Volatility and Commodities (go together like a horse and carriage)

Contributed by: Matt Trujillo, CFP®

There has been a lot of press lately about the recent volatility in the crude oil markets.  Every smart person with a microphone is making predictions about how low it could go or where it ultimately might end up. I can’t open a financial website, magazine, or journal without seeing some sort of headline declaring that Oil is going to $10 a barrel!

All of this sensationalism would lead one to believe that this price behavior is something unusual for commodities and oil specifically. It’s a constant reminder how short sighted the media is and why it’s best not to make financial decisions solely based on what you hear on CNBC or Yahoo Finance.

Historical Perspective on Commodities

In fact, try going back over the last 100 years and study not just oil, but all commodities. You’ll see that large double-digit gains and large double-digit losses are quite common and almost expected in these types of markets.  If you have that kind of time (and that level of interest) click here to browse through all the various commodity prices and historical price data.

For those of you that don’t have that kind of time, let’s focus mainly on the last 10 years.  For illustrative purposes, we’ll use the annual performance data found here. This interactive chart shows the historical pricing performance for oil as well as several other commodities over the last 10 years. Using this data, let’s say I invested a hypothetical $10,000, and earned the returns illustrated on the chart. My original $10,000 would have grown to $12,351 after 2014.  This is equivalent to roughly a 2.3% average annual rate of return.  Not really anything to get overly excited about, but the path to get that 2.3% was quite dramatic. A few notable years: 2005: +40.48%, 2007: +57.22%, 2008: -53.53%, 2009: +77.94%, and 2014: -45.58%.  Quite the volatile rollercoaster ride…especially if you end up with a paltry 2.3% for enduring all of the swings!

As you can see, when it comes to Oil price volatility is nothing new. Commodity markets are not for the faint of heart and might make sense as a part of a well-diversified portfolio. If you are considering adding oil or any other commodity to your overall investment plan, please talk to a qualified professional first to make sure that it is a suitable investment for your risk tolerance and time horizon.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matthew Trujillo, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance may not be indicative of future results. Hypothetical example provided in this article is for illustrative purposes only. Actual investor results will vary.Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Why Active Money Managers are so Unpopular Right Now

Contributed by: Angela Palacios, CFP®

Today, maybe more than ever, active managers are the unpopular kid on the block.  Over the past 5 years, very few U.S. Large cap managers have managed to beat the S&P 500.  Last year, according to Morningstar Inc., was the worst year in modern history for active management underperformance in the U.S. stock category.  Investors tend to be very harsh on money managers, giving more importance to what they have done lately as opposed to over longer periods of time.

This is an old chart idea that never gets old.  Investors need to be often reminded of this.  We hold Wall Street to very tight standards, encouraging them to try to outperform or provide positive returns over very short periods of time when this is very difficult.  Looking at the S&P 500 if your investment time frame (holding period) is one year the chances of achieving a positive return are 68%. That’s only a little better than a coin flip. You are at the mercy of the market’s craziness.  As individual investors we are usually lucky in the sense that we have time on our side.  If our investment time frame is 20 years or more, then the markets have been kind to us offering positive returns 100% of the time.

Source: Robert Shiller, author's calculations. 1-day returns since 1930, via S&P Capital IQ.

Unfortunately, so many investors are busy chasing a benchmark or their neighbor’s returns that they are rarely happy.  You do have the opportunity to focus on the long term and have the odds in your favor, but will you?

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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http://www.ritholtz.com/blog/

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information obtained from sources is considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Are we Seeing Inflation or Deflation in the US Economy?

Contributed by: Jaclyn Jackson

The Fed has created investor concern by stumbling away from its hope of 2% inflation.  That concern has given rise to a polarizing inflation/deflation debate. With a fragile recovery at stake, the Fed struggles against overcoming persistently low inflation rates and losing the public’s faith.  At the same time, investors build their cases for inflation or deflation; each side posing strong arguments for why either threatens the US economy.   

Evidence of Deflation

Investors who find themselves in the deflation camp argue that fears that the European Central Bank’s bond buying program will make the euro less attractive and send investors flocking to rising currencies.  As a result, European growth will improve, but at the expense of growth in the US, Switzerland, and other countries with strong currencies.

