Are You Financially Literate?

classroomIn 2009, the Financial Industry Regulatory Authority, or FINRA, started a periodic survey of the financial capabilities of US adults, measuring the skills, judgment and resources needed to manage their financial well-being. Questions range from credit-card behavior (are you paying just the minimum due?) to home equity (do you owe more on your mortgage than your home is worth?).

The study was repeated in 2012 and 2015. Results are encouraging: resources and judgment show a steady improvement over six years. But when it comes to skills, results are disappointing. More and more adults fail to demonstrate a basic level of financial knowledge.

First, the good news. As labor conditions improve, fewer individuals spend more than they make: 20% in 2009, 19% in 2012, and 18% in 2015. The Affordable Care Act had a strong impact on reducing the number of people with overdue medical bills: 26% in 2012 versus 21% in 2015 (the question was not asked in 2009). Similarly, more people have rainy day funds (35% in 2009, 40% in 2012, and 46% in 2015) and fewer pay just the minimum on credit card balances (40% in 2009, 34% in 2012, 32% in 2015). And as home prices recovered, just 9% report having a home underwater in 2015 (i.e. with a mortgage balance higher than the value of the home) versus 14% in 2012.

The data paints a much improved picture. In fact, when asked directly if people are satisfied with their personal finances, the percentage saying “yes“ has gone up to 31% in 2015 from 24% in 2012 and 16% in 2009.

Unfortunately, the opposite is true of financial literacy. Study participants were asked five questions about basic aspects of economics and daily-life finances regarding inflation, interest rates, mortgage debt, and investment risk. In 2009 the percentage of respondents with 3 or less correct answers was 58%. This went up to 61% in 2012 and again to 63% in 2015.

This is a worrisome development because, as FINRA notes, “individuals need at least a fundamental level of financial knowledge” to make sound financial decisions.

Even more worrisome for us at Path Financial is that in 2015 Florida scored second-worst in the nation, at an average of 2.89 correct answers out of five (Texas was worst, at 2.81). You can take the five-question quiz here.

An even more worrisome fact is that, despite their poor performance in this quiz, Americans tend to see themselves as highly versed in financial matters. In 2015, 76% gave themselves a “high” assessment of their own financial knowledge. And while the proportion of “high” self-scoring went up in each of the study years, the public’s ability to answer basic questions correctly went down every time.

Furthermore, when asked to evaluate their math skills, less than two-thirds among the 79% of respondents who gave themselves a “high score” could estimate compound interest correctly in the context of debt.

The disconnect between people’s perceived and actual financial skills is alarming, because it is contributes to making bad decisions regarding savings, investments, and debt.

Understanding risk and avoiding fraud, specifically, are two key areas that are difficult to handle without basic financial knowledge. Even securing conflict-free advice can be challenging without some level of financial literacy: for example, many “seminars” aimed to the public, usually involving a free meal, are aimed more at selling products preying on financial illiteracy than on actually enlightening the public.

This does not mean that everyone who is not a financial expert is doomed to investment failure. But a basic set of skills is necessary to identify those “too good to be true” situations that we all encounter at some point.

A good place to start is an adult-education course offered by a community college, although you may not be able or willing to commit to classroom training. If you want to hire a financial advisor to help you instead, you can screen his or her record beforehand at the Investment Advisor Public Disclosure website. Watch for “disclosures,” which alert the public to client disputes or regulatory violations involving the advisor or firm you want to check out.

Another excellent resource is FINRA’s “protect your money” site. One of the links will take you to a “scam meter” that asks a few questions about investments you might be considering. See, for example, if you identify with these statements:

– I learned about an investment at a free investment seminar

– I cannot clearly articulate what the investment is

– I am not sure what license the person selling the investment has

– The investment is guaranteed

These four answers earn four red flags in the “scam meter”. This is a useful tool that will not analyze a specific investment but can alert you to potential dangers when considering one.

