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Steady As She Goes

| May 12, 2015
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We don’t see the “Sell in May and go away” scenario materializing this year.  Instead, we see the market trading in a tight range.  With that in mind, we would like to compare the direction of the market to the story of a ship at sea…

The veteran captain of a ship may cry out from time to time, “Steady as she goes!”  To the novice, the waters may intermittently appear choppy and unsettling.  The experienced helmsman, though, has charted out a plan.  More importantly, he knows how to read the signs of change on the horizon, utilize his available tools to attain adequate information, properly circumnavigate any obstacles along the way, and safely arrive at the planned destination.  While we cannot claim to be nautical experts and have no plans to set sails across the vast ocean, we do pride ourselves on navigating the investment markets to assist our clients in securely reaching their personal goals. 

The theme for this quarter is quite similar to the last, as we remain positive on stocks but acknowledge that volatility will persist.  This type of market works well with our active management strategies, since we can create value for clients by trading the ranges and targeting specific prices for long-term purchases and sales.  Internationally, we are attuned to monetary easing policies and their global impacts on exports, currencies, and stock prices.  Domestically, we are closely following economic indicators, the Federal Reserve interest rate hike timeline, and corporate profit margin trends. 

Outside of the United States, nations around the world have continued with expansionary monetary policies.  Just in the first quarter of 2015, 30 central banks cut interest rates.  This correlates to 85% of the US trading partners.  The most prominent of these quantitative easing measures came on January 22, when the ECB announced a massive €1 trillion asset-purchase program.  The impact of such actions has been threefold.  First, bond yields globally are at all-time lows.  Surprisingly, this has caused roughly 33% of the European sovereign bond market to have fallen to negative yields.  In other words, creditors have to pay in order to lend money (feel free to scratch your head).  This global demand for yield has and will keep the intermediate- and long-term US Treasuries low for a long time.  Secondly, the zero-sum nature of currency adjustments means that currency weakness generated by stimulative central banks must flow to areas of relative strength, which has supported the US dollar.  Compared to the dollar, the Euro depreciated 11.2% in the first quarter to arrive at an 11-year low.  This has provided a tailwind for European exports because it essentially makes their local goods cheaper in the global markets.  Furthermore, a competitive Euro tends to have an outsized impact on Europe’s economy because it is largely export based.  In contrast to the US, in which exports represent 13% of GDP, exports characterize a sizable 42% of the economy in the Eurozone.  Thirdly, international stock markets have responded positively to these easing measures, thus inflating asset prices and allowing for improved stock performance.  Currency movements aside, notable first quarter returns included Japan (10.21%) as it is likely exiting a recession, Germany (8.28%) with its export economy and cheapening currency, and China (8.12%) due to lowered growth expectations already being factored in and an array of accommodative tools at their disposal.

Let’s now take a break to further explore the impact of currency appreciation for the United States consumer and investor.  The stronger dollar (and cheaper energy prices) is a boon for US consumers, since it means that foreign goods are now cheaper.  For example, if you are purchasing coffee in Florence for €4, your cup now costs you $4.32 versus $5.50 (a savings of over 20%!) as the currency has shifted from $1.38 per euro to $1.08.  Conversely, if you are an investor with non-US assets, the returns on your investments will be affected when you translate your investment from its local currency back into dollars.  With the dollar appreciating, many US investors will see the value of certain international holdings decline in currency terms as returns are translated from a weaker euro or yen to a stronger dollar.  It is the opposite of receiving the traveler’s discount on that coffee.  This translation effect represents a headwind for larger US-based multinationals that depend on exports.  As a result, many corporations reduced earnings expectations for the first quarter and high profit margins have come under modest pressure.  These are factors for volatility in the markets, although corporations have tended to beat those diminished expectations through earnings season.  Key indicators suggest that this trend of a strong US dollar is here to stay awhile due to pending rate increases, improving employment data, and surging domestic oil production.  In the long-term, the strength of the dollar is a positive because it highlights the nation’s growth and leadership in the global economy.

According to a recent report by Fidelity Investments, small businesses have started to raise compensation and households are finally starting to anticipate incremental income gains.  Coupled with falling gasoline prices, a stronger dollar, and muted inflation, the outlook for real income growth is the brightest in a decade.  Regarding Federal Reserve interest rate hikes, it is unlikely that monetary policy will be tightened to an extent that would harm economic growth this year.  Fed Chair Janet Yellen has made it clear that monetary policy will remain data dependent.  She also responded to critics that “just because we removed the word patient [in the latest statement] doesn’t mean we are going to be impatient.”  As the Fed has shown since the downturn of 2008, it will remain extremely accommodative to support a healthy economy and stable markets.  Any rate increases will be done at a conservatively measured pace.

We hope you are enjoying spring time.  We do not see any major corrections pending.  Hence, any pullbacks in the market will be met as opportunities for trading and future growth of the portfolio.  We are focused on maximizing our clients’ yield and assisting them in securely reaching financial goals through active stock selection and proper investment allocation.


  • Emily Ashcroft, my longtime assistant, became a mother in September 2013.  Since then, she has been working part-time and focusing on family.  She is enjoying her newfound motherhood and has decided to expand the family and be a stay-at-home mom. We are excited for her and fully support her.  She will forever be a part of the Tellone family.  As such…
  • I am pleased to welcome Ruby Sabile as the Executive Client Relationship Manager (featured in the front left of the photo).  As the newest member of our team, Ruby is a seasoned Executive Assistant with over 25 years assisting C-Level Executives.  She has extensive experience with all administrative tasks, including overseeing special projects.  Having held positions in many diverse service oriented industries, Ruby is able to tailor her skills to meet the needs of all types of clients.  Her primary function at Tellone Financial will be to assist me full-time with the overall operations of the firm and continue to provide exemplary service to our clients.
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