Moreover, January 2015 marked the third month in a row that prices for goods declined, clearly discouraging hope of a healthy growing US economy.  With a -0.1% price decline in January, goods actually cost less than they did one year ago. Similar to 2009, deflation affects falling prices, consumer spending, and adds pressure to corporate profit margins, typically spawning wage reductions and increased unemployment.

Not to mention, some dispute whether quantitative easing even worked.  The Fed made huge bond purchases with the intention of increasing the money supply.  Ideally, central bank asset purchases should increase bank reserves and the money supply, resulting in increased lending by banks. However, in reality, banks were so panicked during the financial crisis that they held on to the excess money and did not lend. There can’t be inflation without lending.

Argument for Inflation

Conversely, investors in the inflation camp argue that the energy sector, especially cheap gas prices, is the primary driver of falling goods prices.  Moreover, they believe recent price stabilizing marks the beginning of increasing gas prices moving forward. Essentially, as gas prices rebound, the inflation figures should also put deflation worries to bed.

What’s more, if you exclude energy from consumer prices, staples such as food, shelter, and medical care have increased 1.9% from 2014.  When the most volatile categories like food and fuel are removed from the equation, core inflation is steady and up 1.6% from last January.  These numbers reflect the economy being more in line with the Fed’s 2% goal.

Despite looming worries, economists are still optimistic about the overall improvement of the US economy.  Many credit quantitative easing for keeping interest rates low, building job creation opportunities, and preventing the Great Recession from becoming the second Great Depression. However, it is also important to note that critics of quantitative easing say that a long-term effect could be high inflation.

The Verdict

This is not a black and white issue.  There are areas of inflation and deflation pulling the US economy in both directions.  We are watching bank stability, consumer spending, and credit to monitor the situation.  Yet, taking the glass half full perspective, investors can be comforted that the United States’ core inflation is key in differentiating the U.S. economy from more challenging economies like Japan and the Eurozone. 

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Jaclyn Jackson, Investment Research Associate and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Jaclyn Jackson, Investment Research Associate and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss.

Is a Market Correction Coming Soon?

Contributed by: Matthew E. Chope, CFP®

I’ve said before that I believe market corrections are as natural as the day is long. That’s why, in my last blog, I shared 3 steps to prepare for market volatility. But how do you know if the winds of market change are about to blow? These are some indicators I like to watch.

The Bigger Picture: The Fed & Price Ratios

Beyond the US equity markets, there is more going on behind the scenes that can come into play. In my opinion the Federal Reserve has been keeping money extremely cheap for an extended period of time.  The Fed wants to stimulate the economy and encourage job growth. Recently low inflation has allowed the Fed to stay on this path.  This works very well for the US treasury also since low interest rates keep the US Government balance sheet solvent and interest expenses manageable.  It has also allowed banks the time needed to replenish balance sheets and squeeze out the bad debt on their books. 

Earnings are usually necessary to allow equities to sustain long-term values.  Generally, the price of a security today is the sum of all future discounted cash flows into perpetuity.  When earnings are stable and getting better and money is cheap this allows for higher price multiples like we are seeing today.  We are at or near the highest price ratios ever witnessed in the US equity markets.  The following chart is measuring the price to many other gauges of earnings cash flow and book value over the last 65 years.  It’s not much different if you view it over the last 200 years.

Ratios of various equity valuations

We are at this point in history because of cheap money, cheap labor and now even cheap energy (which is more of a positive shock).  Money, Labor and energy are the 3 main expenses that go into every income statement of most companies in the country. The next two charts give a valuation of corporate equities values to nominal GDP (price of publicly traded companies/gross domestic product)  the important thing to see here is that the chart is indicating very high prices compared to output from a historical standpoint.

The next chart below is very similar depiction of valuation. Each point on the chart is the price of S&P 500 stocks at that point in time divided by the previous 10 years of earnings for the S&P 500.