The bottom line is that it would be great for individuals to have better investment skills, but the numbers show little improvement on that front. Also, free tools that can help people avoid serious investment mistakes remain under-utilized. In the meantime, well-crafted investor protection regulations will have to fill the gaps.

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Merrill Lynch fined $430mm for “unprecedented violations”

According to OnWallStreet magazine, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) slapped Merrill Lynch with massive fines for misusing client’s cash while failing to safeguard their securities, and for failing to disclose material facts to clients about structured notes products.

The major claim by the SEC was that Merrill artificially reduced required cash deposits in customer accounts to free up billions of dollars per week to finance its own trading activities. The SEC said that if any trade had collapsed, Merrill’s customers would have been exposed to massive shortfalls.

In addition, Merrill disregarded rules for years by holding up to $58bn per day of customer securities in clearing bank accounts that were not shielded from claims by third parties and subject to general liens.

Merrill admitted to the wrongdoing. The article can be found here.

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Goodbye England

Photo courtesy of
A panic rush for the exit door of a burning theater is likely to end up with people trampled to death. That’s why the first advice in such situations is to “remain calm.”

However, the second advice is to “find an exit near you.” If the theater is indeed going up in flames, it is a very bad idea to remain inside for no other reason than to show that you are unswayed by the surrounding frenzy.

That, in a nutshell, is the dilemma that Brexit, or last week’s decision made by the UK to leave the European Union, poses to investors. Stripped to its essence, the question is whether Brexit is about to set world markets aflame or whether it amounts to just a lot of smoke.

Some would undoubtedly run for the exit before calmly reflecting on the question, just in case that by the time they reach an answer they find that it’s too late. Those are the ones that pundits often scorn – the ones easily scared, who liquidate positions at the first sign of trouble. But, given how much people suffered through the financial crisis of 2008, it may be unfair to paint them as undiscerning lemmings. The rational response, especially for those who depend on their portfolios for retirement, may well be to choose a certain outcome (known losses) over an uncertain one (far larger losses down the road). This is because a portfolio that is subject to periodic withdrawals to fund living expenses can’t recover well in a falling market.

So will Brexit trigger larger losses? The market seems to think the vote was bad enough to send the British pound tumbling to its lowest level in decades, and the foreign exchange market is not one dominated by small-time retirees but by very large professional traders. So is the bond market, which is in an increasing state of disarray as many developed-market government bonds are trading at even deeper negative interest rates (which means that not only you won’t receive any interest from buying a German bond, for example, but that you would pay the German government for that privilege).

More worrisome, from the point of view of market dynamics, is the fact that the implied volatility of US stocks had started to go up well before the vote, and then kept climbing, reflecting the fact that at least some professional players have a dim view of the market outlook. The idea taking hold is that every market weakness that has been glossed over until now (decreasing earnings, higher dependence on corporate buybacks, a slowing economy, an explosion of private-sector debt, etc.) may find in Brexit a catalyst and bring the market down to levels that reflect those concerns more fully.

One of the more worrisome ideas is that the British vote gave a shot in the arm to similar anti-European forces. The more vocal ones in France, Austria and the Netherlands have already called for a similar referendum.

To be sure, it is exceedingly unlikely that any other EU member would allow such a vote, as it is now quite clear that UK Prime Minister David Cameron made an enormous mistake in doing so, not only because it triggered huge market and political uncertainty, but also because it cost his job and possibly condemned him go down in history books as the man who divorced the UK from Europe.

The reasons for the vote result have been discussed at length everywhere and we will not rehash them here. With respect to the market impact, our initial assessment is that it is difficult to see how this could be seen as a positive, or even neutral, market event. As we see it, the only way for the market to recover easily is for the UK Parliament to ignore the vote – which they can do, since the referendum is not binding. Barring that, increased uncertainty over the future of Europe seems likely to keep in place the going-nowhere, up-and-down market state that has ruled for the last two years.

