June 20th, 2013 Market Update

After Mr. Bernanke’s presser yesterday, the markets dropped after interpreting his comments as liquidity being halted by the Fed, interest rates are going to move higher immediately, inflation will run rampant out of control – I am embellishing but the reaction was so predictable it was quite boring. As investors, these reactions provide great opportunity to reallocate funds into good businesses and I continue to do so.

On the heels of the decline in the US and Canada yesterday Asia and Europe are down in the 2 to 2.5% range today, notwithstanding the fact that China has seen manufacturing fall to nine month lows on the back of tighter monetary policy in the region to quell real estate speculation and positive news out of Europe as the economies there continue to contract at a lesser pace.

US and Canadian futures are down again this morning around 1% following through on yesterday’s declines.  US Weekly Jobless Claims were released and came in above estimates at 354000 vs. 340000.  While a negative number the trend remains consistent and improving

Bond market yields moved higher with the 10 year US Treasury moving to 2.40% which is up from 2.12% at the end of last week.

The big movers today are commodities with gold and silver leading the way down 5.5% and 7.4% respectively.  Gold has just broken through 1300 to 1296 down 78.00 as the US dollar strengthens against most other currencies.  Oil is off 1.58 to 96.91 and the loonie is down more than a half a cent at 96.74.

Looking back at Mr. Bernanke’s comments I would suggest that reading through the minutes and disseminating his commentary, unlike the immediate liquidity solution that occurred when the asset buying program began the withdrawal will be slow and calculated based on economic conditions and he made it clear that an increase in the Fed Funds Rate “far away”.  The street however is suggesting this is happening now – immediately.  10 year interest rates are at 2.4%, not a yield that would cause any to be excited about in regard to an income portfolio.  A market correction is healthy as in most cases it takes the weak money off the table and allows the investor to step in and find value

Tony Dwyer, Canaccord Genuity US strategist is still committed to the levels he has forecast for the next twelve months.  His comments are below:


The underlying positive fundamental and tactical framework of the market that has driven our view has not changed. Our fundamental thesis remains firmly in place, and until we get much stronger economic numbers or core inflation expectations begin to rise, we expect the Fed to stay on hold. Bottom line: we continue to urge investors to not fight the Fed or the tape, and with the uptrend in place, the economy in the fundamental sweet spot, and the S&P 500 (SPX) trading at less than 15x a conservative 2014 estimate of $115, our conviction level for SPX 1955 remains high.

Multiple expansion tracking prior cycles

The SPX is up 144% and 22% since the 2009 and 2012 lows, respectively. Given those returns, how could the market not be ahead of itself given the subpar economic performance in the U.S. and weakening global growth outlook on the back of emerging markets and European issues? The answer is the SPX is in the midst of a multiple expansion very similar to that of the mid-1980s and mid-1990s (Figure 1). While that doesn’t guarantee the similarities continue, we believe investors are far too focused on the degree of fundamental change and each little nuance vs. the simple direction of fundamental change and valuation trend, which remains positive. If the current trend continues, our 2014 target could be conservative by a couple hundred SPX points.

But isn’t the SPX ahead of itself?

The current economic recovery has been one of the slowest in post WW2 history and many fear the gains are not sustainable. Let’s use the speculative grade debt market as a way to tell. If the returns of financial assets were based on fundamentals, how can one of the highest risk categories of corporate fixed income be trading near a record low yield and default rate assumption given the subpar economic domestic and global backdrop? The Barclay’s High Yield Debt Index reached a yield of 22.6% and double-digit default rate assumption in 2008 and has since rallied to as low as 4.98% with a low-single-digit default rate assumption! How can this happen given the slowest economic recovery in post WW2 history, a near hard landing in China, a “Fiscal Cliff,” a handful of Euro Zone breakup fears, and pressure in commodities? The answer can be found in the one thing that never changes: human nature. As fear decreases, the appetite for risk increases in the search for a better return – as long as there is a positive trajectory in the fundamental backdrop.

There are going to be continued fluctuations in valuations and when you get your monthly statements they will be apparent, with that said I am still confident in the longer term recovery and continue to monitor the situation closely and make the appropriate changes when necessary.  Please don’t hesitate to call or mail with any questions or concerns.

Kenneth A. Dick, BA, CIM, CFP, FCSI

Branch Manager & Portfolio Manager | Independent Wealth Management

Canaccord Genuity Wealth Management


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