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Markets Quiet in Front of Easter Weekend

Jeff-PantagesIt was a relatively quiet week in the U.S. markets. Stocks in the U.S. traded sideways for most of the week, which ended with Thursday’s close (markets were closed on Good Friday). The S&P 500 lost -0.7% last week, but has provided a 0.1% total return year to date. Ten year Treasury bonds rose in yield to 1.90%.

Last week we talked about central banks “pushing on a string,” arguing that monetary policy was losing its punch. John Hussman weighed in elsewhere with this pithy comment, “Central bankers are behaving like lab rats frantically pressing a bar in hope that more food pellets will come out of the chute. They ain’t comin.”

The Bank Credit Analyst (BCA) took a look at the prospects for a “Brexit” – that’s the June 23rd referendum in which Britons will vote on whether to stay in or leave the European Union (EU). The charts below highlight current polling and one of the problems: in contrast to the rest of the Euro area, Britons are much more likely to solely identify with being British and not European.

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Charts: Bank Credit Analyst

BCA thinks voters will ultimately choose to “stay,” but they have a low conviction level on that forecast. While the economics argue for staying within the EU, ultimately it’s an emotional issue. Britons have always been suspicious of “European entanglements” and now confront an immigration crisis among other challenges. Bottom line for BCA is that they don’t think the event is significant in terms of long run market impact and are recommending to sell the British stock rallies in a “Bremain” decision and buy the likely sell off in equities in case of “Brexit.” I’m not that sanguine; a “Brexit” could trigger other nations to consider leaving the EU or at least abandon the Euro.

In other investment news, Ben Carlson took alternatives like hedge funds and private equity to task in an interesting article titled “The problem with trying to quantify risk.” He noted:

  • Alternatives are valued on a quarterly basis and this is usually done by the fund companies who hold the positions themselves. There’s no way that these holdings give you a legitimate sense of actual volatility from an overall portfolio perspective. (Although not being able to view the daily changes may be a benefit from a behavioral perspective.)
  • Alternative funds tend to come with leverage, concentrated holdings, limited holdings transparency, illiquidity and higher than average fees. It is hard to define risk in your portfolio when you’re not sure what your actual holdings are and what kind of leverage is being applied to earn your returns.

APCM couldn’t agree more. We would emphasize the very high fees, underestimation of true volatility, difficulty in identifying consistently good managers (and getting access to them), and the poor performance in the Panic of 2008 as insurmountable challenges for most investors.

Looking ahead this week, U.S. employment data for March will be released this Friday. Analysts expect a solid gain of 190,000 new jobs and a 4.9% unemployment rate. By the way, last Thursday we learned that the number of Americans filing for unemployment benefits was only 253,000, the lowest since 1973.

Have a great week everyone. Spring is here. The Cardinals and Pirates kick-off (mixing metaphors?) the baseball season this Sunday, April 3.

Jeff Pantages, CFA®
Chief Investment Officer

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