There may be some positive outcomes for continental Europe in the long term, however. Multinational companies that were domiciled in the UK to gain entry into the EU could change address to a safer location within Europe, for example. While regulations in the UK are friendlier than in Italy, France or Germany, they hardly compensate for the large loss in market access that corporations are now facing. This would provide a boost to European economic activity.

Furthermore, while popular discontent with elites, globalization, technological advances and immigration has finally exacted its first victim, one can be grateful that it was the UK (who is relatively small and always had one foot outside of Europe anyway) and not Germany or France, which would have been the end of the Eurozone and triggered all-out chaos. If European authorities take due notice of what has happened and the danger of ignoring the complaints of their people, Europe may well emerge stronger by this vote.

This is a big if. But it is perhaps possible that the UK may prove to be the sacrificial lamb that ended up making Europe stronger. Such outcome would not become clear for many months, or years. For now, however, chances are that volatility and uncertainty will set in. This is when sensible investment plans that take risk control seriously are most needed. While panicking is never recommended, a sober assessment of risks is necessary to make sure that investment portfolios can still grow while not exposed to unnecessary dangers.

What now?

Our clients want to make sure that their investments are managed efficiently and prudently, and that they partner with an advisor who helps them cut through the market noise. We look at their specific situations and use quantitative techniques and solid execution expertise to build and maintain investment portfolios that are suitable for their needs. We try to identify when to buy or sell different asset classes, with a focus on controlling downside, seeing through the haze of short-term volatility, and looking at what securities are priced favorably at various times. Please send us a request for a copy of a whitepaper describing our investment process, or contact us if you would like to know more about how Path Financial’s investment process can work for you. We’ll be happy to set up a confidential meeting to discuss your path to financial success.

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Market cares more about friendly Fed than Brexit vote

2016-06-20 08_42_27-Who cares about Brexit as long as our Friendly Fed is around_ - Inbox - mc@mccooThe US stock market has not made any new highs in more than a year. Because during the previous six years it went up 150% virtually without interruption, some fear that the market’s inability to break new records could mean that the rally is finally over.

To be sure, the rally has been met with this kind of distrust since the beginning. Its imminent end has been predicted many times, but it marched on for six years to the dismay of many observers who wanted to be first at calling the top.

There is no question that one day the market will stop going up. If history is any guide, it will come a time when it will slump and move sideways for a while, perhaps years. The trick, of course, is that nobody knows when that will happen, nor it seems likely that anyone will be able to identify the beginning of such phase even after it started.

One indicator that has raised red flags is the VIX, or “fear index.” This is a measure of the expected, or implied, volatility of the S&P 500 in the months to come, and it is always associated with a market decline because it reflects the price of insurance (through options) against a market fall. The stronger the demand for insurance, the higher the VIX.

The VIX has gone up sharply in the last few trading sessions, climbing to its highest level since February. While some of this is due to market weakness, the VIX surged far more than during similar recent market declines. To some, this is a sign that something might be brewing.

One does not have to look far for possible dangers. The most obvious could materialize next week, when the UK will have a referendum on whether to exit the European Union (“Brexit”). All observers agree that it could be quite disruptive to risk assets, at least temporarily, if voters choose to leave.

But this is not the only source of concern. Negative interest rates, not long ago considered impossible, are now entrenched in many developed markets. In addition, the pace of bankruptcies larger than $1bn is at its liveliest since 2009; closures at major retail chains now surpass any level since 2010; junk bond defaults are rising and expected to go up; the outcome of the US presidential election could prove quite unfriendly to markets, and so on.

While there may be many reasons for market participants to seek insurance against a market slump (and push up the VIX), another powerful indicator points in a different direction.
The correlation among assets and sectors has been falling, and this is usually a sign that investors are becoming less concerned about the chances of a market crash.

