• Earnings roll in and stock prices continue higher
  • Euro yields move deeper to negative territory
  • US Government blames "Flash Crash" of 2010 on lone trader
  • Civil unrest rising as Baltimore erupts

April saw continued strength in international equity markets, and a strong change in the direction of commodity prices. U.S. Stocks moved slightly higher, but small-cap and mid-cap stocks underperformed the large-cap focused S&P 500 during the month. U.S. Bonds were down slightly, with inflation-protected bonds and international bonds outperforming the traditional U.S. benchmark. For the year so far, international bonds are the weakest asset, while developed and emerging international markets continue to be the strongest in class:


The past 12 months have shown positive returns in most areas of the markets. Commodities, International bonds, and Gold have been the worst performing categories. These three tend to move in the opposite direction of the US dollar. The dollar's strong rally over the last 9 months has had an adverse impact on their recent performance. However, April saw the dollar move down at a rate not seen in four years, losing 4%, and allowing most underperforming sectors to have a strong one month return (gold was an interesting exception). US stocks have still lead over the last year, but international equities have closed the gap on the US stock performance in recent months.                               
Earnings for the first quarter are well under way with more than 72% of companies having reported so far. As for results, it has been a positive quarter for earnings (the bottom line), but a little light from the revenue side (top line).  More than 71% of companies have reported earnings that were above Wall Street estimates, but only 46% of companies said that their revenues were higher than analysts expected. For the full calendar year (CY) 2015, all sectors of the US market have reduced full year growth expectations. But as many might expect, the energy sector has lead the reduction with the collapse in oil prices being the culprit for their weakness. The chart below shows the estimated annual growth rate of each US sector. The left column was the expected 2015 growth rate in December, and the right column is the estimated growth rate today (now 4 months into the year):
Market watchers will be keeping an eye on the Federal Reserve's interest rate decisions as the year progresses. Since earnings haven't been as strong as most expected, the market is fundamentally more expensive than it has been in recent years. As seen in the chart below, the Price to Earnings (P/E Ratio) ratios have risen in many parts of the world to 10 year highs (and far above their long term averages - marked by the green line). These higher P/E ratios can persist for a time, but most analysts expect rising interest rates to be the catalyst for P/E ratios to move back to their long-term averages. This will mean either lower stock prices or a rise in company earnings to more align the markets with long-term valuations:

   Eaton Vance
In Europe, endless negotiations continued over the fate of Greece, with nothing resolved. (Reports circulated that Germany was preparing to abandon the Euro nonetheless.) The most palpable evidence of risk aversion was reflected in the continuing decline in German and Swiss government bond yields, which are now NEGATIVE out to ten years (Swiss yields are in blue, the U.S. yield curve is in green):
         SIX Swiss Exchange             

In contrast, "peripheral" Eurozone members like Italy and Spain have seen yields rise since the ECB began purchasing bonds last month at the launch of their "QE" program. It appears that capital prefers (for now) the relative safety of "core" Eurozone bonds issued by Germany and Switzerland, even at the price of losing fractional amounts of capital. This situation is irrational, unhealthy, and unsustainable, in our view, but it is a reality in the Eurozone.

Interestingly, there are now reports that Swiss pension funds have withdrawn massive amounts of cash from the banks, and stored it in private vaults, to avoid the negative interest "penalty". This is a natural and rational thing to do, and it is known by the ancient term "hoarding". Contrary to the stated aim of the ECB, negative rates do not "promote" or "stimulate" economic activity. In fact, many consider negative rates to be an additional tax on savings.

This official policy follows a global hunt for taxes that is mushrooming into all corners of the global economy. In Australia, a conservative government has just proposed a compulsory tax on savings. France is leading the charge to electronic money, proposing this past month to restrict the use of cash to a maximum of 1,000 euros. In London next month, a global conference of major central banks (including the U.S., Eurozone, and Switzerland) will be held to formally move toward a global electronic currency system, so that everything can be tracked and taxed. No anonymous cash transactions would be allowed under this regime. Some have called this "economic totalitarianism", and it appears to be high on the agenda of global governments.

Back in the U.S., in mid-April the US Justice Department charged a lone 36 year old trader in London with causing the stock market to slide more than 600 points in May of 2010 (in what has become known as the "flash crash"). No bank or financial institution has been similarly charged, even though proprietary trading is a primary business of well-connected players like JP Morgan and Goldman Sachs.

These preposterous charges are like saying that a leaf blower in Hackensack caused Hurricane Sandy. Does the DOJ think Americans are too stupid to understand what scapegoating looks like? This latest charade comes less than four years after the "disappearance" of $1 billion from supposedly "segregated funds" belonging to customers of MF Global, headed by former NJ Governor Jon Corzine at the time of the firm's bankruptcy. (No criminal charges were ever brought against Corzine, who is reportedly now considering starting a hedge fund. The SEC will be sure to overlook his activities we're sure, just like Bernie Madoff.)

Meanwhile in Baltimore, citizen rage boiled over to widespread looting and violence after yet another incident of questionable police treatment of a detainee. While condemning violence, the palpable sense of injustice was best described by John Angelos, EVP for the Baltimore Orioles. Tweeting in one of the most unvarnished indictments of the U.S. government ever spoken, his comments are noteworthy:

"Brett, speaking only for myself, I agree with your point that the principle of peaceful, non-violent protest and the observance of the rule of law is of utmost importance in any society. MLK, Gandhi, Mandela, and all great opposition leaders throughout history have always preached this precept. Further, it is critical that in any democracy investigation must be completed and due process must be honored before any government or police members are judged responsible. 

That said, my greater source of personal concern, outrage and sympathy beyond this particular case is focused neither upon one night's property damage nor upon the acts, but is focused rather upon the past four-decade period during which an American political elite have shipped middle class and working class jobs away from Baltimore and cities and towns around the U.S. to third-world dictatorships like China and others, plunged tens of millions of good hard-working Americans into economic devastation, and then followed that action around the nation by diminishing every American's civil rights protections in order to control an unfairly impoverished population living under an ever-declining standard of living and suffering at the butt end of an ever-more militarized and aggressive surveillance state. 

The innocent working families of all backgrounds whose lives and dreams have been cut short by excessive violence, surveillance, and other abuses of the Bill of Rights by government pay the true price, an ultimate price, and one that far exceeds the importance of any kids' game played tonight, or ever, at Camden Yards. We need to keep in mind people are suffering and dying around the U.S., and while we are thankful no one was injured at Camden Yards, there is a far bigger picture for poor Americans in Baltimore and everywhere who don't have jobs and are losing economic civil and legal rights, and this makes inconvenience at a ball game irrelevant in light of the needless suffering government is inflicting upon ordinary Americans."

Both on Wall Street and Main Street, confidence in government is slipping. The different and deferential treatment afforded the political elite was demonstrated again last month with acute clarity when Hillary Clinton got a free pass for using a personal server for government email - when any other rank and file employee would have been charged and jailed. Her audacious refusal to turn over government documents is part and parcel of the wrist slap given to the well-connected, while insignificant individuals like a thirtysomething trader are targeted for massive crimes and fines. Coupled with an inability for the average citizen to redress their concerns, violence is increasingly seen as the only alternative. Civil unrest is on the rise, and it is a trend that is gathering force, with significant implications for the 2016 election. Time for a Third Party?

A popular market saying this time of year is to "sell in May and go away". As usual, we'll let the data do the talking, and stay positioned in the strongest performing groups of assets. In the meantime, enjoy one of the best months of the year, weather and other wise, especially as we get to celebrate the most important person in the world - Moms everywhere!


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