WEATHERING THE STORM

There's a lot of fear in the air, and Wall Street may turn lower as earnings concerns mount.  You may feel like you want to do "something."  Try not to let it get to you.  With our highly selective approach, we're well equipped to weather the storm.  With a little knowledge, a lot of research, and an understanding of what produces higher returns, anyone can create the financial success they want, especially if they screen out the "junk."  Nowhere is that more clear than when it comes to Diversifying Strategies in investing, a strategy that works exceptionally well over widely varied market conditions.  For example, since 1963, if you were to buy top 10% of the market as ranked by six-month momentum, you'd have achieved an average annual return of 14.4% versus the 9.9% turned in by the S&P 500.  That's a very attractive 4.5% improvement per year.

The problem, of course,, is that you'll have a wild ride absent a means of limiting your choices to undervalued stocks everybody is just beginning to notice.  Not many people understand the inherent conflict.  We get around that sticky little problem by combining the two using a strict set of criteria that limits our choices to only the strongest companies enjoying great valuation.  This give us a huge advantage because it lets us concentrate on stocks that yield considerably more impressive results over time while avoiding those that don't.  And, perhaps more importantly, this helps dampen the volatility that craters other investors who don't have the tools, the research, and the discipline we do.

As you can see, the S&P 500 that defines broader markets has gone absolutely nowhere for a while now.  Traders call this a "sideways channel" because that's what it looks like.  While I'd rather see a good ol'fashioned rip-snorting rally, this isn't bad either because it's normal.  The markets have to wander around from time to time to build the strength needed for another push higher.  In fact, every great bull market run starts with this kind of listless behavior.  A lot of people are tempted to view this as a bearish development, but in my opinion they're making a mistake.  It's actually a contrarian bull in the making.  More to the point though, the S&P 500 is green, meaning there's still upside momentum.

 
Economic Perspective
Relative to expectations, U.S. economic activity appears to have hit a soft patch recently.  A number of factors, to varying degrees, seem to be at fault, including the weather, the West Coast port disruption, as well as the impacts of the higher dollar and weaker global demand.  However, I believe most of these factors are transitory.  The dispute has been resolved, and, with spring here, warmer weather is around the corner.  Thus, I continue to expect better economic growth to materialize in the months ahead.  Perhaps the biggest disappointment so far has been the pace of consumer spending.  Despite strong job growth, high confidence and the decline in gas prices leaving more money in consumers’ pockets, the last couple of retail sales reports have come in weaker than expected, however we are seeing an uptick this month.  I believe part of this is due to the weather.  While online retailers had their best month since 2013, auto and building materials – two categories most impacted by harsh winter weather – posted poor results.  Weakness in both of these categories is likely to rebound as more moderate weather returns, and as the boost from lower gasoline prices kicks in further. 

Along with the large increase in employment and the pickup in compensation, the decline in energy prices has led to a sharp rise in real incomes over the past several months.  So far, however, households appear to have saved rather than spent their gasoline windfalls.  Indeed, the savings rate has risen to a two-year high of 5.8% despite household net wealth being back near the level last seen before the recession.  For now, households have seemed to take a ‘wait and see’ approach to spending their extra savings from lower gasoline prices.  In recent years, households have waited roughly six months before adjusting their spending to gasoline price swings.  The upshot is that even though consumers have not yet taken full advantage of their savings on gasoline, with household financial positions getting stronger, they should still have a lot of scope to increase spending.

Likewise, it appears that a number of transitory factors are behind the recent slump in U.S. industrial production, and better output is likely over the next couple of quarters.  It is true that U.S. manufacturers appear to be struggling with the stronger dollar and that the collapse in oil prices has triggered a sharp decline in mining output.  However, it is worth remembering that for a net oil importer like the U.S., the lower oil price is a positive for the economy as a whole.  With the overall economy in good shape, strong domestic demand should ensure that manufacturing output continues to grow at a reasonable pace despite headwinds from abroad.  We saw a scenario similar to this play out last year.  After a harsh winter cause U.S. growth to decline 2.1% in the first quarter of 2014, the economy snapped back in the spring and summer, with growth surging to its best six-month rate in 11 years.  Much of the economic activity that went missing last winter was merely shifted to later in the year.  Since underlying economic fundamentals remain strong, we expect it will not be long before we see a pickup in growth this year as well.
 