While the VIX, or implied volatility, is informative about investor mood, the correlation among assets – i.e. the extent to which they move together – is a key gauge of investor confidence: optimism leads to lower correlations, pessimism to higher correlations. This is because when market expectations take a hit, investors tend to sell their positions indiscriminately, pushing asset prices down in unison, thus increasing the correlation among them. Conversely, when investors are confident about market prospects, they engage in the minutiae of relative value, buying some assets and selling others. This drives correlations down.

Where are correlations now? While the higher VIX means that future volatility is expected to go higher, the fact is that actual volatility has decreased in the last couple of weeks, and correlations have fallen. This suggests that there is little evidence that pressure leading to widespread selling could be building behind the scenes. US equity sectors seem particularly well situated with respect to the last nine months, as both the correlation among equity sectors and the overall volatility of a hypothetical US-equity sector portfolio including small cap stocks are at their lowest point. A similar portfolio of global risk assets that includes emerging and non-US developed market stocks and commodities is in a somewhat less privileged state, but far from a “danger zone.”

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So while the cost of insuring a portfolio of US stocks has gone up, correlations do not point to a deterioration of market conditions. While this change in a flash, there is no evidence that market sentiment is currently souring.

A simple explanation to this might be that the VIX is going up simply because the market is seeking insurance in advance of the Brexit vote, but does not actually believe that, even if it goes through, it will lead to an extended market crisis. Investors might be buying insurance but don’t seem bothered enough to engage in substantial rebalancing of their portfolios.

This remarkable calmness in the face of highly unusual market conditions (like Brexit and negative rates) suggests that investors, rightly or wrongly, are quite reassured by the Fed’s retreat from earlier hawkishness. If this is what is happening, it is another reminder that the co-dependence between the Fed and the markets will not end anytime soon.

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The Fed is not the only one inflating asset prices

balloon3sThe US Federal Reserve, along with central banks around the world, has been accused of artificially pumping asset prices with low interest rates and large injections of money. But when it comes to US stocks, the private sector has played an important role keeping prices high: Simply stated, corporations have been major buyers of their own stock. But this activity could come to an end if interest rates rise, thus removing a key support for stock prices.

The economy has recovered from the devastating financial crisis of 2008/2009, but by many measures the improvement has been weak. Several indicators still do not show a full recovery, most notably GDP, which although it is about 15% higher today than at the end of the Great Recession, it grew much less than in the last five recessions since 1975. Other measures still below their pre-recession levels include capacity utilization, industrial production, housing starts, and the labor participation rate, to name a few.

But in the last six years the US stock market staged a stunning bull market with few parallels in history. Corporate profits grew strongly during that period, and are today significantly larger than prior to the financial crisis, but much of the profit growth took place in the first couple of years of the recovery. In the last few years, the stock market kept going up without a corresponding increase in earnings, and this is true even leaving out the beleaguered energy sector.

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The surge of US large caps has been somewhat of a puzzle and a source of much lamentation among investment strategists who believed all along in diversification as a basic matter of sound investing, only to see their returns dragged down by anything other than US stocks. For six years straight, Blue Chips outperformed virtually every other asset class, making diversification seem unnecessary and, in fact, a detriment to returns.

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A likely contributor to the spectacular performance of US Large Caps above other asset classes is the commitment of companies to repurchase their own equity.

Repurchased stock appears in the shareholders’ equity section of balance sheets with the confusing name of “Treasury Stock.” A small, random sample shows the enormous extent of this activity: Exxon is a prime exhibit, having repurchased a staggering $220bn of its own stock. Other companies include MacDonald’s ($40bn), Procter & Gamble ($83bn), Boeing ($33bn) and Citigroup ($8bn), all familiar names.

Virtually all of this activity took place as interest rates fell to historic lows – which is understandable, because it made it cheaper for company treasurers to issue low-rate debt than to pay dividends. As a result, corporate debt issuance exploded, as we reported elsewhere (This is where the next crisis will come from, 8/21/2015). A significant portion of the proceeds was earmarked to buy back stock and bury it back in the companies’ books.