Shiller P/E for the S&P 500 Chart

More Indicators to Watch

From a historical standpoint, these 3 expenses for companies are close to, if not at, the lowest they have been for a generation or two.  It’s hard to see how it can get much better. On top of that, we have moderate energy prices again.  That indicates that earnings should be fantastic (and they are), but what's next?  When the cost of money increases and labor costs rise again (as projected for later this year or early 2016 in the chart below) we could see the earnings improvements slow and possibly fall.  And what if there is any type of energy shock the other way (and there always is eventually)?

The following chart from GMO provides some understanding of the last 50 years of initial unemployment claims.  When initial claims are high, we are usually deep into a recession. When they are rising, we are usually entering a recession. And when they are near the level we see today, the labor force is beginning to tighten, which typically leads to wage inflation and motivates the fed to increase interest rates and slow the economy down from overheating.

This chart is initial claims for unemployment 1965 to present.

Winds of Change?

The wind, which has been blowing behind us for so long, has allowed us to feel confident, but it’s beginning to slow considerably from some of the indicators I watch.  Over the next year we could see the economic winds actually begin to blow at us.  On top of that some don’t see a lot of room for upside in US equities over the next 7 years as shown in the chart below.  Those at GMO have forecast for US equities to have negative returns after counting for inflation.  So, if you haven’t recently, now may be the time to review your portfolio allocation, time frame and risk tolerance with your advisor.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matthew Chope, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

3 Ways to Prepare for a Market Correction

Contributed by: Matthew E. Chope, CFP®

Markets need to correct from time to time – I believe it’s as natural as the day is long. We may even be past due. I attend a lot of conferences and lectures about everything related to finances, financial planning, investments and economics – All the fun stuff!  Well, fun to me.

Recently, I heard the presenter talk about this chart, the “S&P 500 Growth/Value index Ratio”.  He actually said the S&P 500 still has a ways to go - like 25% before it's at the same peak of 2000. My thought was: Why anyone would want to get back to the type of silliness we had in 2000? 

Three years ago I did not see excesses in the market valuations and most economic indicators were still getting better, and rightly so.  I believe today valuations are rich.

Economic Cycle in Extra Innings

Someone asked me recently what inning we’re in for this economic cycle. I responded: Probably the 13th inning! The average lifespan of a US economic cycle is 4.9 years and we are almost at our 6th year.  However, there may be time left. We could see the rest of this inning, maybe more, before a 10% downturn or more.  A 10% downturn is a very normal annual event, historically speaking. And we have not had a 10% downturn in the Dow or S&P 500 since the 3rd quarter of 2011 -- almost 3 ½ years.

3 Steps to Prepare for Volatility

At The Center, we strongly believe in a philosophy of investing, not attempting to time the market.  So I’m not here telling you this a market top.  No one is smart enough to do such a thing with any consistency and getting in and out can be more detrimental than staying put over the long haul. These are the 3 steps I suggest to my clients no matter the market cycle:

1. Make sure your long-term allocation is still appropriate

2. Double check that your time frame is correct for the investments in your portfolio

3. Review and consider your risk tolerance for those investments

If there is money you need in the next 12 months for a project or money invested for less than 5 years, discuss with your planner where to put this so that it has less volatility. In my next blog, I’ll take a look at the bigger picture and what to watch for signs of a potential downturn. 

Matthew E. Chope, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matthew Chope, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

First Quarter Investment Pulse

Contributed by: Angela Palacios, CFP®

We hit the ground running this year with a flurry of meetings with top notch investment managers.  In January Angela Palacios attended the ETF.com conference where international investing was a hot topic.  Angela shares some interesting insights along with notable quotes from some of our top money managers.

Ryan Barksdale of Vanguard: Due Diligence process

Melissa and Angela sat down with Ryan to discuss how Vanguard structures their investment committee in making key decisions as well as how they evaluate a company they are looking to bring on as a partner in making investment decisions.  Ryan discussed with us their manager oversight and selection process.  The keys in their investment selection process include low cost, top talent and patience.

