SPECIAL: Wealth Management Greece Update June 30, 2015

Tsipras_220Over the weekend Greek Prime Minister Alexis Tsipras announced he will hold a referendum on July 5th on whether to accept the terms of a bailout offered by the country’s creditors. While Prime Minister Tsipras is recommending a ‘No’ vote, initial polling indicates that a majority of citizens favoring voting ‘Yes’. Standard & Poor’s predicts a 50% chance of Greece exiting the Eurozone given the political climate in the country.

Greece also announced strict capital controls that include a bank holiday through the July 5th vote in order to stave off a bank run which had begun over the weekend with massive lines of people at banks and ATMs trying to withdraw cash. As a result of the combined news, world markets turned sharply negative yesterday on heightened expectations of a Greek default on their debt obligations and the growing possibility that the country will be forced to leave the Euro currency.

Adding to the uncertainty Greece has a €1.6 billion ($1.7 billion) debt payment to the International Monetary Fund (IMF) due June 30 and Eurozone finance ministers say they will not allow an extension of that deadline through the referendum vote next week.

While news of a Greek default combined with the imposed capital controls would certainly be painful for those in the country, we currently see little evidence that contagion would spread to the rest of the Eurozone. Most of Greece’s debt is owned by the IMF and the European Central Bank (ECB) and not by investors and national governments, so a default is believed to be contained. Lastly, given the size of Greece’s economy compared to the Eurozone as a whole, a Greek exit, or ‘Grexit’, from the Euro would not pose a large threat to accelerating economic growth we are beginning to see in much of Europe.

If you have any additional questions or concerns, please do not hesitate to reach out to an Investment Officer or your Relationship Manager.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA®, CFP® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Tamara Wiley, CFP® – (630) 844-3222 twiley@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com

Visit Old Second Wealth Management

Outlook June 30, 2015

Global Investing: The New Normal

As we embark on the third quarter of 2015, happily we leave behind the weather-slowed economy of the first quarter.  Consensus expectations for the U.S. economy are pleasantly looking up for the remainder of the year.   Consumer confidence is strengthening as evidenced by increased spending on durable goods such as housing and automobiles.  Jobless claims, the number of people who claim unemployment benefits for the first time, continue declining albeit with a few bumps along the way.

Real gains in housing are being made for the first time in seven or more years.  Consider the fact that the consumer represents nearly seventy percent of the U.S. GDP, therefore, decisive moves to build, sell or buy homes have a marked impact on the economy.  Recent reports indicate that housing permits rose to the highest level since August 2008.  Home construction rose 14.5% on a year-over-year basis in May with the boost coming from single family home sector.  Investment in multi-family homes has cooled recently.  Another indicator of the rebound in housing is the NAHB Index rising to 65, its highest level since 2008, demonstrating builders’ confidence.

Inflation appears to be stable as evidenced by Core CPI which is at a 1.7% annualized rate over the past four months, slightly below the Fed’s target 2% rate.  While energy prices rose about 4% year to date they remain 16.3% below year ago levels.  Adding to the benefit of lower oil prices, the consumer also gained on the wage front.  Real average hourly earnings are up a healthy 2.2% in the past twelve months.  Reflecting on the two indicators makes us wonder when the Fed will begin raising rates.  Consensus expectations still look for a Fed Funds rate increase in the second half of this year.

We believe that the initial rate increase will not squeeze the money supply.  Short rates have been so low for such a long time, held artificially low as the economy healed from the financial shocks of 2008.  An increase at this point will be a step towards restoring a “normal” rate.  Fixed income returns moderated in the period as investors begin to digest the prospect of rising rates.  The 10-year Treasury yields 2.35% versus 1.65% at the end of 2014, anticipating the Fed’s next move.

The fixed income markets have continued to demonstrate volatility with a bias towards modestly higher rates.  In Japan and the Euro-markets these moves, from very depressed rate levels, have tended to be more about continued reaction to local market monetary policy and concerns over Greece and less a reaction to robust economic growth.

Foreign sovereign bond rates remain at very low levels (France, Germany, Japan, Switzerland, etc.) combined with continued strength of the U.S. dollar, therefore we expect any increase in U.S. interest rates will be limited.  In part this will be due to our modest inflation rates and also because if our rates move up too much, foreign investors will expand their purchases of our bonds to obtain the twin benefits of our higher yields and a strong currency.