This activity has not shown signs of abating and, according to Standard and Poors, the number of companies reducing their outstanding stock by 4% or more has accelerated in the last two quarters. In addition, the much-smaller number of companies increasing their outstanding stock by the same amount has gone down.

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This may help explain the resiliency of the US stock market despite falling earnings. It also explains the rise in the Price-to-Earnings ratio, a measure of how expensive stocks are relative to their profits. According to data compiled by prof. Robert Shiller of Yale University, US stocks appear to be increasingly more expensive relative to their earnings in recent quarters, a fact consistent with our preceding discussion.

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It is interesting to note that companies that have been the most aggressive buyers of their own stock have nevertheless underperformed their counterparts. The S&P buyback index (made up of companies with a high buyback ratio) lagged the broader market in recent times.

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Companies with poor results stand most to gain from supporting their stock price through buybacks, even if this activity cannot fully offset dismal earning numbers. Indeed, among the top 10 holdings of the buyback index we find LNC (with GAAP earnings falling by 19.9% in 2015), LLL (-51.5%), NOV (-134.9%), AIZ (-68.1%), DE (-33.2%), MON (-8.6%) and JEC (only -3.1%, but after -28.3% in 2014).

According to the latest minutes, Fed officials said they feel that the economy is ready for higher rates, maybe as early as June. Interest rates have been expected to go up anytime now for years, but they have largely ignored these predictions and are still hovering close to their long-term lows. But if the Fed raises rates and finally starts pushing them higher over the next few months, the buyback activity is bound to decline as debt issued for that purpose becomes more expensive.

The double blow of a less accommodating central bank and fewer corporate buybacks could be felt across the US stock market unless profits stage a recovery. Both are linked: higher rates hamper profits, while lower rates help them recover sooner. Analysts remain optimistic that profits will climb quickly in upcoming quarters regardless, judging by their forward earnings projections. Time will tell if they are right.

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Fast-growing wages may lead to higher rates

banker_558Last Friday, as on the first Friday of every month, we had the latest job report. The news is that employment is as strong and tight as it has been in years. So one would expect that wages should be going through the roof, right?

Wrong – observers have complained that wages are barely going up, and by that standard the economic recovery is weak. But this might not be true. Recent research suggests that wages are stronger than they look. If so, the Federal Reserve may have the justification they need to raise rates faster and more extensively than what the market currently assumes.

By many measures, the job market is on fire. Seven years of uninterrupted improvement after the remarkably disastrous 2008 have resulted in an almost complete recovery.

Consider the following: The non-farm payrolls number, a traditional measure of employment, has stabilized at well above 200,000 new jobs per month – higher than before the Great Recession. Initial unemployment insurance claims are fewer now than before the crisis. The unemployment rate is at 4.9%, a level consistent with full employment, and the U-6 unemployment rate, a broad measure that includes discouraged and part-time workers, is almost at pre-crisis levels. Fifteen million private sector jobs were created since the beginning of 2010, and currently they are at 122 million – the highest level ever. There are a million more job openings than at the previous 2007 peak, and workers are quitting their jobs at the fastest pace since then, which usually means that workers find it easy to get a new, better-paying job.

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In any other time, an economist looking at this data would conclude that workers can dictate their pay – an undesirable environment of accelerating wage inflation.

But this does not seem to be happening: An average of common measures of wage growth – average hourly earnings, the employment cost index, median weekly earnings, and so on – is currently running at around 2%, higher than the very weak 1.5% growth of much of the post-recession period, but well below the 3%-plus average of the last thirty years.

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A recent paper by the Federal Reserve Bank of San Francisco (FRBSF) (“What’s Up With Wage Growth?”, 3.7.2016) explains that the slow wage growth observed is mostly an illusion created by the way it is calculated. The reality, it argues, is that wages are growing just as economic theory would suggest in a strong labor market. If so, then the Fed is right to worry that wage inflation may be gathering steam.

