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Pound Poor, Pound Foolish

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

You may have read that the British pound has had a very rough couple of weeks on world markets, losing more than 4% of its value against the dollar in one week, and continuing the slide through the next, finally reaching a 31-year low against the dollar. Part of the problem was a mysterious "flash crash" that sent the pound down more than six percent last Friday morning before it briefly stabilized—and then promptly started the next week by testing those crash lows all over again. Market analysts blamed the initial decline on trading algorithms—that is, computers programmed to buy or sell in milliseconds based on news or shifts in the marketplace. Apparently, the twitchy programs triggered other algorithms to create a cascade of sell orders that had to be interrupted by human intervention. But now the human traders appear to be in agreement with the original panicked consensus.

The obvious cause for this decline in one of the world's most historically stable currencies is uncertainty. U.K. Prime Minister Theresa May has signaled that her country will pursue a so-called "hard Brexit," meaning a full uncoupling of British and mainland European trade agreements sooner and more definitively than the markets apparently expected. Brexit Secretary David Davis probably didn't help matters when he said that Britain would renounce any contribution to the European Union budget, agree to jurisdiction of trade disputes in the European Court of Justice, or (a big issue for British voters) the free movement of labor across national borders.

Of course, French President Francois Hollande, responding to his counterpart's rhetoric, promised that the European response would be equally harsh, and German Chancellor Angela Merkel added that negotiations would not be easy on her side of the table.

Right now, the British currency seems to be a way for all of us to visibly watch how market participants view the future of Britain's economy, based on what they're hearing about the way negotiators plan to handle the disengagement.

This is a classic case of foolishly trading on headlines rather than fundamentals, since the actual negotiations will last two years, and won't even start until late Spring of next year. Whatever the outcome of those negotiations, you can bet there will be a lot more news about movements in the British pound between now and two and a half years hence—up and down.

Meanwhile, with the pound this cheap, British-based exporters are expected to prosper, since whatever they sell abroad will now enjoy a price advantage. And this might be a great time for American tourists, if they can endure the Autumn weather, to visit London, Stonehenge and Scotland—at bargain prices.

Sources:

http://gizmodo.com/rogue-algorithm-blamed-for-historic-crash-of-the-britis-1787523587?utm_campaign=socialflow_gizmodo_twitter&utm_source=gizmodo_twitter&utm_medium=socialflow

https://www.ft.com/content/28787548-8c82-11e6-8cb7-e7ada1d123b1?ftcamp=published_links%2Frss%2Fpersonal-finance%2Ffeed%2F%2Fproduct

http://www.bloomberg.com/news/articles/2016-10-07/rude-awakening-in-the-u-k-over-brexit-costs-send-pound-tumbling

Presidential Elections and the Stock Market

Written by Dimensional Fund Advisors LP & Gerald E Gasber, CFP®, CIMA®, QPFC.

Next month, Americans will head to the polls to elect the next president of the United States.
While the outcome is unknown, one thing is for certain: There will be a steady stream of opinions from pundits and prognosticators about how the election will impact the stock market. As we explain below, investors would be well‑served to avoid the temptation to make significant changes to a long‑term investment plan based upon these sorts of predictions.

SHORT-TERM TRADING AND PRESIDENTIAL ELECTION RESULTS

Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections. While unanticipated future events—surprises relative to those expectations—may trigger price changes in the future, the nature of these surprises cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. This suggests it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.

Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926 to June 2016. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a presidential election was held. Red corresponds with a resulting win for the Republican Party and blue with a win for the Democratic Party. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election.

Exhibit 1.

  presidential elections and the stock market pp1

LONG-TERM INVESTING: BULLS & BEARS ≠ DONKEYS & ELEPHANTS

Predictions about presidential elections and the stock market often focus on which party or candidate will be "better for the market" over the long run. Exhibit 2 shows the growth of one dollar invested in the S&P 500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not suggest an obvious pattern of long-term stock market performance based upon which party holds the Oval Office. The key takeaway here is that over the long run, the market has provided substantial returns regardless of who controlled the executive branch.

