Market Update-Caution Rules Today, But No Reason For Fear

In Greek mythology it was Icarus who constructed two wings out of feathers so he could flee imprisonment. Icarus, having ignored his fathers warning, flew too close to the sun, which then melted the wax which secured his feathers resulting in him crashing into the sea below. Investors both individual and institutional, on the other hand remained overly cautious and as such underinvested in equities entering 2013 fearing the ill effects of higher capital gains and nominal tax rates. Having largely missed the gains the market provided in 2012 and being the “fiscal cliff” turned out to be more of a mole hill for the markets, investors have been playing catch up ever since. To the layman this can be evidenced by the shallow nature of any attempted sell-offs and the aggressive buying that follow immediately. The latest example is the recent 5% correction bouncing back to within 1% of all time highs after Friday’s 207 point rally in the Dow. But, first let’s get to the dete’s (that’s details in geek speak). The market has gone virtually straight up since January 1. Market technicians, myself included here, grew ever more watchful as we historians can note over and over again the market can or will go up only so far without some degree of correction (selloff). The longer the time frame and percentage gain, the higher the probability and severity of the correction….most times. I posit we are not living in normal times. We just barely survived a near global financial collapse. The life blood of capitalism, free flowing markets nearly froze, seizing the flow of corporate funding necessary for payrolls, accounts payable and quite simply utility bills to keep the lights on. The Treasury and Federal Reserve took coordinated extraordinary steps to stave off the second coming of The Great Depression. So, back to the here and now. Some nervous Investors having fled to the shore early following the old ditty of “Sell in May go away” were looking for a reason to sell and lock in gains. They looked too hard for the bogeyman under the bed and believed they finally saw one in the Federal Reserve Chairman’s statement that merely mentioned one day they would have to end their monthly $85 billion asset purchases. Thus, the choppy near 5% selloff in the various indices. To GSA, they misread or misunderstood the Feds statement as they said One Day not Today, they’d ease off their asset purchases. Thursday’s price action, being down 115 points on the Dow at one point only to finish up +80 followed by Friday’s +207 point rally suggest just such a reconsideration of current conditions, Federal Reserve policy and valuations. Now to the digits: Housing: What a comeback. Arguably the one area of the economy responsible for nearly crippling or collapsing the US is roaring back. While housing starts in April took a breather, permits, which looks to the future, boomed 14.3% suggesting an annual run rate of over 1 million new households. The highest levels since mid 2008. Leading Economic Indicators: April’s LEI reading came in at +.6 after March’s figure was slightly negative. Taken within the context of the average six months would support the current expectations of modest GDP expansion in the range of 2 ¼%-2 ¾% gaining strength later into 2013 and a stronger 2014. Industrial Production: IP is a volatile figure when looking at the month to month basis. IP fell .5% after solid gains the prior two months. The year over year figures comes in at +1.9% which again supports a good not great environment. Factory Capacity Utilization or Cap U eased to 77.8. On an historical basis this leaves ample capacity to absorb any upticks in inflationary pressures. Inflation- Consumer Price Index/Producer Price Indices both remain well anchored and are of no concern currently. The Federal Reserve continues fighting a potential deflationary spiral attempting to prop up asset prices. Nuff said. The ISM Purchasing Managers Index-Manufacturing PMI dipped to 49 below the all important 50 which suggests a contracting economy. Responders pointed to sluggish demand from the EU and China. They also point to buyers holding off in anticipation of price cuts from commodity input costs dropping. Further they point to a stall in Government project awards due to the spending cuts along with a somewhat stable environment right up until mid month where demand slacked off. On the flip side The ISM Non-manufacturing or Services Index came in at 56.5% solidly in expansion mode. We saw strength in new orders and employment. Respondents in IT spending pointed to an overall improving environment heading into the second half of the year. On the other side Healthcare professionals pointed to the sequestration and Obamacare as “having a strong negative impact on business”. So, a very positive reading but worth watching for any weakness. JOBS: Friday’s non-farm payrolls came in at +175,000. At best a simmer not a boil. The economy is operating back in the Goldilocks zone. Not too hot, not too cold to put the Feds hand to adjust their Quantitative Easing program just yet. I look for more of the same until we get to the third or fourth quarter. Going forward: The Federal Reserve has been and continues to be the most transparent ever in telegraphing policy moves. Recent commentary surrounding the eventual tampering of asset purchases provided a terrific buying opportunity for the brave and or underinvested. The most recent economic data suggests we’re experiencing a slow patch amid continued economic expansion. Europe is on the mend, China while slowing is also continuing on the path towards greater domestic consumption and less reliance on an export driven economy. The picture for US corporate earnings and revenues appear much more favorable as the inflation outlook remain tame, monetary policy favorable and a gradually improving jobs market gains momentum into year end and out to 2014. We now look for S&P 500 earnings of $110 share. Attaching a 15.5x price/earnings multiple brings us to our new year end target of 1705. At this point we at GSA believe our 2013 target is conservative and see reason for considerable optimism for 2014. Housing and Autos, which dragged us into this near financial abyss are now releasing some pent up demand accumulated over the dark days of the near collapse. The current low interest rate environment should continue to support sales going forward. So, Automobile sales along with Construction and home sales should help lead us out of the current sluggish patch the economy has hit. We remain constructive and maintain our aggressive exposure to the markets but will be wary for any potential Canary’s in the coal mine Thank you for your continued support and confidence in these very challenging times. Yours in pursuit of the KWAN.

