The June 2017 Connolly Financial Newsletter was published today

This month we cover a number of topics in our 15 pages of economic and market analysis.  The picture of our economy and the market is painted as if it were a Thunder Storm.  Being prepared is the key, while also investing for the future.  The potential of Crypto-currencies is a meaningful part of the investing discussion, and should not be missed.

The topics covered in this month’s newsletter include:

  • Developed economies across the globe are navigating an emerging world of less liquidity, and while economic growth is present, is it accelerating? 
  • What are fiscal budgets indicating? 
  • What happened to capital investment? 
  • Do current stock market valuations make sense? 
  • Should we be anticipating a continued increase in equity prices?   
  • Where in this market am I allocating my capital? 
  • Which equities am I tracking for buying and selling purposes? 
  • The Imagining the Future section focuses on the world of Digital currencies and attempts to answer the question “Are we interpreting this phenomenon correctly?”

A subscription to the monthly newsletter costs $150 on an annual basis for twelve newsletters.  In addition to the newsletters, for an additional $100 per year, subscribers also receive Trade Alerts on the day I buy or sell any investment.   The Trade Alert feature adds $100 to the annual subscription cost.  For a total of $250 per year, you receive an Economic and Market newsletter each month and Trade notifications on any day I make an investment decision.

Email me for a subscription at tjc@theconnollyfinancialadvisors.com

 

 

 

The May 2017 Connolly Financial Advisors Newsletter was published today

This month we cover the following topics:

Developed economies across the globe are exhibiting growth, but the US growth is decelerating.  

What are stock market valuations telling us? 

Are we peaking or setting up for a continued increase in equity prices?

Digital currencies, fever or reality? 

Where in this market am I allocating capital? 

The Imagining the Future section focuses on China and the One Belt One Road initiative.

Subscribe now for the insights that will help you better manage your investments and position your portfolio for greater success.

write to me for a subscription at tjc@theconnollyfinancialadvisors.com

 

The April 2017 Connolly Financial Advisors Newsletter

The May Newsletter on the U.S. Economy and the attractiveness of Investment choices from Connolly Financial Advisors is due to be released to subscribers on May 20, 2017.  The April newsletter that discusses the attractiveness of investing in India, Bitcoin, currency positions in the Foreign Exchange markets, long and short positions in commodities such as Cocoa, Oil and Precious metals, and a select group of long and short equity candidates for future investment, was distributed to subscribers on April 23rd, and is attached below for your enjoyment.  I should also note that subscribers to the newsletter receive trading alerts during each month on the day of the trade when I buy or sell any investment asset.

Should you wish to subscribe to the upcoming May newsletter, please drop me a note here or email me at tjc@theconnollyfinancialadvisors.com

Invest well,

Tom

The Connolly Financial Advisors April 2017 Newsletter

The Connolly Financial Advisors April 2017 Newsletter is Available

A key statement from this month’s Executive Summary is:  “As we wade through the Economic, Fundamental, Technical and Tonal aspects of the markets in this month’s essay, all of which confirm the current state of Market Churn and possible topping action, there is a gem hidden within these writings, one that should be pursued in terms of seeking knowledge.”

The April 2017 newsletter has just been issued and covers the following areas:

  • Economies across the globe are exhibiting growth.  
  • What are stock market valuations telling us? 
  • Why are we churning each day in a way that leaves us running in place?
  • Are we going through a topping pattern? 
  • Where am I allocating capital in this environment?   
  • The “Imagining the Future” section looks into what may be one of the most compelling investment opportunities in the world today

Subscribe now by emailing tjc@theconnollyfinancialadvisors.com to enroll in our annual membership plan.

The Newsletter for March is now free and is available below by clicking on the link to the article.