The FRBSF explains that, by construction, wage computation over different periods does not adjust by who moves into the workforce and who moves out of it.

For example, during the Great Recession of 2008-2009 a disproportionate number of low-wage workers lost their jobs. The larger proportion of high-wage workers boosted average pay measures, and this was compounded by a sharp reduction in new hires who typically start with below-median pay. The wages of continuously employed workers rose in the early stages of labor-market improvement, keeping wage measures higher still because new job openings were few.

As the job market continued to improve, however, hiring took off and the composition of new entrants had the opposite effect on average wages. Many of the new entrants were previous part-time workers who found full-time employment; others were previously discouraged workers who were not considered until then to be part of the workforce. Others were workers who had been counted as part of the workforce but had been unemployed until recently.

These three groups entered full-time employment at overwhelmingly (80%) below-median wages, thus depressing traditional measures of wage growth. The FRBSF paper is quite precise about this, coming to these conclusions through the use of hard-core math (including references to “Daly-Hobijn percentile decompositions”, “changes in the aggregate median log-wage over a period”, etc. etc.)

The paper concludes that the wage growth of the continuously full-time employed is growing at 4% and accelerating, matching what one would expect from observed tight labor conditions. The aggregate measures suggesting that wage growth is weak are therefore misleading. The artificially low numbers are due to the unadjusted sheer number of new entrants. It is only a matter of time for those aggregate measures to show faster wage growth.

This is both good news and bad news. The good news is that the labor market is doing even better than we thought – not only growing strongly, but also delivering faster-growing pay to the continuously employed. It also raises the reasonable expectation that today’s new entrants will have higher pay as they become more seasoned.

The bad news is that this vindicates the Federal Reserve Board’s view that wage-inflation pressures are going up. While the Fed wants higher inflation, it also raises the chances that interest rate hikes could come earlier and more frequently than what the market is currently assuming, depending on what the data show in the weeks and months ahead.

Some mitigating factors come from abroad: the Chinese economy continues to appear relatively weak (exports just had the steepest drop since 2009), European prices continue to fall, and the Bank of Japan adoption of negative rates stands opposite to the stance of the US Federal Reserve.

The contrast between the US and the rest of the world seems pronounced, both on the direction of economic activity and of monetary policy. While this deserves analysis beyond the present commentary, it is fair to say that non-US considerations are likely to play a minor role in the Fed’s deliberations on when to hike rates next.

This means that the US stock market, currently buoyed by the view that rates are likely to be on hold for longer, may be unpleasantly surprised. This argues against aggressive equity positions for the time being.

What now?

Our clients want to make sure that their investments are managed efficiently and prudently, and that they partner with an advisor who helps them cut through the market noise. We look at their specific situations and use quantitative techniques and solid execution expertise to build and maintain investment portfolios that are suitable for their needs. We try to identify when to buy or sell different asset classes, with a focus on controlling downside, seeing through the haze of short-term volatility, and looking at what securities are priced favorably at various times. Please send us a request for a copy of a whitepaper describing our investment process, or contact us if you would like to know more about how Path Financial’s investment process can work for you. We’ll be happy to set up a confidential meeting to discuss your path to financial success

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The Oil Crisis Expands to Banks

Oil has plummeted, and it is unlikely to climb back anytime soon. There is simply too much supply going around, and demand has shrunk along with global economic activity and, to a lesser extent, due to a world-wide push for clean-energy sources.

Oil dropped so fast that the world has found it difficult to adjust to the lower prices, creating dislocations that threaten to burst beyond the energy world and spill over the broader economy. While oil prices could recover quickly in the event of a major negative geopolitical event, long-term trends are not favorable for a sustained recovery.

The fact that the equity market has fallen in tandem with oil is puzzling to some observers, who generally assume that lower energy costs are good for consumers. Many analysts, in fact, had predicted that lower gasoline prices would be great for the world, as they could be thought of a kind of “tax cut” that would be especially beneficial to the middle class.

