Spring 2015
INSIGHT
P E R S P E C T I V E S F O R T H E G O A L- F O C U S E D I N V E S TO R
Living in a Low Yield World
by Jonathan Scheid, CFA
I
nterest rates in most developed nations around the world are quite
paltry. We aren’t just talking about our savings account and money
market interest rates, which have essentially been at zero percent for
the last six years. We are referring to some of the longer term, interest
bearing bonds issued by many developed nations.
As seen in the table, recent yields on select 10-year bonds from
around the world are remarkably low. The 10-year U.S. Treasury
bond is actually one of the higher yielding bonds among developed
nations, even though it yields a little under 2%. To give that rate
some perspective, if we loan the U.S. government $100,000 for 10
years, we only get $2,000 a year ($20,000 over the life of the loan)
in interest. By comparison, just 10 years ago (March 27, 2005) we
would have earned more than double that amount (i.e., $4,600 per
year, or $46,000 over the life of the loan).
Select 10-Year Government Bond Yields
While interest rates are low in the U.S., they are lower in many other countries
2.5%
normally see higher interest rates and vice versa. In the U.S., as well as
Europe and Japan, there have been very few inflationary pressures and
inflation has been well under 2% for a while. Additionally, investors
don’t expect inflation to increase from these low levels anytime soon.
Another reason interest rates are so low is that central banks around
the world want them low. Currently, central banks in Europe and
Japan are buying bonds, like the U.S. did from 2009 to 2014, in
an effort to spur economic growth, increase inflation and decrease
unemployment. These central bank bond purchases push interest
rates lower since it increases demand when the supply of bonds isn’t
changing.
While low rates have been great for people that have needed to
borrow money, it hasn’t been the best environment for people that
want to lend it, or that depend on interest from their investments to
meet their needs.
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
Switzerland
Germany
Japan
France
Italy
Britain
U.S.
Source: Bloomberg (3/27/15)
In Europe, rates are lower for many of our G-7 colleagues.
Government bonds with 10 years to maturity issued by Germany,
France, Italy and Britain are all lower than those issued by the U.S.
In Switzerland, investors are not getting a low interest rate -- they are
getting no interest. In fact, the negative -0.06% means that investors
are actually paying Switzerland to take their money.
One of the reasons that interest rates are so low is that the rate of
inflation is quite low. When we have higher levels of inflation we
A recent study by the reinsurance company Swiss Re estimated that
U.S. savers lost $470 billion in interest income from 2008 to 2013.
The study compared what investors actually earned over the period
to what they should have earned if the Federal Reserve followed a
highly regarded interest rate setting formula known as the Taylor
Rule. Interest rates should have been approximately 1.7% higher on
average over the time period.
Signs of a potential interest rate increase are starting to show in the
U.S., but abnormally low rates seem likely to stay with us for the
foreseeable future. Given this potential turning point, it is still a
great time to refinance our mortgages, borrow money to buy a car
or expand a business. Unfortunately, savers will have to continue
waiting for higher savings account yields and bond income.
3 Charts that Illustrate the Strong U.S. Job Market
by
Jonathan Scheid, CFA
T
he strength of the U.S. job market is another sign that the worst of the last recession is well behind us. It has taken a healthy dose of
favorable monetary policy, private sector innovation and time to get the job market churning again. Let’s look at three charts that show
where we have been and where we are headed.
Unemployment Rate
Quit Rate
Employment Trends Index
December 2007 to February 2015
December 2007 to January 2015
December 2007 to February 2015
11
2.2
140
2.0
130
8
7
6
5
4
3
Index Value
9
% of Total Employment
% of Labor Force Unemployed
10
1.8
1.6
120
110
1.4
100
1.2
90
1.0
80
May-14
Jul-12
Jun-13
Aug-11
Sep-10
Oct-09
Nov-08
Dec-07
May-14
Jul-12
Jun-13
Aug-11
Sep-10
Oct-09
Nov-08
Dec-07
May-14
Jun-13
Jul-12
Aug-11
Sep-10
Oct-09
Nov-08
1
Dec-07
2
Source: St. Louis Federal Reserve
Source: Bureau of Labor Statistics
Source: The Conference Board
The U.S. unemployment rate is finally holding
below 6%. While unemployment peaked at 10%
in 2009, many economists were discouraged by
the amount of time it took to get closer to normal
levels. What is normal? The Federal Reserve
recently revised their long-run unemployment
rate to the range of 5.0% to 5.2%.
