Download July 2015 We have all heard the phrase “timing is everything” – and

July 2015
We have all heard the phrase “timing is everything” – and we certainly consider timing to be an
important aspect of the things we do for you each day. But, this shouldn’t be confused with “market
timing”, a somewhat fruitless effort to believe your understanding and expectations in the market are in
some way more efficient than the market as a whole. Now pause for a second and think about the
availability of market information and how investors can react to that information. While technology is
a beautiful thing, it does add disruptive innovation at times, and in the investment world it essentially
drives market participants to react to information in an unprecedented fashion; after all, we can trade
from our cell phones, iPad or laptop almost instantly. And I hear some of you say “but, that is a good
thing”. Is it? The jury is still out, but the point is that the availability of information and the ability for
investors to make quick decisions will do one of two things: it will either increase market efficiency
(think “assets are fairly valued”) or it will drive investors to react in an immediate fashion that could
actually end up doing the exact opposite (promote volatility and disrupt efficient pricing). The outcome
will depend on precisely how investors perceive and react to information, but suffice it to say, there may
be some benefit to a “cooling off” period whereby investors do their due diligence before reacting. In
other words, there is an element of emotion that can exist in markets nowadays at a pace we have
never seen before. This is all important because it is likely linked to the gyrating markets as of late and
how investors may overreact to information, particularly when coupled with a sensationalizing media.
Even still, Q2 2015 didn’t experience the pronounced volatility we saw in the past two quarters.
This is important because “volatility” is used loosely and means different things to different investors.
Q3 and Q4 2014 had more pronounced and extended sell -offs, while thus far this year - especially in Q2
- we have seen sell-offs followed by more immediate buying support. This was due, in large part, to
investors testing new market highs and the divergent sentiment of U.S. markets versus markets globally.
Greek and Puerto Rican debt woes, coupled with downward pressure in Chinese markets drove
investors to react to the changing environment at a rapid pace late in the second quarter, prompting a
more robust sell-off across most asset classes. This late-quarter trend is perhaps better depicted by a
visual that will show how major asset classes reacted to information during the month of June:
Benchmark
S&P 500
S&P MIDCAP 400
S&P 600
MSCI EAFE Developed Markets
MSCI Emerging Markets
DOW JONES US Select REIT
DOW JONES UBS Commodity
Index
Barclays US Aggregate Bond
Barclays Muni Bond
YTD thru
5/31/2015
Month of
June
3.23
5.59
3.10
8.60
6.34
-1.39
-1.94
-2.05
1.03
-2.83
-2.52
-4.42
-3.23
1.00
0.21
1.73
-1.09
-0.09
Greece has been center stage recently so it is important to shed some insight and perspective.
The short story for Greece is that Prime Minister Alexis Tsipras has been in negotiations with the
European Union (EU), the International Monetary Fund (IMF), and the European Central Bank (ECB) to
work out a deal to address their 1.6 billion euro installment to the IMF. Negotiations didn’t go
particularly smoothly, largely due to the fact Tsipras was unwilling to submit to the proposed austerity
measures and Greece defaulted on their $1.6 billion payment on June 30th. Tsipras proposed a Greek
referendum and vocally supported a “no” vote to further austerity measures; On July 5th, Greek
constituents voted “no” with a two-thirds majority. In the meantime, the ECB has been providing muchneeded emergency credit to Greek banks. This credit, however, must be backed by collateral (which has
weakened due to the debt crisis). To that end, these measures are keeping Greece afloat but the tide is
rising. While Eurozone leaders aren’t in full agreement on how to specifically address the Greek crisis,
the ECB has submitted they will do what they can to add stability in the Eurozone. As of now, it appears
Tsipras and ECB officials are open to negotiations, albeit in a somewhat gridlock fashion due to
conflicting terms they each bring to the table. While we aren’t numb to the Greek crisis, do know that
Greece makes up just 2% of Europe’s GDP and just .39% of the world’s GDP. Furthermore, nearly all
Greek debt is held within the Eurozone. Indeed, the broader impact of the Greek crisis from a portfolio
perspective thus far has been through the equity markets and not specific holdings of Greek debt.
Closer to home, Puerto Rico has been struggling for some time with its surmounting debt. A
territory of the United States, it is subject to various restrictions (and benefits) imposed by our federal
government. Despite a vast array of socio-economic pinpoints for issues in Puerto Rico, U.S. investors
face fears stemming from its triple tax-exempt status when issuing sovereign debt. Regardless of where
you are in the U.S., investors can receive the triple-exempt status and this has effectively allowed Puerto
Rico to issue debt in the U.S. just like any other state. The outcome has been a catch-22: U.S. investors
arguably have had more flexibility (through access to inventory) in the municipal space, while they may
have found themselves stretching for yield and accessing the debt issues at high volumes. It has become
clear Puerto Rico has no capacity at the current time to repay this debt (which is an issue that is
currently being debated in Congress). Under current laws, Puerto Rico does not have an option to file
for Chapter 9 bankruptcy and reorganization, although this is a measure that is currently being
proposed. The good news is that Puerto Rico was able to make its most recent interest payment on the
debt, however, this is pennies on the dollar compared to the overall burden. In light of all this, exposure
to direct Puerto Rican debt in the portfolio is miniscule (and in some cases none) and my suspicion is
that an agreement will be reached to address the debt.