With The First Quarter Closed Out Some Wonder if It's "Time To "Sell In May Go Away?" Maybe Not This Year

As Charles Dickens so eloquently stated, “It was the best of times, it was the worst of times”. He could very well have been referring to the just closed first quarter market returns. The best of times. The market had a first quarter for the record books. The Dow and S&P 500 both reached new closing all time highs. Both the Dow and S&P 500 notched better than 9% returns with broad based participation. The economy also continues flashing signs of recovery from its nearly four year slumber. The worst of times. As Britney Spears chirped, oops they did it again. Hedge funds, after turning in a dismal 4% average return for calendar 2012, continued underweight equities entering 2013. They remained convinced the market was wrong to be rallying and waited for the resumption of the secular bear market to begin taking us down anywhere from 10% to 50% depending on which Yogi or Boo-Boo you listened to. A man much wiser than myself told me something many many (is that enough many's) years ago as I was beginning my career on Wall Street that stuck with me to this day. After a fairly volatile day in the market and realizing I had positioned myself short as the market rallied fiercely, a friend came to me after the close and asked how I felt about the market. I responded I still did not like the market and rattled off a few quick strong points to support my stance. He nodded and acknowledged my incredibly insightful remarks then said, “If your opinion is wrong, lose your opinion”. His point being I could have been correct in my talking points and thought process, but the market was going against me. So, don’t be proud or stubborn and don’t fightit. Hedge Fund managers have been on a terrible run under performing the markets for a few years running and need a dose of humility. They don’t need to be rip roaring, thundering herd bulls, but they’ll need to at least get neutral to their benchmarks as investors will increasingly be taking their monies elsewhere. We can see some evidence of these managers taking on risk simply by watching intra-day trading activity. Friday was a great example of buying dips. Early Friday the market sold off sharply in the wake of some soft job figures, a bid began surfacing amid the softness. Before the day ended the market had rallied over 130 points off the lows. Where we are: After such a near uninterrupted rally out of the gates in 2013 it would not be out of the question to see a 5%-10% correction. There remain concerns surrounding the effects of the elimination of the 2% payroll tax holiday and the so called sequestrations mandated $85 Billion in spending cuts. Also lingering out there is this little program initiated by the Federal Reserve, Quantitative Easing or QE. QE is the Feds program to purchase $85 billion in treasury and mortgage backed securities. But when it comes to where we are the devil is in the details so here we go: Leading Economic Indicators-LEI. LEI rose .5% in February after having risen .5% in January and .4% in December. This positive three month trend suggests a continued “Goldi-locks” recovery. Not too fast to ignite a bout of hyper inflation forcing the Federal Reserve to shift policy. And not too slow to push our fearless leaders in DC to abandon austerity and embark on another round of fiscal stimulus budget busting spending. Industrial Production-IP. IP rose .7% after being unchanged in January. There was reasonable strength across the index as Manufacturing output rose .8% and utilities output rose 1.6%. The capacity utilization remained stable and rose to 79.6% a bit below the 30 year average but the best figure since March 2008. This slack in capacity utilization should act as a buffer against any inflationary pressures arising. Housing. Housing continues to make solid gains. We’re not yet back to the levels seen before the great recession but nor should we be. Sales of single family homes in February came in at a 411,000 annual run rate. That is below January’s 431,000 but a solid 23% gain year over year. Total existing home sales came in at 4.98 million annual run rate up from January’s 4.94 million and up 10.2% year over year. Clearly this is a positive development in housing and we should cease to see this all important sector of the economy be a drag to GDP Employment. The cheers coming from investors after February’s non-farm payroll figure of 236,000 were hushed when March’s figures were announced this past Friday at 88,000. No way to couch this one, it stinks. We were expecting a numbers closer to 175,000-190,000 especially when we were able to look at the real time jobs figures, the weekly unemployment claims which had dropped smartly in the survey weeks. The surprise as I see it came from retail. Think restaurants, shopping malls, Macy’s, JC Penny’s etc and were responsible for a negative 24,000 jobs eliminated when we were looking for an add from the group. The Post office also contracted by 11,000 jobs due to attrition, no real firings. Taken in context with the three month average and we see the US jobs markets just about at the average for this recovery of 175,000. Still, questions now surface regarding the effects of the 2% payroll tax effects on consumers discretionary spending and the still to be felt effects of the so-called sequestration. US Purchasing Managers Manufacturing Index-PMI. PMI for March contracted to 51.3 from February’s 54.2 and January’s 53.1. A reading above 50 still suggests a growing/expanding economy. Survey respondents paint a mixed picture. Wood products pointed to very strong demand along with automotives, furniture, food, beverage and tobacco. On the flip side there appeared to be some softness in computers and electronic along with the energy sector being in stall mode as they await any new policy and/or regulations. As we dig further, the data show some weakness in the new orders and inventory categories while we see a bounce in employment, deliveries and exports. The Non-Manufacturing or services sector PMI registered 54.4 down from February’s 56 but still in expansion mode. Again the respondents paint a mixed picture of cautious growth. Going Forward:. The US market is surely on firmer footing than last we reached such lofty levels on the various market indices. Revenues and earnings are stronger, leverage is down, corporate balance sheets are pristine and headcounts remain lean and mean. The market multiple back then too were stretched at closer to 20 than today’s 14 ½ which is below the 15 ½ thirty year average. The domestic economy remains in Jekyll & Hyde mode. Mild mannered recovery mode by day, 88,000 jobs growth chases you down a dark deserted alley to strip you of your ill gotten profits at night. Domestically the Fed Chairman Bernanke has got our back thank goodness. Like his policies or not ( I don’t) but due to the lack of backbone, will or just a desire to keep their cushy jobs in DC the Federal Reserve is the only reason we have even a modest economic recovery. Without Chairman Bernanke perhaps perma-bear Muriel Roubini may have been proven correct in his constant calls for Dow 3,000. There remain many headwinds and potential pitfalls. The Euro-zone crisis simply will not go away. The EU has found its own Chairman Bernanke in Mario Draghi vowing to do whatever is necessary to save the EU. Chairman Draghi has been successful dousing the fears of financial contagion in Spain and Italy while helping to orchestrate the bailout of Greece and Portugal along the way and sending bond vigilantes running for cover. China and India continue to attempt to jump start their domestic economy while stoking domestic demand from their respective populace. The Bank of Japan joined the other global central bankers in the race to de-base their currencies. Chairman Shinzo Abe even one upped Chairman Bernanke vowing to do whatever’s necessary while buying treasury’s, mortgages, REIT’s and Equities in order to finally break the deflationary forces gripping the third largest economy for over twenty years. This unprecedented show of unified liquidity force should push asset prices to even loftier levels. Again, I don’t like or agree with this massive printing and debasing of currencies, but for now, I’ll be keeping my opinion at bay, as I’d rather make money than be right…..for now. We maintain our aggressive posture to the markets with an eye towards earnings season and upcoming budget negotiations to act as the near term catalyst to drive the markets. Expectations for both have been guided down so outperformance should be simple enough. Should earnings and revenues come in on the light side or budget negotiations not get off the ground, we may move aggressively to adjust our cash positions and be in contact immediately. I thank you again for your patience and confidence in these very challenging times. Yours in pursuit of the KWAN. James