THE FED
Monetary policy from the Fed has moved decidedly dovish as it downgraded its assessment of economic activity, mentioning that growth has “moderated somewhat” – a contrast from the Fed’s view December when it stated that economic activity was growing at “a solid pace.”  The Fed also lowered its inflation outlook, most likely reflecting lower oil prices, a stronger dollar, and the global economic slowdown.  The Fed is “reasonably confident” that inflation will eventually return to its goal of 2.0%, although it believes this will not happen for several years.  On a positive note, the Fed’s projection of the labor market has improved due to the red-hot pace of job hiring since last summer (2014 hiring was the strongest since 1999).  The Fed moved down its projection of the unemployment rate for the next several years, and the midpoint of its long-term view of the unemployment rate is now 5.1% (it had been 5.3%).  The most anticipated part of Fed policy was its indication of the future direction of short-term interest rates.  In the past, the Fed stated that it would be "patient" with initiation of the "liftoff" of interest rates.  The Fed dropped that terminology and at the same time lowered its projection of the year-end federal funds rate to 0.625%; back in December it had been 1.125%.  Even after the Fed begins to raise interest rates, Fed Chair Yellen stated that the Fed will remain highly accommodative, and it is not looking to slow down the economy. 
 
LABOR
Another strong month of hiring has helped move the unemployment rate to 5.1% - the lowest level in the cycle - as it continues a strong downward trend.  Labor demand is on an impressive streak, and hiring continues to be strong in virtually every sector of the economy.  The number of positions waiting to be filled is 5.1 million, which is the highest level in 14 years.  On the other side of the spectrum, unemployment insurance claims have been around 300,000 which is a level associated with a labor market at, or near, full employment.  A closely watched component of the labor report has been wage gains, which have been bouncing around a 2.0% annual rate since lat 2009.  Wage gains are believed to be mired at this low level due to the slack in the labor market, since wages do not begin to accelerate in earnest until the labor market approaches the full, or natural, rate of employment.  However, it is believed that this effect is beginning to change.  Faster wage gains have been seen for certain high-skilled positions, and there has been some well-publicized news of wage increases within some national retail firms.
 
INFLATION
After three consecutive months of declining prices, the Consumer Price Index (CPI) rebounded, helping lift the year-over-year in CPI out of negative territory-it now stands at 0.0%.  Although there were broad gains in many categories, the most notable change was in gasoline prices, which jumped 2.4% (up 14 cents) to $2.24 per gallon last month.  This followed seven months of price declines.  The national average gasoline price ended the quarter $2.41, $1.29 lower than last April's cycle pear of $3.70.  Core inflation, which excludes the volatile food and energy components, and is closely watched by the Fed, is at 1.7% for the past year.  It has been bouncing around in a narrow range of 1.5% to 2.0% for about two and a half years, reflecting no directional momentum.  The Fed favors core inflation because it gives the best view of underlying inflationary trends (for policy decisions, the Fed prefers the Core Personal Consumption Expenditures Price Index [Core-PCE]).  Furthermore, fluctuations in energy and food prices are not something that the Fed can control.
 
Economic and Financial Indicators
Monetary Policy is moderately high...U.S. Economic Outlook is moderately strong...The current Yield curve is moderately steep...Consumer sentiment is moderately high...Political Environment is fairly low...Housing Mortgages are moderate...Labor Market is somewhat on the plus side...Consumer Spending is moderately high...Corporate Profit growth is flat...Interest Rates very slightly up... Business Outlook moderately up...Lending Indexes moderately up...Disposable Personal Income/Wages is slightly up...Equity Market Valuation is somewhat high... Fiscal Policy is somewhat easy...Inflation is low...Credit Demand/Availability is slightly higher...Energy/Oil costs are low...Global Economic outlook moderately weak...Geopolitical Risk moderately low...