Giorgio Caputo a portfolio manager and analyst at First Eagle

On the global front, First Eagle’s Giorgio Caputo noted that international valuations seem to be becoming more attractive relative to the US.   And with global confidence at multi-year lows and depressed earnings, if anything goes right things would start to look attractive. US quality positions have been reaching their cash targets and they’ve been replaced with overseas holding. Caputo noted that their investors pay a tax by holding cash, high quality bonds, and golds in order to get lower risk as measured by volatility in the portfolios.

It was noteworthy that Caputo was meeting with us on January 23rd, which was the day that Mario Draghi announced new quantitative easing initiatives in Europe. Caputo mentioned that the trend has been to buy on rumor and sell on fact. This seemed to be repeated with the announcements.

Discussion turned to the global fears on deflation. Caputo noted the perplexing conundrum that worldwide labor pools are shrinking as populations age, but wage growth isn’t increasing with a tighter labor pool. He blamed this on a deflation pulse which is coming from the automation of equipment. Whereas a new factory 30 years ago might have employed 1,000 workers, today a similar factory might only employ 10 or 20 people with machines taking care of the rest.

Notable Quotes from some of our top managers shareholder letters

From Steven Romick President of FPA notes it has been rough weather for some time for deep-value investors.  However, rather than letting the market’s and its price fluctuations drive them, they remain patient, picking companies that are easy to earn a return on for the price they are paying.  They have to often sit in cash and wait for these opportunities as they are now, at least partially.

“Our money is invested alongside yours so we’re willing to look stupid for a time rather than act stupidly”

Rob Arnott Chairman and CEO of Research Affiliates notes that diversification in a bull market is always painful. 

History and common sense suggest some serious caution going forward, given a potentially toxic brew of historically high valuation levels, peak earnings, an economic expansion that’s about to enter its seventh year, the markets’ evident addiction to monetary stimulus as the primary fuel for further rallies, and the stark divergence between U.S. stocks and pretty much everything else.

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Raymond James is not affiliated with and does not endorse the opinions or services of Ryan Barksdale, Giogio Caputo, Steven Romick, Rob Arnott, or the companies they represent.

Investment Commentary - January 2015

2014 was highlighted by the continued dominance of America’s large cap stock bull market and a bond surprise with US treasuries providing returns to investors. We like to think of markets in cycles and you may be feeling more and more used to stock returns as it’s been more than five years since we had negative returns in US large company stocks (generally). Moreover, you may wonder why you would own anything but US stocks and bonds given a divergence of returns between US large companies and almost everything else.

The Curse of Diversification?

If you have a diversified portfolio of different types of stocks and bonds as we recommend through asset allocation, it may to be frustrating to see the largest US benchmarks with double-digit returns while other different types of stocks have been more mediocre. Using 2014 as an example, small cap stocks as measured by the Russell 2000 were up 4.89% vs. 13.69% for the S&P 500. Meanwhile, foreign stocks as measured by the MSCI All-Cap World Ex-US were down for the year return -3.87%.

As you can see from the chart below, the drop-off was precipitous. While we have made some adjustments to our recommended mix of stocks, we continue to recommend a commitment to diversification.

It is difficult to overstate the power that diversification has in terms of long-term investment returns. By long-term, we don’t mean one year or three years but over decades which is ultimately the time horizon for most of our clients at least for some of your money. Indeed, the SEC refers to “The Magic of Diversification” on their website educating investors. They go on to note, “The practice of spreading money among different investments to reduce risk is known as diversification. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.” Source.

Bond Redux

While we have been amongst the majority of investors who have been concerned about rising interest rates over the next five to ten years, bonds reiterated their unwillingness to be predictable in 2014 by returning close to their lows in terms of yields. The ten-year treasury yields 1.93% today (January 12). That number seems impossibly low, likely manipulated by a very accommodating federal reserve. It’s not difficult, though, to see why it may stay that low for some time when you notice that the German ten-year bond yields 0.47% and a Spanish bond – much less creditworthy than Uncle Sam – pays just 1.64%.

Predicting short-term bond returns is a fool’s errand. That said, the very low bond yield – about the same as inflation – coupled by forewarning from the federal reserve that rates may go higher this year means our outlook is unchanged. From year-to-year we can’t predict the returns of bonds, but over the next several years, yields will likely go higher. This march higher would be likely to accelerate if there were signs of inflation which seems to be the farthest thing from reality with CPI less than 2% right now. As with all things, it’s healthy to not assume anything.

