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Investment Commentary
Quarter Ended March 31, 2014
After a rip-roaring 2013, US
stocks ended the first quarter
generally flat. While this might
suggest a dull market environment,
the underlying currents were
anything but boring. A minor early
year correction reversed course in
February, and geopolitical tension
(i.e. Russia/Ukraine) injected
uncertainty and contributed to
increased day-to-day volatility.
Time will tell if this is the ‘pause
that refreshes’ or the ‘calm before
the storm’. Fundamental,
technical and seasonal factors
continue to suggest that a
meaningful correction should
occur this year; based on
historical precedent, the May –
October time frame would
seem most likely. As for bond
investments, despite the
overwhelming unanimity of
opinion that interest rates would
be headed higher, intermediate to
longer term yields actually fell a
bit, resulting in slightly positive
returns for the quarter.
When 2014 began, the overall
consensus was for US economic
growth to accelerate, and for the
stock market to put in another
good year. Of course, economists
have predicted strong growth for
years, and those expectations have
fallen short in most every case.
The “recovery”, now in its 6th
year, remains muted, with total
jobs, labor force participation, real
income, and wage growth all near
or below 2007 levels. Economic
indicators continue to be
confusing and sometimes
contradictory. There may be
some validity to the argument that
bad weather hampered first
quarter activity but there seems
little reason to expect robust
economic and/or corporate
earnings growth in 2014. While
there should be pent-up demand
for business spending, the latest
data remains sluggish. Add all this
together and it should be no
surprise that expectations for
first quarter earnings growth
have dropped to 2%, from 8%
when the year commenced.
A kind of stalemate appears to
have developed between the
lackluster fundamental
backdrop, and the positive
investor sentiment that centers
on low interest rates making
Investments offered by Lodestar Investment Counsel, LLC are not insured are not obligations of, or
guaranteed by Lodestar Investment Counsel, LLC. Investments are subject to risk, including possible loss of the
principal amount invested.
stocks the only game in town.
Indeed, the current bull market
has stretched over 1,800 days,
ranking as the seventh longest
since 1928. Stock market bulls
argue the following: valuations,
while elevated, are not in the
stratosphere, state and federal
government deficits are shrinking,
consumer balance sheets are on
the mend, and the nation is on the
road to energy independence.
Bears counter that there is more
than enough to be concerned
about, particularly if you have a
sense of market history and are
more focused on potential
downside than upside.
Irrespective of one’s market
outlook, it seems evident that
there is a growing gap between
the financial markets and the
real economy. With stocks near
In this issue:
Commentary
Manager Profile
Market Snapshot
1
4
4
“ Irrespective of one’s market outlook, it seems evident that there is a growing gap
between the financial markets and the real economy.”
all-time highs and earnings growth
minimal, several valuation measures
suggest that the market is quite
fully priced. Moreover, signs of
excess are abundant. Investor
surveys reflect extremely bullish
sentiment, and record margin debt
(investors borrowing to buy
stocks) is consistent with levels at
the two most recent market peaks.
In addition, corporate insiders,
those who should know their
businesses best, are selling at a
furious pace. Also worrisome are
the valuations being paid for
‘momentum’ stocks, as well as the
merger and takeover activity in the
social media industry. Reminiscent
of the Internet bubble of 19982000, we are again seeing
acquisitions of companies with
little or no revenue, never mind
earnings, such as Facebook’s
recent $19 billion acquisition of a
messaging service company.
“The recovery still feels like a
recession to many Americans,
and it also looks that way in
some economic statistics.” Janet Yellen (3/31/14)
One can debate the underpinnings
of this bull market, but there is no
doubt as to who has engineered
the plan. As we have previously
noted, all that seems to matter is
Federal Reserve commentary
and activity. These days, the
markets react to every utterance
about quantitative easing and the
direction of interest rates, but little
else. The chart above illustrates
the stock market’s dependence on
Fed money printing activities, with
every peak and valley over the past
five years coinciding with a central
bank stimulus program. US
monetary authorities understand
that quantitative easing is not
sustainable, and they have attempted
to stop on two occasions. These
periods resulted in average stock
market losses of 17%. The current
“taper” is a more measured
attempt to wean investors off the
liquidity bottle.
Based on a couple of off the cuff
comments earlier this year, some
market observers posited that new
Fed Chairperson Yellen might be
less beholden to Wall Street, and
more interested in policies that
help the economy and reinforce
the credibility of the financial
system. By keeping interest rates
low, many believe that Congress
has been able to avoid dealing
with the debt and entitlement
issues that will eventually have
Lodestar Investment Counsel, LLC 150 South Wacker Drive, Chicago, Illinois 312.630.9666
“ One can debate the underpinnings of this bull market, but there is no doubt as
to who has engineered the plan . . . all that seems to matter is Federal Reserve
commentary and activity.”
serious economic repercussions.
