Download April 2016 Investment Letter - "MARCH MARKET

DAVE JANNY APRIL 2016 INVESTMENT LETTER
2016 VOLUME 4
“MARCH MARKET MADNESS”
“Charts courtesy of StockCharts.com”
One of the most exciting events of the year, sporting or otherwise, always seems to be the NCAA Men’s
Basketball Tournament. It is known as March Madness. This year’s tournament didn’t disappoint. The
Final featured betting underdog Villanova versus consensus favorites the University of North Carolina.
The tournament was particularly exciting for my family since we had a rooting interest in Villanova. My
son Matt is a junior at “Nova” and I of course have “invested” more than a couple of dollars in tuition.
Matt had the once in a lifetime experience of being at the Final Four in Houston to firsthand witness all
the excitement and the “Nova” national championship. The “final’ game will go down as one of the best
and most exciting tournament games ever, punctuated by two incredible shots in the waning moments
of the game. If you watched it, you know exactly what I’m talking about.
1
The tournament itself was marked by games that featured great comebacks, last second shots and other
exciting moments typical of March Madness. The thrill of victory and the agony of defeat seem even
more dramatic in the single elimination college format.
Speaking of March Madness, I would describe the global market action in March as “March Market
Madness”. As I had detailed in my March Investment Letter, I felt we were in a sharp but potentially
short bear market rally. Again, some of the sharpest rallies occur in bear markets. Reminiscent of a
college basketball game, marked by two distinctly different momentum based halves, the sharp market
correction of the first half of the 1st quarter was followed up by an equally sharp second half of the 1st
quarter rally. The net effect was actually not much net change in the S&P 500 for the year thus far.
(Reuters) To add to the “Madness”, the rally phase was marked by generally negative news. According
to the IMF, all four of the major global central banks (U.S., Europe, Japan and China) downgraded
economic forecasts for this year and next as well. Earnings forecasts were generally revised down
again.(Morgan Stanley) We sadly experienced the Brussels terrorist attacks. Ultimately I view this rally as
a great asset allocation opportunity. I believe the stock market rally is a short term “gift” in the context
of a broader bear market equity environment. I’ll explain the situation in the backdrop of a “March
Market Madness” theme.
THE “SWEET SIXTEEN” CONCERNS
There is still much to be concerned about in the investment world in what I still assert is a central bank
bubble. I’ll list these concerns from the #16 seed (lowest current concern) down to the #1 seed (most
salient concern). Just as is the case for the NCAA Tournament Committee, seeding is difficult (there are
always some controversial seeds). I’ll try to do my best.
#16 seed – “Cybersecurity” The whole realm of technology is increasingly becoming an important
component of all countries’ national security. The recent Apple/FBI debate is just the beginning of a
larger debate that will get only more complicated on the fine line between privacy and national security.
Cybercrime is rapidly becoming a common and frequent occurrence. Cybersecurity will continue to be
an important investment theme. CNBC had a good 3/9/16 interview with Fred Kaplan speaking about
his new book “Dark Territory: The Secret History of Cyber War”. It shows how prevalent and potentially
dangerous the issue is. I urge you to watch it.
http://video.cnbc.com/gallery/?video=3000499167
#15 seed – “Brexit” Polling in the UK suggests that there is a legitimate chance that citizens may opt
out of the European Union. (Brexit Poll Tracker, 2016)It’s been termed “Brexit”. The Europeans are very
concerned, as it would cast a negative light on the European Union and possibly influence talk of other
potential exits that could create uncertainty and volatility in European markets. . Trying to portray an
image of “unity” has been of utmost importance to pro-European Union politicians. The vote is in June
and can certainly create much media attention between now and then.
#14 seed - “Geopolitics and Islamic Terrorism” Global markets have shook off terrorist incidents as well
as other negative geopolitical events such as Syria, Iran, Ukraine and North Korea, thus far. Geopolitics is
2
always a risk, but the world seems to be a more complicated place than ever. Thus far, the terrorist
attacks have actually caused rallies (Ismailidou, 2016), but I think it could be a lot different if the
frequency or size of the attacks in the West would increase. Despite increased security, the possibility of
more attacks would not be that much of a surprise.