Within market segments, municipal bonds look especially attractive as concerns about issuers, such as Chicago, State of Illinois and Puerto Rico, have pushed tax exempt rates, relative to taxable bonds, to higher spreads.  Thus, even strong municipal credits can be very attractive on an after-tax yield basis.

The stock market continues to float along as the “bull market that investors love to hate”.  Underlying fundamentals have improved as companies make capital investments, buy back shares and raise dividends to improve shareholder returns.  On the earnings front, S&P 500 earnings are expected to be $120, 6% ahead of 2014’s earnings.  Stronger than expected GDP growth, continued low interest rates and contained inflation add to companies’ abilities to grow earnings.  We are watching profit margins as they have risen to high levels.

During the quarter ended June 30, 2015, equity markets had lackluster returns as indicated in the chart below.

Market Indicies (Total Return as of 6/30/2015)
YTD% 1-Year% 3-Year%*
Dow Jones 0.03 7.19 13.75
NASDAQ 5.99 14.59 20.98
S&P 500 1.23 7.41 17.27
Russell 2000 4.76 6.49 17.80
MSCI World ex-USA** 5.94 -3.49 12.66
MSCI Emerging Markets** 3.05 4.81 4.04
Source: Bloomberg; *Annualized; **USD

Given the modest inflation outlook, research indicates that stock prices can continue to rise in light of rising interest rates.  Volatility has declined since the beginning of the year resulting in the S&P 500 Index trading in a narrow range over the period.  The Forward P/E ratio of the S&P 500 is 17.3x; slightly ahead of the 15.7x average Forward P/E over the last 25 years.  On an aggregate basis, we believe that  valuations do not appear to be extended.

Investors have been net buyers of equity ETFs.  The “T.I.N.A.” thesis remains intact as “there is no alternative” to equities in this low rate environment.  The 2% dividend yield on stocks is attractive when compared to the 1.6% yield available on a 5-year U.S. Treasury note.  In response to the Supreme Court ruling on the Affordable Health Care Act, Healthcare stocks rose 15% on a year-to-date basis.  Interest rate sensitive utility stocks fared the worst during the period amidst rising rate concerns.

Boring, but important, is the ruling surrounding the 2008 Federal Government bailout of A.I.G., Inc.  The ruling stated “the Board of Governors and the FRB did not have the legal right to become owner of A.I.G. ……”.  Although the ruling will most likely be appealed – the message is clear – the Fed’s ability to aid in bailouts in the future will be limited to nonexistent.  Companies in trouble under this interpretation will be allowed to fail.

Shifting to foreign markets, there have been mixed results for the period as the European Central Bank and Bank of Japan employ monetary policies to provide stimulus to their sluggish economies.  Economic growth in Europe and Japan has begun to pick up which makes developed foreign markets attractive in our view.  Emerging Markets are another story.  Largely dominated by the slowdown of the Chinese economy, emerging markets struggle to gain traction.

In our opinion, the Greece situation will be volatile and not be a contagion in the region.  The impact of a withdrawal from the Euro would not be a huge detraction from the European GDP since Greece’s economy comprises 2% of the total.  However, to remove itself from the EU would be a devastating blow to the Greek economy.

The global world of investing is here to stay.  As is our tradition, we analyze the investing landscape looking for opportunities where we are rewarded for taking on risk.  We appreciate your business and are delighted to be of service to you and yours.

Please contact a member of the Wealth Management Department if you have any questions about this information.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA®, CFP® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Tamara Wiley, CFP® – (630) 844-3222 twiley@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com
Visit Old Second Wealth Management

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Wealth Management Economic Update June 29, 2015

