a Greek exit  will certainly cause  losses for many investors, Granite Group believes that it will be a short term phenomena. The Greek situation will not materially impact the markets in the long term because of its de minimis contribution to world GDP. We hope that Greece leaves the union as any deal will not resolve the crisis, but just prolong the inevitable collapse.  As proof, the IMF will consider Greece in arrears and not in default when Greece misses their June 30^th payment. Granite  Group believes it is time to bite the bullet,  kicking the can down the road for another 5-9 months will never achieve a permanent solution.  Our advice to Greece and to the ECB, leave or kick them out.

Please feel free to call us directly.  You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

We’ve been saying for several months that bonds would not be the best place to be, for making any decent  return in the cycle. The ten year treasury yield has gone from a low of 1.6% to almost 2.50%. That is over a 50% back up in yields  this year. While most firms are calling for much higher rates by year end, we are not as optimistic on higher yields. Unless the economy picks up in the second half, we do not see a reason for the Ten Year treasury yield to go too much higher from here. We are not calling a top on the 10yr yield,  but we believe the biggest percentage move is behind us. At this point, if you are a bond buyer, you might consider dipping your toe in slowly, until a clearer path evolves.

Today we saw an enormous rally in the 10yr bringing yields close to 2.4% which means bond valuations went down.  The continuation of disappointing economic numbers should push the Fed off from increasing rates.  There are many on Wall Street that feel the market should be trading at a premium simply based on the low risk free rate of the US treasury.  Granite Group believes that higher rates do not work well with equity markets that trade at a premium valuation.

The slew of bad economic data that has come out recently does not bode well for growth in the second quarter.  With a preliminary first quarter GDP of 0.2 and with many economists predicting it will be revised negative,  it is looking like the fed’s GDP growth target will not be reached again.  Interestingly enough, with all this bad data, the market is still trading at  a nice premium to historical P/E averages.  Currently the S&P 500 is trading at roughly 18 times earnings while historically the average is 14 times earnings.  Our perspective is that, due to the low interest rate environment, investors had nowhere else to go but into the equity markets. While the fed has telegraphed their intentions of raising short term rates, any move up in yields on the longer end of the curve will send stocks down.  We have seen this happen multiple times this year.  Stocks move up, yields move down, and then the big reversal.  This is why the markets are seeing such increased volatility.  This range movement in both the equities and bonds is our expectation for the rest of the year!