To some extent, it is true that lower gas bills resulted in additional spending in other goods. According to the Census Bureau, total 2015 spending in gasoline stations was $100bn lower than in 2014. This was mostly spent, reasonably, in automobiles ($83bn increase). But apart from a shift in spending, the positive impact of the implosion in oil prices now appears insufficient to offset its negative consequences.

For starters, energy companies have been hit hard: Their stocks have plummeted, credit ratings have been slashed, and some are on the brink of bankruptcy. Other companies like Caterpillar, Cummins or Dover that do not belong in the “energy” category but that provide goods and services to the sector have suffered just as much.

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In addition, some countries have staked their entire fortunes on the price of fossil fuels, like Venezuela, Ecuador, Azerbaijan, and Nigeria. Still others, while less exposed, are nevertheless highly dependent on oil: Russia, for example, derives half of its budget revenues and three-quarters of its exports from it. Norway’s oil and gas sector accounts for a quarter of its GDP and two-thirds of exports. And while Saudi Arabia has large foreign exchange reserves and a low break-even production price, the IMF estimates that it needs a price of $86 to balance its budget in 2016 – a far cry from the current $30.

In addition to the pressure on energy and industrial companies and the fiscal concerns surrounding commodity-dependent countries, the issue that could prove most dangerous is the explosion of private debt that is related to oil.

As we mentioned many times (see This is where the next crisis will come from, 8/21/2015), severe crises are almost always preceded by a large build-up of private debt that, like a house of cards, comes tumbling down after a threshold is crossed. The usual outcome is that the unmanageable private debt stock is then taken over by the public sector. Oil-related debt woes may well prove to be the trigger that sets off this mechanism of contagion.

High levels of debt are especially dangerous for banks. While US banks have made large progress towards cleaning up their balance sheets, European banks continue to suffer under the weight of their liabilities. Although the extent of their loan exposures to the energy sector is unknown, the magnitude of the problem became apparent this week when Deutsche Bank’s CEO was forced to declare, in response to fears that the bank was not solvent and might default on some of its obligations, that the firm was “rock-solid” which of course was widely interpreted as a suggestion to the opposite. Indeed, European financial stocks have fallen at a much faster clip than its US counterparts.

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Banks are also being pummeled because of the rapid decline in interest rates. Right after the rate hike of last December, the Federal Reserve made clear that it was prepared to raise rates a few more times during 2016. This was controversial to many observers, including us (see The lack of inflation should keep the Fed on hold, 10/17/2015). While higher rates are necessary to dampen accelerating economic conditions that threaten to push inflation higher, neither condition is present: US economic activity is steady but muted, and inflation is well below the Fed’s target. The Fed went ahead anyway and hiked rates, raising widespread concerns that this could push inflation even lower or, even worse, reviving fears of deflation. Long-term rates plummeted as a result, which is exactly the opposite of what banks need in order to be profitable.

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So the question is whether the US stock market swoon is a temporary sell-off that presents investors with a buying opportunity, or rather the beginning of something more ominous.

This cannot be answered categorically, but the combination of factors that affect the market today suggest that the outlook may well worsen before it improves. Oil is unlikely to recover anytime soon, rates may well remain low as long as the global economy remains weak, and banks look exposed and vulnerable to a double front of deteriorating loan books and an unfavorable interest-rate picture.

In this environment, it is not surprising that the only assets that have performed well are cash and highest-quality fixed income assets like US Treasury bonds. A reasonable investor should find little reason to go searching for bargains at this time.

What now?

Our clients want to make sure that their investments are managed efficiently and prudently, and that they partner with an advisor who helps them cut through the market noise. We look at their specific situations and use quantitative techniques and solid execution expertise to build and maintain investment portfolios that are suitable for their needs. We try to identify when to buy or sell different asset classes, with a focus on controlling downside, seeing through the haze of short-term volatility, and looking at what securities are priced favorably at various times. Please send us a request for a copy of a whitepaper describing our investment process, or contact us if you would like to know more about how Path Financial’s investment process can work for you. We’ll be happy to set up a confidential meeting to discuss your path to financial success.

