Outlook for 2nd Quarter (April 10, 2013)

Highlights:
 US Stocks were one of the best performing asset classes in the first quarter of 2013
 Outlook still positive for US equities and medium grade corporate bonds
 Steve Liesman, Senior Economic Correspondent with CNBC, presents insights analysis
of the US economy and Federal Reserve policy to students at Hodges University
1
st Quarter Summary
The financial markets had an exciting 1
st Quarter. The stock market had the largest gains in over
a decade, as Washington came to an agreement on taxes in early January, thus removing fears of
significantly higher tax rates. As investors became more confident, they began to favor stocks
which led to a sharp selloff in bonds in early March, bringing to question the thirty-one year rally
in bonds. Later in March investors returned to bonds when a little known country, Cyprus, ran
into a financial crisis sending a small dose of fear back into the capital markets.
1
st Quarter Financial Market Performance
SP500 +10% +10%
Barclays Bond Index (.6%)
Gold (GLD) (4.7%)
Emerging Market Index (EEM) ( 3.7%)
US Dollar Index (UUP) + 3.1%
One of the most important factors often overlooked by the financial media, has been the strength
in the US Dollar. The strength of the US Dollar is due to the decreasing US budget deficit,
moderate economic strength, and a marginally improving political situation, thereby increasing
the appeal of our currency worldwide. The impact has been to keep commodity prices under
control since the US Dollar and commodities tend to trade in opposite directions. Gold has been
particularly weak – dropping by about 5% this year. With commodity prices weak, the chances
of inflation accelerating is muted, thus bonds keep their appeal on a longer term basis.2 | P a g e
US DOLLAR RISES SHARPLY FROM FEBRUARY LOW
Strategy & Outlook for 2nd Quarter 2013 – and for the rest of the year…
Generally, our outlook is favorable; therefore we are maintaining an objective of being fully
invested with asset allocations over-weighted in stocks relative to clients’ objectives.
Equity Market
While a rally in stocks looks a bit “tired,” further gains in 2013 are likely. Although our outlook
for the balance of 2013 is positive, a degree of caution is advised. The stock market historically
is very seasonal with the majority of gains occurring between November to April. Also, the
average decline from the seasonal highs of spring to the lows of the summer is often over 5%.
Further, several psychological indicators are showing that investors are a bit too confident on a
short term basis. For example:
 Insider buying vs. selling ratio – bearish
 Put/call ratio – moderately bearish
 Advisory sentiment – moderately bearish
On a longer term basis, many investors have missed the rally over the past four years by
erroneously anticipating a second bear market which has yet to occur. This is one of the most
“unloved” stock market rallies. The financial media has been quick to cover bearish stories
creating a “crisis phobia” mentality. Many of the bearish investors are looking to increase their 3 | P a g e
exposure to stocks during corrections. Stocks are still a good value as the SP500 flirts with the
all-time high of 1576. Over the past decade corporate earnings have about doubled while stock
prices are flat, thus stocks still offer appreciation potential despite the strong gains over the past
four years.
Recently, the SP500 closed at an all-time high. The potential exists for the beginning of a new,
long term bull market, but, time will be needed to confirm.
SP500 HITS ALL-TIME HIGH
Fixed Income Market
As for the bond market, with inflation continuing at a moderate 2% pace, a slow increase in
interest rates is expected, as investors migrate from risk adverse bond holdings to the equity
markets offering better potential returns. Medium grade corporate bonds remain our favorite
fixed income strategy. Yields are attractive relative to high grade issues while the credit risks are
manageable.
Commodity Markets
Commodity prices should remain stable with the Federal Reserve’s policy of monetary
stimulation in a “maintenance” mode. The price of gold and other commodities have been very
weak this year. Further, due to increased domestic drilling and increasing auto efficiency, the 4 | P a g e
demand for oil is stable, a key component in inflation. Agriculture commodities have been weak
this year due to expectations of good harvests, although destructive weather issues seem to crop
up every summer.
GOLD IS LOSING ITS GLIMMER
Andrew Hill Investment Advisors, Inc. brings Steve Liesman to Hodges University
Steve Liesman, who is the Senior Economic Correspondent for CNBC and known for numerous
interviews with many of the leading bank and finance officials from around the world, made a
special presentation on March 28, 2013 at Hodges University- The Johnson School of Business.
Mr. Liesman explained the number of challenges with “optimal economic policy” in the US,
including global issues, monetary/fiscal policy, financial regulations, and addressing the skills
deficit in our work force. One of his most noteworthy comments was in regard to the current
economic environment and how different it is than prior economic cycles, thus his comment to
“throw out your textbooks.”