The Bureau of Labor Statistics keeps tabs on
workers that voluntarily leave their jobs via a stat
commonly referred to as the quit rate. Higher
quit rates are typically associated with a strong
job market since people that quit are usually
moving on to a more favorable opportunity.
The Conference Board created an index of
employment trends that looks at eight factors
that influence current and future workplace
opportunities. The index has been positive for
the past 14 months in a strong indication that
job market will continue to improve.
The New Fiduciary Standard: A Closer Look
A
s part of his “Middle-Class Economics” plan, President Obama
recently announced his endorsement of the Department of
Labor’s fiduciary rule proposal that aims to strengthen retirement
security by requiring brokers to act in a client’s best interest in
regards to their retirement accounts.
Currently, not every financial professional plays by the same rules.
Some financial professionals, like your financial advisor, are already
held to a fiduciary level of care and are required to act in your best
interests. Other financial professionals are only held to the suitability
standard of care, where disclosure requirements about fees and expenses
are lighter and broad financial planning advice cannot be given.
At heart of this issue are claims that there are backdoor payments
and hidden fees that are hurting the middle class. Research from
the White House Council of Economic Advisors found that middleclass families who receive conflicted advice earn between 50 and
100 basis points lower annual returns on their retirement savings,
which amounts to approximately $8-$17 billion in annual losses.
The conflicted advice mentioned in the research refers to the act of
directing clients’ retirement money toward funds with higher fees
by James Kakoza
and lower returns and conducting “inappropriate” rollovers from
low-cost retirement plans into higher cost vehicles.
The Department of Labor’s plan calls for expanding the types of
retirement advice subject to the Employee Retirement Income
Security Act (ERISA). ERISA is a federal law that sets minimum
standards for retirement plans in the private sector and requires
accountability from plan fiduciaries.
In addition to the President’s efforts, the Dodd-Frank Act mandates
the Securities and Exchange Commission to establish a uniform
standard of care similar to a fiduciary standard for all financial
professionals. To date, they have been unsuccessful moving this
mandate forward, but such a mandate would be more comprehensive
than the Department of Labor’s proposed rule.
The President’s proposed new fiduciary standard has not been
finalized and is still subject to solicited comments and a public
hearing in the coming months. If the new rule minimizes bad
behavior and better aligns the interests of investors and advisors then
investors will be better off for it.
Will QE work in Europe?
O
n January 22nd, European Central Bank President Mario
Draghi announced an accommodative monetary policy
program that aims to boost inflationary pressure and stimulate
growth in the eurozone area. The quantitative easing program will
see the European Central Bank purchase €60 billion of sovereign and
private debt per month from March 2015 until at least September
2016. In aggregate, the size of the program is expected to be no less
than €1.08 trillion.
While this amount exceeded the initial expectations of market
participants, it is still unknown whether the program will meet
its stated objectives. Since announcing the program, things have
improved in Europe. Deflationary pressures are subsiding, the
unemployment rate is starting to come down, manufacturing activity
is increasing and their stock markets are off to a great start for the
year. But will the program do enough after the initial enthusiasm
wears off?
At first glance, the size of the European QE program seemed large,
but compared to similar programs it looks inadequate. The table
below lists the dates and sizes of quantitative easing programs
implemented in the United States, Japan, and the United Kingdom.
As a percentage of gross domestic product, the size of Europe’s QE
(10.7%) is relatively small when compared to the United States
(25.6%), Japan (35%), and the United Kingdom (25.3%).
There is potential for Europe’s QE to grow larger. Draghi has said the
purchases will continue until the ECB sees “sustained adjustment”
in inflation close to their target of 2% over the medium term.
However, with falling energy prices creating headwinds for inflation,
as it stands today it appears the program may not be enough to get
growth and inflation to where the ECB wants them.
Another hurdle for Europe’s QE program is the level of supply
of sovereign bonds that can be purchased. Under the program’s
current rules, central bank purchases are limited to sovereign bonds
that yield no less than the ECB’s deposit rate of -0.20%. In recent
months, yields on short- to mid-dated sovereign bonds of eurozone
countries have turned negative and are closely approaching or have
fallen below the ECB deposit rate. The ECB may eventually remove
its yield requirement for sovereign purchases, but for now it remains
a concern for the efficacy of the program.
