Catepillar reported a huge increase in earnings and raised its forecast for the remainder of the year. This is important because Caterpillar sells equipment to construction and mining companies globally. In addition, it was noted that orders for new equipment exceeded shipments so the company will need to increase production (i.e. hire new workers). This earnings announcement, combined with positive earnings reports from 3M and Honeywell, whom also sell to industrial companies, is good news.
Additional good news came from UPS noting higher earnings due, in part, to increased package shipments. Also, American Express and Capital One both noted increased spending and fewer bad loans from their credit card customers. Overseas there was positive economic news from the Euro-zone as Germany reported robust growth, which helps offset the weakness of its counterparts such as Greece.
Offsetting or counterbalancing this good news was the fact that the number of unsold homes in the U.S. is increasing, and the Baltic Dry Index (BDI) just recently rebounded from its longest losing streak in 15 years. You may ask, what is the BDI and why do I care? It is important because the index tracks worldwide international shipping prices of various dry bulk cargoes. The index provides an assessment of the price of moving major raw materials by sea. Thus a declining (BDI) is representative of lower shipping rates, and reflects lower demand to ship raw materials, which eventually are processed or manufactured into products. Ironically, the rates for shipping manufactured goods (i.e., container shipping rates) have actually been steadily increasing. As such, both of these items should be important leading indicators of where global economies are headed. However, in the short-term, they are sending mixed signals since demand to ship raw materials is weak compared to demand to ship finished or manufactured goods.
Telling non-for-profits to raise their risk level
To be a contrarian, and a profitable one at that, one must be able to stick their neck out when others won’t. This is exactly what Mr. Verne Sedlacek CEO of the Common Fund has recently done in his interview with CNBC (see attached link below – I highly recommend viewing it).
http://www.cnbc.com/id/15840232/?video=1548330548&play=1
Mr. Sedlacek’s firm is an advisor to endowment funds, which are long-term oriented and have a goal of earning 5% in excess of the inflation rate. As such, when it comes to long-term investing for conservatively minded institutions, he knows of what he speaks. He notes that endowments in his opinion cannot achieve their investment objectives long-term by allocating 100% of their funds to fixed income and bond type investments. They must consider stocks, real estate, and even alternative investments (that in some cases are not available to the average investor).
Currently, fear has resulted in investors over-weighted in bonds. Interestingly, 10 years ago investors were over-weight in technology stocks. This resulted in stocks being overvalued at the beginning of the last decade. As compared to now, bonds are considered by many to be overvalued. It just seems that the herd syndrome just continues, but only to different investment categories.
I’m not advocating all investors placing 100% in of their funds in stocks or bonds; however, it is interesting to hear Mr. Sedlacek talk about conservatively-oriented, long-term minded endowment funds having as much as 70% – 75% of their allocation in “risk” assets (i.e., stocks, real estate, commodities, etc.). This type of investment allocation and objective advice from someone who manages tens of billions of dollars for institutions (who want their “nest egg” to continue into perpetuity) seems to get lost on the average investor whose emotions dictate their investment allocations / strategy.
What history says about what happens after the market bounces off its lows?
The following chart illustrates that the S&P 500 has been quite resilient for the five-year periods following bear market lows. Please note, history is no guarantee of future results, but it is reassuring to see that the S&P 500 has averaged 18.95% annually for the five-year period following market downturns of at least 15% and more than 80 days. This is one case that it would be great if history did repeat!
I find some the previously noted facts listed in this commentary encouraging, but that doesn’t mean I am not still concerned about some the economic headwinds facing us. The recovery of the global economies and stock markets are like a marathon. We’ve made considerable progress; however, we still have the majority of the race ahead of us and some hills to climb.
Quotes
“As a historian, I think about the past. But, as a parent, I think about the future.”
Alice Greenwald, museum director
“Friends and good manners will carry you where money won’t go.”
Margaret Walker, writer poet
“He who is virtuous is wise; and he who is wise is good; and he who is good is happy.”
Boethius, philosopher
“A single conversation across the table with a wise man is worth a month’s study of books.”
Chinese Proverb
Tony Moeller
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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