Connolly Financial Advisors Market Newsletter from March 2017

Executive Summary Issued March 17, 2017
Economic growth, inflation and interest rates are on the rise across the globe.  Fiscal stimulus is beginning to complement/replace monetary stimulus and the impact is giving us economic green shoots, optimism, expanding employment, increases in production and consumption, and the emergence of rising inflation expectations.  These factors, along with a pro-business posture in government, have directed the strong monetary flows that have been in the financial system and channeled them with aggressiveness into the equity markets.  The result has been a dramatic rise in the equity indexes since November 2016. This rise has been further fueled by the movement of the retail investor out of money markets and into equity index funds.  The monetary fuel and the expectations of a struck fiscal matchstick have ignited this fire, and for many it has been a great ride.  For others, there is a sense of having missed the parade which is driving a newly inspired desire to join in and to buy stocks. Per the WSJ, Fund tracker EPFR Global reported record net inflows into equity mutual and Exchange Traded Funds during the week of March 1st, clear evidence of the herd moving in one direction.  Jamie Diamond of JP Morgan was recently reported to have stated that the animal spirits are back and in play.  I wonder if that is good or bad.

 

A contrary observation to the above is the ratio of company executives buying shares to those selling shares in their own companies.  This ratio has slumped to a 29-year low as selling overwhelms buying.  That observation more or less aligns with my personal activity in the market.  I am not joining the buying parade, for while the reasons for the powerful move higher have substance, the regime of the market in terms of over-valuation, weakening market internals, and the move towards tightening of monetary policy present a real reason to be cautious and conservative until a better entry point appears.  That summarizes my current approach.

The link below will provide you with the full report.

TJC@TheConnollyFinancialAdvisors.com

CFA March 2017 Newsletter

Regime Change?

What investing regime are we now in?

We are transitioning away from the Central Bank stimulation regime.

What may be the new Regime?  An environment of fiscal stimulus in China, Japan and the United States.  A spending of money by governments to stimulate growth, a global reflation environment.

This is what has driven the equity markets to new highs.  My sense at this point, given the anticipatory move higher in equity prices that has already occurred, is that it is too late to buy and too early to short. 

The phase we are in is an early inflation set-up, one that will continue to expand and that will have meaningful impact on various asset classes.  What to do?  Buy Gold and Silver.  With inflation emerging, real interest rates will become negative and that will drive interest rates higher.  Short bonds and buy TIPS.  Inflation should help commodity countries, so emerging market ETFs and commodity ETFs become more attractive.  Finally, with paper currencies walking around with a target on their back as governments try to increase tax revenues by attacking the black market and the shadow economy, it may be prudent to establish a small position in Bitcoin.

The Parade

Witnessing the recent and continuing equity market climb to new heights reminds me more and more of the years of 1999 and 2000.  For me, those years were consumed by an aggressive buying of equities as I increased my initial capital in the market from a base of $250,000 to $11,500,000, entirely through price increases.  I thought it would never end and that I had become the invincible winner of selecting companies that would grow forevermore.  What I did not appreciate at that time was my ignorance of what a bear market felt like and what it could, and in my case would, do to my outsized gains.  It was a very meaningful education.

Today, I believe that education is being called upon.  Prudence is my mantra and it governs how I begin each and every day.  I do not feel this is the time to buy, the time to get on the bandwagon for a ride to glory.  It feels more like the time to reap the rewards that have emerged and to watch the parade from the sidewalk for awhile.  It is an interesting view.

Deficit Financing: A problem

 

Thoughts are blossoming in my mind about a connection between prior outcomes and likely future outcomes that find similarities between the housing market boom/excess, the central bank QE efforts to add liquidity and boost prices, and the emerging global initiatives by governments to take on additional debt for military and infrastructure projects.  History seems to indicate that there is an existing and growing level of risk in the system that is not reflected in the financial markets.

During the 2004 thru 2008 timeframe, securitization of debt obligations emerged in a way that was marketed to investors as containing minimized risk in obtaining outsized returns.  This fed liquidity and encouraged investment bank demand for greater supply to meet investor desires for higher returns with low levels of default risk.  The supply was provided by new mortgages to finance an ever-increasing amount of housing demand that was being driven by free/low cost financing of homes.  Many of the new buyers had insufficient incomes to purchase a home, but the need for more mortgages to meet investor demand for securitized mortgage packages caused the banks to lower the income requirements thereby bringing greater levels of buyers into the market.  The new buyers’ income levels could not support the home price without ever increasing access to debt to fill the gap of price to income.  The growth in mortgages fed the debt securitization machine, and was further exacerbated by the selling of “insurance” on debt defaults to buyers who had no risk of principal on the debt being insured.  All of this low-cost financing that mispriced risk ultimately turned out very badly for the world.