#13 seed – “U.S. Presidential Election” The election probably hasn’t had a huge impact on the markets
thus far, but that could potentially change. The rise of Donald Trump and Bernie Sanders most certainly
has its’ roots in a wave of populism brought on by dissatisfaction with the political establishment.
Neither party seems to be satisfied with their potential nominees. This election season, which already
has been one the craziest ever witnessed, is likely to get even more bizarre and divisive and could easily
impacts markets as we get closer.
#12 seed – “The Reach for Yield” One of the objectives of Quantitative Easing (QE) by the U.S. Fed, as
well as other central banks, is to potentially make “risk” assets, such as equities more attractive. Central
bankers felt that if stock markets rallied, economic growth would follow. That has not been the case.
Global economic growth forecasts have underwhelmed every year since the Financial Crisis. (Fels, 2016)
As I had detailed in some of my 2016 Investment Letters, stock market performance in 2015 was
tougher than the indices would imply. High yielding assets were particularly hard hit. Conservative
savers and investors, faced with historically low interest rates, have chosen “reaching for yield” in riskier
assets. (The Experts: Finding Income Despite Low Interest Rates, 2016). The worst may be yet to come in
another stock market down leg when many investors could panic when they may finally realize they may
be holding riskier investments than they want.
#11 seed – “High Yield Spread Widening” All last year my Investment Letters talked about credit
concerns building as yields on non-investment grade securities were rapidly rising. The same thing
happened in 2000 and 2007, typically, one of the more reliable warning signs of problems to come. The
energy sector, where much of the bad lending occurred, has been at the forefront of the concerns.
“Spread widening” makes it more difficult for entities to borrow new money and refinance existing
loans. If the economy continues to weaken, this “concern” can move towards the top of the headlines.
#10 seed – “U.S. Earnings Slowdown” We’ve already had a recent streak of disappointing quarters of
earnings growth. 1st quarter earnings season is about to begin and indications don’t appear very good
again. Ultimately rising earnings are a key ingredient for a rising stock market. Not only are earnings not
rising, but as I’ve pointed out in a number of my recent Investment Letters, the quality of those earnings
is deteriorating. There was a good article by Michael Hiltzik in the 3/18/16 LA Times that talks about SEC
scrutiny on the non –GAAP earnings issue that I’ve been writing about.
http://www.latimes.com/business/hiltzik/la-fi-hiltzik-silicon-valley-accounting-snap-htmlstory.html
3
Below is a chart that illustrates the quality issue I referenced above. The spread between GAAP and non
–GAAP earnings is getting very wide. Measuring P/E ratios using GAAP earnings produces a very large
ratio, much different than the P/E ratio using non-GAAP (pro-forma) earnings.
#9 seed – “U.S. Corporate Stock Buybacks” One of the biggest buyers of stocks in the U.S. has been
the corporations themselves. Historically high levels of corporate stock buybacks occur at market peaks
(see 2000 and 2007). Corporate stock buybacks have masked some of the earnings and revenues
problems of the last couple of years, what market watchers have termed “financial engineering”. This
time around, alarmingly, corporations have been borrowing more than ever to execute those buybacks.
Another problem with spending that much on “financial engineering “ is that it takes away from long
term productive spending and investment for corporations. It has been recently identified that most
corporate buyback occurs in the second half of a quarter since there are more buyback blackout periods
around earnings in the first half of a quarter. Not only that, but corporate buyback activity has been
identified as one of the biggest buying influences in our stock market. Maybe not so coincidentally, that
explains some of the wide performance divergence in the 2016 1st quarter. Lu Wang had a great
a3/14/16 article on Bloomberg about this topic that I urge you to read:
http://www.bloomberg.com/news/articles/2016-03-14/there-s-only-one-buyer-keeping-the-s-p-500-sbull-market-alive
#8 seed – “Slowing U.S. Economy”
One of the most watched economic forecasting tools for GDP
estimates is the Atlanta Fed GDP indicator that I often cite. The estimate for the 2016 1st quarter has
4
recently plunged to only 0.1%. As recently as 2/12/16, the indicator was calling for a 2.7% number for
the first quarter. This comes on top of a disappointing 2015 4th quarter GDP performance. What makes it
even more disconcerting is that last year’s winter’s weak numbers were blamed on cold weather. This
year’s warm weather should have been a positive factor. Optimists are trying to tell us that our
economy is still better than others, but I believe the reality of the situation is that we have a weak
economy.