Unfortunately, Yellen’s initial
comments were met with disdain
by some investors, causing her
tone to change. Her quote above
is important for two reasons:
(i) we find it remarkable that a Fed
Chairperson would admit that the
5-year old recovery “still feels like
a recession” in some respects, and
(ii) more important than confirming
that the economy remains weak,
her ‘dovish’ speech provided
support, once again, for those who
believe that ‘free money’ will
continue to be available should the
economy sputter.
Things to Watch
Asset prices will be influenced in
coming months by the answers to
a number of questions, including
the following:
Will the sharp pull-back in last
year’s high flying momentum
stocks spill over to the rest of
the market?
 Will the US economy gain traction
once the weather improves, with
any strength flowing through to
corporate earnings?
 Will the Federal Reserve finish
tapering its bond purchases by

this fall, as expected. What
tool(s) will be utilized if the
economy does not improve
and/or if stock prices correct
meaningfully?
 Will the severe drought in the
western US, together with
crop damage from the harsh
winter, cause significant food
inflation?
 With economic growth and
spending cuts less effective
these days in driving stocks
higher, will
‘deconglomeration’ (where
large companies sell assets or
split into separate entities)
become an increasingly
popular means of driving
shareholder value?
market is throwing curveballs and
we prefer to swing at fastballs.
During these periods, experience
suggests that relative inactivity is
often an asset. Chasing ‘story’
stocks may be exciting, but it is
usually not profitable. To the
contrary, we strongly believe in the
virtues of owning solid companies
with the objectives being to
preserve and enhance capital over
time, generate safe and growing
income, and avoid undue risk.
While the value of these
investments will fluctuate with
swings in the markets, we, and our
clients, take comfort in this
rational, conservative and prudent
investment philosophy.
Our concluding thoughts
involve peace of mind, and how
this can be best accomplished
within the context of an
investment portfolio. Over
time, the strategy of owning
quality, buying when assets
offer compelling long-term
value, and adopting the
mindset of ‘slow and steady
wins the race’ has historically
provided excellent risk adjusted
returns. There are times when
patience is required because the
For more information about Lodestar, please visit our website at www.ldstr.com.
Managing Director Profile
Peter W. Flanzer
Managing Director
Peter joined Lodestar in 2002 after
serving as a Principal with another
Chicago-based investment advisory
firm. For over 25 years, his focus has
been on working with private clients
in the management of their
investment portfolios.
Peter earned his bachelor of arts degree
from Kenyon College, and received his
law degree from the John Marshall Law
School in Chicago.
In addition to spending time with his
family and participating in civic and
charitable affairs, Peter is an avid golfer
in the warmer months and enjoys
playing paddle tennis in the winter.
Peter can be reached at 312.630.9666 or
at [email protected].
Market Snapshot - March 31, 2014
Equity Indices
Quarter
Interest Rates
3/31/14
3/31/13
S&P 500
1.82%
5-Year Tax-Exempt AA
1.45%
0.85%
Dow Industrials
(0.15)%
5-Year US Treasury Notes
1.73%
0.77%
NASDAQ
0.81%
Russell 2000 Index
1.07%
$1,291.70
$1,598.20
$101.58
$97.23
Commodities
Gold
Oil - WTI ($/Barrel)
“Lodestar”: 1 A guiding principle, interest, or ambition. 2. A star, especially Polaris, that is used as a point of reference.
Lodestar Investment Counsel was
formed in 1989, as an independent
registered investment advisor, with the
above definitions firmly in mind. All of
our principals have extensive
experience working with wealthy individuals, families, corporate and individual retirement plans, and charitable organizations, like those who make up
our client base today.
We recognize and respect the need to
grow and preserve our clients’ core
assets. Our services are designed to
provide a risk-averse approach to longterm capital appreciation, that is tailored
to the unique financial circumstances
and needs of each specific investor. We
provide discretionary account
management for taxable, tax-exempt,
balanced and fixed-income portfolios.
business, we strive to adhere to the
guiding principles of focus, consistency
and service.
We would welcome the opportunity to
meet with you, or others you know who
might benefit from our services.
To assure that all our clients receive a
high level of personal service, our
minimum account is $1 million in investable assets. In all aspects of our
Lodestar Investment Counsel, LLC 150 South Wacker Drive, Chicago, Illinois 312.630.9666 www.ldstr.com