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We are kind of stumped about what the PMI is measuring. Specifically, what does the percentage measure? Is there such a thing as 100% of "something"?

PMI is a diffusion index which is a fancy way of measuring the breadth of expansion or contraction in manufacturing. It never hits 100%. The highest it ever got in 1950s was 70%. There are 5 components and I will show you how the most important works. New Orders Dec 2017 - 37% was better ; 55% was the same ; 8% was worse compared to last month. Basically they take 1/2 55% (same) + 37% positive add together and then seasonally adjust for all five. Bottomline: Ignore everything else...if its over 50 it is good, if it is near 60 it is not only good but the breadth is broadening to every sector.

What is your opinion on high bonds now and into 2018?

The U.S. Corporate High Yield has a yield (YTW) of 5.68% and YTD total return of 7.18%. Therefore YTD return was driven by narrowing spreads and marginally lower rates. The spread refers to the premium over treasuries and reflects improved profitability. The lower rates reflect lower expectation of growth. I expect high yield bonds to return close to its current yield. I expect on our expectation of solid corporate earnings spreads may narrow further providing a marginally capital gain. I do expect rates to go up to 2.70% and that will somewhat hurt high yield. The bottomline though is high yield beats all of the rest on income with – what I am forecasting – not too much downside risk. Hope that helps.

October 30, 2017 - Have you been looking at 2018? If so, what is your opinion domestic and international markets?

Earnings are expected to increase double digits in 2018 so we are very bullish. Most companies are not pricing in tax cuts so this will be an additional positive. Investors are missing the fact that we are in the midst of a global synchronized expansion. Of the 45 OECD economies, 45 out of 45 are expanding. This is creating a virtuous cycle and global earnings are expanding. Therefore, we see good things for domestic and international markets in 2018. But as always, we advocate global diversification across stocks and bonds so when volatility inevitably rears its head, investors will be able to sleep at night. Hope that helps!

October 6, 2017 - Clients have begun to "hear" the media as they report on the impending "market correction." Is this a realistic fear? How is this different from the upside risk that you mentioned in your 9/27 write-up?

Investors have become accustom to ultra-low market volatility. Corrections are normal but we have not seen one in so long, its sure to rattle investors when we finally do. However, I don’t see a severe correction on the horizon. The economic data is just so darn good, not just here in the U.S. but also globally. It is not often that almost all global economies are moving forward in a synchronized expansion. And earnings, the fundamental driver of markets, continue to move higher. Therefore, any time we see a little bit of a selloff, there are plenty of investors willing to swoop in and buy on the dips. If Washington passes tax reform, markets will go even higher. So the path of least resistance is up not down. That is what we mean by upside risk – the market going higher and investors missing out by sitting on the sidelines in fear. We advocate global diversification to help smooth the bumps (corrections) when they do occur. But the biggest risk in the last few years has not been Washington, North Korea, etc. It has been not being in the market. It is realistic to expect a correction at some point but not to fear it. A correction would actually be a buying opportunity.

September 29, 2017 - What are your thoughts about using preferred stocks as a bond surrogate, particularly as we look at another Fed raise this year and three next year? And how would you compare the idea against using senior loans?

I like the diversification and dividend tax treatment of preferred stocks. Preferred stocks are very bond like but often have higher yields because the dividends are not guaranteed and preferreds usually have call provisions. Yes, the Fed will continue to increase short term rates and I see long term interest rates ticking up but not a dramatic rise, so I think preferreds will do well. Credit conditions are generally quite good so risk of default remains low. And calls occur when rates go down not up. Keep in mind not every company issues preferred stock therefore, you may have limited options and the reason they have a higher yield is because they are more risky. Senior loans will obviously shine if we see a dramatic spike in interest rates because they have zero duration. But even if interest rates remain subdued, I still like Senior Loans as an all-weather asset class. Low defaults, higher recovery rates than high yield bonds and long term returns of around 5% make them attractive in any market. So I would advocate for both, not one or the other.

