Quarterly Outlook Summary

The past quarter (and year) has been fairly brutal to portfolio returns due to high volatility stemming from factors I’ll discuss below. Immediately following the end of September, the market staged a surprising rally that at present appears to have legs. If it continues, this year will produce good returns after having been stagnant all year.

Much of the recent volatility stems from a lack of leadership from the Fed and Congress together with abundant speculation about what they will ultimately do in the form of Continue reading

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Quarterly Outlook Summary

The economy continues to grow. Unemployment is low and interest rates remain at zero. On the downside, labor force participation is the lowest since the 1970’s and continues to decline. Unemployment is declining because prospective employees have stopped looking for work. It is against this backdrop that the deficit continues to decline taking money out of the economy, Congress continues to look for more ways to cut spending which would take even more money out of the economy, and the Federal Reserve is looking for any reason whatsoever to Continue reading

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Quarterly Outlook Summary

In general terms, the overall economy continues to gradually improve. Labor unemployment and job creation is improving. Although consumer demand is also improving, this is moderated by consumers’ continuing to avoid debt and leverage that got us all into trouble prior to the last financial melt-down. There is plenty of room for further dramatic improvement, but there remain many hurdles to overcome to get there.

We previously wrote that the EU economy was weakening and that because allegiance to austerity, any stimulus would be unlikely. We were wrong. The ECB stepped in with what is called “quantitative easing” in central banking parlance, “money printing” to the rest of us. On foreign exchange markets, the Euro subsequently and predictably, took a nose dive, meaning in turn, that the dollar went up, their exports improved and a small recovery seems to be taking hold. On the other side, American imports become cheaper curtailing further inflationary pressures and exports become more difficult with the effect being that corporate profits are hurt and the economy slows.

These effects lead squarely back to the Federal Reserve and whether they will be able to raise interest rates as they seem so determined to do. Even though labor markets are marginally improving, the prospects are, “not anytime soon”. Higher interest rates would only make a strong dollar even stronger exacerbating the earnings and export problems. Furthermore, since a strong currency curtails inflationary pressures, the Fed’s need and desire to raise rates is further diminished. In our view, the longer the Fed keeps “jawboning” for minimal tightening in the form of higher rates, the markets will remain choppy. As a practical matter, given the above, most Fed watchers now believe, as do we, that even in the face of stronger labor markets, any interest rate increases will now be pushed off until late this year or more likely, next year.

Please remember that because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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2014 Year-end Summary

As discussed recently, the economy has been slowly gathering momentum. It is still far from operating at full capacity. Despite the respectable unemployment numbers, over the last five years millions of workers have left the workforce and are now only beginning to return. However, government stimulus, both from the Federal Reserve and from Congress is now nearly negligible. The private sector has been gaining steam, but has not yet been able to fully compensate for the withdrawal of government stimulus. This is likely to continue for some time resulting in continued sluggish and choppy economic growth.

Despite murmurings from the Fed that they hope to raise interest rates this year, they won’t. There is no chance that they will be able to raise interest rates in an environment of sluggish growth and falling food, energy and commodity prices. The vanishing federal deficits and drastically falling oil prices have put to rest any fantasies of rising interest rates in the foreseeable future. They are, after all, still unsuccessfully trying to achieve a 2% inflation target. Far more likely, we will see, as we are seeing in Europe, negative interest rates before they ever begin to rise.

We anticipate that the markets will continue to grow although at a somewhat diminished pace. As interest rates continue to fall, U.S. Treasury bond prices and fixed income investments will rise. We may begin adding some of these to our holdings. The long-term outlook for the markets remains positive. There is still vast untapped and pent-up consumer demand. Business investment will continue to grow as technology advances and as obsolete plant and equipment continues to be replaced. Europe and Asia will pursue aggressive monetary stimulus in an attempt to ward of deflationary pressures now exacerbated by falling energy costs. There is still a painfully long way to go to put the global economy on a stable footing and growth path.

Because these quarterly thumbnail summaries are very abbreviated, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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Quarterly Outlook Summary

The markets recently have been modestly stable considering that the Federal Reserve has nearly ended its economic stimulus programs. One can always argue that given the still relatively weak growth of the economy, this ending of the stimulus is premature. It is remarkable that the economy has performed as well as it has, all while fiscal stimulus has been effectively absent. The Federal deficit is now at its lowest in a decade. With U.S. growth slowing and Asia and Europe facing stagnant growth at best, or even recession, there is a likelihood that the Fed will begin to temporarily re-start the stimulus. There are also better than even odds, that after the elections, and given the disappearing deficit, Congress will begin finding new ways to spend money. We can only hope. Because the Fed had already maximized its available tools, fiscal deficit stimulus has been the missing ingredient that would have had the economy on a strong growth trajectory by now.

However, other risks remain. As mentioned above, the global economy is faltering. The European Big Three, Germany, France and Italy, may already be in recession and facing deflation. Because of the rigid monetary structures of the Euro, there is no assurance that the ECB, the European Central Bank, will begin any meaningful monetary stimulus anytime soon. In addition, as we have seen for over a decade now, the Europeans are also firmly wedded to austerity and budget cutting as a remedy. Recession and deflation presently are a very real concern awaiting their action.

If these and other risks continue to develop we will likely begin allocating significant portions of each account into U.S. Treasury instruments as a defensive measure. Please remember that because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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Quarterly Outlook Summary

The economy continues to grow albeit slowly. However, despite a weak first quarter, unemployment continues to decline, yet employment has yet to come close to pre-meltdown levels. Again, although the Fed maintains an accommodative policy, they have curtailed their bond purchases which will end entirely within a few months. Congress has no will to provide additional stimulus, quite to the contrary continues to look for ways to cut spending further. This despite the fact that the deficit is now lower than before the melt-down. The month of June actually ran a surplus of fifty million. The fact that the economy is doing so well without congressional fiscal stimulus is evidence of the fact that business confidence in the private sector is increasing and picking up the slack.

We will aggressively monitor emerging public sector (government) policies for evidence that it would possibly affect, or curtail the positive growth now taking place in the private sector. For example, there is academic evidence that the federal government budget surpluses late in the Clinton presidency may have exacerbated, if not contributed to the dot com bust that occurred one year later. Absent the government injecting money into the economy by means of the deficit, the only means of monetary growth is private sector indebtedness which quickly results in an over leveraged economy. Household and business balance sheets are now very healthy having undergone drastic debt restructuring during the last six years. That can change rapidly if the government begins taking additional money out of the economy by means of further budget cuts or by running budget surpluses.

We expect continued growth in the economy but we also understand the usual volatility and the policies described above can cause serious periodic corrections that we hope to avoid when possible. Please remember that because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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