April 2017

……….Thoughts and Comments

Market Review – Q1 2017

The S&P was up 1.8% in January, up 3.7% in February and down 1.4% in March and the down-trend has continued in April.  Much of the move in the first quarter was based on the belief that the Trump administration would reduce regulation, reduce the cost of Obamacare and reduce taxes.  At the same time, economic news continued to be positive, albeit GDP was still growing under 2%.

In March, it became more obvious that the Trump administration would have to fight to achieve anything and that everything would take longer than hoped.  While there has been some significant slowing of government regulation, Congress’s various factions will fight him on anything that can’t be done by presidential mandate.

For all the euphoria, the markets, while up, were not up broadly.  Base metals (the “infrastructure trade”) rallied, only to give back most of their gains.  The same with banks.  As of this writing, banks are flat for the year after being up 10%.  The only areas that performed were technology stocks (but not all) and healthcare stocks.  Energy stocks were down over 7% for the quarter and were the big loser.

Interest Rates – Conflicting Views

The Fed raised rates in March and are currently expected to raise at least two more times this year, yet treasury yields are below where they were when President Trump was sworn into office.  Currently the 10 year is yielding 2.28% (down from a high of 2.60 on March 13) while  the short end of the curve is higher, leading to tighter spreads between 2yrs and 10yrs.  Historically, this would suggest concerns of a recession or at least a slow-down in demand for debt.

As we have noted above however, this does not reflect the view of stocks either domestically or in the emerging markets, nor does it reflect the movement of junk debt.

What to do, what to do?

We have added slowly to the energy sector as stocks have sold off.  We added to banking stocks after the initial sell-off and may add to them again as we get more information from first quarter earnings.

Expectations are for 9% earnings growth (year-over-year) which we think is excessive and so we are waiting for results before adding much.  The markets have had very little volatility in Q1, but that seems to be picking up which will help our volatility strategy which helps hedge excessive optimism in stocks.

We are adding a little to fixed income that will benefit from higher rates as well (IOs and adjustable rate debt), but still be stable if rates actually drop.

Gold stocks have picked up steam in the second quarter due to French and Italian elections uncertainty, as well as North Korea and Syrian issues. We are positioned well but do not expect to add to these positions at this point.

The Bottom Line

The markets continue to move based on short-term trading rather than fundamentals.  While this is frustrating, there is one thing I am certain of: the markets always come back to fundamentals.  It may be a short a or long period until that happens, but it will happen.    While stocks as a whole may be up, it is all pure speculation and that is fine – as long as you: 1) understand and accept that it is speculation; and 2) you are willing to expose yourself to significant down-side risk.  There is a reason you make a huge amount of money betting on 00 at the roulette wheel.

For those like us that don’t like those risks, stay focused on quality, diversity and fundamentals.  Combined with reasonable yields, we will get through this and prosper on the other side.


Alan E. Rosenfield, Managing Director

April 2017



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