Author Archives: Donald Capone

Have the Capital Markets Been Bumpy Lately or Does it Just Feel that Way? Our Research Says…

Although we have been calling for a choppy 2010 from late last year, given the market movements which at times felt rather dramatic even given our expectations, we set out to determine if markets really have been more or less volatile given the recent history.

Using the month of June 2010 as our sample month, we went back for the last 10 years and calculated the daily movements of the markets and compared this average to our June 2010 sample month.

So was June more or less volatile?

In our quick internal poll prior to the research data we estimated that markets felt slightly more volatile than average and blindly guessed about a 20% increase.

On average over the last 10 years for the month of June, here are some of the findings:

Highest Three other than 2010

  1. 2002 June Average Daily Volatility 1.35% (Coming out of last recession)
  2. 2009 June Average Daily Volatility 1.29%
  3. 2008 June Average Daily Volatility 1.24%

Lowest Three

  1. 2005 June Average Daily Volatility .51%
  2. 2004 June Average Daily Volatility .61%
  3. 2001 June Average Daily Volatility .86%

Finally the average for the latest 10 years was 1.03%

Calculating the average for our latest June 2010 we came up with 1.61%.

So What Does it all Mean?

The month of June 2010 was a full 60% more volatile than the average of the last 10 years!

If you had a few dizzied moments last month, your feelings were warranted.

Given our surprise findings we will continue to monitor this comparison analysis in the future. This again confirms our continued belief diversified portfolios with lower risk will be an excellent investor choice now and moving forward.

 Donald W Capone III CFA

Portfolio Manager

FOMC Statement

Release Date: November 4, 2009

For immediate release

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Waiting on Fed….

Federal Reserve statement that will be released shortly may prove to be a key determinant on the direction of the market moving forward.  The market will look for any positive tones from the statement, especially expectations on how the economy looks to be recovering and what they plan to do moving forward. Our expectations are for things to remain status quo(from a big picture on current interest rates), but the direction of the market will be set depending on those subtle details that were changed from the previous statement. 


Not All Bonds are Created Equal-The GNMA! (If it sounds too good to be true, it might be)

Based on a conversation I had over the weekend, I thought I would share some information gathered about the popular GNMA (Ginnie Mae) bonds. 

Most investors have heard of Mortgage Backed Securities (MBS) because they have been the cause of many problems over the last year.  GNMA Bonds are also MBS’s, but what makes them different from other MBS’s is that they are backed by the “Full Faith and Credit: of the United States Government.”

While this is a great benefit to have and makes these particular bonds much safer than other MBS’s, that does not mean they are not without their own risks.   The government backing solves one of the bigger risks tied to MBS’s recently, default risk, but investors are still exposed to two other important risks – interest rate risk and term risk.  

For Example: An investor may look to a 3 year GNMA and find a yield much higher than a similar 3 year Treasury, BUT there is not guarantee that a 3 year GNMA will actually mature/pay out in three years, in fact it is highly likely a 3 year GNMA bond will eventually pay out over a much longer time frame due to the way a GNMA is paid back, from Mortgage refinancing. With Mortgage rates at extremely low levels, if rates rise, refinancing may slow, turning a 3 year GNMA into a much longer maturity instrument AND exposing the investor to future principal and interest rate risk.

Investors should review these risks because of the higher yield these GNMA bonds pay.  Remember that there is no such thing as a free lunch, and that yield is equivalent to the risk one has to take for the investment.  The higher yield may pose an immediate satisfaction at a much greater risk in the future. 


