Market Update, April 2016

James Pope |

DIS and DAT - Market Update, April 2016

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 reviewing past performance of broad areas, which is not indicative of future results.

Index                                  Y-T-D                    1 Year               5 year(annualized)

SP 500                                1.32%                    1.65%                  10.97%

SP 500 Value                      2.20%                   (0.50)%                9.35%

SP 500 Growth                  0.45%                    3.27%                  12.40%

Russell 2000 Growth        (4.60)%                (11.70)%                 7.68%

Russell 2000 Value              1.78%                  (7.83)%                 6.28%

Aggregate Bond                  3.03%                     1.70%                  3.52%

MSCI EAFE                      (2.66)%                 (8.09)%                   2.02%

Gold                                    15.95%                   3.50%                 (3.40)%

XOM                                     8.17%                    1.78%                 2.66%

Commodities                       (2.50)%                (30.43)%             (17.43)%

SOURCE: Yahoo Finance, – As of 3/31/2016

Fundamental review

                Turning to a review of the general investment fundamentals we find that, according to the Bureau of Labor Statistics ( the core (ex food and energy) inflation rate increased 2.2% and the headline increased 0.9% for 12 months ending March. Energy continues to bring down the headline rate, declining 12.6% year over year. The five year average inflation rate is 1.08%.  For purposes of analysis, we will use 2.0% inflation as the core inflation rate has stayed above 2% for five straight months. From Value line selection and opinion (, the 90 day T-bill yields held steady at 0.20%, where it ended 2015. “A” rated industrial corporate bond yields fell 35 basis points, as corporate spreads have narrowed. The 10 year minus 2 year treasury yield spread continued to flatten and now is down to 1.05% compared to 1.36% a year ago. The JP Morgan guide to the markets, reports that the SP500 index of stocks had a return on equity of 16.1%, and a price to book value of 2.6.  Currently, SP500 has an earnings yield of 6% and the 10 year treasury yields 1.79%.

Thoughts and comments on asset classes

It was a tale of two halves for the equity indices in the 1st quarter of 2016. Major Indices were down 8-10% for the first month and a half, only to stage a strong rally to end in positive territory. Value outperformed Growth for the first time since 2nd quarter of 2014. International continued to lag US markets, with Japan down 6.4%. Utilities and Telecoms were the best performing SP500 sectors as the fear of rising rates subsided. The flattening of the yield curve weighed on Financials, and political pressure over drug pricing caused Healthcare to underperform.

               After a year of uncertainty about Fed rate hikes, 2016 started nicely for the fixed income sector. The 10 year treasury yield fell to levels not seen since 2013, on the backdrop of fears of a global economic collapse, and weakening US data. This led the market to start pricing in the Fed holding rates lower for longer. Emerging Market Debt was the best performer as the Dollar came off 13 year highs. Treasury Inflation Protected Securities (TIPS) also performed well with falling yields and higher inflation.                   

                The commodities market continued to make headlines.  Energy continued to be the weakest as oil dipped below $30/barrel on the belief that neither Iran nor Saudi Arabia would make production cuts. Precious metals were finally a bright spot (pun intended) with gold up 16%, having its best quarter since 1986, and silver up 12%.    

At the beginning of 2016, our internal asset class model suggested new money be invested 50% International Developed Markets and 50% Aggregate Bond Index. After the sharp equity pullback in January, the model indicated Small Cap Value was attractive relative to other asset classes. At the end of the quarter, our model is back to 50% International and 50% Bonds for new money. While Small Cap Value is still a hold, the model suggested Large Cap Growth would be the first place to look if one needed to create cash. Bonds are not attractive from a pure valuation standpoint with the 10 year treasury yield at 1.79% and inflation at 2.2%, or -0.41% real yield, but rather a holding place after the strong close to the quarter in the equity markets.  

Corporate Updates

                This section highlights a few updates from the companies we have been watching this quarter.

Green Dot – Harvest Capital issues letter to management calling for removal of CEO Steven Streit along with board changes. Outlines plan for enhancing long-term shareholder value

Dick’s Sporting Goods – Competitor Sports Authority files for bankruptcy. Also announces grand opening in Lafayette, Louisiana

Apollo Education – Accepted buyout offer to go private at $9.50/share. U.K. fund manager, Apollo’s largest shareholder plans to vote against takeover

Rightside Group – Activist investor, J. Carlo Cannell, sent letter to chairman of the board wanting company to focus on domain registrar instead of generic top-level domains (GTLDs).