A positive note for Europe is that the program is still in its infancy
and tweaks and adjustments will occur over time, as was the case for
the QE programs in the U.S., U.K. and Japan. ECB officials also
have the benefit of conducting analysis on those countries’ programs
to strengthen what it has in place.
by James Kakoza
Lastly, QE programs have tended to weaken the currency of the
countries implementing them, which should help export-oriented
companies in the eurozone. We aren’t sure how this story will play
out, but it warrants close monitoring and we expect it to be one of
the biggest themes for the next couple of years.
Size and Dates of QE around the world
The ECB has a way to go to match the size of other QE programs.
Country
Dates
Value
% of GDP
€1.08 trn
10.7%
European Central Bank
QE
March 2015 September 2016
United Kingdom
QE1
March 2009 January 2010
£200 bn
14.1%
QE2
October 2011 May 2012
£125 bn
8.0%
QE3
July 2012 October 2012
£50 bn
3.2%
Total
25.3%
Japan
QE
March 2001 March 2006
¥36.7 trn
7.30%
QQE
April 2013March 2015
¥136 trn
27.70%
Total
35.0%
United States
QE1
November 2008 March 2010
$1.725 bn
12%
QE2
November 2010 June 2011
$600 bn
4.0%
Op. Twist
September 2011 June 2012
$400 bn
2.70%
QE3
September 2012 October 2014
$1.605 bn
9.60%
Total (excl. Operation Twist)
Source: Capital Economics, Federal Reserve Bank, ECB,
Bank of Japan, Bank of England
25.6%
NASDAQ: The Long Trek Back to 5,000
by Jonathan Scheid, CFA
R
emember the late 90s when companies were adding “.com” to their business name in an effort to participate in the Internet stock market
boom? A lot of money was made AND lost in that period. The NASDAQ Composite Index, which measures all the stocks that trade on
the NASDAQ exchange, reached a high of 5,048 at the height of the Internet boom in early 2000 and dropped as low as 1,114 during the bust
that followed. That was a decline of 78%!
It has taken 15 years for the NASDAQ Composite Index to return to the 5,000 price level. The NASDAQ Composite Index is a different
market now and many of the technology companies that helped it get above 5,000 in 2000 are no longer around in 2015. The following
infographic helps illustrate how times have changed:
NASDAQ Returns to 5,000 Level
After 15 Years
Information Technology
Carries Less Weight
% of NASDAQ Composite Index Represented by I.T.
March 2015
End of 1999
vs.
57%
0005
43%
0004
0003
0002
0001
There are fewer companies
listed on the NASDAQ
5000
4000
4,715
4000
Where Did All NASDAQ
Companies Go?
3000
Analysis of Companies that Left
the NASDAQ Composite Since 1999
5000
0
Mergers & Acquisition
Relisted to Another Exchange
Regulatory Non-Compliance
3000
(e.g., Bankruptcy)
Voluntary Delisting
2000
2000
Moved to Over the Counter
2,568
1000
1000
0
1999
Other
0%
2015
0
0
10%
December 31, 1999
Top 10
NASDAQ Stocks
Then & Now
Stock
10
20% 30% 40% 50% 60%
20
30
40
50
60
March 26, 2015
Market Capitalization
Stock
Market Capitalization
Microsoft
$606 billion
Apple
$723 billion
Cisco
$360 billion
Google
$377 billion
Qualcomm
$332 billion
Microsoft
$338 billion
Intel
$277 billion
Facebook
$232 billion
WorldCom
$228 billion
Amazon
$171 billion
Oracle
$151 billion
Gilead Sciences
$151 billion
Dell
$132 billion
Comcast
$143 billion
Sun Microsystems
$117 billion
Intel
$142 billion
Yahoo
$103 billion
Cisco
$138 billion
JDS Uniphase
$75 billion
Amgen
$122 billion
Source: NASDAQ OMX Group and Yahoo! Finance. Past performance is not indicative of future results. The NASDAQ Composite Index measures the performance of all issues listed in the NASDAQ
Stock Market. All Indices are unmanaged and are not available for direct investment.
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05
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Copyright © 2015. All rights reserved. Bellatore Financial, Inc. is a registered investment advisor. 15.040.c.04.15
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