Exhibit 2. 

presidential elections and the stock market pp2

CONCLUSION


Equity markets can help investors grow their assets, but investing is a long-term endeavor. Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.

 

Source: Dimensional Fund Advisors LP.
All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.
Diversification does not eliminate the risk of market loss. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful.
Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group.

Brexit Update

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

Remember Brexit? Of course you do. Many short-term traders thought the sky was falling when British voters unexpectedly decided to opt their country out of the European Union. But the process of extricating the British economy from the complexities of European membership has been deliberate and thoughtful—on both sides.

Recently, the UK's new Brexit minister, David Davis, told reporters that the government plans to examine whether the country will continue to honor the customs agreements it has in place with European nations, or not, before it will invoke the Article 50 clause of the EU agreement. You can understand the complexity of the Brexit ministry's job (sorting through how it wants to restructure economic relations between England and the Eurozone) by the fact that the ministry currently employs 180 economists and other staff in London, and has access to 120 officials in Brussels. Don't expect them to do anything rash.

If Britain decides to opt out of some or all of the EU customs agreements, it will be free to sign new trade agreements with the U.S., China, Japan and other nations, but could face additional customs duties and tariffs from its trading partners across the English Channel.

Davis also announced that there would not be a second vote to overturn the first one, saying that those who voted 'remain' have accepted the result.

Sources:

https://www.ft.com/content/2c3a2cc6-ab81-32e7-92bd-1f49863d22f5

http://www.ft.com/fastft/2016/09/05/brexit-minister-rejects-possibility-of-second-referendum/?siteedition=intl

 

Reason to Panic?

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, QPFC.

On Friday, the S&P 500 index fell 2.4%, while the Dow Jones Industrial Average fell 2.1%. This was the first 1% sell-off since June, and the press reports are describing it as a full-blown market panic.

What's going on? Efforts to trace the reason why quick-twitch traders scattered for the hills on Friday turned up two suspects. The first was Boston Federal Reserve President Eric Rosengren, who sits at the table of Fed policy makers who decide when (and how much) to raise the Federal Funds rate. On Friday, he announced that there was a "reasonable case" for raising interest rates in the U.S. economy. According to a number of observers, traders had previously believed there was a 12% chance of a September rate hike by the Fed; now, they think there's a 24% chance that the rates will go up after the Fed's September 21-22 meeting.

If the Fed decides the economy is healthy enough to sustain another rise in interest rates—from rates that are still at historic lows—why would that be bad for stocks? Any rise in bond rates would make bond investments more attractive compared with stocks, and therefore might entice some investors to sell stocks and buy bonds. However, with dividends from the S&P 500 stocks averaging 2.09%, compared with a 1.67% yield from 10-year Treasury bonds, this might not be a money-making trade.

If the possibility of a 0.25% rise in short-term interest rates doesn't send you into a panic, maybe a pronouncement by bond guru Jeffrey Gundlach, of DoubleLine Capital Management, will make you quiver. Gundlach's exact words, which are said to have helped send Friday's markets into a tailspin, were: "Interest rates have bottomed. They may not rise in the near term as I've talked about for years (emphasis added).  But I think it's the beginning of something, and you're supposed to be defensive."

Short-term traders appear to have decided that Gundlach was telling them to retreat to the sidelines, and some have speculated that a small exodus caused automatic program trading—that is, money management algorithms that are programmed to sell stocks whenever they sense that there are others selling. After the computers had taken the market down by 1%, human investors noticed and began selling.

For seasoned investors, a 2% drop after a very long market calm simply means a return to normal volatility. This is generally good news for investors, because volatility has historically provided more upside than downside, and because these occasional downdrafts provide a chance to add to your stock holdings at bargain prices.