Concepts for Investing

               Studies by Dalbar demonstrate that the average investor’s results far well below index returns and the returns of tools in which investors use to invest. Our desire is to improve our client’s results and we realize key concepts are not natural to human thinking.  We believe this means investors must constantly remind themselves of investing concepts, or else their portfolios tend to drift away from those concepts.  Here is our creation of ten key concepts for investing. 

  1. We believe the concept of low turnover in investing is important.   In an attempt to simplify the jargon, we would say that turnover means how quickly a portfolio buys and sells. A high turnover means the portfolio manager buys and sells often. Usually turnover brings with it higher fees, higher taxes, and more stress.  Besides the direct negatives of cost, the mindset does not match well with an INVESTING TIME HORIZON.  Warren Buffett’s partner, Charlie Munger, refers to the duo’s patient approach as “sit on you’re a$$ investing.”  As human beings, investors are all prone to believe that they are above average and have more knowledge then the rest of the investors.  With emotions, investors tend to believe that they maybe the “first to know”, and an impulse “of must act now” takes over.  In today’s market place of quick information dissemination, being first to know is not the reality for the “average” investor.  We believe a minimum time frame for investment activity is three years.  In order to receive the compounding effects from a great company, one needs to hold it for a long time. Of course if one selected a poor company for investment, then more losses develop over the long-term. That important factor is why we think the concept of holding forever is important in investing. An investment approach that involves “testing a stock out” type of concept, often ends with the investors emotions convincing them to sell at the worst time.
  2. Diversification of risk drivers
  3. Contrary mindset
  4. Business analyst mindset
  5. Separate investment versus non-investment funds
  6. Process over performance
  7. Investing is personal
  8. Exhibition not a competition
  9. Development mindset
  10. Comprehensive review

DIS Commentary

As we discussed last time ( ) the market alternates between a momentum fueled market and a valuation fueled market. We believe that change occurred in this first quarter.  Obviously we are not going to waste time predicting the duration of the “value market”.  As proponents of a value approach we are just glad to see it finally arrive. We add caution once again that market participants tend to switch between the two mindsets.

                More specifically, we believe the markets adjusted to the incorrect belief that America can become great while the rest of the world suffers economically.  The dollar’s unsustainable strength from the period of June 30th 2014, to March 1st 2015, seems to have ended. The Federal Reserve made concessions to its “Fed Speak” which began the dollar rally in the first place.  Japan’s latest attempt at monetary stimulus has actually brought its interest rates to below zero.  Adjustments like this continue to penalize retirees.  Yet our industry continues to tout academic research based on a world that we do not believe exists at this point.  Text books refer to a “risk free return”.  The lowering of the United States credit rating after the financial crisis; and the lowering of interest rates, caused some analysts to begin calling those “investments” “return free risk”.  The consensus of the industry remains to use a standard for “moderate” investing allocation as 60% stocks and 40% bonds, based on those same concepts. The models leading to that conclusion include a time where interest rates dropped from near 18% to zero.  We are skeptical when others say that future results from an allocation like that will be the same now that interest rates begin near zero in the United States, and negative in Japan.  We wrote in July 2013 ( of how the change from the previous decade’s long interest rate environment to a new one may not occur overnight, but we believe it could more likely occur in steps.   For these reasons, we place more emphasis on a diversification of risk factors approach then an approach based on the selection of asset classes along an elusive “efficient frontier” .The data input into that “efficient frontier” comes from a past when domestic stocks and bonds both benefited from falling interest rates.  If both asset classes have benefitted from the wind at their back since the early 1980’s and so many financial advisors are relying on that past performance to “construct portfolios” then we believe it is prudent to consider that one huge risk in the construction of a 60/40 portfolio, which is that interest rates increase from this level. It is apparent that most central banks now encourage “a little” inflation, with the alternative, deflation, being a worse outcome. We are not here to predict, nor claim that we can tell if their policies are correct.  We do believe that we need to assess the current investment reality of extremely low rates instead of relying on theory. We believe that starting at these low interest rates increases the need for flexibility in managing retirement portfolios.  Our overall investment philosophy can be read here in the May 2012 Dis and Dat.

                We remind you that no one including us knows the course of future interest rates, but we do know that this too shall pass.

We appreciate your time and will talk to you again soon,

Reggie McFadden, CFA 


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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