 
Obama Caught Lying On Framework Agreement With Iran
What else in new for the pathological lying President (Dictator).  "When a President locks himself in the cockpit and heads us for a crash, you have to wonder how much we're really doing to correct our course."  Iranian media reported that Iran's Foreign Minister Zarif and Ali Akbar Salehi attended a closed session in the Parliament to brief the MPs on the framework agreement with the six world powers that is supposed to curb Iran's nuclear program.  Fars News reported that Iran is planning to use its advanced IR-8 centrifuges as soon as a nuclear accord with the world powers is agreed, although this would appear to entirely contradict the United States' interpretation of the deal under discussion.  Fars quoted Javad Karimi Qoddousi, a member of the parliament's National Security and Foreign Policy Commission.  He said following the closed-door session at the Iranian parliament:  "The AEOI chief and the Foreign Minister presented hopeful remarks about nuclear technology R&D which, they said, have been agreed upon during the talks (with six world powers), and that gas will be injected into IR8 (centrifuge machines) with the start of the (implementation of the) agreement."  One of the Iranian MP's who attended the meeting told Mehr News that Zahrif had said that Iran would allow no online cameras to be installed in nuclear facilities.  The reason?  The country had several tragic experiences in which Iranian nuclear scientists have been assassinated due to having been identified.  These online cameras are important for the inspections of the International Atomic Energy Agency (IAEA).  The MP also quoted Zarif as having said :  "I have told the Western diplomats that Iran is capable of making an atom bomb anytime it wills, but the one and only fact that has stopped us from doing so is Ayatollah Khamenei's Fatwa (an Islamic legal pronouncement) and not the sanctions and pressures levied at the country."
 
The same claim about Khamenei's fatwa was also made by President Obama during his Rose Garden statement last week.  However, as Western Journalism reported earlier, Khamenei never issued such a Fatwa.  In fact, in 1987, Khamenei ordered the Iranian Atomic-Energy Organization (IAEO) to develop nuclear weapon.  He did so during a secret meeting of the IAEO of Iran, where Khamenei said the following:  "Our nation has always been subject to external threats.  The little we can do to stand up to this danger is to make our enemies aware that we can defend ourselves.  Accordingly, any step that we can take here will serve the defense of our nation and your revolution.  With this aim in mind, you must work hard and fast."  As for Zarif's remark that Iran is capable of making a atom bomb anytime it wills, Obama proved that he lied about the actual break-out time.  That is the time Iran needs to build a bomb.


In October 2013, Obama said IRAN was a year or more away from having sufficient enriched uranium to produce a nuclear weapon (or a completed weapon - the answer is unclear).  In March 2015, Obama said that under the interim deal from November 2013, Iran has "frozen its program, and rolled back some of its most dangerous highly enriched uranium."  That would suggest a longer break-out time than a year.  But Obama now says that Iran is only two or three months from making an atom bomb.  The administration invented their one year timeline in the fall of 2013 to battle against the Kirk-Menendez opposition group in Congress.  They were lying - the Iranians were within three months of breakout-and people like Israeli Prime Minister Benyamin Netanyahu said so.  Once the administration had the Joint Plan Of Action of November 2013 in hand, they began slowly shifting from "don't impose more sanctions because the Iranians are a year out" to "we have no choice but to bribe the Iranians because they're 3 months out."  This raises the question of how the Obama administration could have been so negligent as to let the Iranians get within three months of breakout.   Ynet in Israel reported that Obama now concedes that Iran could cut break-out time to near zero after the deal with the 5+1 world powers expires.  Obama told NPR News that after 13 years under the agreement, Tehran will be able to use advanced centrifuges that enrich uranium faster-but said that a future president's ability to take action against a nuclear Iran will be undiminished.  This proves that Israeli Prime Minister Netanyahu was right.  In his speech before Congress, Netanyahu raised the possibility that in addition to developing a nuclear weapon by violating the deal, there existed "an even greater danger that Iran could get to the bomb by keeping the deal."  He added that once limits on Iran's enrichment activity were lifted, Iran could have enough centrifuges to "make the fuel for an entire nuclear arsenal and this in a matter of weeks, once it makes that decision."  The parties also issued contradictory statements about what was agreed upon in the framework agreement.  Zarif even accused the White House of spinning what the agreement says.  Journalist Amir Taheri, who speaks Farsi, decided to compare the American statement to the Iranian one.  He discovered that Zarif was right.
 
Finally Spring has arrived!  Enjoy!

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