Issue 79 - April 9, 2012


13,000 x 1,400

Equity markets posted one of their best first quarters in over a decade as the Dow surpassed 13,000 and the S&P eclipsed 1,400 as economic data was generally positive and slightly above expectations. Meanwhile in the continuing theme of an economy which at times seems either “half full or half empty”; corporate earnings slowed from their torrid pace of the previous quarters. Investor courage was buoyed in large measure by strong readings in employment data which included gains in the monthly payroll reports as well as a decline in the overall unemployment rate. However, the lower rate was in part the result of continuing declines in the overall workforce participation rate, with many participants choosing to no longer actively search for work. Moderate temperatures that were well above normal across large parts of the country (present company excluded) helped in part to offset rising commodity prices and provided a boost to disposable incomes of consumers.

This mixed bag of data does not resolve the question of whether or not the economy has reached “Escape Velocity” or sufficient organic growth to begin to remove the remarkable levels of support that the US economy received over the past few years. Low rates, substantial deficit spending, and an immense expansion of the Federal Reserve’s balance sheet have been the three legs of the effort that the government has employed to cushion and invigorate the economy. The collective stimulus both here and abroad has been stunning in its magnitude and we should not be surprised that the economy is acting better. But we should not confuse our current condition with an economy that is functioning at this level without such dramatic supports. This is why when we hear Mr. Bernanke speak, he remains cautious despite the cheerleading of CNBC and other outlets. He sees the data and knows the power of the mechanisms that are currently in place. His studies of the 1930s have been widely reported and he has commented on many occasions that one of the major policy mistakes of that period was the removal of support prematurely thus prolonging the economic depression.

When markets act so favorably, so quickly, participants tend to do two things: extrapolate performance and assume that the market is “telling us” something profound. First, market performance is lumpy and rarely moves in a straight line. A hallmark of these past 4 years has been the sudden and unpredictable nature of the market moves. Consider last summer. Equity markets fell dramatically and it felt at times that we would never see another up day. That decline has been followed by a strong recovery of as much as 25% since those early October lows. As to the second point; the market is not a Ouija Board. The market responds to many factors but its predictive capacity for the economy is certainly far from perfect. Stocks may be over sold, they may appear as better options than low yielding alternatives (this has been the Federal Reserve’s playbook) or they may offer unique investment stories. None of these scenarios say much about the economic outlook, but they do speak volumes about other forces at play.

The first quarter also saw a modest back up in US Treasury rates from just under 2% on the benchmark 10 year to 2.20%. Bond bears are now in full throat calling for much higher rates. Before patting themselves on the back too hard, these bears should consider the substantial income that their clients have not enjoyed these past 4 years and the opportunities that they missed to lock in 4-5% tax free income streams.

Lessons Learned

As expected, Greece was not able to make its March 20th interest payment and as a result, the wheels were put into motion for one of the largest defaults by a sovereign nation in the modern era. Terms of the restructuring were split into two tiers with private bondholders receiving less than 25 percent of their face value investments while the ECB and IMF were paid par for theirs. This compulsory subordination of private bondholders may prove to be a major impediment to the rebuilding of the capital markets in the Euro Zone. Money tends to go where it is treated best and very few private investors will venture back into this market any time soon. This is an extremely important point as Greece was not unique. They were simply first. Portugal, Spain, and potentially Italy will be challenged to roll over near term debts. They may also need to restructure longer term obligations. The ECB “foamed the runway” in the short term by putting over €1 Trillion in over 800 banking institutions with the Long Term Repo Operation. These funds can be used by the banks to buy the next wave or two of refundings but beyond the banks, who will be the investors in the Euro Zone sovereign market? Euro banks and certain sovereign entities are now wholly dependent on the ECB for funding. The Euro crisis is far from over. The stage is just being set for the next act.

It's Not Insider Trading When Congress Does It

Congress has a well deserved 11% approval rating. In what can only be described as having “more Gaul than Caesar ever conquered”, Congress had somehow managed to insulate itself from the requirements of all other citizens as it relates to insider trading. In a 60 Minute expose, it became clear to all that Congress was exempt from insider trading rules. We don’t even know what to say about this. That they would have to pass an ethics rule to join the rest of us is disturbing. That they thought that it was ok for them to abuse their position is worse.

There is simply no substitute for strong principles. Rules can never be a substitute for principles and we could never invent enough rules to anticipate every possible situation.
Huntington Steele Newsletter May, 2010

Crystal Ball

The first quarter of 2012 provided another reminder on the perils of market timing. Strong equity returns were posted despite mixed economic data and a sovereign default in the Euro Zone. Given that many of these same conditions look to persist into the months ahead, a continuation of current trends might be the most likely outcome. However, given the strong run in the market, neither should we be surprised to see a consolidation of these levels. This again is why we construct high quality, resilient portfolios that can benefit in rising markets but also have the durability to withstand the punishment of downdrafts.

