Commentary


Happy New and Leap Year !!!


Just like the way Olympics of old were staged, every 4 years apart. Have any grand plans for Monday, February 29th..? If not, plan something unique or at least take some time and recognize the next Leap Day will occur in another decade. But before we look ahead that far, ominous clouds are not only the horizon, but are flat out, here.


A crash in oil and commodity prices, China’s comeuppance, worldwide instability (read: Terrorism), Fed in a box and lest we forget, a US presidential election. Pardon me if I may have omitted one, two or a dozen others. These chosen few will do for now as our Fed ‘funny money’ day of reckoning is here. Attentive focus is in order to earn a nominal investment return, as opposed to the litany of economists, market strategists and any other sell side person who believes the stock market is the only place to invest. Bull fertilizer.


In my very humble opinion, the title ‘One and Done’ says it all – The Federal Reserve will only raise interest rates one more time in 2016, so eliminate all the hand wringing about what the Fed will or won’t do. Why, only once you ask? Pretty simple. See above for some clues, but economic growth is anemic at best in the USA, while it is much worse across the globe. Whereas central banks around the world are flushing massive amounts of liquidity into banking systems, trying to stimulate demand, a stronger dollar, via higher real/perceived US interest rates is blunting emerging market economies, as they need to protect their currencies, while hindering export-driven developed economies. Talk about a negative feedback loop!!!


Add in Newton’s ‘Law of Gravity’ in that what goes up, must come down, in reference to artificially stimulated stock markets and the stasis of capital preservation comes to the fore in the grab for investment yield (safe assets), while risk assets (bubble or not) are losing altitude with a reversion to the mean/average, which from a fundamental analysis and historical perspective are overvalued. Question is ‘By How Much’? If you can tell me the answer, then I know exactly where you should invest. Absent that, I continue to borrow from past GAZBIT’s:


From 2015:

“Let’s start with the glass half full: Same as 2014, the US economy continue to lead the world. Our economic performance is the envy of the world, bar none. Add in a desirable dollar, attractive Treasury yields vs. other major developed economies and you have a powerful tailwind for investment purposes.” Everything holds true except for the “powerful tailwind”, which is more like a gentle breeze at best.


From 2014:

“The US economy continues to grind ahead, Europe will grapple with deflation and Japan, is well, Japan. What do all three have in common? Anemic growth, loose monetary policy and rising debt. That’s positive? Well, not really, but the US will power ahead, as the least bad, while the systemic combo platter of structural unemployment and debt, limit any advances in other developed economies. As a result, the US will continue to benefit as the investing haven, by default, for both stocks and bonds.” Again, most everything holds true, except for “loose monetary policy.”


For 2016:

“No need to rewrite. All is coming true, due to fruitless “economic engineering” by world central banks and the primary axiom ‘You cannot create demand’. Individual and companies must have confidence to borrow money AND pay it back, no matter what interest rates are. Simply put, this is lacking. Without these animal spirits, we will plod along, until that confidence becomes not only relevant, but crystal clear”. Given my cheerless peering into this year, what does one invest in? Sounding like a broken record, but with an eye towards prudent risk/reward (read: Preserving Your Money), large cap domestic blue chip common stocks that can churn out profits and thus dividends, my continued career long favorite, select preferred stocks, and here I go again (apologies to David Coverdale & Whitesnake) that asset class called Bonds, primarily in Certificates of Deposit, yielding either side of 3.00%, although you need to extend your maturities out to 8-10 years. Although defensive in nature, CD’s will provide a stable source of income and will be price-supported by even lower interest rates across the globe, while the US Treasury market remains the world’s most liquid market. This is the gentle breeze I spoke of earlier. Last are municipal bonds, which had a fantastic total return in 2015. I still love the tax-free appeal, but prices have been bid up and you need to go much further out, maturity-wise, which leaves me less inclined to be exposed to more interest rate risk than desired.

Now let’s turn our attention to the 2016 headwinds:


It all starts with China. The transition from a manufacturing to service economy is underway, but man is the Silk Road strewn with potholes and in some instances, craters. Everyone knows economic growth has slowed, debts from overbuilding are big-But how big? Add in China’s desire to have their currency included in the IMF’s basket of currencies (desire/wish granted), but currency manipulation is frowned upon at the grown ups table (Beijing is fully aware of this now), so be careful what you wish for. Slower growth = slower natural resource demand with a huge commodity implosion (Oil, Minerals, etc.) as a result. Don’t expect this to reverse itself anytime soon. Worldwide Instability/Terrorism is like your favorite roller coaster – It soars to your attention front and center at times, then falls into the background, only to repeat. And repeat. And repeat. Different place, different challenge. Flare ups occur, almost daily, but recede as quickly as they emerge. This is manageable. If you get the harrowing ‘Black Swan’ event, be it nuclear, biological or my dark horse, cyber, are the answers to be found in the same unwritten playbook, similar to what central bankers are currently employing? God helps us if it is.


Last, but hardly least, is the 2016 U.S. presidential election. As the pretenders begin to fall by the wayside and the November contenders emerge, what does America want? Politics as usual? Establishment? Renegade? Suffice to say, the undercurrent of discontent in America is growing and no one candidate will have all the verbal solutions. Even before the first primary in Iowa, my prediction for November is Hillary Clinton vs. Donald Trump. Given this
scenario, how do you vote? Americans will have 3-4 months to decide and I will have time to look into my crystal ball and tell you exactly what you want to hear ☺ Sounds like a politician, doesn’t it?!? From my perspective, 2016 will be about keeping investing simple and straightforward, while maintaining flexibility to get in or out of a market, which is hypercritical in this era of uncertainty. A prudent asset allocation of targeted blue chip, dividend-paying stocks, preferreds and very selective fixed income securities will carry the day as we navigate through the inevitable financial storms. Let’s see how it goes…


All The Best…

Greg Zandlo

Greg Zandlo

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