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August 7th, 2015

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Trumped Up

Mike Leist Michael Leist | Articles

Read Time: 3:30 min

trumped_up

The DJIA extended its losing streak to 7 days, the longest period since 2011. The losses have been relatively well-contained, but the trend is a concern.

Market Review

Contributed by Alan Leist, III

The DJIA extended its losing streak to 7 days, the longest period since 2011. The losses have been relatively well-contained, but the trend is a concern.

Demand Side Economics: The continued sell-off in oil and the rally in the bond market are signals that weak economic activity and deflation remain concerns.

  • With stock valuations stretched, there is no margin of safety to cushion a slowdown in earnings growth.
  • Can/will the Fed raise rates in this environment? Yes

Beat it: Over 70% of companies have beaten earnings estimates this season (Factset). Not too bad, but…

*The beats are on sharply lower estimates and we may see that earnings actually declined year over year.

Political Theatre: The Iran and GOP debates were headline grabbers, but ultimately market snoozers.

  • As the Presidential campaign heats-up, a fun fact to remember: Democrats lead Republicans in stock market performance by a wide margin over the decades.
  • Obama’s return: +150%.
150%

Stock market performance during Obama administration

Investment Strategy Update

STRATEGIC Asset Allocation

See Saw: With a 5-year fulcrum, the Treasury curve continues to get flatter. Investors are heading to the long-end of the curve in anticipation of a Fed rate hike. This type of movement is not typically viewed as a ringing endorsement of the economy’s direction.

Slide: Stock markets are less than thrilled with impending rate hikes with August off to a weak start.

Merry-go-round: Chinese stock markets continue to post dizzying daily gyrations.

Swings: Sentiment in the commodity markets continues to be sour. In oil markets, supply show no signs of easing.

STRATEGIC Growth

A Mouse in the House: Several earnings release impacted the strategy this week including these three industry leaders…

  • The Good: Priceline Group Inc. (PCLN) topped consensus and reported a 12% jump in international bookings.
  • The Bad: EOG Resources (EOG) technically beat expectations, but reported earnings that were down 99% year over year.
  • The Ugly: Walt Disney Co. (DIS) showed the impact of “cord-cutters” particularly in the ESPN franchise.

STRATEGIC Equity Income

The Road to BaxShire: A relatively good week for the strategy as market’s rotation to dividend paying stocks was evident.

  • Recent spin-off from Baxter Intl. (BAX), Baxalta (BXLT), received an unsolicited merger offer from Shire (SHPG) valued at $30B, a 36% premium to Monday’s close. Baxalta quickly rejected the advance because it “significantly undervalues the co. and its attractive prospects for growth.”

 

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