September 21, 2017 - I was wondering whether you can shed some light on whether, in your opinion, the senior loans segment remains one that can generate decent relative returns. A lot of noise lately on weaker covenants and too much money chasing that asset class with few banks suggesting to exit the strategy. A couple of lines highlighting your stance would be much appreciated.

Yes, I still think they Senior Loans are an attractive asset class. In anticipation of a rate surge last year, many investors jumped on Sr Loans driving prices up. But Senior Loans are a good all weather asset. If interest rates rise, they will do well. But even if rates don’t rise they provide coupon interest of 4.6% average, lower defaults and higher recovery rates than high yield bonds if credit conditions were to materially weaken. Our Voya Senior Loan team goes through a rigorous credit underwriting process for each new deal and I have not heard anything about weaker covenants. If you look at the long term averages, Senior Loans are the steady Eddie, returning about 5% with no duration risk.

September 21, 2017 - The Feds are going to start selling the bonds that they bought for the quantitative easing. They say they are keeping the rates the same until maybe Dec. If they are selling bonds are they really keeping rates the same? The whole unwinding of the quantitative easing seems to be a continuation of the same experiment that no one knows the end result. I Have even heard some refer to it as another 1937. The market is on a roll right now and does not seem to care what the news is and just goes up. Almost seems like bubble time again. What do you think?

No one is really sure what will happen for sure but the market is general sanguine about the runoff for a few reasons. The Fed is going to be taking baby steps and the runoff each month is likely to be very small. Second, other global central banks are still accommodative and buying bonds. Third, the global economy is getting stronger and rates should be going higher. And finally, many think the Fed was overstepping its bounds by buying bonds in the first place. Manipulating rates leads to misallocation of capital and mispricing of assets. Perhaps the Fed’s interference actually suppressed economic growth by propping up weaker players. Normalization may get bumpy but it is better for the long term economic growth outlook. We are not quite sure of the benefit the program had on the upside and are therefore not sure of the implications on the exit. However, corporate earnings are the true driver of markets and if they can continue to move forward the market will follow. The lineup is not always a straight line but I’m not worried right now. Global diversification across stocks and bonds is the best way to participate in the market with somewhat of a cushion against any potential market downturns.

How can the Feds raise rates in this environment because we have doubled the debt in the last 8 years and a significant increase in rates would appear to increase our payments to service the debt. Any thoughts?

There are a lot of ways to approach this and in theory you are correct. High debt with higher interest should be dangerous. Unless of course the Fed owns a substantial portion of the US government debt. The $4 trillion or so with interest is paid to the US treasury. All things being equal if interest rates go up due to economic growth and pricing power then tax receipts will go up too. Interest is not the big problem though. Unfunded liabilities like for Medicare and social security is far worse. Again growing the economy is the best solution.

April 25, 2016: Should I "Go away in May." I am up to date. The election scares me the world events scare me. I am think the sideline is looking good until the election is over. Any thoughts?

“Sell in May and walk away” usually doesn’t work! The market follows corporate earnings and the last 3 quarters (and so far for this quarter currently being reported) companies have made less money than they did in the same quarter a year ago. This is why the market has been range bound and is struggling to move forward. However, as we move through the year company earnings look like they will be improving. Why? Oil is now higher, the dollar is weaker which will help overseas sales, the Fed has backed off raising rates four times and China has stabilized and has actually shown signs of improvement. So unless the election derails earnings growth, I think the market looks more attractive in the second half of the year than the first. Sure the election will cause some volatility in the short run but a diversified portfolio of stocks and bonds helps ride out the bumps.

Looking at the fundamental chart today (Jan. 25, 2016), isn't this a bad signal?

Corporate earnings are the fundamental driver of markets. And the fundamentals drive markets chart shows that corporate earnings are not growing. This is problematic and the reason equity markets are struggling. The slowdown in global growth, the strong dollar and low oil prices are dragging down earnings. However, the U.S. economy is still doing ok. The consumer is the primary driver of GDP. Consumer spending is holding up because the employment market, housing, and cheap energy prices are supportive of a strong consumer.


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