We have more to share in our investment commentary website http://centerinvesting.com.

• Tim Wyman shares his personal frustration with diversification last year with  “Why I Dislike a Diversified Portfolio…in 2014”

• Our investment strategy quarterly is updated and available

• I share an update on oil prices and other geopolitical events and how they might affect markets

• Angie Palacios has a research roundup from the second half of 2014

• On a housekeeping note, we have established an informational page for tax information

You will not find us making predictions for investment returns in 2015. We can predict that your commitment to financial planning coupled with a long-term outlook when working with us to make investment decisions will have a positive impact on your ability to meet your financial and life goals. We appreciate your partnership and trust in allowing us to work together to meet your needs.

As always, please don’t hesitate to contact us for any questions or conversations.

On behalf of everyone here at The Center,

Melissa Joy, CFP®
Director of Wealth Management

Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2013, Melissa was honored by Financial Advisor magazine in the Research All Star List for the third consecutive year. In addition to her contributions to Money Centered blogs, she writes investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.

Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Melissa Joy & Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. C15-001750

Investment Pulse Fourth Quarter

While the end of the year is busy with processing RMD’s, charitable gifting and loss harvesting we still find time to dedicate to research.  In the last few months of the year we heard from a wide variety of money managers and got their take on the markets.

Kathleen Gaffney, Portfolio Manager for Eaton Vance

• Kathleen feels like they have reached an inflection point in the bond market, even though fundamentals for the economy are still positive, high yield is selling off and investors seem to be bracing for higher rates to come.

• She feels the risk worth taking at this time is found in the equity markets in companies with good fundamentals.

• There is so much cash on the sidelines now that every time there is a selloff in bonds causing rates to rise there are many buyers swooping in to buy up the bonds bringing the rates right back down.

Joe Zidle of Richard Bernstein advisors

Often seen on CNBC, Joe came to Detroit to share some of his company’s views of the markets in general.  They have many interesting and often differing viewpoints from the consensus. 

• He describes the market now as a secular equity bull.  “Bull markets don't end with skepticism, they end with euphoria.  Markets can't be overvalued if people are uncertain.”

• There is still a lack of capital spending by U.S. companies to invest in the future of their businesses.  94% of S&P 500 companies are putting money into share buybacks and dividends rather than in capital spending. 

• He says we are still early in the business cycle.  Business cycles start here in the U.S., go to Europe and then finally the emerging markets.  They see the emerging markets and China as still “in a bubble” while Europe is still correcting.

Jeff Rosenburg CIO of Fixed Income for Blackrock

Jeff is another expert who is often seen on CNBC.  Jeff stopped worrying about bonds and learned to love them in 2014.

• According to Jeff, where you hold your duration (by maturity) matters as much to returns as how much duration you own.  Active management can help a portfolio by managing this.

• He says high-yield bonds will take on more interest rate sensitivity.   They tend to be shorter maturity bonds as these companies aren’t trusted enough to loan to them for longer periods of time. This will subject them to more interest rate sensitivity than normal when short rates start to rise.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Investment Pulse: What we’ve heard in the Third Quarter

While the quarter started quietly, as summer was in full swing, it ended with a bang as Bill Gross announced his departure from PIMCO.  As summer travel and vacations died down, we ramped up our travel to collect insights from some of the world’s largest money managers.

Socially Responsive Investing with Neuberger Berman

In early August The Center’s Investment Committee had the opportunity to speak one-on-one with the management of Neuberger Berman’s long-time successful Socially Responsive Investing (SRI) strategy.  Since this is an area that seems to be gaining in interest from our clients, we talked with some of the most successful investors to get their take on how they do it.

•  Process: They look for areas of business that have tailwinds and find the best positioned companies.  They analyze the companies for 13-15 months.  Once a company meets their expectations, it is added to their prospect list (173 names currently).  When looking to buy they ask, “Why is the price attractive?”; “Is something broken (based what they know about the company)?”; “Does the stock have value criteria?"