U.S. and World News

  • Another week passed and there is still no resolution to the Greek debt crisis just days before a €1.6 billion payment is due from Athens to the International Monetary Fund (IMF). Expectations of a deal rose mid-week as Prime Minister Alexis Tsipras submitted a set of reforms that were closer to those demanded by creditors, however these talks soon fell apart. Eurozone finance ministers will meet again on Saturday in a last ditch effort before Tuesday’s deadline. German Chancellor Angela Merkel said the upcoming meeting would be “of decisive importance,” but did not provide any additional detail as to what would happen if a deal is not reached.
  • congress_000009112701_320After a six week battle that temporarily failed twice, the Senate voted to grant President Obama ‘fast-track’ authority to negotiate trade deals and expedite them through Congress. With this hurdle cleared, the next step to passing the Trans-Pacific Partnership (TPP) trade deal is for the U.S. and Japan to discuss outstanding bilateral issues at an upcoming meeting in July. If the TPP deal is struck, it would be the largest trade deal since NAFTA and would cover 40% of the world economy.
  • As its economy falters from the Middle East Respiratory Syndrome (MERS) virus, South Korea is reported to be planning a stimulus package of more than 15 trillion won ($13.5 billion). The package would aim at cushioning the economic impact of the deadly virus that has killed over 30 people and has resulted in widespread quarantines across the country.

Markets

  • Equity markets finished negatively this week. The S&P 500 lost 0.39%, closing at 2,101. Similarly, the Dow Jones fell by 0.38% and closed at 17,947. Year to date, the S&P is up 3.08% and the Dow is up 1.87%.
  • Yields in the Treasury markets were volatile yet again this week and ended higher than the week prior. The 10 year Treasury bond now yields 2.48% and the 5 year Treasury bond yields 1.76%.
  • The spot price of WTI Crude Oil dipped by 0.62% from last week, closing at $59.60 per barrel. In 2015, WTI Oil prices are now up 4.80%.
  • The spot price of Gold decreased this week by 2.12% and closed at $1,174.77 per ounce. Year to date, gold prices are down 0.81%.

Economic Data

  • Initial jobless claims increased a bit from last week and remain quite low, coming in at 271,000, below consensus expectations of 273,000. The Labor Department noted that no special factors affected claims this week. The four week moving average for claims now stands at 273,750.
  • The University of Michigan consumer sentiment index rose to a reading of 96.1, surpassing expectations of 94.6. Both consumers’ sentiment of present situation and expectations for the future improved.
  • The headline PCE price index (measure of inflation) rose 0.3% in May, in line with expectations. This was due in large part to a 10.2% increase in gas prices. The core PCE index (excludes food and energy) rose 0.1% in May, also in line with expectations. Over the last 12 months, headline PCE prices are up 0.2% (mainly due to lower energy costs) and core PCE prices are up 1.2%, both consistent with subdued inflation.

Fact of the Week

  • Last week, Republican presidential candidate Rand Paul proposed a 14.5% flat income tax. According to the IRS, the $9.1 trillion of adjusted gross income in the US in 2012 would generate $1.32 trillion of tax revenues if it were taxed at this 14.5% rate. This represents an additional $131 billion of revenue over the $1.19 trillion of taxes actually collected in that year.

Please contact a member of the Wealth Management Department if you have any questions about this information.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA®, CFP® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Tamara Wiley, CFP® – (630) 844-3222 twiley@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com

Visit Old Second Wealth Management

Wealth Management Economic Update June 22, 2015

U.S. and World News

  • greek_coin46611238_320The highly anticipated Eurogroup meeting on Thursday ended without resolution for Greece’s debt crisis. Now Eurozone officials have called for an emergency summit on Monday. This is likely a last ditch effort to end the impasse that will lead to a Greek default or a Greek exit from the Eurozone if no agreement is reached by June 30th. While Greek Prime Minister Alexis Tsipras appears to remain confident that his country’s position in the euro is secure, many Greek citizens do not share that optimism with over €2 billion having been withdrawn from banks over the last three days and expectations that a bank run will continue through the weekend.
  • The Fed meeting this week produced little insight into the central bank’s timeline for raising the Fed Funds rate. Signs still point to a September hike, however Chairperson Janet Yellen continued to state that the Fed’s decision will be data dependent and that there still need to be improvements in inflation conditions which are still tracking below the Committee’s long-run objective. The assessment given to the US economy was brighter than the previous meeting, reflecting a bounce back following the stagnant 1st quarter.
  • As expected, the Bank of Japan maintained its massive stimulus program today, keeping intact its plan to make asset purchases of ¥80 trillion per year. Bank of Japan Governor Haruhiko Kuroda reiterated his expectations for consumer inflation to hit the central bank’s 2% target by mid-2016, a goal that many analysts believe is much too optimistic given Japan’s unfavorable demographic situation (rapidly aging population) and lack of natural resources.

