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Quarterly Market Commentary | July 2015
Quicksilver Markets
Top Economic Headlines
The Greek Tragedy
Wile E. Coyote’s Gravity Lessons
Q2 Top Economic Headlines
T. Doug Dale, Jr.
Mr. Dale serves as a
shareholder and investment
advisor of Security Ballew
Wealth Management.
Security Ballew and its
advisors guide over $600
million dollars in assets
under advisement for
corporations, foundations,
qualified retirement plans
and high net worth
individuals. Mr. Dale
graduated from the
University of Mississippi in
1994 with a Bachelor of
Business Administration
degree in managerial
Purchases of new homes in the U.S. rose in May to the
highest level in seven years, signaling this key sector in the
U.S. economy is finally normalizing. The loosening of
lending standards along with low interest rates suggests
residential real estate will continue to be additive to the US
economy in 2015.
Federal Reserve Chairwoman, Janet Yellen, announced she is
not yet prepared to raise interest rates off the current zero Fed
Funds policy level. Market expectations suggest a September
or December time frame for the Fed’s first move to raise
interest rates for the first time in nearly ten years. U.S.
Treasury notes and bonds despite their historically low yields
finance. He earned his
Master’s degree from the
Millsaps College Else
School of Management.
With over 20 years of
investment management
experience, he holds Series
7, 63, and 65 securities
licenses.
remain among the highest yielding government debt
securities in the developed world.
Emerging markets and commodity suppliers have grappled
with reduced demand from China as China’s property
downturn continues to weigh on the world’s second largest
economy. After rising over 100% in the last 12 months,
China’s equity market is showing signs of deflating.
4800 I-55 North, Suite 21
Jackson, MS 39211
Post Office Box 14888
Jackson, MS 39236-4888
Phone: 601-368-3500
www.sbcorp.com
The IMF (International Monetary Fund) has remained
unsatisfied with key aspects of Greece’s economic proposals.
IMF Managing Director Christine Lagarde noted that Greece
has already missed four payments making Greece ineligible
for additional funds as long as they are in arrears. June
30th marked a technical default on payments due to the IMF.
Now the Euro currency member faces a possible system wide
bank restructuring similar to the Cypress episode whereby the
larger Greek bank depositors lose a substantial portion of
their account balances in order to recapitalize the Greek
banking system.
Greece and Potential Implications for the Euro
Currency
For such a relatively small economy, Greece has been getting more than its fair share of the
financial media’s headlines. The European Union member has been stuck in a Catch-22 as a result
of being unable to maintain its excessive debt burden estimated at $362 billion (U.S.) with an
economy tied to the Euro currency. Because Greece’s government remains an excessively large part
of the Greek economy, their ability to outgrow their debt burden which now stands at 178% of GDP
has finally caused the ECB and the IMF to stop financing the country until more pro-business and
pro-growth oriented reforms are enacted along with changing entitlements which are more generous
than those of other European countries in the Eurozone.
So, what is the big deal if Greece defaults and/or leaves the Euro currency? After all, Greece’s
economy and debts are not that big in the scope of Europe’s overall economy. Some have argued
that allowing Greece to restructure a meaningful portion of their debts in 2011 was a wise decision
as it allowed Portugal, Italy, and Spain to better resist any Greek contagion should Greece have gone
into default. The European economy and financial markets were in a tail spin at the time and
something needed to be done in order to prevent the 2008 financial crisis from returning to Europe.
Others (including me) beg to differ because these “PIGS” countries each have a higher amount of
debt relative to GDP (annual economic output) in comparison to 2011. This group also suggests that
a Greece free Euro currency would be a good warning to Euro currency members to mind their
finances or risk the same outcome. Interestingly, history suggests that a Greek default and return to
the drachma will in time help make Greece more competitive thereby speeding up a post default
healing process. It will be important to watch how this plays out for Greece because the
implications may also apply to other significantly larger European Union members at some point.
Either way, I look forward to a resolution to this game of chess that European Union members are
presently playing with one another in an attempt to solve an insolvency dilemma. Remember, the
Eurozone collectively has a larger economy than the U.S. Therefore, investors should be watchful
as to whether or not a Greek default and/or Euro currency exit scenario creates an unexpected level
of contagion in global financial markets in coming months.
Wile E. Coyote’s Gravity Lessons
U.S. equity markets have been moving higher on lower and lower trading volumes in concert with
lower and lower volatility over the last few years. At first glance this may sound like a meaningless
observation as U.S. equities enter a seventh year of a cyclical bull market that started in March of
2009. However, low volumes and low equity market volatility for long stretches have a way of
making up for themselves by returning in sudden jolts to remind investors that equity prices can go
down as well as up periodically.
Equity markets on average experience intra year corrections of 14.5% each year. The last
correction greater than 10% occurred in 2012 shortly after the Federal Reserve ended its QE 2
program. As of the end of 2014, the Fed ended QE 3 and now is attempting to finally raise short
term rates later this year. 49 other central banks around the world have actually had to lower
interest rates this year in an attempt to ease credit conditions in response to falling inflation and
growth levels. U.S. monetary policy is presently diverging from the herd of other central banks as
the Janet Yellen-led Federal Reserve publically assumes the decline in U.S. GDP in Q1 will not only
strengthen in Q2 but also continue to strengthen the balance of the year.
As equity market participants enter the seasonally weak months of May to October, investors should
not be surprised if indices such as the Dow Jones Industrials and the S&P 500 experience an average
or perhaps even greater than average correction. An average correction would erase (perhaps
temporarily) all of the gains from 2014 to date. A greater than average correction similar to those
experienced after QE 1 and QE 2 could erase gains as far back as to the beginning of 2013.
Therefore, equity investors would be wise to reassess their risk tolerances and objectives in order to
ensure not becoming complacent due to the lack of volatility in recent years.
T. Doug Dale, Jr.
The Quarterly Market Commentary is a
quarterly publication for the benefit of the
clients of Ballew/Russell, Inc. Pursuant to the
provisions of Rule 206(4)-1 of the Investment
Advisors Act of 1940, we advise all readers to
recognize that they should not assume that
recommendations made in the future will be
profitable or will equal the performance of
past recommendations. The contents of this
letter have been compiled from original and
published sources believed to be reliable but
are not guaranteed as to accuracy or
completeness. M. L. Ballew, III and T. Doug
Dale, Jr. serve as portfolio managers at
Ballew/Russell, Inc., a registered investment
advisor, Ballew/Russell, Inc. is affiliated with
Ballew Investments, Inc., a fully-disclosed
introducing broker/dealer and FINRA/SIPC
Member utilizing the clearing services of
Pershing, LLC. Ballew/Russell, Inc. and
Ballew Investments, Inc. are both subsidiaries
of Security Ballew, Inc. Clients of
Ballew/Russell, Inc. may have positions in and
may from time to time make purchases and
sales of securities mentioned herein.
Copyright © 2015 Security Ballew, All rights reserved.
SB Advisors
M. L. Ballew, III, CPA, JD, LLM, Chairman
of the Board
C. Brooks Mosley, CPA, President
Karl E. Byrd, CFP, Shareholder
T. Doug Dale, Jr, CRPS, MBA,
Shareholder
James A. Hurt, CLU, ChFC, CSA,
Shareholder
Alan McCormick, MBA, CFP, Shareholder
Robert Scott Rives, CRPS, Shareholder
Security Ballew Wealth Management is a
comprehensive wealth management firm
serving high net worth individuals,
foundations, corporations and institutional
pension funds. Among the firm's
subsidiaries, IPS, serves as a TPA
consultant to hundreds of corporate
sponsored qualified 401(k) retirement
programs.