January Surprises As The Fiscal Cliff More Bark Than Bite

Forget about " A September to Remember" for those shunning equities in January that just plain stings. The S&P 500 advanced an impressive 5.2% as fear of the fiscal cliff faded into memory. Once again our fearless leaders dragged us into the 11th hour before they agreed upon a compromise that was on the table eight months earlier. The temporary Bush tax cuts became permanent for most taxpayers and now appropriate policy once they could be re-branded. Of course the heavy lifting on the titanic budget deficit was postponed until the arguments can be framed out to blame the other party when entitlement program cuts and raising taxes need be introduced. Once again both parties utilized scare tactics using the media as their podiums to galvanize their bases that the "Fiscal Cliff" would cripple the country. The recent announcement that fourth quarter GDP fell -.1% after expanding +3.1% in the third quarter seems to support those threats. Time to pull back the curtain and shed some light on what really happened. Two main detractors to fourth quarter GDP, 1.Defense Spending -22%. Many government agencies sensing the upcoming budget cuts exhausted funding in a "use it or lose it" mindset in the third quarter. 2. Inventories inventories inventories. This is where policy effected corporate behavior. The uncertainty surrounding the onslaught of tax hikes combined with the sun-setting of Bush tax cuts and the expiration of the 2% reduction of the payroll tax cut lead many retailers to draw down existing inventories leaving the shelves barren due to lack of reinvestment. Combined these two events accounted for nearly -2.6 percent negative growth. Then an interesting thing happened on 12/31/12 at 12:59:59 a compromise was reached to extend the current tax rates (no longer referred to as Bush tax cuts) for 99% of ordinary folks. You can see the results in the market. January had its best start in 30+ years. The message should be loud and clear to all, the US economy is itching to spread its wings and take flight again, Washington just need to get out of the way! What's happening! Jobs: Let's start with the most important factor, employment. The real time indicator for job creation/destruction is weekly unemployment claims. Weekly Claims have moved down from a previous range of 160,000-185,000 to 130,000-155,000 range as hirings ramped up to meet improving demand. The monthly numbers, Non-Farm Payroll grew by a not too impressive 157,000 for January. However, the revisions to December and November added an additional 127,000 jobs for a three month average of 200,000. We're clearly heading in the right direction. Housing: We're not ready to pop the corks but housing appears to officially have bottomed and should no longer be a drag to the economic output and job creation in general. The housing market index continued to hold at its best levels since 2006. In December housing starts increased 12.1% to an annual run rate of 954,000. Home prices as measured by the Case/Shiller Index rose 5.5%. Lastly, building permits which is a forward looking indicator grew +.3% to a 903,000 annual run rate. So we note a continuation of the trend. Leading Economic Indicators: LEI came in at +.5% the best showing in three months. The gains reflect strength in the labor market, low interest rates and gains in stock prices. When we factor in the rebound in housing/construction it would continue to support the bullish thesis. Institute for Supply Management: ISM releases their reports for both Manufacturing and Non-Manufacturing (referred to as the services measure). We received good news on both fronts suggesting the economy is expanding on all fronts. ISM Manufacturing came in at 53.1% in January vs 50.2 in December (a number above 50 suggests an expanding economy). The new orders component posted a 3.6% increase to 53.3%. Also impressing the masses, the employment component accelerated + 2.1% to a 54 reading. The ISM Non-Manufacturing eased a bit to 55.2 vs 55.7 however once again we see strength in the employment component as it leapt to a 7 year high of 57.5. Back to 4th Quarter GDP and why we maintain our bullish posture in the face of the negative report. 1. Consumer spending and income. The GDP reports shows consumers after tax income rose 6.8% the fastest pace since the recession. 2. Business investment rose 8.4% 3. Home building. Home construction rose at at 15.3% annual rate 4. Inventories. They were drawn down by strong sales and an unwillingness by retailers to restock. They'll need to be rebuilt. 5. Government spending reduced GDP by 1.3% Forward: The equity market sprung out of the gates in January but we believe some of the gains were a give back from the December Fiscal Cliff Fright that saw some investor liquidations ahead of potential higher capital gains and income taxes. Global Central banks have the spigots wide open and are flooding the banking system and financial markets with unprecedented amounts of stimuli and liquidity. The good thing is markets are responding. The challenge will come when those same spigots need to begin to lessen the flow and whether the economy and markets can stand on their own. The current results are promising. The US economy is, arguably about to re-accelerate (IF DC gets out of the way) and China's economy has resumed expansion mode. The EU has been stabilized, India is liberalizing it's economy, Brazil, Mexico and emerging markets in general are gaining traction which all bodes well for global trade as a rising tide lifts all boats. While trading should remain volatile, overall the trend remains positive and our year end target for the S&P 500 remains in tact and most likely overly conservative and will need to be updated as the resolution and details of the budget debate come to light. For now we maintain our aggressive posture to the markets but are on alert for any changes to policy or geopolitical events and will be in contact immediately should any changes be necessary. Thank you again for your confidence and patience in these challenging times. Yours in pursuit of the KWAN! James