# 7 seed – “Energy Prices” Stock markets in recent weeks have been tied to the daily moves in oil
prices. Oil has staged a significant rally, not coincidentally in tandem with the stock market, since the
mid February lows in the mid $20s to the current level in the low $40s. There has been persistent
production cut rumors in the market during that whole rally. There has also been some recent U.S.
dollar weakness which has helped commodities in general. (Cunningham, 2016) The rally has been so
large that you’d think some of it has to be attributable to short covering. (Kee, 2016) Coordinated
production cuts may be hard to come by because many energy dependent countries as well as
companies need to continue to pump to keep cash flow going to service high levels of debt and
expenses. With global economic forecasts continuing to drop, it might be tougher for markets to rally. If
energy prices start to drop, for whatever reason, it is likely that that would adversely impact stock
prices.
#6 seed – “Janet Yellen Change of Game Plan” Since my last Investment Letter, Janet Yellen had two
high impact speeches. 3/16/15 was the Fed Meeting and then 3/29/16 was a speech at the New York
Economic Club. Keep in mind that the December 2015 Fed meeting featured a ¼ rate hike and forward
guidance of four more rate hikes for 2016. Other Fed officials had and have generally supported that
“hawkish” view. Both Yellen appearances turned out to be” dovish“, and the NY Economic Club speech
could even be considered “uber dovish”. The Morgan Stanley FX team put out a report titled “Who Let
the Doves Out”. Here’s an excerpt:
“Chair Yellen could not have been clearer in suggesting that the Fed will keep US real rates lower for
longer, citing international factors and the potential negative feedback loop into the US economy as
the main reasons for adjusting its policy stance.”
“It has broadened its reaction function beyond its traditional inflation and employment targets to
include international factors, citing particularly weaker global growth indications and their impact on
US corporate earnings.”
Art Cashin in his 3/30/16 Cashin’s Comments included a great summary by Craig Torres of Bloomberg on
conditions that Yellen needs for future rate hikes:
“The Yellen Speech – Let’s start out with a helpful outline from Craig Torres of Bloomberg. Here’s a bit
of what he wrote:
In one of her most detailed policy discussions this year, Yellen gave investors a list of conditions they
need to watch for future rate hikes. Here they are:
5





Foreign economies and their financial markets need to stabilize.
The dollar can’t appreciate further. That would depress inflation and exports, and hurt U.S.
manufacturing.
Commodity prices need to stabilize to help foreign producers find a better footing for growth.
The housing sector needs to make a larger contribution to U.S. output.
Inflation is a two-sided risk: Yellen is skeptical that the recent rise in core inflation, which strips out
food and energy, “will prove durable.” She is watching closely.”
With all those conditions, it looks like it could be very tough for the Fed to raise rates this year.
#5 seed – “The European Bazooka”
Mario Draghi came out with his bazooka at the 3/10/16 ECB
meeting. Porter Stansberry in his 3/10/16 Stansberry Digest described it this way.
“According to the financial media, European Central Bank ("ECB") President Mario Draghi pulled out
the big guns this morning…
In a statement following the ECB's March meeting, Draghi announced a major change to the bank's
open-ended quantitative-easing ("QE") program.
In particular, Draghi said the ECB would now be buying 80 billion euros of bonds every month. That's
an increase of 20 billion euros a month, topping expectations of an increase of 10 billion to 15 billion
euros. The program is also expanding to allow the central bank to purchase investment-grade
European corporate bonds.
For comparison, at the peak rate of QE here in the U.S., the Federal Reserve was buying
approximately $80 billion a month for a little more than a year. As of this morning, the ECB has
matched that rate… and there's no end in sight.
In addition, Draghi announced that the ECB was slashing interest rates again. Most notably, the
central bank pushed deposit rates – the rate it charges commercial banks to keep their extra reserves
at the ECB, which was already negative – even further into negative territory, from -0.30% to -0.40%.
