Market Analysis-Spring, April 2014

James Pope |

DIS and DAT-Market Analysis-Spring, April 2014

The ultimate authority must always rest with the individual's own reason and critical analysis.
Dalai Lama

 Performance review by the numbers

We begin by taking a look at past performance of some broad areas, which is not indicative of future results.

Index                                  1st quarter                1 year                5 year(annualized)

SP 500                                   1.81%                    21.9%                    21.16%

SP 500 Value                          2.26%                    20.54%                  21.32%

SP 500 Growth                       1.39%                    23.12%                  21.1%

Russell 2000 Growth             0.48%                    27.19%                  25.24%

Russell 2000 Value                1.78%                    22.65%                  23.33%

Aggregate Bond                       1.84%                    -0.10%                  4.8%

MSCI EAFE                           0.66%                    17.54%                  16.02%

Gold                                          7.24%                    -19.18%                6.96%

XOM                                        -2.78%                  11.1%                    9.2%

Commodities                           6.98%                    -2.1%                     4.24%

SOURCE: Yahoo Finance,


Chart Watching       

We will take a look at a few charts, and make comments on the asset classes from long term to short term.

Monthly charts

  1. NASDAQ…. Is rising and hugging the top Bollinger band, which it began in april 2010.
  2. SP500…. Similar momentum, began a little later in December 2010.
  3. Ten year treasury yield…. A little pull back, but possible trend change in june 2013 when the yield closed the month above the top Bollinger band.
  4. ICF REIT ETF… The Bands continue to squeeze as the price has drifted sideways for a year.
  5. EFA International ETF…. Upward momentum continuing from January 2013 top band break.
  6. DJAIG commodities index…. In middle of bands, which broke bottom band May 2012.

Weekly Charts

  1. NASDAQ ….Pull back to middle of bands during a strong upward move
  2. SP500…. Continued to track upward band in strong momentum
  3. Ten Year treasury yield…. Sideways track without much direction
  4. ICF reit etf….. recaptured upward move after pull back
  5. EFA international ETF…. Slightly trending up
  6. DJAIG commodities…. Strong bounce to reverse down trend and break through top band

Daily Charts

  1. NASDAQ….. A couple of down ward breaks of the bottom band this year, in between not enough momentum to break top band.
  2. Sp500….A large break down in beginning of year, followed by a rebound not strong enough to break top band.
  3. Ten Year treasury yield…. Sideways directionless motion
  4. ICF…. An attempt to break through top band in early March is being tested, in other wise directionless pattern
  5. EFA international…. Sideways back and forth action since October 2013.
  6. DJIAG… Strong bounce off the bottom in early January has paused in March.            

Fundamental review

                Now we turn to a review of the general investment fundamentals.  According to the Bureau of Labor Statistics ( the inflation rate ended at 1.6% on the core, and the top line fell to 1.1% for the quarter. The five year average is 2.04% on the core.  For purposes of analysis, using 2.0% inflation seems reasonable, given the Federal Reserve’s desire and related actions of reflation. From Value line selection and opinion ( we find 90 day T-bill yields are 0.04%, down from 0.08% a year ago.  “A” rated industrial corporate bonds yield 4.40%, which is up from a year ago of 4.06%.   In our view, the required return on equity would be about 8.0% to be worth book value, using the 2% inflation.  JP Morgan guide to the markets reports the SP500 index of stocks ended with a return on equity of 16.0%, and a price to book value of 2.8.  We believe that would leave U.S. large capitalization equities not undervalued and short term treasuries terribly unattractive for investment.


This too shall pass

                In this section a few news items which have moved markets will be discussed. As time passes, hopefully this section will serve as a reminder that the world keeps spinning as we try avoiding the “chicken little” thought pattern.  The Fed torch was passed to Janet Yellen. In the last quarter of 2013 there was concern about Mr. Bernanke leaving, yet in the end, the transition has been smooth.  A somewhat large amount of time has been spent covering the Malaysian plane disappearance.  As of the end of the quarter, the plane is still missing, presumably in the Indian Ocean. The colder than average winter has been blamed for a drop in consumer spending in the first quarter.  The winter weather definitely wreaked havoc in Baton Rouge and delayed one’s return flight from Midland by a few days. The Russia Crimea conflict has added new dimensions to the global political scene, bringing back discussions of the cold war. On the IPO front King Digital entertainment, the producer of the popular online game Candy Crush, went public valuing the company at over $7 billion. Needless to say we didn’t buy any shares.