Grand Street Advisors 2013 Outlook

The markets put in a very respectable performance in 2012 catching most professional investors off guard and missing the move as 85% of hedge funds underperformed the S&P 500. Many spent much too much time looking for the black swan event that would send our economy reeling and markets swooning. It just never fully materialized. I guess we had many a tan swan though. There was the near Greek debt default. We were kept on the edge of our seats by the threat of a full scale bailout of Spain and Italy. The Middle East was set ablaze once again by rocket fire between Israel and the Palestinians as well as the raging ongoing civil war in Syria that has claimed over 100,000 lives. These events all paled in comparison to the paralyzing effect the juvenile politicking in DC had on the markets which severely hampered any progress on sculpting a credible budget deal. Who could really blame investors as they were in a position of the unknown. It's like going to a jump rope contest with a baseball bat and glove. You'll probably get a bunch of meaningless hits, but you won't win any double dutch trophies. Where We Are: The US economy has proven remarkably resilient in the face of uneven global growth and widespread fiscal uncertainty. Monetary policy has become the primary tool utilized to stimulate global growth and reflate assets these days in the face of social unrest and total political unwillingness to balance budgets and cut spending. < b>Retail Sales: December Retail Sales rose 4.8% after experienced a .6% swing in November from October's -.3% with notable strength in Automobiles which ended 2012 at a 15.5 million annual run rate. Building materials store sales were also robust rising 1.6% a direct beneficiary of the devastating storm, Hurricane Sandy. December's figures showed strength in high end Nordstom's, Macy's and also Costco. Laggards such as Target and Victoria's Secrets pointed to 24 hour fiscal cliff coverage damping consumer enthusiasm. Still many remained optimistic of a bump in sales post Christmas as those of us who weren't too naughty received gift cards that would send them scurrying to the mall to redeem. Inflation: The inflation rate for 2012 clocked in at a very tame 1.8% as measured by the consumer price index (CPI) a clear beneficiary of slack in employment, spare manufacturing capacity and rising productivity. One thing I'm growing more concerned about is how much these continued productivity gains are actually a result of the increase in the unofficial workweek. How many times have we all taken home some paperwork to catch up and how often have we checked and responded to "a few" emails? These are unreported and unpaid hours that cut away at our quality of life and as such cannot, will not and should not go on. That's for another discussion though. Industrial Production: Industrial Production staged a nice showing coming in at +1.1% a direct beneficiary from Hurricane Sandy. This disaster will benefit all major sectors of our economy for many quarters to come. Aside from the natural pent up demand that developed due to the recession over the years, Sandy's swells swamped and totaled thousands more automobiles that need to be replaced. Homes were leveled and businesses shuttered. Auto production popped 4.5% to end 2012 and should remain strong for 2013 as the general economy continues to heal. The housing industry already clearly in recovery will get an additional Sandy jolt which should help, building materials providers, appliance manufacturers and generally all ancillary industries with exposure to the sector. Hello GE, Home Depot and United Rentals. Good news for inflation hawks Factory Capacity Utilization rebounded .7% to 78.4 which still is 1.9% below its forty year average. Employment: We just received our first Non-Farm Payroll figures in 2013 with December coming in at +155,000 and the unemployment rate ticking up to 7.8% with the workweek +.1 and hourly earning up a not too shabby +.06. Good not great but enough to keep the trend in tact. I would anticipate a gradual acceleration in job creation after DC muddles through all the pre-posturing and threatening to finally forge a budget deal. Key drivers will be in automobiles manufacturing, health care and construction. If only Obama's EPA would embrace the energy sector and regulate "fracking" instead of threatening to outlaw the process we could see a surge in production, a spike in high paying jobs and along the way pushing us further towards our goal of energy independence. One can dream can't one? GDP: GDP most likely finished up 2012 at 2%-2.2%. Fairly lackluster considering we just closed out the fourth year after the recession ended in the summer of 2009. When we consider all monetary and stimulative programs from the Federal Reserve and D.C, it points to just how severe the recession was. 2013 should provide more of the same with weakness in the upfront month overcome with a re-acceleration in the back end of the year bringing growth to a estimated range of 2 1/4%-2 1/2%. This is of course all predicated upon DC doing the job they all were elected