Draghi also announced a new program of "cheap loans" to European banks, which the ECB hopes will
stimulate lending to businesses and consumers.
As one money manager put it to the Wall Street Journal, "This has all the hallmarks of the ECB having
thrown the kitchen sink at the problem."
We couldn't help but wonder, though… What if the kitchen sink isn't enough?”
As big as the bazooka was, the Euro currency has actually rallied and not declined as intended since the
announcement. European stock markets are relatively flat since then. (Hobbs, 2016) It is possible that
these central banks announcements are losing their ability to move markets.
#4 seed – “China Credit Reacceleration” The Chinese are facing a problem that is requiring them to
“walk the tightrope” The economy is slowing, but the People’s Bank of China (PBOC) doesn’t want to
devalue much because there is capital flight occurring amongst wealthy Chinese. Currency devaluation
6
would probably accelerate the flight. In the meantime the route the PBOC is taking is to reaccelerate
credit growth. Remember this is on top of the largest episode of credit growth that the world has ever
seen. It is causing real estate prices amongst major Chinese cities to rapidly rise, similar to what
happened to the Chinese stock market last year before it eventually crashed. The 3/28/16 Randall
Forsyth column in Barron’s had this blurb from Anne Stevenson-Yang of J Capital Research; she is a
highly regarded voice on China:
China is another market that has rebounded with the help of the authorities. But, according to Anne
Stevenson-Yang, it amounts to a "dead-panda bounce."
The Chinese stock market and its currency, the renminbi or yuan, have firmed in tandem with the
rosier hue taken on by markets around the globe. But in the case of China's equity and property
markets, she writes in a report to clients of J Capital Research, "the root of nearly every part of the
'rebound' story is cash stoking an asset bubble, and that will not last long. It does suggest a degree of
political panic."
For now, the authorities are attempting to portray confidence. Curbs on margin lending and shortselling, two big culprits in last year's market debacle, are being eased. Moreover, the yuan has been
guided subtly higher by the People's Bank of China this year, albeit against a weaker dollar, following
last August's sudden decline.
There has been a robust bounce in property speculation that Stevenson-Yang says is being likened to
that of the stock market at its frenetic peak last year. Behind it is a stunning surge in governmentbacked lending to smaller banks and nonbank financial institutions that, in the first two months of this
year, equaled almost half of China's reported GDP for 2015, or 36 trillion renminbi -- more than $5
trillion. In the past four months, lending by those institutions has exceeded all of last year's GDP by
RMB20 trillion.
"Leverage is the only idea left in the Chinese government, and is reaching truly suicidal levels," she
contends.
The financial pumping supports the "unrelenting jawboning from the top about the strength of the
economy," Stevenson-Yang continues. While she concedes that her forecast of a further weakening of
the yuan -- to 6.80 to the dollar versus the current 6.51 -- has been off the mark, she says that
delaying the needed adjustments will worsen their cost and potential severity.
But capital flight -- from both Communist Party elites and more modest families seeking to build
wealth pools and income streams abroad, …… puts Chinese monetary authorities in a box. Pumping
liquidity into the domestic economy further weakens the yuan. To counter that, the central bank sells
dollars to meet the demand for foreign currency, which tightens domestic liquidity.
The easiest way to sort out this conflict would be to let the yuan continue to fall. That has been the
biggest bet by hedge funds this year, and it has been Beijing's aim to make the hedgies lose that
wager.
7
Indeed, Stevenson-Yang says that Beijing may have to end the already-limited convertibility of the
yuan to stanch capital flight. She claims that the $130 billion decline in currency reserves in January
and February was a "manipulated number," to the downside, a figure that, like so much of China's
data, is uncorroborated.
And when the numbers and sums no longer can be juggled, the poor panda may come back down
with a thud.”
Anne Stevenson Yang did a great interview on ABC News that really adds a lot to those comments that I
urge you to view:
http://www.abc.net.au/news/2016-03-11/extended-interview-with-anne-stevenson-yang/7241618
China is a big story and eventually a big risk that can have many ripple effects on an ongoing basis.