The 45 minute presentation concluded with a Q&A session. In addition, attendees, students, and
faculty members of the University had an opportunity to meet and speak with Mr. Liesman in
person. 5 | P a g e
We would like to thank all of those who attended, including several of our clients, and Hodges
University for organizing the details for this event. We are especially grateful to Steve Liesman
for his time and participation.
L-R: Terry McMahon-President of Hodges University, Andrew D.W. Hill, Steve Liesman, Dr. Marcia Turner, Dr. Aysegul Timur
and Geoff Moser (Group photo courtesy of Hodges University. Steve Liesman photo courtesy of Bill Dabroski, CPA)
Economic Overview
The economy has been growing around a 2% pace for the last year and a half, but the quarter to
quarter variations have led investors on an emotional roller coaster ride. The variation is
primarily due to the Federal Reserve stimulating the private sector economy with low interest
rates while the government sector is contracting its spending. For example, residential and
commercial construction spending is up 7% over the past year in comparison to the public sector
while construction spending (schools & other government buildings) is down 1.4%. These were
some of the key points made by Steve Liesman during his presentation at Hodges University.
The hottest area of economics is the interest rate sensitive sectors. The benefits of the Federal
Reserve’s aggressive quantitative easing (QE) strategies are becoming evident. The housing and
auto industries are benefitting from low interest rates. Bigger ticket items such as planes, are
also often purchased with loans, which makes financing large purchases more attractive. An
often voiced concern of QE is inflation, however, there is little evidence of inflation accelerating
above its 2% pace (CPI +1.98% February 2012 to February 2013.) Furthermore, the recent
strength in the US Dollar is keeping commodity prices under control.
AHIA Economic Assumptions – 2013
Private Sector +3%
Government -1%
Gross Domestic Product +2%
Portfolio Strategy Update
Our portfolio strategy philosophy aims to match the client’s cash needs from the portfolio with
the maturity of the investment. With that core strategy in mind, the fixed income strategy will 6 | P a g e
continue to favor “medium” grade corporate bonds with average portfolios targeted towards five
years or less. For clients with high tax rates, municipal bonds offer attractive yields, especially
after the municipal bond market sold off in early March. Generally, Florida issues are preferred
as yields are generally attractive and the economy is improving while we avoid Illinois and
California issues.
Equity holdings tend to focus on 20 to 30 mid and large cap stocks with mutual fund exposure
for the international and small cap holdings. Most client portfolios have significant exposure to
technology and innovative companies such as Intel, eBay, Qualcomm, Trimble, and Corning.
The over weighting in technology stocks has hurt market performance lately, but offers
significant return potential the rest of the year as technology companies strong earnings potential,
but, are selling for modest price to earnings. Historically stocks have shown significant seasonal
trends. Medical and food stocks often perform better relative to the overall market during the
April to October period, thus a recent portfolio addition – AmerisourceBergen, a major
pharmaceutical distributor, has historically been a strong summer performer.
One segment which has been avoided has been international. So far this year, many former hot
international markets such as Brazil, China and even Canada, are significantly underperforming
the SP500.
Tidbits on Notable Equity Holdings
Helmerich & Payne (HP $61) – HP is the industry leading land driller for oil and natural gas in
the US. HP is well positioned to prosper from the secular domestic energy trend. Despite a very
strong financial strength and the best technology in its industry, HP trades at a cheap price to
earnings ratio of 11, thus significant appreciation lies in HP shares.
E-Bay (EBAY $55) – E-Bay is really two companies in one; an online retailer and an electronic
commerce provider. E-Bay has dramatically improved their legacy online commerce site
(eBay.com) over the last few years. Many items can be purchased immediately, rather than a
relic auction process. The fastest growing segment of E-Bay is the electronic payment division
which includes PayPal. The stock of E-Bay has increased by 53% over the last year. While it
has been lackluster so far this year, it offers significant growth potential.
Qualcomm (QCOM $66) – Qualcomm is the industry leader for telecommunication
semiconductors used in popular products such as smart phones. Qualcomm’s business continues
to grow at a steady pace. Telecommunications are in a constant state of innovation and growth.
Recently, Qualcomm raised its quarterly dividend to 2.1%; however, despite strong financial
performance and a dividend increase, Qualcomm’s shares have only performed more or less in
line with the SP500 due to concerns over the Apple business.