to do and not pushing us to the brink yet again. We are not overly confident this will be accomplished when we take into account this will be the third year in a row our fearless leaders have stale-mated us right up to the very last hour before reaching a deal. Monetary Policy: Domestic monetary policy will continue to be anchored at zero until the official unemployment rate hits 6 1/2%. This is the clearest sign ever from Federal Reserve policy makers. This clarity surrounding policy is very important when making long term investment decisions. Kudos to the Chairman for being so bold. The Federal Reserve's Quantitative Easing programs are not however tied to the employment figure. The Federal Reserve has sent a signal to the markets they will continue to purchase via QE, US Treasuries and Mortgage backed securities to help support housing and employment. The initial take was this program would go through 2013 and into 2014 at a minimum. We are not as confident the Fed will stay the course if we see continued progress in housing and the size of the Fed's balance sheet becomes problematic from the market participants perspective. For now it's steady as she goes with Bernanke's zero interest rate policy and monthly asset purchases of $85 billion which should continue to support markets along with the continued rebound in housing and construction. Black Swans: 1.An Inflation spike forces the Federal Reserve to reverse course sooner than stated causing a spike in borrowing costs and stymieing the housing and construction expansion sending markets reeling. This very real fear would be the result of years of printing money by all global central banks. 2. The failure of a major European financial institution reigniting fears of contagion sending the EU economy into a tailspin creating yet another drag on global growth. Many of Europe's large financial institutions still need to take write downs, sells assets and raise capital to shore up their balance sheets. Progress is being made, but the glacial pace needs to quicken. 3. Syria. In a last gasp move at preserving power Syria launches a preemptive attack on Israel causing a strong response. This may open the door for Syria's lone ally in the area Iran to enter the fray igniting the whole Middle East testing alliances and potentially dragging the US into yet another war with foes and allies uncertain. 4. Not so Black Swan: Washington continues to embarrass themselves in a spectacular show of ineptitude from both sides of the aisle not seen since the summer of 2011's debt ceiling debacle causing yet another credit downgrade investor uncertainty and sharp market correction. Going Forward: The US economy can and should do better as we get deeper into the new year. We simply need Washington to get out of the way. We look for exports to re-accelerate as Central Bank policy and stimulus programs in China, India, Brazil, Australia, Japan and Korea start to show meaningful traction. We also look for the EU periphery economies to begin a basing pattern as, ex-Greece most countries already have taken aggressive steps to right size government spending, pare back bloated government payrolls and liberalize private employment regulations. We look for continued progress in construction and housing as patient buyers are pulled off the sidelines with the looming threat of rising borrowing costs along with the pain of the recession falling further in the rear view mirror. We look for inflation to remain well contained in the 2%-2 1/4% range as commodity input prices come under pressure. We look for a rise in borrowing costs in the mid to late 2013 with mortgage rates climbing above 4% and 10 year treasury yields climbing to 2 1/2%-2 3/4% as the global growth story takes hold. Our year end target range for the S&P 500 is 1575-1620 which assumes earning of $105-$108 per share and utilizing a 15 multiple which implies a 10 1/2 % - 13 1/2% gain. In closing Americans needs a reality check when it comes to our perennial budget deficits and ballooning debt. There are some in Washington that would have us believe this can continue ad infinitum. This is clearly deceptive and outrageous much like the person that jumps from a 100 story building that believes he is flying right up to the time he hits the pavement. We as Americans need to ditch our party colors and encourage our elected officials to make the tough decision to cut spending, if not for ourselves for the children and future generations. That being said, as stated above we believe 2013 should be a very good year as long as DC gets out of the way. It therefore is a year where we don't believe we need to over complicate things. Keep our strong commitment to the market while buying good solid companies. As Warren Buffet stated long ago, " Invest in company's any idiot can run because eventually one will". We'll be on alert for any changes to Policy, in market sentiment or economic data that may change our view and be in contact to adjust our strategy and commitment to the markets. We thank you again for your patience and confidence in the very challenging times. Yours in pursuit of the KWAN.

