Issue 91 - September 25, 2013



The third quarter of 2013 has featured epic geopolitical events coupled with unease around the potential wind down of the Federal Reserve’s Quantitative Easing program. Throw in a melodrama surrounding the appointment of the next Chairperson of the Federal Reserve, the largest municipal bankruptcy filing since the 1970’s, and another DC budgetary slugfest. To say the markets have had their hands full is perhaps an understatement. Both stock and bond markets did find their equilibrium during the period as economic data (for what it is worth) remains in stubbornly low gear. The implications of these many disparate events will affect markets unevenly, but their impact may provide certain investment opportunities for the balance of the year and into 2014.

The real problem is this: After the Islamist wars, the United States has, as happened before, sought to minimize its presence in the world and while enjoying the benefits of being the world's leading economy, not pay any political or military price for it. It is a strategy that is impossible to maintain, as the United States learned after World War I, Vietnam and Desert Storm. It is a seductive vision but a fantasy. The world comes visiting.

Stratfor, September 3rd, 2013

For the quarter, geopolitical events and their associated network effects took oil prices up to levels last seen in 2008. On July 3rd, following massive public protests, the Egyptian Elite Military Guard placed President Mohamed Morsi under house arrest. A crackdown on the briefly empowered Muslim Brotherhood ensued, just as it did in 1954 at the hands of Abdel Nasser. General Abdel Sisi has now assumed control of the government and the country is looking to the summer of 2014 for its next election. In Syria, the tragedy only deepens. On August 21st, a sarin gas attack by the government against its own civilians took the world’s collective breath away. As the civil war morphs into a larger conflagration blurring the lines between itself and Iraq, the hopes for any democratic foothold in the region seem unlikely. The implications for additional unrest and potential global oil supply disruptions from the likes of Libya, Nigeria, and Mali are putting a floor under commodity prices despite the ongoing demand weakness from the Euro Zone.


The West is not on an inexorable slide towards irrelevance. Far from it. America’s economy is recovering and its gas boom has undermined energy-fueled autocracies. Dictatorships are getting harder to manage: from Beijing to Riyadh, people have been talking about freedom and the rule of law.

The Economist – September 21st, 2013

The US has a massive plumbing challenge and it has nothing to do with our usual infrastructure darlings, water and sewer projects. Driven by the ever growing supplies of natural resources, the US finds itself with an antiquated delivery system that does not begin to address either the capacity or directional needs of our 21st century producers. Consider the following.

As a result of oil embargo of 1973-4, the US banned the export of Oil and Gas with very modest exceptions. The current pipeline industry in the US was therefore constructed to deliver imported products from gulf ports to northern refiners. Refined products were not banned from export, and refineries were largely tooled to take on the imported heavy crude from exporters such as Venezuela. Natural gas was a modest by-product used on a local basis for power production and as feedstock for high intensity manufacturing, but was subject to large price swings due to seasonal weather influences and the lack of practical storage options.

Now consider the current world. The pipelines which brought heavy products from south to north are being re-tasked to deliver light materials from north to south. This has already driven down the inventory overhang and the stubborn price discount from Cushing, Oklahoma based West Texas Intermediate (WTI) to the Global price of Brent Crude has evaporated to near zero. Gulf based refiners are now considering options for retooling refineries to accept US based product. Natural gas remains below $4 here in the US despite its growing adoption as a stable energy fuel and the onshoring of numerous global manufacturing to take advantage of industrial energy prices which are half of those found in Europe and a third of those in Japan. Finally, while oil exports remain off limits for now, three new permits have been issued to begin the process of establishing Liquefied Natural Gas export facilities: a reality that would have been utterly unthinkable just a few years ago. The investment implications of this energy renaissance are wide spread; from infrastructure improvements to manufacturing, the US will require a great deal of capital investment over the coming decade to fully realize the economic potential of these developments.

No Taper for Now

“Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated.”…

“The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.”

FOMC Statement, September 18th, 2013

On September 18th, The Federal Reserve concluded their two day meeting with the news that they would continue on the current path of open market purchases. Market participants while initially disappointed with the news, responded favorably with both stock and bond markets rallying. Much was written on both sides of the taper argument, but in the end the committee felt that the improvement in the economy was not yet sufficient to dial down support. The implication of the Committee’s decision does beg the question of “if not now, then when” as to what conditions would be deemed suitable to begin to reduce accommodation. Perhaps the talk of another budget stalemate out of Washington was enough to keep their current policy in place. In any case, there remain two more meetings before year end, but it may well be the case that any material changes will fall to the next Fed Chairperson in 2014 to decide.