Markets

  • Equity markets finished positively this week. The S&P 500 gained 0.76%, closing at 2,110. Similarly, the Dow Jones rose by 0.65% and closed at 18,014. Year to date, the S&P is up 3.47% and the Dow is up 2.27%.
  • Yields in the Treasury markets were volatile yet again this week and ended lower than the week prior. The 10 year Treasury bond now yields 2.26% and the 5 year Treasury bond yields 1.57%.
  • The spot price of WTI Crude Oil dipped by 0.95% from last week, closing at $59.48 per barrel. In 2015, WTI Oil prices are now up 5.72%.
  • The spot price of Gold increased this week by 1.58% and closed at $1,200.29 per ounce. Year to date, gold prices are up 1.34%.

Economic Data

  • Initial jobless claims declined from last week and remain quite low, coming in at 267,000, below consensus expectations of 277,000. The Labor Department noted that no special factors affected claims this week. The four week moving average for claims now stands at 276,750.
  • The headline Consumer Price Index (measure of inflation) rose 0.4% in May, below estimates of 0.5% and was boosted by a 4.3% increase in energy prices. Core CPI (does not include food or energy) rose 0.15% vs estimates of 0.2%. Over the last 12 months, headline prices are flat and core prices are now up 1.7%.

Fact of the Week

  • Famous economist John Maynard Keynes predicted in 1930 that by the year 2000, Americans would be able to choose to work as little as 15 hours per week because the bulk of their material needs would have been satisfied and a life of leisure would take precedence. The latest data showed that as of May 30th, the average American employee works 34.5 hours a week.

Please contact a member of the Wealth Management Department if you have any questions about this information.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA®, CFP® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Tamara Wiley, CFP® – (630) 844-3222 twiley@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com

Visit Old Second Wealth Management

Wealth Management Economic Update June 15, 2015

U.S. and World News

  • Reports indicate that Greece is attempting to get an extension of the country’s bailout program through March 2016 in order to break the current impasse over reforms and austerity measures. With the current bailout set to run out on June 30, Greece would get access to nearly €11 billion in aid that was originally set aside to prop up Greek banks in order to remain solvent over the proposed extension period. Greek officials hope to reach a deal with its lenders at a Eurogroup meeting on June 18th as time is running out for the country to fend off a looming default.
  • lungs_320A deadly outbreak of Middle East Respiratory Syndrome (MERS) forced South Korea’s central bank to cut interest rates this week after authorities reported more new cases of the virus that first turned up in the country on May 20. There have been at least 122 cases of the virus reported and nine related deaths. The 0.25% interest rate cut to a record-low 1.5% is the country’s 4th cut in the last year. Central bankers hope to stave off any negative impact that the virus may have on South Korea’s economy.

Markets

  • Equity markets finished slightly positive after a bit of a volatile week. The S&P 500 gained 0.12%, closing at 2,094. Similarly, the Dow Jones rose by 0.35% and closed at 17,899. Year to date, the S&P is up 2.68% and the Dow is up 1.61%.
  • Yields in the Treasury markets were volatile but ended the week mostly unchanged. The 10 year Treasury bond now yields 2.40% and the 5 year Treasury bond yields 1.74%.
  • The spot price of WTI Crude Oil rose 1.56% from last week, closing at $60.05 per barrel. In 2015, WTI Oil prices are now up 6.74%.
  • The spot price of Gold increased this week by 0.81% and closed at $1,181.38 per ounce. Year to date, gold prices are down 0.25%.

Economic Data

  • Initial jobless claims rose a bit from last week and remain quite low, coming in at 279,000, above consensus expectations of 275,000. The Labor Department noted that no special factors affected claims this week. The four week moving average for claims now stands at 278,750.
  • Headline retail sales rose 1.2% in May which was in line with consensus expectations. This was aided by a 3.7% sales increase at gas stations on higher selling prices and a 2.0% increase in auto sales. Core retail sales (used to measure consumer spending in the GDP report) rose 0.7%, beating estimates of 0.5%. Here, gains of 1.5% in apparel sales and 1.4% in non-store retail sales were responsible for the upside surprise.
  • The University of Michigan consumer sentiment survey improved in June to a reading of 94.6 up from 90.7 in May. The survey showed that both the assessment of current conditions and for future expectations both had solid increases for the month. Expected change in income during the next year reached a post-recession high of +2.2%.