Obama Wins, Now Time For A Bit Of Cliff Diving

Hallelujah! It's finally over! "Grab your forks and pop the corks" or so were the shouts from the celebratory Democrats feasting after an Obama rout, in the electoral college anyway. From the other lest festive group of conservatives it was more, " lock your door prepare to be poor". I can only speak for myself and share the not so sophisticated Byrne exit poll data that showed just about every donkey and elephant ,blue and red coat (even the lone yellow dog) suffered various degrees of election fatigue. The post election market reaction saw some players who had been soo convinced of a Romney victory they positioned themselves for a celebratory rally, quickly reversed course and unwind long positions. That selling was damaging but subsided heading into the holiday weekend. But, we'll get back to that later. So Now Where We Are. The US economy continues to heal, albeit the expansion has been inconsistent and uneven. We've seen a weakening over the summer months and rekindled fears of a stealth oncoming double dip recession. Quite the imaginations these perma-bears have. But, we don't do guess work here especially when it's all in the digits (data). So, here we go. Gross Domestic Product (GDP). The initial reading on third quarter GDP came in at 2% improving over the June quarter final reading of 1.6%. A solid improvement, but off a very low base. The better news is we should see the 2% initial reading be revised higher when we see the first revision coming this week possibly closer to 2 1/2% due to improved sales and inventories. Leading Economic Indicators (LEI). The LEI rose .2% for October coming off a .6% rise in September. This number was capturing some of the impact of hurricane Sandy's massive destructive force along the eastern seaboard. Still .02% suggest a continued slow below trend pace of economic growth going forward. Industrial Production (IP). IP showed a decline of -.4 after having increased +.2 in September. The main culprit was Sandy once again. Analysts calculate after taking into account the drop in utility output, food, transportation, electronics etc., Sandy accounted for roughly a full -1% decline in IP. Capacity utilization also showed a decline of -.4 to 77.8 a full 2.5%+ below its long term average leaving ample room to absorb inflationary pressures when they rear their heads. Inflation. Consumer Price Index (CPI), Producer Price Index (PPI). As reflected in the PPI and CPI indexes as well as the elevated rate of unemployed, inflationary pressures remain well contained. That is, as long as one needn't eat, drive or heat a hovel. Housing. Home sales continue to show a bottom is officially in. New home sales fell -3% in October the impact of Sandy remain in question. But even taking the number as clean, we can look at existing homes sales surging 2.1% over September and 10.9% yoy while pricing was up 11.1% yoy. Also importantly the supply of homes on the market is at a very manageable 5.4 months worth. Equally important for the home builders and home sales, rents continue to firm and rise from an already elevated platform. Employment. October non-farm payrolls added 171,000 in October and the jobless rate stood at a 1st term Obama low of 7.9%. Unemployment claims had fallen to a soled range of 350-385,000 and were trending down. Then Sandy hit. The November Jobs number may take a hit due to Sandy. The Union planned extinction of the Twinkies, and destruction of an estimated 18,000 jobs will also have an impact. But both events are blips in a job market heading in the right direction, just spending far too long traveling in the slow lane. Federal Reserve. Chairman Ben Bernanke has steered the Federal Reserve into a surreal version of Ground Hogs Day (if you haven't seen this Bill Murray classic call me and I'll fill you in). After introducing Quantitative Easing and his very publicly stated goal of "exceptionally low rates into 2015", he could simply push "replay" from here on. True he'll need to decide whether to continue Operation Twist, but all the surprises have been exposed. Investors may like his policies or not, what I find inarguable is Chairman Bernanke was the only one that GOT IT and was bold enough to take steps to prevent IT. IT being the looming and inevitable Great Depression Part II. Washington was frozen and in hyper finger pointing mode which we've come to realize was not a one time event but a skill being honed. What I believe can be debated is, has he gone too far. Too early to tell as his zero interest rate policy is still not making credit available to all those in need and importantly would normally qualify such as small businesses and potential borrowers with good not great credit. . International. It appears we've averted another Greek tragedy. The ECB and IMF found a way to restructure without a default. We're all aware of the old, "if it looks like a duck, walks like a duck and quacks like a duck, IT'S A DUCK". Take a look at the restructuring details if you will, but be warned to wear ear plugs as the quacking is still ringing in my ears. Nonetheless it's a restructuring and Greece gets their bailout funds. Now we await Spain's march up to the soup line. No doubt the European Union is on sounder footing with Greece's default and ensuing expulsion from the EU taken off the table. Shifting to China we see the hand off of power went smoothly and the economy rebounded to expansion mode after having contracted the previous three months due to significant expenditures in infrastructure spending. The private label HSBC China FLASH PMI moved to 50.4 while the official government figure is expected to come out at 50.6 from Octobers 50.2, any figure above 50 reflects expansion in the economy. India has also taken a cue its time to move as they've recently implemented pro growth legislation intended to liberalize their economy and encourage direct foreign investment. All in all strong positive news. On the not so positive. Iran would still like a new set of nukes for Christmas. Afghanistan is still a mess as is Pakistan. Israel after having bested Hamas in an aerial show that sent off in excess of 100 foreign fighters to greet their awaiting virgins in the afterlife is still on high alert. Energy. With the hotbed that is the middle east oil prices remain rather well contained even with Iran, Iraq, Pakistan, Syria and Afghanistan in some stage of war or civil revolt. Why? Saudi Arabia is pumping at full capacity. Iraq is pumping more oil than it has in decades with growing supplies and capacity. Libyan oil flow has recovered six months ahead of time. Most importantly the US is producing more oil and energy then ever. As long as we can manage drilling in hard to reach areas safely US production will spring board the US to the top global producer within 5 years and become a net exporter of oil by 2030. So much for the Peak Oil theory. Always be aware of who is funding all these "research" groups as the outcomes can be somewhat predictable and heavily biased. Going Forward. The markets are hanging on every statement coming from the gang that couldn't govern straight (last year anyway). Just today we saw the market fall 100 points on the Dow due to Sen Reid's "hands off entitlements" rhetoric. We saw a whipsaw move back up 86 when Boehner countered with his acknowledgement we are closer to an agreement than is believed. In the end we believe an agreement and grand compromise will happen that allows both parties to save a little face but not be totally happy. This spells good news for investors. We believe a calm cautious approach is warranted for now and maintain an aggressive and balanced positioning to the markets. Growth is improving on near all indices. Consumer spending is holding up well, home sales improving and auto sales remain on a 14mm+ annual run rate. Lastly, hurricane Sandy is currently a drag on growth but homes need to be rebuilt, washer dryers bought automobiles replaced and importantly personnel to man the registers, sod the lawns, and skilled labor to do the work. This should provide a nice bump to growth over the next 9-15 months on all fronts. We'll maintain our aggressive posturing for now and keep a watchful eye on DC for any signs of the reversion to stalemate to force our retrenchment from the markets. Should we need to get more defensive we'll be in contact immediately to discuss re-balancing and raising our cash positions.