The mere mention of “Taper Talk” took the 10 year US Treasury from 1.60% to 2.90% over the course of late spring and summer. This rapid movement had a short term disruptive effect on fixed income markets which were hit with a wave of bond fund redemptions. On the municipal front, investors were once again provided the opportunity to purchase high quality, 5% long term bonds at par. While we do prefer to have our bond portfolio consistently rise in value, we employ Municipal bonds to create reliable income streams. The longer end of the municipal market has for some time provided investors with dramatic income advantages over the shorter end of the curve and at historic spreads to comparable US Treasuries. With the passage of time, portfolios which were initially established with high quality longer term investments have provided not only well above average income, but are also now beginning to mature as their individual positions “roll down the yield curve”. As cash becomes available it can be redeployed once again in higher yielding longer bonds, thus maintaining the income stream.

Adding to the disruption in the Municipal market was the July 18th bankruptcy filing by the city of Detroit. Citing debts of some $19 billion, this is the largest municipal filing since Cleveland in 1978. We noted in our previous newsletter that “the elephant in the living room” for Detroit, as is the case for many municipalities, is the size of the pension and healthcare obligations to retirees. Given the lack of standardized accounting in municipal finance, there is even debate as to how unfunded these plans actually are. In the case of Detroit, if you drop the discount rate by just 1%, the liabilities grow by some $3.5 billion. The main implication of this filing will be the precedent established as to whether the pension obligations are ordinary debts or do they enjoy special protections as specified by state constitutions.

World events are not likely to provide investors any sort of reprieve in the coming months, but as you can see, the markets are always evolving and the opportunity set in front of us at this time is quite robust. We will continue to focus on high quality, liquid investments as we navigate the balance of 2013.

Best Wishes,

Jen & Patsy


In this Edition

  • Implications
  • Opportunity
  • No Taper for Now

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

90 - 07.08.13
Half Time 2013/ Shape of Things to Come/ The Path Forward for Detroit/ Second Half Outlook

89 - 05.31.13
Strong Hands/ #1 The New Federal Funds/ #2 Income as a Commodity/ #3 New Buyers, Fewer Markets, New Terms/ #4 Changing Demands for Leverage/ Measuring Our Multi Speed World with a 12 inch Ruler

88 - 03.27.13
European Union?/ Global Arbitrage/ 1940s Fed

87 - 03.08.13
Pulling & Pushing/ Deus ex Machina/ Perfect as the Enemy

86 - 01.04.13
The Fiscal Alps/ The Paradox & the Rub/ Next up - Zero Rates Forever/ 2013: Promises & Plausibility/ On a Positive Note

85 - 12.13.12
Giving Sausage a Bad Name/ Drowning in a River 2 Feet Deep/ Scarcity in US Treasuries

84 - 09.19.12
Plus Ça Change/ Fantasia meets the Euro Zone/ Cue the Federal Reserve/ Shifting Transmission/ Bottom's Up

83 - 08.21.12
Summer Time Slows but the Lawyers are busy/ Whatever it Takes/ Heavy Weight Fight

82 - 06.29.12
Half Time 2012/ 19 Euro Summits - A Tiger by the Tail/ The Crystal Ball

81 - 06.11.12
Next Chapter/ Election Lessons/ A Gentleman's C/ Opportunities

80 - 05.10.12
Choices/ Texas Hedge/ Outcomes

79 - 04.09.12
13,000 x 1,400/ Lessons Learned/ It's Not Insider Trading When Congress Does It/ Crystal Ball

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
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Market Highlights

06/28/13 03/26/13
6/29/12 3/30/12 12/30/11 12/31/10 12/31/09 12/31/08 12/31/07
14,910 14,560 13,104 12,880 13,212 12,218 11,578 10,428
S&P 500 US 1,697 1,606 1,564 1,426 1,362 1,408 1,258 1,258 1,115
Nasdaq US
3,403 3,252 3,020 2,935 3,092 2,605 2,653 2,269
EAFE Int'l Equity 1,831 1,639 1,678 1,604 1,423 1,553 1,413 1,658 1,581
5 Yr Treasury 1.46 1.40 .82 .74 .75 1.07 .85 2.02 2.71
5 Yr AAA Muni 1.43 1.56 .88 .9 .86 1.03 .94 1.75
10 Yr Treasury
2.52 1.98 1.81 1.73 2.28 1.96 3.38 3.92
10 Yr AAA Muni
2.95 2.13 1.99 2.05 2.24 2.08 3.44 3.26
30 Yr Treasury 3.65 3.48 3.13 2.94 2.78 3.33 2.914 4.325
30 Yr AAA Muni 4.28 4.10 3.21 3.16 3.56 3.72 3.82 4.9
EUR Currency 1.35 1.31 1.29 1.32 1.26 1.33 1.29 1.34
JPY Currency 98.85 99.05 94.28 86.10 79.49 82.08 77.36 81.32
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