The coming quarter will likely see a modest slowdown in the growth rate of corporate profits but corporate balance sheets remain one of the best dressed of all asset classes. As to interest rates, there are those who quip that low rates have not helped so much such that higher rates will not matter. This is silly. Low rates may not have been the cure all that some may have hoped for, but to say that they are not having an impact is to be deliberately intellectually dishonest. Prices matter. Look no further than the traffic on the 520 bridge and elsewhere in the Seattle metro area. We see price discovery on a daily basis!

It would be helpful if we had the tools to make better sense of our economic conditions. Many of the elements we regularly rely upon were established more than 50 years ago. Consider the term “non farm payroll”. The seasonal adjustments applied to these readings are regularly a multiple of the data themselves. There is too much coming and going and adjusting and yet we assign three decimal point accuracy to their outcomes. We now live in a world were many services know what color shoelaces we wear. It would be nice if we could apply a bit of modern technology to the pursuit of economic measurement.

Once again, geopolitical events may dominate the news and market cycles. As we alluded to earlier, the unfolding of the next chapter in the Euro Zone may not be too far off with elections in France and Greece on tap for April and commodity prices will continue to suffer with the standoff in the Straits of Hormuz.

For those who have become frustrated with the pace of this recovery we would simply remind them that this has not been a garden variety recession and recovery business cycle. This is a much longer term process of addressing decades of accumulated leverage. It requires patience and discipline. High quality portfolios have clearly asserted themselves in this environment and we will continue to focus our investments in that direction.

Best Wishes –

Jen & Patsy


In this Edition

  • 13,000 x 1,400
  • Lessons Learned
  • It's Not Insider Trading When Congress Does It
  • Crystal Ball

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

78 - 03.21.12
Goldman's Casablanca Moment/ Mr. Macy meet Mr. Gimbel/ The Fiduciary Standard - The Gold Standard

77 - 03.05.12
Punxsutawney Greece/ Foaming the Runway/ "The Euro Crisis is Behind Us/ Healing Hoopla/ What Price Income?

76 - 01.09.12
2012 - The Continuum/ Europe - Working in the Injury Time/ "Risk On - Risk Off"/ The Road Ahead

75 - 12.05.11
The Problem/ What Could Go Wrong/ Compound Interest/ Germany or Bust/ The Cavalry/ Stress Tests/ Next Chapters/ MF Global

74 - 09.29.11
Broken Transmission/ Chickens and Eggs/ Where to?

73 - 08.29.11
The Confluence/ The ECB/ US Economy - Distinction without a Difference/ A Different Kind of Exit/ Gold as a Thermos/ Where to Now?

72 - 06.28.11
Sovereign, Central, Commercial/ Why we call them "Banksters"/ "Extended Period" just got a lot longer/ Forward.

71 - 05.24.11
The Question is... How Many Years?/ "Unexpected" Housing Weakness/ P.I.G.S. Can't Fly/ Stages.

70 - 04.11.11
Inflation for thee, but not for me/ On the Other Hand .

69 - 04.05.11
Implications - A Bevy & A Wedge/ Implications - Quantitative Easing 2.0/ Implications - Rules Rules Rules/ Catching Up with the Can.

68 - 03.03.11
What Ever Happened to Housing?/ Where Do Loans Come From?/
Where Do Loans Go?/ The Last Straw/ The Path Forward/ Equity/ Clearing Mechanism/ Restart Your Securitization Engines.

67 - 01.10.11
Curiosity of the Federal Reserve/ Complacency & Fragility

66 - 11.12.10
Phew/ Taxes and Employment/ Quantitative Easing Returns/ Incentives & Unintended Consequences/ Dear Mr. President

65 - 09.28.10
Progress in the Absence of Milestones/ Changing Nature/ Correlations & Valuations/ Synthetic Securities

64 - 08.18.10
A Tricky Diagnosis/ Traditional Treatment/ Bad Medicine/ New Age Medicine/ Homeowners/ The Banks/ Pension Plans/ Bull Flattening

63 - 06.17.10
Hip & Groovy/ The Trouble with Zombies

62 - 05.24.10
Next Sequel/ 2012

61 - 05.04.10
Intensity/ Principles versus Rules

60 - 04.01.10
Grand Isle to Lincoln
/ Mile Post 312/ Mile Post 353/ Mile Post 399/ P.I.G.S. are a Problem

59 - 02.17.10
Surprise, Surprise, Surprise/ P.I.G.S. Matter/ Leverage vs. Debt/ Going Forward



More Past Issues
can be found in our

Newsletter Archive


Market Highlights



12/30/11 12/31/10 12/31/09 12/31/08 12/31/07 12/29/06 12/30/05 12/31/04
12,218 11,578 10,428
S&P 500 US


1,258 1,258 1,115


Nasdaq US
2,605 2,653 2,269
EAFE Int'l Equity
1,413 1,658 1,581


5 Yr Treasury 1.07 .85 2.02 2.71
5 Yr AAA Muni 1.03 .94 1.75


10 Yr Treasury
1.96 3.38 3.92
10 Yr AAA Muni
2.08 3.44 3.26
30 Yr Treasury 3.33 2.914 4.325
30 Yr AAA Muni 3.72 3.82 4.9
EUR Currency 1.33 1.29 1.34
JPY Currency 82.08 77.36 81.32


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