Seabiscuit We Ain't, But 2012 Should Provide For An Exciting Finish

As the famous Belmont Stakes announcer Dave Johnson roared as Secretariat defied our visual senses and shattered the record books, "Down the stretch they come!", so to, we face such a finish to 2012. The investing year hasn't enjoyed such a straight uninterrupted run to the finish though. We've heard, "Sell in May go away". Nice ditty, not an investment strategy. During the Spring market correction some pundits broke out the old, "Look for a return OF capital not ON capital", again cute bit most likely propagated by news "reporters" or S&L's pushing CD's. I could go on, but you get the point. Investing must be a long term journey unencumbered by emotion, and importantly opportunistic. The market has experienced one of the most distrusted and unloved rallies I've ever experienced in my entire career. Investors were nervous about the new Greek tragedy, a potential default and exit from the Euro zone. Frightened by the flash crash caused further retreat. Now we seem to be closing in on the looming fiscal cliff which again has caused potential investors to steer clear of equities and risk assets. All the while bond funds have become the new chick magnet for all genders. While Warren Buffet coined derivatives the Financial Weapons of Mass Destruction, current bond funds investors unknowingly are treading into a financial minefield. The road seems safe right up until the legs of the portfolio (least risky investments) get blown off when rates begin to rise. Investors that hold individual bonds and fixed income products can always hold investments to maturity and receive their principal back. Bond funds have no such maturity so the pain will be severe and extended. How long can someone take a 2% yield while simultaneously getting pole axed with a 30-40% hit to principal? My sense is and history supports the retail investor will take near max pain before cashing in his chips at or near the absolute market bottom. The all important Where We Are. The market appears reasonably priced. Earnings season is about to officially kick off tomorrow with Alcoa. Some companies have already preannounced a softer quarter, such as Federal Express and Caterpillar. The stock prices have already corrected to reflect the lowered earnings and revenue guidance. So, if all goes as anticipated S&P 500 company earnings should come in around $100-103 per share for 2012. Attaching a 14x or 14.5x multiple gives us our year end target range of 1400-1493 which may prove conservative. GDP: GDP is currently estimated to have been running at a 1.5 to 2% growth rate for the just closed out 3rd quarter after an anemic 1.3% growth rate for the 2nd quarter. . Barring any major spikes in capital gains, dividends and taxes in general this tepid growth rate should continue into early 2013. A lot can and should happen before the end of 2012 to keep these rates manageable, as allowing for an unrestrained spike in the above mentioned rates coupled with the mandatory spending cuts to budgetary spending would most likely push the US economy back into a recession. Neither party or Presidential candidate can tolerate this or use it to their benefit, so it most likely will not occur and we'll get the grand compromise that has so far proven so elusive. Leading Economic Indicators: This declined .1% in August but is averaging .3% over the previous six months supporting a continued, slow below trend growth rate to close out the fourth quarter and into early 2013. This also suggests we are stuck with elevated levels of unemployed and underemployed for the foreseeable future. The major positive buried within the report were new orders for non-defense capital goods. There was a concerning negative contained in the LEI report that being consumer expectations. ISM Purchasing Managers Index for Manufacturing: This came in at 51.5 above the all important 50 which signifies a neutral posture neither expanding or contracting. The recent report reverses the prior three months which showed slight contraction. Positive surprises came in the 5% pop in new orders which bodes well for the future. ISM Purchasing Managers Non-Manufacturing Index: This came in at 55.1. Up 1.4% from August's release. This "services" sector index shows managers optimistic about the current quarter and reflected some easing of concern about unemployed and the pace of activity. Some mentioned the strains the drought had put on business along with companies putting major emphasis in driving cost efficiencies and productivity. (working existing employees longer and harder) Housing: IT'S BACK BABY! I've been waiting four plus years to say that. For the last four years housing has been a laggard and a drag on domestic US GDP and employment. No longer. Housing Starts were up 2.3% in August to a 750,000 run rate. Single family home starts rose to a level not seen since April '10. Conditions remain favorable. The pace of bank foreclosures has slowed to a manageable rate. Thus the huge overhang created by homes being dumped on a lackluster market has come down dramatically. With a stabilizing jobs market and near generational lows in interest rates we can have even more confidence the housing market is/has bottomed. Employment/Unemployment: Jack Welsh made a splash this past Friday after the release of the Non-Farm Payroll and Unemployment rate release after "tweeting", "THE FIX IS IN!". Baloney! What Jack and the other talking heads forgot to mention was the "maneuvering" Jack crafted to beat Wall Street's earnings estimates for years when he ran GE. So, you'd think if anyone could figure out how one was gaming the figures he could. Still waiting for any support for his "outrage". (FYI, he now makes a few pennies writing books and hits the speaking tour in order to keep those baloney sandwiches tabletop) Once he left his CEO perch the SEC investigated and fined GE and forced them to restate earnings along with some hefty fines. Who's cooking the books? Friday's jobs report was not notable for the 114,000 jobs created it was more the unemployment rate dropping below the 8% rate. HOORAH!! Really? No. The U-6 (number of unemployed + underemployed) is still stuck at 14.7%. If they wanted to game the numbers, here is where the eraser would have been used. Putting our political hats back in the closets and our pins in the drawer, one must conclude the jobs front is getting incrementally better. Weekly unemployment claims have settled into a not overly impressive 350,000-385,000 range. Analysts suggest 100,000-150,000 new jobs must be created in order to simply absorb new entrants. So, we're doing better, but clearly have some wood to chop. Central Banks: Spigots wide open. Four major central banks are flooding the markets with cash and outright expanding their balance sheets while purchasing assets. With the new European Central Bank president and Chairman Ben Bernanke both having initiated policies of "Whatever it Takes, For However Long It Takes" it is, has become a fools game to bet against the markets. As much as you or I may agree or disagree with their stated policy, we are investors here and you currently make money by getting in the passenger seat alongside the central banks. Black Swans/Potential Shocks: Look no further than Europe, still. Greece continues to replay the Clash hit for the markets, "Should I stay or Should I go". Spain is keeping us on pins and needles as we await their formal request for a bailout. Chairman Draghi is on full alert, but we're on watch of him being on watch. Next let's shift back yet again to the Mid East. Syria is in civil war. Turkey is getting sucked into the Syrian conflict which might set off a regional contagion. Iran, where to start. Iran is supporting Syria, influencing Iraq and attempting to expand its sphere of influence in general at the same time as they push their nuclear capabilities. Israel was just short of mounting their troops for an assault. They've since backed off as the Iranian economy is in a tailspin from UN sanctions and the near complete collapse of their currency, the Real. To Asia we go. The Asian Tigers have been downgraded to polecats. China's economy has not hit stall speed, but it has slowed to an estimated 7.7%-8% annual GDP growth rate. Impressive for any other developed economy, but down sharply from the heydays of double digit growth. China must jump start their economy or face continued and escalating bouts of domestic unrest. They've initiated stimulus packages in the hundreds of billions already. Should the deceleration continue the global expansion as tepid as it stands would be in jeopardy of contraction. With Central banks already in crisis mode this would be disastrous. Going Forward: There most assuredly is enough to keep investors awake at night. Europe is reentering a recession and must continue to be proactive amid a weakening global economy, ex-US. However, the improving domestic jobs front buoyed by a rebound in automobile manufacturing, housing and yes energy production for now affords us some protection. Another reason for our optimism is strong corporate earnings, reasonable valuations along with a resilient US consumer that helps gives us some cover and comfort. The aforementioned strengths along with an accommodative Fed, rock solid balance sheets of domestic banks and Corporate America in general allows us to maintain our cautious optimism and aggressive posturing to the markets overall. We'll be on high alert for any significant deterioration in market sentiment or economic indicators and for signs it's time to take some of our chips off the table. This 2012 contest has been difficult to navigate, uphill at times with many unforeseen obstacles. But as we head to the finish line, I'm betting the bulls take this one by more than just a nose. Thank you again for the opportunity to serve your and your patience in these very challenging times. Yours in pursuit of the KWAN!