Thoughts and comments on asset classes

                Generally this quarter’s performance of the U.S. common stock indices were back and forth ending nearly where they began.  The increase in common stock prices has continued from the bottom made on March 9, 2009 during the financial crisis.  The rally has been strong enough to make 5 year returns quite positive in those indices. The 5 year numbers, generally show that if one put money into U.S. stocks during the great fear of the crisis and held five years they would have received above average returns.  On the downside, the one year performance of gold places it into what some consider bear market territory at -19.18%.

                The bond markets have experienced a rather flat period across one year and five year time frames.  An example is the Ten year treasury which traded around 3.0% at the end of the quarter and five years ago.  This may demonstrate the effects of Q.E.  where the fed has been buying bonds while investors have fled bonds for stocks.

                Our internal model indicates a few different things.  First, keeping some money in short term maturities, while awaiting better bargains could be appropriate.  Also commodities have been out of favor and one may possibly be able to find some value there. Additionally, taking some gains to reposition or rebalance from U.S. small capitalization stocks may add longer term value.


Diversified Investment Strategies

            Within our eligible investment funds we tend to utilize various strategies with an attempt to diversify the risk drivers. For communication purposes we list and categorize as follows:

1.Timed Events

a. Merger arbitrage

b. Deep covered calls

2. Untimed Events

a. Liquidations

b. Closed end funds

3. Non Event Driven

a. Out of favor companies with significant competitive advantages

b.Turn around or transitions

An individual selection may not fit into any of the categories or may fit into more than one.

We wanted to talk about Merger arbitrage.  In this strategy we are looking for companies that have agreed to merge or be bought out.  We like all cash deals, to lessen the uncertainty.  We like where both boards have agreed to terms and announced it. We then attempt to analyze the situation for an appropriate return given what we consider are the risks involved. A risk in this strategy is that the deal does not get approved by regulators. Another risk is that payment takes longer to receive than originally thought.  This strategy adds different risks to the portfolios when combined with the other strategies.

From Berkshire letter 1988


To evaluate arbitrage situations you must answer four

questions: (1) How likely is it that the promised event will

indeed occur? (2) How long will your money be tied up? (3) What

chance is there that something still better will transpire - a

competing takeover bid, for example? and (4) What will happen if

the event does not take place because of anti-trust action,

financing glitches, etc.?


Positions spotlight

We wanted to show here differences in our largest non-cash, non-ExxonMobil (XOM) holdings, from last quarter to this one. The Coffee position (JO), which was spotlighted in the last market analysis, was sold and Weight Watchers (WTW) had a large price decline causing them to drop from the list. That left room for Demand Media (DMD), resulting from additional purchases during the quarter, and Apollo Education (APOL), from a 25% increase in price for the quarter, to make the list. Another notable was that DIS largest purchase during the 1st quarter was Transocean (RIG), which is not on the list.


Wrap up

                We appreciate your time and the opportunity to share with you our investment thoughts.  We strive with our communications to add to our clients understanding of our investment management thoughts, which we hope will help improve longer term performance. In that regard, we will shortly add to our communications with a “Bayou Side Chat” and we hope to see you there.

See you next time.


James Pope

Please remember to contact Diversified Investment Strategies, LLC dba Advisor.Investments, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct that Diversified Investment Strategies, LLC DBA Advisor.Investments to effect any specific transactions for your account.  A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available upon request.

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Diversified Investment Strategies, LLC dba Advisor.Investments), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Diversified Investment Strategies, LLC dba Advisor.Investments.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Diversified Investment Strategies, LLC DBA Advisor.Investments is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  If you are a Diversified Investment Strategies, LLC dba Advisor. Investments client, please remember to contact Diversified Investment Strategies, LLC dba Advisor.Investments, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Diversified Investment Strategies, LLC dba Advisor.Investments current written disclosure statement discussing our advisory services and fees is available upon request.


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Performance Disclosures

All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. (JPM: Guide to the Markets)

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index (JPM: Guide to the Markets)

The Russell 2000 Growth Index® measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. (JPM: Guide to the Markets)

The Russell 2000 Value Index® measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. (JPM: Guide to the Markets)

The MSCI®EAFE (Europe, Australia, Far East) Net Index is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America. (JPM: Guide to the Markets)

The Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis. (JPM: Guide to the Markets)

The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities and represents 22 separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc. (JPM: Guide to the Markets)

The spot price for gold bullion is determined by market forces in the 24-hour global over-the-counter (OTC) market for gold. The OTC market accounts for most global gold trading, and prices quoted reflect the information available to the market at any given time. (Ishares) 

XOM is the common stock symbol of ExxonMobil Corporation that trades on the exchange