Market Analysis- Winter, January 2014

James Pope |

DIS and DAT -Market Analysis- Winter, January 2014

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

-Dalai Lama

Performance review by the numbers

Index                                 4th quarter                  2013                    5 year(annualized)

SP 500                                   10.5%                    32.4%                    17.9%

SP 500 Value                          9.8%                      32.0%                    16.6%

SP 500 Growth                       11.2%                    32.8%                    19.2%

Russell 2000 growth               8.2%                      43.3%                    22.6%

Russell 2000 Value                 9.3%                      34.5%                    17.6%

Aggregate Bond                      -0.1%                     -2.0%                     4.4%

MSCI EAFE                             5.7%                      22.8%                    12.4%

Gold                                         -9.2%                     -27.6%                    6.4%

XOM                                        18.3%                    19.6%                      6.7%

Commodities(CRB)                  -1.1%                     -9.5%                     1.5%

SOURCE: Yahoo Finance,

            In general the fourth quarter was quite strong for U.S. common stock indices.  This strength continued from the stock market’s bottom during the financial crisis on March 9, 2009.  The rally has brought 5 year returns up to very positive numbers in those indices even though the time period begins months before the actual bottom. The 5 year numbers demonstrate what type of returns could have been possible from a broad basket of U.S. stocks purchased during the extreme fear caused by the crisis if held for five years.  On the downside, the one year performance of gold places it into what some consider bear market territory at -27.6%. Noteworthy is the late year rally in shares of XOM, sparked in part by news that Warren Buffett had made a sizeable investment. Commodities displayed poor relative returns across each period.

            The bond markets have experienced a sharp increase in yields during the last half of the 2013, which is negative for the price of bonds.  An example of the increase in yields is the 10-year treasury note yield was around 1.6% in May and jumped to 3.0% within a few months.  This increase in yields was accompanied by a change in investor fund flows. Investors began pulling money out of bonds and putting it into stocks.

Chart Watching

            This chart shows the increase in yield on the 10-year treasury note.


Fundamental review

            Now we turn to a review of some fundamentals figures.  According to government figures, the inflation rate ended at 1.7% on the core, and the top line fell to 1.5% for the fourth quarter. The five year average is 2.08% on the core.  Using 2.0% inflation seems reasonable, due to the economy experiencing major difficulty, and the government’s stated objective of reflation. According to value line, 90 day treasury bills yields ended the year at .06%, down from 0.07% a year ago; 25-30 year  industrial corporate bonds A yield  ended at 4.82%, and  is up from a year ago of 3.99%.   The required return on equity of stocks would be about 8.0% to be worth book value.  The return on equity of the S and P 500 was 14.0% at the end of the year with a price to book value of 2.7, according to J P Morgan.  In our view of the fundamentals, that would place U.S. equities near fairly valued, long term corporate bonds slightly attractive and short term treasuries terribly unattractive.

This too shall pass

             This section will discuss a few news items which have moved markets and serve as a reminder that the world keeps spinning. In the second half of the year most of the focus was on Federal Reserve events.  Let us begin though with news regarding Syria.  This event demonstrates why we titled this section as such, and why we believe it is prudent to think before reacting to news headlines.  Seemingly out of nowhere to Wall Street, news spread that Syria’s president used chemical warfare on rebels and citizens.  The United States President spoke swiftly.  Paraphrasing and tongue in cheek, he said we will bomb targets after 1:00 on Friday so get your ducks in a row.  One can assume the time limit allowed circumstances to change or to be thought about differently and no military action was taken.  This is not suggesting the saga is over, but the media and Wall Street seemed to have moved on. In the void popped up news regarding the Federal Reserve.  The Federal Reserve has been saying the purchasing of bonds would begin to taper shortly, leading media and pundits to predict it would occur at the end of the third quarter.  The tapering did not occur.  These details were played out with all types of movements, in bond and stock prices not only in the United States but throughout the world. The other Fed event making headlines dealt with who would lead the Federal Reserve next.  At first the person in front was Larry Summers.  Rumors were that he would be more restrictive on buying bonds.  This sent U.S. common stock indices lower.  He eventually bowed out and Janet Yellin became the front runner who is anticipated to make fewer adjustments to current policy and be more “accommodative”.

Positions spotlight

Recently Barclays has created a new investment tool exchange traded notes. The notes are unsecured, unsubordinated debt. They trade on the New York Stock Exchange during normal business hours. Barclays refers to these notes as “I Path.” The selling point of the notes is that it allows Investors to place money into areas that were previously difficult to reach.

We have recently purchased two of these I path notes for client accounts, but not all accounts due to portfolio customization. The notes are the I path Dow Jones- UBS coffee Sub index Total Return ETN- Symbol (JO) and I path Dow Jones UBS sugar sub index total return ETN- Symbol (SGG). The thought process is similar to other purchases we have made on previous investments. One of the factors leading to the purchase is that both sugar and coffee prices have fallen substantially. We believe that the demand for sugar and coffee still exist in the future. We believe recently the prices have fallen enough to create a desire to adjust actions which can affect supply. We believe the position size we have selected allows us to wait until these conditions of supply and demand adjust.

            Of course there is no guarantee that our outlook will materialize and risks are present in this and all investments.

Wrap up

            We appreciate your time, in this initial brief edition. We look forward to sharing and adding more analysis with you over the years to come.    Below you will find an annual tabulation of stock market returns. Interesting to note is that the S and P 500 has seen 24 years end negatively since 1928. After a year of above average stock market returns this should remind all of us that investing has risk and relying on average annual returns can be disastrous when you find yourself in a not too average type of negative year.  This is demonstrated by the difficult period of 2000 – 9.03%, 2001 -11.85%, and 2002 -21.98%.


See you next time.


James Pope


*This information can be found at

*Stocks in this illustration are refering to the S&P 500

*The S&P 500 is an unmanaged group of securities considered to be representative of the stock market in general

*It is not possible to invest directly into an index

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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