Fact of the Week

  • According to the Department of Labor, over the 10 year period ending 4/30/15, broad national inflation measured by the Consumer Price Index has increased by 1.97% per year. Over that same period, the cost of medical care has increased at a nearly 70% greater pace, rising 3.34% per year.

Please contact a member of the Wealth Management Department if you have any questions about this information.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA®, CFP® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Tamara Wiley, CFP® – (630) 844-3222 twiley@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com

Visit Old Second Wealth Management

Wealth Management Economic Update June 8, 2015

U.S. and World News

  • After another week of back and forth negotiations between Greece and its international creditors, Greece delayed a key debt payment to the IMF that was to be due on Friday. While this does not signal a formal default, the decision to postpone payment of €300 million is an unusual step. Prime Minister Alexis Tsipras claims Greece still intends to repay the debt, saying it will bundle the four payments due this month into a single €1.5 billion lump sum to be paid on June 30. A cash-for-reforms deal between Greece and its creditors still looks like somewhat of longshot, with the two sides at odds over issues like state pensions and a value-added tax.
  • Members of OPEC met this week in Vienna, Austria and again decided to leave its current production ceiling of 30 million barrels per day unchanged therefore keeping the market oversupplied. With oil prices having rebounded roughly 33% from its six-year low of $45/barrel in January, OPEC officials see little reason to deviate from its course that has seemed to resurrect oil consumption and dealt a powerful blow to the U.S. shale boom.
  • water_hands_320The EPA released a report this week based on five years of analysis of U.S. water pollution risks that concluded that there is no evidence that fracking for oil has had a “widespread, systemic impact on drinking water.” While there have been cases of spills and leaking wells, the rise of fracking has not caused extensive damage to groundwater resources according to the agency.

Markets

  • Equity markets continued their trend down this week. The S&P 500 lost 0.69%, closing at 2,093. Similarly, the Dow Jones fell by 0.90% and closed at 17,849. Year to date, the S&P is up 1.65% and the Dow is up 0.15%.
  • Yields in the Treasury markets ticked up this week. The 10 year Treasury bond now yields 2.41% and the 5 year Treasury bond yields 1.74%.
  • The spot price of WTI Crude Oil fell 1.94% this week, closing at $59.13 per barrel. In 2015, WTI Oil prices are now up 5.10%.
  • Once again, the spot price of Gold fell this week by 1.57% and closed at $1,171.94 per ounce. Year to date, gold prices down 1.05%.

Economic Data

  • Initial jobless claims declined a bit from last week and remain quite low, coming in at 276,000, below consensus expectations of 278,000. The Labor Department noted that no special factors affected claims this week. The four week moving average for claims now stands at 274,750.
  • The monthly employment report showed better than expected job gains with 280,000 added during the month vs. expectations of 226,000. With the 32,000 jobs that were added in back revisions, the three month average of job gains rose to 207,000.
    • The headline unemployment rate rose by 0.1% to 5.5%, though this was the result of a 0.1% increase in the labor force participation rate to 62.9%.
    • Average hourly earnings rose 0.3% during the month, beating consensus expectations of 0.2%. Wages have now grown 2.3% over the last 12 months.
  • The PCE price index (Federal Reserve’s preferred measure of inflation) was unchanged in April, vs. expectations of a 0.1% gain. Core PCE (excludes food and energy) rose only 0.1% vs. expectations of 0.2%. Over the last year, core prices are up only 1.2%, representing a very subdued inflation situation.

Fact of the Week

  • 48 years ago, Warren Buffett’s Berkshire Hathaway went public with the A shares that ended 1967 at a price of $20.50. Today, those shares are worth an astonishing $212,000/share. This represents a total return of 1,034,146% which is an annual rate of return of 21.45%.

Please contact a member of the Wealth Management Department if you have any questions about this information.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA®, CFP® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Tamara Wiley, CFP® – (630) 844-3222 twiley@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com

Visit Old Second Wealth Management