The parallel that appears to be taking place today scares me in that if it continues to expand in an unchecked manner we will find we have a larger problem then we had in 2008.

Central banks across the world have used monetary easing policies to avoid debt defaults and economic contraction.  These policies have resulted in the Central Banks becoming the buyers of the debt issued by the governments of the world.  Market pricing of risk is absent as there is in the market a committed buyer at any price with unlimited access to money through the ability to print paper currency (actually, digital currencies), and to use this printing to buy all of the debt the market chooses to not buy, holding interest rates down in short term maturities and creating demand in the market for longer term maturities at depressed rates.  The duration of debt, the life of the debt, being held by market participants at historically low rates of interest create price/principal risk to the owners that could be crushing if global interest rates rise.  Think about this in terms of the similarity in the explosion in U.S. mortgage debt outstanding in the mid 2000’s and the explosion in U.S. government debt post-2008.  In the United States, government debt over the past eight years has grown by approx. $10 trillion (a doubling of debt from 2008) similar to the U.S. Residential Mortgage debt that doubled between 2001 and 2007.  Add in the rest of the world’s issuance of ever increasing levels of government debt and we are awash in liabilities that are at a level that has never existed before, and this debt is being priced at low interest rates as if no or little risk exists, just like the housing market priced mortgages.

The post 2008 debt growth increased asset prices in stocks, bonds, and in many physical assets.  This is similar to the way in which housing prices rose in the mid 2000’s based on the low cost to finance and easy access to excess credit availability.  The current increase in asset prices has not occurred in an environment where incomes are expanding.  In effect, the debt purchases by the Central Banks are filling the void that income cannot fill in supporting price increases.  At some point, the level of debt will reach a critical and limiting point of excess unless incomes and GDP growth expand rapidly to justify the asset prices we have today.  The answer to the question of where that income expansion is going to come from is paramount to the avoidance of a price correction lower.  Absent a rational answer that indicates favorable odds exist of realizing sufficient income growth that will rebalance the fundamental relationship of earnings to price, there exists a much higher risk in buying assets at current prices than the market is anticipating.

The outlook for future debt expansion after an incredible growth in debt over the past decade is troublesome.  The only way the US can finance the level of infrastructure investment and military expansion that is being contemplated is to take on an ever-increasing level of debt.  The hope or plan is that by deficit spending we will drive economic expansion and income growth.  However, our starting point of existing debt is problematic to the efficacy of filling the current income price void with more debt in the hope of accelerating future income growth.  We are entering the Catch-22 phase and that is scary (need more debt to generate more income, with new income being consumed by the interest cost of the new and old debt vs new income enabling new investment to drive additional new income sources).

During the past eight years, we have increased annual Government transfer payment to the population of the US by $800 billion per year (now over $2 trillion annually), which has cumulatively added to our national debt during this period by an incremental $2.9 trillion.  That increase to our debt served to provide financial support to people in need versus investment in productive assets (no political point of view on this, just simply stating facts).  Going forward the $2 trillion in annual transfer payments will continue to add to our debt before any impact of additional deficit financing for new investments.  The continued growth in the gap of our spending to income is troublesome, and the more debt incurred without an acceleration of income poses higher systemic risk to our economy and a meaningful potential decline in the value of the dollar.

The risk to the value of the U.S. dollar is simply a story of supply and demand.  The additional supply of currency coming to the market that will be created by financing our existing obligations such as interest payments and transfer payments, plus the new infrastructure and military investments, will debase the U.S. dollar’s value in terms of purchasing power given the lack of income driven investment growth by the private sector that is needed to serve as an incremental demand factor for dollars.  This will ultimately stall the power of the economy and lead to stagflation and levels of government debt that are not serviceable from tax receipts given the lack of income growth.

We and the world have a problem, and the lack of global growth coupled with deficit financing and Central Bank buying of governmental debt will one day reach a point where default is the only available path.  It will be a very bumpy ride when we get there, and being prudent with investment decisions will one day be rewarded.