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Best Practices for Updating Revocable Trusts Explained in Free Seminar

Raul Elizalde Raul Elizalde, president and chief investment officer of the financial advisory firm Path Financial, is presenting a free seminar, open to the public, covering essential concepts of legal and financial protection of family assets through revocable living trusts, with an emphasis on best practices for strategically updating existing trusts. Guest speaker will be Sarasota attorney David G. Bowman Jr., Esq, of Bowman, George, Scheb, Kimbrough, Koach & Chapman, P.A. Elizalde will join Bowman to discuss specific strategies for assessing and mitigating financial and investment risks within portfolios, including trusts. The seminar is offered Thursday, January 21 at 2 p.m., at 1990 Main Street, Suite 750, downtown Sarasota; building parking is complimentary and refreshments will be provided. To register, call 941-366-5510.

The seminar will include discussions on tax law changes, Florida domicile, and particular circumstances such as second marriages, changed relationships with trustees or beneficiaries, and more. Other topics will include how trusts may help cut tax bills, and how to protect and grow investments, while minimizing exposure to risk.

David Bowman, Jr., is a partner with the Sarasota law firm of Bowman, George, Scheb, Kimbrough, Koach & Chapman, P.A. His practice is focused in the areas of estate planning and administration, as well as real estate and corporate law.

Elizalde is a contributing columnist for Oxford World Financial Digest, and has a national reputation for financial insights and analyses that are published online by some of the most respected financial media in the country, including Morningstar, Motley Fool, the Street and Yahoo! Finance. In 2014, he was a featured expert panelist during National Financial Advisor Week in New York City, and in 2012, was named among the country’s most respected and innovative money managers in Max Isaacman’s 2012 book, “Winning with ETF Strategies: Top Asset Managers Share Their Methods for Beating the Market,” published by Financial Times Press. Elizalde is a current member and past chair of the Asset Management Committee for the State College of Florida Foundation.

Path Financial is a Florida-registered investment firm rated “A+” by the Better Business Bureau, and is located at 1990 Main St., in Sarasota, Florida.

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Bad apples: Associate Dean of MIT and Harvard MBA to Prison for Hedge Fund Scam

Two former Boston-area hedge fund managers were sentenced on Dec. 14, 2015, for conspiring to mislead investors into investing more than $500 million in their fraudulent hedge fund business.

From 2005 through 2011, Gabriel and Marco Bitran solicited and maintained investors in their hedge fund and investment advisory businesses through false claims that, for eight or more years they had delivered average annual returns between 16 and 23%, with no down years. But it was a scam.

Click here to read the statement from the department of Justice.

The moral of this story is not new: if it is too good to be true, it most certainly is. Beware of anybody claiming that they can produce outrageous returns. Even if they come from MIT or Harvard.



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Junk-Bond Wake-Up Call Column Quotes Raul Elizalde of Path Financial

herald tribune logoIn his newspaper column in today’s Sarasota Herald Tribune, contributing columnist Ernest “Doc” Werlin quoted Path Financial President and Chief Investment Officer Raul Elizalde on the topic of the current challenges facing the junk-bond market. Drawing from Path Financial’s Dec. 15 article for investors, “Junk Bond Troubles Could Be the Tip of the Iceberg,” Werlin noted Elizalde’s comment that “it’s too soon to say the worst is over for investors….It took over a year for the earliest signs of serious problems in the mortgage bond market to metastasize into the collapse of Lehman Brothers and a full-blown financial crisis.” Werlin also quoted Carl Icahn’s Dec. 12 appearance on CNBC where Icahn “warned that a lack of liquidity could cause the high-yield market — otherwise known as the junk-bond market — to implode and contribute to a broad market crisis.”

Read Werlin’s full column here.

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