Expectations vs. Reality

As the summer comes to a close, market participant’s will begin to come back from their vacations and once again focus on the direction of the market.  Once again this course will be laid with the expectations of both the economy and individual stocks, higher expectations generally mean a growing stock market.  However, these higher expectations come with a higher cost, the risk of not meeting those expectations.  Over the last few days we have seen both economic numbers and company earnings information, for the most part come in better than market participants were expecting.  Part of this comes from companies being overly cautious when making predictions of the future, as well as economists being overly cautious as they make their predictions for the future.  The problem with the continued beating of expectations is if the market fails to continue to beat expectations or the rate at which they are beating them slows that market has the potential to come falling back to reality.  This is similar to someone coming off a “sugar high,” once you come back to normal you generally need more sugar to amp your body up again.  Our hope is analysts will slowly raise their expectations so the market doesn’t get addicted to the “sugar” too quickly. DC

Expect More of the Same

One thing most people can agree on is that we can expect more of what we have seen over the last few days from the markets moving forward.  While it seems that each economist has their own view of what could happen for the remainder of the year, it is also evident that investor’s are trying to figure out that same notion.  While it is clear the market has had a huge rally from extremely oversold levels, we have now reached to point of “what next?”  Until investor’s can obtain more clarity on what that is, the markets will continue to have a see-saw action.  The market will continue to be very news driven, because right now that is all investor’s have to gauge the expectations of the economy moving forward.  While it makes for a bumpy ride in the short-term, when we are able to look back in our rear-view mirror over the coming years the ride will have looked a lot smoother. DC

Good News but Will it Last

After last quarters earnings releases, market participants were not sure what to expect moving forward.  Most analysts began cutting estimates for the following quarter, as we have seen with this quarters earnings releases, those estimates may have been cut too low.  As of 07/31/2009 we are almost 70% of the way through earnings season and so far 80% of the companies that have released earnings have either beat or met expectations.  In this case that may show Analyst’s lowered their expectations too much after the 1st Quarters releases.  The question moving forward is what happens next quarter, just as Analyst’s can get too cold (causing the market to move higher because so many companies beat expectations), they can also get too hot (causing the market to move lower because not enough companies beat expectations).  Moving forward we will continue to monitor analyst expectations to obtain a gauge of what will happen next quarter. DC

The Ups and Downs of the AFG Conference

I am back from the AFG Conference and after almost a week of contemplation I think I have my thoughts in order to give an accurate account of what I learned at the conference.  As I am sure most of you are hearing, there are going to be plenty of “Ups and Downs” in the market moving forward.  This will be especially true as we move through the slow pace of the “Summer Doldrums.”  On a similar theme to John’s post about his CFA Conference experience I will briefly discuss “The Good, The Bad, and The Ugly.” Continue reading

2009 AFG Conference

Starting on Wednesday I will be attending the Applied Finance Group Annual Conference, this has been an annual conference that John and I have attended for 6 years in a row (which is also the number of times the conference has been held).  We feel this is one of the better conferences we attend on an annual basis because it is one of the smaller scale conferences which allows us to get up close and personal with many of the guest speakers.  We always return from this conference with a lot of valuable information and new ideas.  This year some of the guest speakers include:

  • Victor Davis Hanson,Martin and Illie Anderson Senior Fellow, Stanford University
    A comparison of Modern Society to Lessons Learned from the Greek Empire
  • Bret Swanson,President, Entropy Economics, LLC
    Growth Opportunities in the Technology Sector
  • Victor Canto, Founder and Chairman, La Jolla Economics
    Victor Canto will lead a discussion on the state of the World Economy
  • John Tamny, Senior Economist, H.C.Wainwright Economics
    John Tamny will discuss the current U.S.Economy

    Hopefully this year will continue to provide us with some great perspectives of what has happened over the past year and what we can expect moving forward.  Once I return you can look forward to a posting of how the conference went and some of the things I heard.


    Sell in May….

    One of the most well known sayings on Wall-Street is “Sell in May and Go Away,” the main focus of this saying expresses the view that traders and portfolio managers tend to take the summer off from investing.  To do this managers close out some of their underlying positions or most likely just make less trades over the course of the summer.  While I have experienced this trend many times over the course of my career, I am not sure it will happen this summer.   I am sure that things will be slower during the summer around some of the major holidays, I don’t feel that people will be completely absent from the markets like previous years.  If nothing else it maybe the individual trader who carries the market through the summer “doldrums.”  I believe that there is too much riding on the next few months for people to just walk away and forget about the markets until September.  DC