April 20, 2015
The Markets
It’s a topsy-turvy world.
In the United States, during the last quarter of 2014,
about seven million (13 percent) of all mortgaged residential properties were
underwater, meaning the mortgage loan amount was at least 25 percent higher
than the estimated market value of the property, according to RealtyTrac.com. That’s a significantly
lower number than the 12.8 million that were underwater early in 2012.
Regardless, it’s an unhappy situation for the homeowners who may wish they
lived in Spain.
Why Spain? Well, as has been mentioned before,
negative interest rates have been sweeping across Europe and affected mortgage
rates. The Wall Street Journal
explained:
“In countries such as Spain, Portugal, and Italy, the
base interest rate used for many loans, especially mortgages, is the euro interbank
offered rate, or Euribor… Banks set interest rates on many loans as a small
percentage above or below a benchmark such as Euribor. As rates have declined,
sometimes to below zero, some banks have faced the paradox of paying interest
to those who have borrowed money from them.”
In fact, at least one bank – the seventh largest in
Spain – has been paying some of its mortgage holders’ interest! It just deducts
the interest amount from the principal amount the borrower owes. It may be safe
to say European banks’ expenses have increased since, in addition to paying
interest on some loans they’ve issued, banks also have been “compelled to
rebuild computer programs, update legal documents, and redo spreadsheets to
account for negative rates.”
In addition
to a confounding interest rate environment, Europe is also contending with
issues related to Greek debt, which triggered a sell-off in stock markets late
last week. U.S. markets fared no better. Major markets lost value last week on
concerns about Greece leaving the Euro, the potential for weaker-than-expected
earnings results, and new trading regulations in China.
Data as of
4/17/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard & Poor's 500 (Domestic Stocks)
|
-1.0%
|
1.1%
|
11.6%
|
14.4%
|
11.7%
|
6.2%
|
Dow Jones Global ex-U.S.
|
0.3
|
7.0
|
0.6
|
6.4
|
3.3
|
3.8
|
10-year Treasury Note (Yield Only)
|
1.9
|
NA
|
2.7
|
2.0
|
3.8
|
4.3
|
Gold (per ounce)
|
-0.3
|
0.3
|
-7.4
|
-9.7
|
1.2
|
10.9
|
Bloomberg Commodity
Index
|
2.4
|
-2.4
|
-26.0
|
-9.7
|
-5.2
|
-3.9
|
DJ Equity
All REIT Total Return Index
|
-0.8
|
1.4
|
17.8
|
13.0
|
14.4
|
9.1
|
S&P 500, Dow Jones Global
ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends
(gold does not pay a dividend) and the three-, five-, and 10-year returns are
annualized; the DJ Equity All REIT Total Return Index does include reinvested
dividends and the three-, five-, and 10-year returns are annualized; and the
10-year Treasury Note is simply the yield at the close of the day on each of
the historical time periods.
Sources: Yahoo! Finance,
Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no
guarantee of future results. Indices are unmanaged and cannot be invested into
directly. N/A means not applicable.
is creative
destruction accelerating? In the
middle of the last century, economist Joseph Schumpeter presented the idea of
creative destruction which causes current ideas, technologies, equipment,
skills, and more to become obsolete. He wrote creative destruction “incessantly
revolutionizes the economic structure from within, incessantly destroying the
old one, incessantly creating a new one. This process of Creative Destruction
is the essential fact about capitalism.”
Globalization appears to have hastened the pace of
creative destruction in ways Schumpeter may not have imagined. The current
issue of PWC’s Strategy + Business
pointed out:
“Business operates today in a world of accelerating
change. In the United States, it took 76 years for half the population to own a
telephone. The smartphone achieved the same penetration in less than a decade.
It took France 100 years to double the share of its over-60 population within
the labor force, from 7 to 14 percent. China, India, and Brazil will make the
same leap in less than 30 years. Due to the whirlwind pace of global forces, a
phenomenal amount of value can be created or destroyed more quickly today than
at any other point in history.”
Strategy +
Business suggested most companies
will face disruptions during 2015 as the ways in which they reach customers and
the products and services they provide to customers evolve. The magazine
pointed out seven industries that are on the cusp of significant change
including automobile manufacturing (where brand is less important than it once
was), shipping (which will be competing with 3D printing), healthcare (where
consumers are becoming more influential), and telecommunications (where
companies are being challenged by nimble and responsive rivals).
Change may open new investment opportunities and,
sometimes, may make companies which have been good investments less attractive.
Weekly Focus – Think About It
“What we need to do is always lean into
the future; when the world changes around you and when it changes against you –
what used to be a tail wind is now a head wind – you have to lean into that and
figure out what to do because complaining isn't a strategy.”
--Jeff Bezos,
Founder and CEO of Amazon
Best regards,
Leif M. Hagen
Leif
M. Hagen, CLU, ChFC
LP Financial Advisor
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* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general. You cannot invest directly in
this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees, expenses, or sales charges. Index performance is not indicative of the
performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S. Government is seen as a risk-free borrower, investors use the 10-year
Treasury Note as a benchmark for the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association. The
gold price is set twice daily by the London Gold Fixing Company at 10:30 and
15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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Sources:
http://www.wsj.com/articles/as-interest-benchmarks-go-negative-banks-may-have-to-pay-borrowers-1428939338 (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/04-20-15_WSJ-Tumbling_Interest_Rates_in_Europe-Footnote_2.pdf)
http://online.barrons.com/articles/soft-earnings-and-jitters-produce-a-selloff-1429327007?mod=BOL_hp_we_columns (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/04-20-15_Barrons-Soft_Earnings_and_Jitters_Produce_a_Selloff-Footnote_3.pdf)