#3 seed – “ Yen Currency Volatility” By taking easing measures, central banks have been trying to
devalue their own currencies. These actions are intended to give their own economy a potential short
term economic boost, but this is ultimately turning into a form of ”currency wars” that are difficult to
win. Historically, currency volatility coincides with stock market volatility inflection points. In last
month’s Investment Letter, I pointed out that one of the potentially biggest events of the year so far was
the initial rejection by the currency and stock markets in Japan of the Bank of Japan’s (BOJ) move into
negative interest rates (NIRP).The yen has rallied over 10% at this point from the day of the
announcement., while the Japanese stock market has been down. (Worrachate, 2016)The Japanese
economy continues to struggle in a recession. This is exactly the opposite of what was intended by the
BOJ. Japan has been unsuccessfully fighting deflationary forces for approximately 25 years. Jeffrey
Snider of Alhambra Partners wrote an interesting fact filled 3/31/16 article entitled “The Evidence Piles
Up- Japan’s Economy Keeps Shrinking, Abenomics an Abject Failure”. I’ll share a small bit with you:
“In fact, no matter how many QE’s and other activities the Bank of Japan has undertaken since the
Great Recession, industrial production remains 20% below the start of that year. That is not a
misprint; Japan IP is still 20% smaller in the first months of 2016 than the first months of 2008 as if the
whole economy just shrunk never to return (at least so long as “stimulus”). Only the financial and
corporate sectors very narrowly count any of the QE’s as being “stimulus”; the rest of the country has
been only impoverished.”
#2 seed – “NIRP” By now you know NIRP stands for negative interest rates. Just think about that
statement for a moment, negative interest rates. Of course it sounds very unnatural. In central bankers’
quest to force people into more borrowing, spending and stock market investing, NIRP was devised. It is
a radical step as it distorts economics and punishes savers and pension funds amongst other entities.
Have they gone too far? I’ve attached links to two excellent articles from two very savvy and
experienced market progniscators, Bill Gross of Janus Funds and Stephen Roach. Bill Gross’ nickname of
course is the “Bond King” while Roach is the former Chairman of Morgan Stanley Asia and current senior
fellow at Yale’s Jackson Institute for Global Affairs. Must read stuff:
8
https://www.janus.com/bill-gross-investment-outlook
http://www.marketwatch.com/story/negative-interest-rates-set-stage-for-next-crisis-stephen-roachsays-2016-02-18
#1 seed - “Debt Buildup” Obviously there is a lot of relation and overlap in all the “concerns” that I’ve
seeded. The common denominator is “debt “. The global central bank game plan is simple, fix a debt
crisis by creating more debt. This #1 seed is essentially the combined result of all the above. There is a
limit to how much debt can be created before a tipping point, and I guess the world can try its’ hardest
to get there. It could take longer to get there than I think, but I believe we’re rapidly approaching that
tipping point that can bring with it negative consequences. With the interconnectivity of the global
economy and markets, it can probably only take one of the “big four” central banks to hit that tipping
point before shock waves reach the others’ shores.
THE FINAL
If I had to synthesize all of the above “seeds” into a “final” matchup, I would call it:
“Confidence in central bankers versus global economic growth and earnings”
If all these central banker interventions don’t generate improving economic growth and earnings, what’s
next? More of the same? At some point, a loss of confidence in central bank actions is likely if we don’t
get some real growth. As Bill Gross summed it up in his April Investment Outlook:
“The real market and the real economy await a different conclusion as losses from negative rates
result in capital losses, not capital gains. Investors cannot make money when money yields nothing.
Unless real growth/inflation commonly known as Nominal GDP can be raised to levels that allow
central banks to normalize short term interest rates, then south instead of north is the logical
direction for markets.”
This cycle has been stretched out further than I would have thought, but there will be a down side of the
cycle. Short term you can’t tell the timing, but beyond that the market top that appears to have been
forming over the course of the last 10-16 months still has a good chance to stand.
