October 2014

………………Thoughts and Comments

Q3 Weather Alert

This week is the start of Q3 earnings season, with it getting into full swing next week.  With little to update at this juncture, we thought we try some forecasting.  While no one ever expects the weatherman to be terribly accurate, we still all listen to them hoping to benefit.  Much the same can be said about investment predictions, but still everyone prognosticates and everyone listens to the prognosticators.

We won’t go that far, but we will note a few headwinds starting with the following charts.

Euro/US Dollar – Chart supplied by S&P Capital IQ

Yen/US Dollar – Chart supplied by S&P Capital IQ

 

The dollar has strengthened against all the major currencies – quickly and dramatically.  Since May, the USD is up 8% against the Yen and 9% versus the Euro.  This will have a negative earnings impact on U.S. companies doing significant business abroad (most of the S&P 500).  This is because the economic numbers in Europe are awful and fading fast.  Even the core of the EU economic engine, Germany, has reported weakening numbers.  The Ukrainian crisis and the associated sanctions between Europe and Russia are adding to this weakness and will continue to have an impact on economies in Europe and by contagion, the rest of the world.

Also, the Fed will be ending the latest version of Quantitative Easing (“QE”) this month.  While it may be different this time (it rarely is when someone says that) every other time the Fed has removed the leverage from the stock markets, the markets have fallen rapidly and hard.  In the summer of 2011 (the last end of tapering), the S&P 500 dropped over 17% in one month.  In 2010 (the end of the first tapering), the S&P 500 dropped over 16% in two months.

Maybe it will be different this time, but I am a little skeptical.  In fact, given that margin levels in the stock market are near all-time highs, it would be none-too-surprising that following a fast, sharp sell-off, the Fed will come back to the rescue with a new version of QE.  Time will tell, but a prudent investor ought to hedge against this possibility.

The Bottom Line…

When you are worried about rain, you take an umbrella with you.  With the possibility of some volatility (which we started seeing in the past two weeks), we have put on some small hedges in addition to our continued diversification between equities and fixed income.

We have hedged what we think could be some weak earnings reports in the technology sector along with hedges against small-cap stocks.  In the meantime, we continue to be very focused on our positions, holding only companies we think are well run and have good fundamentals.  We have added a number of high qulity, very short duration securities to fixed income portfolios as well.

The next few weeks should be interesting.  We will write more on earnings next month as more data is available.

Alan E. Rosenfield, Managing Director

October, 2014

 

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