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Montecito Capital Management I Investment Advisors


Investment Insights & Financial Facts for the Month of June

6/1/2016

 
-June 26th, 2016. Don't Panic! After Friday’s sharp sell of -3.5% to 4% in the US markets and over -7% for many international markets, we are closely monitoring equity index futures for Monday’s market open.  The US equity futures markets currently show Monday’s opening to be in the -4% range. We already have solid risk-control portfolio hedges in play, but should next week show extreme negative sentiment that is long-term in nature - as opposed to a short-term jolt – then we are prepared to increase allocations toward treasury bonds, gold ETFs and funds that perform well in negative market volatility. However, right now, it is a buying opportunity. For example, two of our core large liquid fund holdings only lost -0.44% on Friday (but remain up +4.5% year-to-date) and -0.66% (but up +8.7% year-to-date) on Friday; yet, these funds have shown the ability to make money in both down and up markets.  For example, the first fund has returned +16% annually since 2006, made +50% in the 2008 market crash and only had one down year of -3%.  Similarly, the other fund has made 11% annually since 1997 with only one down year in 2011 of -7.2% (yet it made +5.33% in the 2008 market crash and +18% in the three year tech bubble crash of 2000-2003).  I would like to emphasize that we are not in the “panic” advice business, but we do believe in investing with discipline and thoughtfully adjusting portfolio allocations to help mitigate the losses of more traditional assets which will be held long-term.  For example, should next week show a massive “risk off” and investor capitulation (for an extended period), we will attempt to limit losses of assets exposed to the whims of the “Mr. Market" with the mix of diverse assets.

-Britain has voted to leave the EU, catching financial markets by surprise and sending risk assets plunging. While many financial experts have espoused that the Brexit decision is “much ado about nothing,” the reality is there will be long-term effects of Britain’s decision to go it alone and exit the EU. The stock market volatility, already up, will increase, eroding confidence and forcing bad decisions made in haste. The US dollar’s potential rise against the pound and euro would make U.S. exports less competitive, hurting companies and their employees here at home.  The US Capital Markets are currently down around 2.5%-2.7%, the British pound plunged to a 30-year low (currently down of -7%) and Crude is -4.5%, along with most commodities down on due to higher USD.  In turn, safe haven gold jumped to a 2-year high, with the gold ETF (GLD) up +4.5% today. Former Fed Chairman Alan Greenspan just gave an interview and stated that “This is worst period that I recall since I have been in public office, including Oct 19, 1987 when the market dropped -23%.  This has a corrosive effect which is not easy to go away.”  All said however, inasmuch as the S&P 500 is currently down -2.5% for the day, the index has essential reversed back to its long-term standing at its 2,050 support level, where it has shifted around for more than year now.


-June 17th Weekly Roundup Update: All major stock indices and sectors retreated as investor caution prevailed ahead of the “Brexit” vote, pushing the S.&P. 500 index down 0.33% to finish at 2,071.2.  Safe haven assets such as sovereign bonds and gold rose in response.  The yield on the U.S. 10-year Treasury declined to 1.52%.  Fed lowered its recent interest rate projections for the coming years; rather than a potential rate hike in June or July, Fed Chair Yellen noted Brexit risks, global growth concerns, and slow productivity gains as sources of ambiguity regarding the interest rate outlook.

-Janet Yellen did not raise rates.  Yellen cited headwinds to growth including slow productivity gains, an aging population, a weak global economy and sluggish household formation, all of which "could persist over some time." The Fed reduced its GDP forecast from 2.2% to 2%. Yellen said next Thursday's British vote on whether to leave the European Union "was one of the factors that factored into today's decision. Fed fund futures gave just 23% odds of a July rate increase.

-Three key fears seem to have overtaken the markets: 1. worry about upcoming central bank meetings on rates, 2. tension about the global economy as a whole, and 3. anxiety about Britain’s EU referendum next week. The issues have been witnessed as stock prices have been falling and bond yields along with them.

-June 10th Weekly Roundup Update: The U.S. Equity Market closed unchanged on lower trading volumes for the second consecutive week as investors stayed cautiously positioned before the upcoming central bank meetings and “Brexit” vote. The Dow Jones Industrial Average fell 0.8%, while the tech-focused NASDAQ Composite climbed 0.4%. The higher beta small-cap stocks outperformed large-cap stocks. In terms of style, large-cap value stocks outperformed large-cap growth stocks. The best performing sectors were telecoms and energy, while the worst performing sectors were financials and health care.  Equities have yet been unable to break through to new highs, while fixed income continues to offer little in terms of yield.

-June 3rd Weekly Roundup Update: The U.S. Equity Market closed little changed for this holiday-shortened week. The S&P 500 and NASDAQ Composite indices ended the week up approximately 0.1%, while the Dow Jones Industrial Average fell 0.3%. The lack of headlines, with the exception of Friday's U.S. jobs report, kept a lid on market volatility as broad equity prices (S&P 500) fluctuated in a 1% range.  Friday’s weaker-than-expected jobs report undermined recent expectations that the Fed would be ready to raise interest rates as soon as June if the U.S. economy continued to improve. However, an additional consideration for the Fed is the potential economic fallout from Britain’s June 23rd vote on EU membership (“Brexit”). Hence, these more recent Fed considerations has put a counter spin on Chair Yellen's comments from last week, when the yield curve was flattened by the headline "Yellen says Fed rate hike in coming months may be appropriate."

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