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.

A Technical and Fundamental Perspective

The markets are technically overbought in the short term.  In addition, they are fundamentally overvalued.   As of yesterday’s close, the S&P was overbought according to Granite Group’s technical indicators.

Fundamentally, the S&P is trading at 17 times 2016 earnings which is well above the historical averages. At this juncture, you should be cautious with additional equity investments.  At the current market multiple,  we do not see a huge upside. As we have said before, there will definitely be more volatility, but also better entry points and opportunities.  On a slightly longer-term view , the S&P is trading at 15 times 2017 earnings.  Assuming the current projections for 2017 are accurate, then it is possible for a slightly higher S&P in 2017.

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


Not too much room for error

Since our post on Feb 12, the markets are up an amazing 8-9%. The S&P is now down about 3% on the year. We have repeatedly spoken about valuation, stating that 14-16 earnings is a more reasonable valuation given the low growth environment. The markets may climb the wall of worry, but at 16.5% times 2016 earnings, we believe there is not much room for error.

The right market valuation?

The good news is the support level on the S&P500 of 1820  held yesterday and is poised to open up today. The market is trading at about 15 times this year and 13.5 times next year’s earnings. At yesterday’s close, the market is now reasonably valued. If one takes energy out of the S&P calculations, earnings would look brighter.

The question for investors is: What is a reasonable valuation? In the graph below, we took the technical resistance levels and divided them by the estimated 2016 and 2017 S&P earnings to get a multiple. The ten year average is 14.1 times. If you believe a recession is coming then one would be expecting a much a lower multiple. We would love to see your comments on this.

S&P 500 resistance levels                             2016 P/E               2017P/E

S&P 500 at 2134 (2015 High)                         17.8x                     15.8x

S&P 500 at 1950                                                16.25                     14.4x

S&P 500 at 1867                                                15.5x                     13.8x

S&P 500 at 1820                                                15.1x                     13.5x

S&P 500 at 1740                                                14.5x                     12.9x

S&P 500 at 1687                                                14x                         12.5x

S&P 500 at 1560                                                13x                         11.5x

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

Street Perceptions

We have not commented as often this year about the market volatility, because our stance has not changed since the end of December.   At this moment, we still do not see a recession, nor do we see a surge in economic growth. Our writings in December explicitly said that the valuations in the markets seemed too high for the tepid growth rate.  We simply did not see the justification for a 10% return on equities that is the general consensus on the street for 2016.

The street’s guesstimate for the year-end S&P 500 target, has been lowered to 2175 from 2250.  This is 17% higher from current trading levels. In December, we indicated that the S&P 2016 target  would be closer to the 2015 close of 2040.  This should hold true, barring any unforeseen recession , war, terrorist attack or anything else.  If companies have an earnings recession, then the S&P 500 targets would be lowered.

If a family, entity or a company retirement plan, would like more market color/education or more personal advice, please feel free to call us directly at 203-201-7814.  You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

Technically speaking

The Bad news: as the market looks to break the 1867 technical support level today, the next support level is 1820. If the market breaks through the 1820 mark, the next spot is the mid to low 1700’s. That would be a full 20% down from the 2015 high.

The Good News: the US economy, without  energy, is doing OK. The largest variable cost to many businesses is oil.  Cheaper oil helps business margins. At 1820, the market would be trading at 13 times 2017 earnings which is below the historical averages.

If earnings come in as expected this year and next, and the market continues its downward bias, this would present a good buying opportunity in the markets.

If you would like more detail, call us at (203) 210-7814.  You can follow Granite Group Advisors on LinkedIn and learn more about our Wealth Management and Corporate Retirement Services on our Website.

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