UNDERDOGS BUT OUTPERFORMERS
Two asset classes that I’ve been advocating in my Investment Letter have been high quality fixed income
and precious metals. U.S. Treasuries continue to be a good defensive position to maintain since U.S.
treasury yields, although historically low, are still significantly higher than most European and Japanese
sovereign bonds. In a continued slow growth or worse environment, Treasuries would be a good place
to invest. Municipal bonds have also done well. (Kosnett, 2016) Stick with higher quality bonds,
particularly if credit spreads start another round of spread widening.
According to Porter Stansberry:
“Gold had its best quarter since 1986. The metal’s spot price was up more than 16%”
9
Gold and silver miners were the outperformers of the 1st quarter. (Sykora, 2016) I’ve documented the
extended rough patch that they went through since October 2011, but they’ve had an explosive move
off the mid- January bottom. (Hamilton, 2016)
I’ve been labelling gold the anti-central bank asset. With a large chunk of the world’s interest rates
negative, gold offers a good defensive alternative. Keep an eye on the price of gold: it perhaps is a good
contrary gauge of confidence in central banks.
CONCLUSION
As I had indicated in my initial comments, this rally presents a terrific opportunity to reallocate your
assets, lightening up on equities into the recent strength. The rally has a chance to have some more to
go, but it has already come a long way in the face of the aforementioned “concerns”. In the last couple
of years, it always seems like just when the market looks like it is breaking out it turns down, and
conversely, when it seems to be breaking down it somehow manages to rally..
Sorry for the length of this Investment Letter, but I feel it is important to make you aware of the large
number of risks that exist in our investment world. I’ve included plenty of backup documentation with
all the info and links. Take some time to read them and hopefully better understand them. Good health
and good luck investing!
David Janny
Senior Vice President
Financial Advisor
NMLS# 1279369
Morgan Stanley Wealth Management
200 Nyala Farms Rd.
Westport, CT 06880
203 221-6093
The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth
Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any
opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future
results.
Please be advised by clicking on a third party URL or hyperlink, you will leave morganstanley.com. Morgan Stanley Smith Barney
LLC is not implying an affiliation, sponsorship, endorsement with/of the third party or that any monitoring is being done by
Morgan Stanley of any information contained within the web site. Morgan Stanley is not responsible for the information
contained on the third party web site or your use of or inability to use such site. Nor do we guarantee their accuracy and
completeness
Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy
or completeness
This material does not provide individually tailored investment advice. It has been prepared without regard to the individual
financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material
may not be suitable for all investors. Morgan Stanley Wealth Management recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness
of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
10
International investing may not be suitable for every investor and is subject to additional risks, including currency fluctuations,
political factors, withholding, lack of liquidity, the absence of adequate financial information, and exchange control restrictions
impacting foreign issuers. These risks may be magnified in emerging markets.
Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including
but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and
international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading
activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of
a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various
factors, including lack of liquidity, participation of speculators and government intervention.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more
sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option,
fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from
sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market
conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the
issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk,
which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.
Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to
the alternative minimum tax (AMT). Typically, state tax-exemption applies if securities are issued within one’s state
of residence and, if applicable, local tax-exemption applies if securities are issued within one’s city of residence. The
tax-exempt status of municipal securities may be changed by legislative process, which could affect their value and
marketability.
Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of
investment grade securities, including greater credit risk, price volatility, and limited liquidity in the secondary market. Investors
should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing
in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio.
S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.
An investment cannot be made directly in a market index.
Dow Jones Industrial Average is a price-weighted index of the 30 “blue-chip” stocks and serves as a measure of the U.S. market,
covering such diverse industries as financial services, technology, retail, entertainment and consumer goods. An investment
cannot be made directly in a market index.
Foreign currencies may have significant price movements, even within the same day, and any currency held in an account may
lose value against other currencies. Foreign currency exchanges depend on the relative values of two different currencies and
are therefore subject to the risk of fluctuations caused by a variety of economic and political factors in each of the two relevant
countries, as well as global pressures. These risks include national debt levels, trade deficits and balance of payments, domestic
and foreign interest rates and inflation, global, regional or national political and economic events, monetary policies of
governments and possible government intervention in the currency markets, or other markets.
Asset allocation does not guarantee a profit or protect against a loss in a declining financial market.
Morgan Stanley Smith Barney LLC. Member SIPC.
11
12