What a Long Strange Trip It ...Continues To Be

I want to start by thanking all those clients and friends who actually read this. Thank you!

I actually personally write this for you each week. I have found that writing these emails does (at least) 2 things that are tremendously beneficial. By summarizing my observations, plus noted and relevant facts and happenings of the week and then assessing the directions, risks and opportunities within the markets, in a broad and relevant sense, the following two things are achieved:

• I am personally able to validate and reassess my opinions by looking at key relevant data at one time.

• I am personally able to share with you my thoughts. Thus, you can have confidence that regardless of whether CapitalRock Investments is buying or selling, or holding and “doing nothing”, we are actually highly engaged and busy working hard to fulfill our fiduciary obligation to you in doing our best job possible in managing your money, and not being steered to “sell something to you” based on commissions, etc.

My goal is to keep these weekly assessments brief, informative, and to the point, so (1) you can read through it quickly and easily, while having access to easy to read sources of data, and (2) I can draft these without spending too many hours writing and drafting, J, and more time providing direct service and advice and portfolio management, plus financial planning, and related financial consulting.

You heard it from me first! -- In an interview with John Bogle, founder of Vanguard – “Market turbulence Just a Lot of ‘Sound and Fury’” – He talks about the impact of the tremendous flow of funds into and out of Exchange Traded Funds and the volatility it creates. (See my Comments of 10/17 for greater discussion.) http://www.morningstar.com/Cover/videoCenter.aspx?id=670432

Market snapshot for the week-

• The Dow and S&P both moved higher with great strength. Today, the Dow hit Intraday record highs! http://online.wsj.com/articles/u-s-stock-futures-surge-after-boj-eases-policy-1414757940?mod=WSJ_hp_LEFTTopStories

• Chart of S&P 500 over past 10 days, Source: MarketWatch.com

• Today Gold fell to a 4 year low. http://online.wsj.com/articles/gold-plunges-to-4-year-low-1414761132

• West Texas Crude Oil has bounced around this week between approx. $79.5 and $83 per barrel. Today it has retested the lows and is now at $80.31.

• Interest Rates this week continued to recover from lows of earlier this month and stabilize here in US, with the 10 year Treasury at 2.33% and the 30 year at 3.07%.

Economic news from the week –

• US Consumer Sentiment in October hit the highest level since July 2007. http://finance.yahoo.com/news/us-consumer-sentiment-index-reaches-143711612.html?l=1

• The US Gov’t Bureau of Economic Analysis released several figures this week. http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp3q14_adv.pdf

• US Third Quarter GDP rose by 3.5% annually (based on initial figures released by the gov’t), definitely higher than the leading economists had expected/projected.

• Second Quarter GDP growth was revised upward to 4.6% from 4% initial reading.

• The price index for gross domestic purchases increased 1.3%, compared to 2% in the second q. Excluding food and energy, the index increased by 1.5% in the 3rd q vs 1.7% in the 2nd.

• Real disposable income (after adjusting for inflation) increased by 0.1% BUT real personal consumption expenditures decreased by 0.2% in September. http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

• The Fed held their Fed Funds rate in the range of 0-0.25% target and confirmed they were terminating bond buying under QE3, noting that the labor market outlook was “substantially” improved and there was underlying strength in the US economy. http://www.pionline.com/article/20141029/ONLINE/141029821/fed-stops-bond-buying-stays-with-federal-funds-rate-near-zero

• Russia, in a surprise and brash move to support the Ruble, raised its key lending rate to 9.5% from 8%, making borrowing by Russian companies and individuals that much more expensive. http://www.bloomberg.com/news/2014-10-31/russia-raises-rate-more-than-expected-to-9-5-on-ruble.html

• Japan, in an effort to prod their economic growth, increased their Quantitative Easing and market stimulus (as the US terminated ours). http://www.bloomberg.com/news/2014-10-31/boj-unexpectedly-boosts-easing-amid-weak-price-gains.html (This has provided a big boost to the stock markets and bond markets today, as it benefits global commerce.)

• The European Central Bank has continued with its Asset Back Securities purchases this week and (in preparation for the growth of additional purchases) has hired four European asset managers to execute future transactions. Purchases are expected to total in excess of 1 trillion Euros. http://www.bloomberg.com/news/2014-10-30/ecb-hires-managers-for-abs-purchases-due-to-start-next-month.html

• Average retail price of a gallon of gas in the US has declined by 10% over the month of October, sitting just above 3%.

Other relevant and interesting facts:

• Third quarter earnings, on average, are reasonably fine, with earnings up 6.5% and revenues up 5.1%. The majority of those reporting have had “positive” surprises. http://www.zacks.com/commentary/35071/q3-earnings-the-halftime-report

• As Ebola survivors remain immune to the disease for 3 months, many are “superpowers” providing assistance and support to those actively suffering. http://www.businessweek.com/articles/2014-10-31/in-liberia-ebola-survivors-find-they-have-superpowers#r=lr-sr

• Though the Fed has “terminated” QE3, they will continue to buy Treasuries and Mortgage Backed Agency Bonds to replace holdings as they mature, thus maintaining the $4.5 trillion (!) portfolio. http://www.federalreserve.gov/newsevents/press/monetary/20141029a.htm

Okay. So the market has fully recovered from its mid-October weakness, gas prices continue to move lower, inflation is low, earnings numbers seem good, personal consumption remains flat/weak, etc. and now what?

Our thoughts remain consistent that US equity markets have additional upside opportunity. Selection of industry and entity is important, as there are always winners and losers, but overall we anticipate and are managing portfolios for addition movement higher. We expect additional volatility, especially in the small and mid cap spaces, as valuations vary significantly as perceptions of growth shift, and perceptions change as news is reported.

We think the Fed will tread lightly regarding the formal raising of rates, as both Germany’s and Japan’s 10 year bond rates are more than 100 bps lower than ours. Our higher rates will continue to attract foreign capital, supporting the US Dollar and both the stock and bond markets. Thus, we expect rates on bonds to maintain a trading range for the near future, without any significant abrupt movements upward. In the longer term, rates will move higher, and thus durations need to be kept reasonably short.

We expect inflation to remain under control. This reflects the impact of lower energy costs, and also the increasingly competitive retail environment between bricks and mortar retailers and on-line merchants. We expect food costs to moderate, reflecting increases in the baby hog populations and excellent grains/corn harvests. The wildcard is milk prices, which continue to rise from global demand growth tremendously outstripping supply. (Unlike adding water and fertilizer to increase corn yields, it is not so simple with cows. : - ) )

We do expect that oil prices will stabilize at levels close to where we are at, and this will be beneficial to much of the economy and many companies. At the same time, much of the expected growth of the oil and gas industry, which has been driving pockets of employment and significant capital investments, will likely slow and profitability and cash flows will very likely decline with correlations to the oil pricing.

Of course, please reach out with any questions, at any time. If we can assist a family member, friend, or colleague with their investments or financial plan, or provide a second opinion, please share our contact information.

Have a great weekend!

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