While I have spent a bit of time focusing on Greece and Puerto Rico and their respective debt
issues, this isn’t to be misconstrued as negative news for you or your portfolio. Granted, each have
added some volatility to the portfolio, but it is important to know this is due to the global
interconnectedness of markets and not any one particular holding in the portfolio. In reality, the U.S.
economy is on solid footing. The expectation is the Fed will raise rates later this year, but to the extent
that they raise slowly and inflation stays in lockstep, the immediate result is that real rates may be flat.
This scenario should help mitigate the impact to our economy as we enter a tightening cycle, and as I
have mentioned in previous commentaries, the initial rate hike has not historically been unfavorable for
the domestic market. Also, as our Fed begins to tighten, it is important to remember much of the
developed world is following a divergent path as they are in easing cycles. To the extent of our exposure
to international markets, this is likely a positive for the portfolio.
As always, I welcome the opportunity to address any questions you may have. Thank you for your
continued trust and confidence. We wish you a safe and happy summer!
Jeff
The opinions expressed are those of Jeff Miller’s as of the date stated on this email and are subject to
change. There is no guarantee that any forecasts made will come to pass. This material does not
constitute investment advice and is not intended as an endorsement of any specific investment or
security. Please remember that all investments carry some level of risk, including the potential loss of
principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly.
Returns represent past performance, are not a guarantee of future performance and are not indicative
of any specific investment. Diversification and strategic asset allocation do not assure profit or protect
against loss.
Investors should be aware of the risks of investments in foreign securities, particularly investments in
securities of companies in developing nations. These include the risks of currency fluctuation, of political
and economic instability and of less well-developed government supervision and regulation of business
and industry practices, as well as differences in accounting standards.
Index Information: Indices are unmanaged and cannot be invested in directly. Returns represent past performance, are not a
guarantee of future performance, and are not indicative of any specific investment or the success of any investment strategy. Index
return information is provided by a third-party vendor and although deemed reliable, is not guaranteed by NMIS or NM. Due to realtime market movement and delayed timing resulting from delivery to you of the attached information, indices may be adjusted after
the publication of this report. The returns of the indices in this report would be lower if they included the effect of sales charges and
taxes. The trademarks, service marks, and copyrights related to the indices briefly described below, as noted, are the property of
their respective owners.
Barclays Municipal Bond Index: Covers the USD-denominated long term tax exempt bond market. The index has four main
sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.
Barclays U.S. Aggregate Index: Covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SECregistered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and
hybrid ARM pass-through securities), ABS, and CMBS sectors.
Citigroup 3-Month Treasury Bill Index: With income reinvested, representative of the three-month Treasury bills.
Bloomberg Commodity Index: A liquid and diversified benchmark for commodities as an asset class. The index is composed of
futures contracts on 19 physical commodities which include oil, metals and agricultural products such as corn or soybean. The
Bloomberg Commodity Index family includes nine subindexes that group commodities based on type, plus single-commodity
indexes for each of the 19 individual commodities in the broad index, plus Cocoa, Lead, Platinum and Tin.
Dow Jones U.S. Select REIT Index: Comprised of companies whose charters are the equity ownership and operation of
commercial real estate and which operate under the REIT Act of 1960. Each REIT in the REIT Index is weighted by its float-adjusted
market capitalization. The total return version of the index is calculated with gross dividends reinvested.
MSCI EAFE Index: Measures the equity market performance of developed markets, excluding the US & Canada. The index returns
are calculated with gross dividends to approximate the maximum possible dividend reinvestment. The amount reinvested is the
entire dividend distributed to individuals resident in the country of the company, but does not include tax credits.
MSCI Emerging Markets Index: Measures the equity market performance of emerging markets. The index returns are calculated
with gross dividends to approximate the maximum possible dividend reinvestment. The amount reinvested is the entire dividend
distributed to individuals resident in the country of the company, but does not include tax credits.
S&P 500® Index: Capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The total return
version of the index is used, which reflects the effects of dividend reinvestment.
S&P MidCap 400® Index: Covers 7% of the U.S. equity market and is comprised of companies with market capitalization in the
range of US $1.4 billion to US $5.9 billion. The total return version of the index is used, which reflects the effects of dividend
reinvestment.
S&P SmallCap 600® Index: Covers approximately 3% of the domestic equities market covering companies with market
capitalization in the range of US $400 million to US $1.8 billion. The total return version of the index is used, which reflects the
effects of dividend reinvestment.