NextEra Energy (NEE $79) – NextEra is recognized by Florida residences by their FPL
subsidiary. In addition to FPL, NextEra is one the largest producers of power sold to the 7 | P a g e
“wholesale” market which includes nuclear, wind, hydro, and solar plants. NextEra has several
large new projects coming online over the next two years, so the potential for steady earnings
growth is appealing to investors seeking a combination of appreciation and dividend income.
Also, NextEra has only nominal exposure to coal production which is being phased out.
Intel (INTC $22) – Intel is a classic “value” opportunity. The stock has few fans on Wall Street
as the concerns of the PC market disappearing poses a significant risk. However, the company
is making large investments to transition their business to new sectors to the semiconductor
market. Much of the PC market decline is already reflected in the price of the stock which
trades at a deep discount to the overall market and pays a dividend yield over 4%.
Corning (GLW $13) – Like Intel, Corning is a “value” stock and also has a nice dividend yield.
Corning has several subsidiaries covering healthcare, air pollution control devises, fiber optic
cables, but the “glass” business is the focal point of many investors. Corning’s glass is used to
make big screen TV’s.
COPA Airlines (CPA $115) – Copa’s stock was one of the best stocks in our client portfolio
this year- up about 13%. CPA has benefitted from strong investor interest in the airline business
that has lifted most airline stocks. Recent financial performance has been subpar with the growth
in expenses rising faster than sales. Over the next few quarters, financial results will be
monitored for a reversal in this trend.
Verizon Communications (VZ $50) – Verizon is becoming a favorite with conservatively
minded investors, as many customers will pay their cellular phone bill before they pay their
mortgage payment (should money get tight). Rumors are circling that Verizon maybe buying out
Vodafone’s 45% stake of Verizon Wireless (55% owned by Verizon Communications.)
Chico’s (CHS $18) – Chico’s is a new holding in many client accounts. The women’s clothing
stores (Chico’s, Soma, and White House/Black Market) have had a tough year so far due to fears
of the negative impact of higher taxes on consumer spending. Despite good financial
performance, Chico’s stock has been underperforming the SP500 this year, but may be an
attractive holding for the summer.
*NEW* EcoLab (ECL $82) – EcoLab is a worldwide service provider of cleaning, sanitizing,
energy, and water products. A position has been recently established in this highly regarded
company. While the EcoLab vans are often seen making deliveries to hotels, the new growth
markets for EcoLab are in the energy and water industries.8 | P a g e
*NEW* Toyota (TM $113) – Recent Central Bank policies in Japan may break the country out
of its multi-decade economic slump, and Toyota is well positioned to benefit. On a fundamental
basis, Toyota is viewed as providing the most fuel efficient vehicles as profiled by the Prius line
of hybrids.
*NEW* AmerisourceBergen (ABC $54) – A recent addition to some client accounts,
AmerisourceBergen is a distributor of pharmaceuticals and healthcare services to the pharmacy,
physician, and hospital markets. Recently, AmerisourceBergen replaced a competitor for the
huge Walgreen’s distribution contract. AmerisourceBergen’s stock historically has been a strong
summer performer, counter to the seasonal trends of most stocks.
*Sold Most of position* Apple (AAPL $430) – Apple has gone from the top of the class to the
bottom over the past six months. Six months ago, investors were expecting new products such as
a TV, some action on the $130 Billion of cash reserves, and growing acceptance of the Apple
product, but investors got nothing. Management has been non-active on addressing the cash
reserves (for example- a dividend increase), and competition is beginning to take market share in
the smart phone industry. Most of the Apple positions were sold in client accounts a few months
ago.
Andy Hill induced into Sigma Beta Delta International Honor Society
On April 4th, Andy was inducted into the Sigma Beta Delta International Honor Society Chapter
of Hodges University as an Honorary Member. Andy has served on the advisory board of the
Kenneth Johnson School of Business for over ten years.
Disclosures
Information sources used to prepare this report include Argus Research, Value Line Investment
Survey, Zacks, Barron’s, Kiplinger’s, Fidelity, and Decision Economics.
Founded in 2010, Andrew Hill Investment Advisors, Inc. is registered as an investment advisor
with the state of Florida and only transacts business in states where it is properly registered, or
is excluded or exempted from registration requirements. Andrew Hill and clients of AHIA hold
positions in the investments mentioned in this report. Please contact Andrew Hill Investment
Advisors, Inc. if there are any changes in your financial situation or investment objectives, or if
you wish to impose, add or modify any reasonable restrictions to the management of your
account. Our current disclosure statement is set forth in Part II of Form ADV and is available
for your review upon request. Tax and estate planning advice is general in nature and the firm is not engaged in the practice of law

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s