Merkel Cooking Up Quite A Stew For The Markets

After having reflected upon the theatrics of the Euro crisis over these last 5 years I've concluded Jerry Seinfeld's Soup Nazi is a caricature of German Chancellor Angela Merkel, "No, No Funds For You!". But as we know, he ultimately acquiesced when his most valuable asset his recipes were wrest from his control. Alas, we find Chairman Merkel faced with the same dilemma. The collapse of the Euro would strip Germany of a prized asset, a cheap currency and by extension cheap competitive exports. Germany has finally blinked and is freeing up Messrs. Draghi to utilize the full force and scope of tools available to stabilize the Eurozone. We anticipate further progress towards fiscal responsibility coupled with growth initiatives designed to jump start the hobbled over-indebted membership. This should be the path taken to help stabilize and save the Euro.

Domestically: We saw a surprise snap back on the jobs front with July's non-farm payroll figures adding 163,000 jobs, almost double the prior 3month average. While a relief, we need to see these figures gravitate toward 200,000+ to make a dent in the unemployed and underemployed as reflected in the U-6 statistics.

Housing: Another bright spot housing. I know you needed to do a double take on that one. Housing is solidly rounding out a bottom and turning up. Housing starts and housing permits have shown strength most recently while at the same time home prices actually turned up.


Industrial Production: Industrial production snapped back to show a .06 gain for July. Equally impressive capacity utilization rose .04 to 79.3 healthy but slightly below its long term average of 81. This 1.7% spread represents the spare or excess capacity for expansion in our manufacturing sector providing an buffer against inflationary pressures going forward.

Leading Economic Indicators: LEI rose .04% in July which would suggest continued economic expansion albeit at a moderated pace for the near term or next six months. Strength was lead by housing permits and the drop in initial unemployment claims.


Retail Sales: Resilient doesn't come close to capturing the state of the US consumer. Blind? No. How about simply pent up demand being released and the want/need to feel better. This is partially the tale but the bigger untold story is things continue to get incrementally better. This best explains the insatiable appetite for $500.00 I-phones and $600 I-pads along with auto sales hitting a $14 million+ annual run rate and home sale finding the fabled Unicorn, or bottom.


There is also the drag on the Us economy that comes from abroad which we've spoke of ad infinitum in past tomes. Europe: Europe is a case of Humpty Dumpty having falling off the wall, shattered and ECB's Jean Claude Trichet sensing the opportunity for an omelette. Only then to have Chef Draghi come in behind and attempt to reconstruct this fractured mess. A work in progress surely, however now having many more sous chefs at his disposal lending a helping hand.

Emerging Markets: As Jagger put it, " you can't always get what you want but if you try sometimes you get what you need". China was staring down the barrel of a real estate bubble forming that may have dwarfed our tech bubble. They acted proactively and aggressively to pierce this bulbous deformity before it became too grotesque. They succeeded but have also come perilously close to driving the economy into stall speed. The soft landing they were targeting may come to pass but it just might require a bit of juicing to achieve. Same for India, Australia and Brazil. While the global economy was in a mid round prize fight battling recession these stalwarts were on inflation watch hiking rates. They've since born witness to the effects of their errors and come about 180 degrees and are as Lionel Richie (Commodores) crooned, "we're eeeaasy, easy like Sunday morning" when it comes to monetary policy.

Closing: GSA has mentioned so many times in the past the old mantra of Wall Street, "you never fight the Fed". I believe the new updated mantra should state, " you never fight the Fed, and you Never Ever fight the Fed, Bank of Japan, Bank of England and Peoples Bank of China". There has been a stealth rally going on that most investors, both individual and institutional are missing out on. They remain under-invested and too heavily weighted in cash. The focus of professional investors, individual investors and media alike has been too much on what's wrong or what can go wrong and not enough on what is going right. At some point there will be a capitulation rally at which point we may need to re-balance and lessen our appetite for risk, but for now we'll maintain our aggressive posturing to the markets as I've still got a craving for a heaping bowl of Merkel's borscht.


Thank you again for the opportunity to work with you in these very challenging times.



Yours in pursuit of the KWAN!