• SRI has five avoidance points:  alcohol, tobacco, weapons, nuclear power, and gambling.  The investment team wants a management team that makes thoughtful, long-term, fundamental decisions.

Steve Vannelli, CFA, managing director of GaveKal Capital

On a trip to Denver, CO to visit clients, Matt Chope, CFP®, Partner, spent an afternoon in September with Steve Vannelli, CFA, Managing Director of GaveKal Capital. Matt and Steven discussed many aspects of investment markets, interest rates, and the state of the economy.  Steven shared GaveKal’s proprietary approach to finding what he calls "knowledge leaders" or firms with an R&D intensity greater than that of the industry they are a part of.  He finds a correlation to these innovative companies of higher future sales growth, higher future Return on Assets, and higher market share as well as lower variability to earnings and stock returns.

Steven described how to better understand the intangible investment that many of these companies make, which he says is the key missing element in understanding the true company value. In that, he says, lies the misunderstood inefficiency in the marketplace.

Matt also learned about their proprietary quality models that scrubs the balance sheet, reviews financial leverage, calculates net debt as a percent of capital, and, most notably, intellectual property as a percent of assets of 1600 companies around the world.

Goldman Sachs, Blackrock and JP Morgan on-site visits

Matt continued his busy schedule with due diligence meetings in New York City.  Global macro themes were the main takeaways from his discussions.  Topics ranged from deflation in Europe to the energy revolution in the U.S.

While many of these companies do not currently have representation in our portfolios, the discussions with management are key to us in the overall management of our clients’ investments.  One of the worst risks you can have is the risk you don’t know about. Discussions like those we had in the 3rd quarter help us to understand where potential risks could be coming from.  While we at The Center can’t be on the ground in 20 different countries every year, we have the opportunity to leverage many experts and listen to their sometimes conflicting viewpoints.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios, CFP®, Portfolio Manager and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

Investment Commentary - September 2014

Clients and Friends,

While much of our communications with you in the last few months have been about The Center’s recent move, our intensive investment focus is always present. The last few months were marked by many insightful conversations with portfolio managers and investment professionals. This reminds me that at our core, our investment process is focused on good old fashioned research whether it comes to the way we construct asset allocation mixes or how we select investments for your portfolios.

Here is some news for you from our investment team:

• We’re more than halfway through 2014 and the financial markets have picked up where they left off last year. Not only are stocks measurably higher this year, but bonds have made a rebound with positive returns as well. We’ve got a new one-page investment dashboard that sums up the current investment world. We’ll update this one-pager each quarter going forward. Let us know what you think of the new look and feel.

• Angie Palacios, CFP® provides a great recap of the Morningstar Investment Conference which is held in Chicago each June. This is a can’t-miss conference each year and 2014 was no exception. She includes notes about employment predictions for the US economy and focus on international as some of the key takeaways this year.

• Our quarterly investment pulse includes recaps from four meetings held here and around Detroit and highlights the extraordinary access we’re able to get to investment professionals because of size and reputation. I particularly enjoyed a meeting with Joseph Brennan and Lee Norton from Vanguard. The discussion was broad and interesting including how Vanguard, known for their preference for indexes, identifies active investment managers for their offerings.  With several other top-notch investors giving us time for lengthy discussion, you can see the quality of discourse we are privileged to entertain.

• Matt Chope shares insight from a conversation with one of his favorite investors – Charles de Vaulx – who is a portfolio manager with IVA.

Do you have investment-related questions for us? Please don’t hesitate to let me or your financial planner know. Thanks again for your trust and commitment to The Center for the opportunity to work with you to pursue achievement of your financial goals!

On behalf of everyone at The Center,
Melissa Joy, CFP®
Partner, Director of Wealth Management
CERTIFIED FINANCIAL PLANNER™

Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2013, Melissa was honored by Financial Advisor magazine in the Research All Star List for the third consecutive year. In addition to her contributions to Money Centered blogs, she writes investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.

Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Melissa Joy and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risks and investors may incur a profit or a loss regardless of strategy selected.