That doesn't, of course, mean that we know what will happen when the exchanges open back up on Monday, or whether the trend will be up or down next week or the remainder of the month. Nor do we know whether the Fed will raise rates in late September, or how THAT will affect the market.

All we can say with certainty is that there have been quite a number of temporary panics during the bull market that started in March 2009, and selling out at any of them would have been a mistake. The U.S. economy is showing no sign of collapse, job creation is stable and a rise in interest rates from near-negative levels would probably be good for long-term economic growth. Panic is seldom a good recipe for making money in the markets, and our best guess is that Friday will prove to have been no exception.

Sources:

http://www.bloomberg.com/news/articles/2016-09-08/gundlach-says-it-s-time-to-get-defensive-as-rates-may-rise

http://www.forbes.com/sites/laurengensler/2016/09/09/stocks-fall-worst-day-since-brexit/#3a9ed7252961

http://www.bloomberg.com/news/articles/2016-09-09/split-among-fed-officials-leaves-september-rate-outlook-murky?utm_content=markets&utm

http://thereformedbroker.com/2016/09/09/dow-decline-signals-end-of-western-civilization/?utm

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

 

Good News About Global Warming

Written by Gerald E Gasber, CFP®, CIMA®, QPFC & Bob Veres.

Chances are you've felt a bit discouraged by the global warning reports. On the one hand, they say that our world is in for trouble unless we make significant changes in how our global economy produces the energy it needs to function. On the other, they tell us that even if we shift totally over to clean energy tomorrow (not likely), the troubling warming trend—and polar ice melts, flooding of coastal areas, and increasing droughts, hurricanes and severe winters—will continue to accelerate for the next 30-50 years. The damage has already been done.

Or has it? The ideal solution would not just reduce carbon dioxide and other greenhouse gas emissions, but remove some of what has already been pumped into the atmosphere.

There are two interesting developments along this front. First, researchers from Columbia University's Lamont-Doherty Earth Observatory in Iceland are perfecting a technique which would mix carbon dioxide captured from the smoke stacks of a power plant with water and hydrogen sulfide, and then inject the mixture into basalt rock—a substance which makes up about 70% of the Earth's crust. The result: 95% of the carbon solidifies into stone, due to a reaction between the various ingredients. In effect, carbon dioxide has been turned to stone and stored away securely—more or less forever. Currently, in Iceland, the local energy utility has been pumping 5,000 tons of carbon dioxide a year into underground rock formations.

Of course, that's a small drop in a very large bucket: currently our various industrial processes release more than 30 billion tons of carbon dioxide into the atmosphere each year. But if each power plant had its own recapture facility, that figure would come down dramatically.

Meanwhile, a company called Global Thermostat is testing a carbon capture unit in Silicon Valley that could suck carbon dioxide directly out of the air, reducing our global carbon footprint and potentially reversing greenhouse gas concentrations in the atmosphere.

The unit, which looks like a giant dehumidifier, would be attached to a power plant or factory, and be powered by the residual heat of the facility itself. Large pipes would bring the power plant's emissions into the unit, while external intakes would suck in the outside air. The carbon is captured from both sources, rendering the plants "carbon negative," reducing carbon dioxide in the nearby atmosphere—and cranking out a pure enough form of carbon to be sold at a profit for industrial uses, including plastics, manufacturing, biofertilizers, biofuels and soda pop factories.

The test unit can extract up to 10,000 tons of carbon per year, which means the world would need roughly 3 million of them to offset the current level of emissions, and many more if we want to start scrubbing the atmosphere and addressing those scary future projections. The company envisions attaching these units to power plants, and also creating farms of them in remote locations to start the long, difficult process of undoing the environmental damage of our energy economy.

Sources:

http://www.theverge.com/2016/6/10/11901368/carbon-dioxide-capture-storage-stone-climate-change-study

http://www.oregonlive.com/today/index.ssf/2016/06/scientists_turn_carbon_dioxide.html