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Minor Tremors both in Anchorage and on Wall Street

PantagesThe equity market lost ground this week with the S&P 500 down 1.3% to close Friday at 1,983. So far it is off 0.9% in September but up 8.9% year to date. Rumors of possible terrorist attacks in NYC and Paris, Russia possibly seizing assets of U.S. companies, and Apple iPhone 6 problems spooked the markets mid-week.

Stocks steadied on Friday after news that GDP in the U.S. expanded at a seasonally adjusted annual rate of 4.6% in Q2 – the fastest pace since 2011. That compares to a 4.2% initial estimate. The economy is doing fine. Next Friday’s employment report (Oct 3) will be an important marker. Most economists expect job gains of 215,000 in September and the unemployment rate to remain at 6.1%.

Treasury bond yields drifted lower with the 10 year note ending the week at 2.53%. Junk bond yields have been soaring of late (as prices have fallen). The Merrill Lynch high yield bond index now yields 6.25%, up from under 5% in July.

The Bond King, Bill Gross, has left PIMCO which he co-founded in 1971, to join Janus Capital. Gross is 70 and performance has been spotty over the last few years prompting the question as to whether Janus has hired a fading star. However, Janus stock went up 30% on the news! (It also comes as PIMCO is being investigated by the SEC over some questionable fund pricing issues – one wonders what the inside story is?)

The euro reached a two year low against the U.S. dollar as ECB President Mario Draghi said that the central bank is willing to act further to stimulate the Eurozone economy and prevent deflation. At one point, the euro traded slightly below $1.27. It was worth $1.40 earlier in the year. That European vacation is looking cheaper! (And that’s the point – a weaker currency stimulates growth/exports and helps the Eurozone!)

The World Bank cut its projection for Russian economic growth to 0.5% from 1.1% this year and to 0.3% from 1.2% next year. They said Russia is headed into stagnation due to sanctions tied to its role in the Ukrainian crisis, unclear economic policies and a failure to make structural reform.

FT: As U.S. corn and soybean harvests hit record highs, the farmers responsible for the crops enter a nervous new era. The weakest grain prices in four years are hitting incomes, pressuring land prices and costing jobs.

ABC: Gasoline prices typically decline during the autumn, and this year they are being pulled even lower by falling global oil prices. By the end of the year, up to 30 states could have an average gasoline price of less than $3 a gallon according to the Oil Price Information Service. The Energy Department estimates that the national average gasoline price for all of 2014 will be $3.46 a gallon, the lowest annual average since 2010.

I attended the Casey Research Summit last weekend in San Antonio. Lacy Hunt of Hoisington Investment Management spoke — very impressive – and a good track record. He believes disinflation is more of a risk than inflation. Here is summary of his comments:

  • The main reason that the global economy continues to falter is that all countries borrow too much and save too little.
  • 275% total debt to GDP is the critical threshold and most large developed countries are above that level and moving higher.
  • Because the U.S. is the least indebted of the three, it will continue to outperform Japan and Europe. The dollar will strengthen.
  • Monetary policy today is totally impotent. The Fed/BOE/BOJ are trying to solve the problem of too much debt by borrowing more. It has had short-term benefits, but will be disastrous long term.
  • Inflation and interest rates will remain low.

Anchorage shook rattled and rolled with a 6.2 quake on Thursday. It didn’t faze us here at APCM – we are used to volatility! Our 6th floor office swayed quite a bit and I am told a few colleagues took cover under tables and desks!

Jeff Pantages
Chief Investment Officer

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