Some of the key criteria included companies that exhibit:
- Low debt
- A distinctive advantage that keeps potential competitors at bay
- Diversified customer and supplier bases
- Effective management
- Consistent, positive cash flow
It was a wonderful learning experience for these bright young scholars and an important reminder that informed investing requires a disciplined and deep examination of the options in front of us. This rigor requires a team of specialists whose sole responsibility is to assess and predict earnings potential based on current and past performance.
The following are notes from our first quarter 2014 economic update and market review:
Over the first quarter of this year, there have been big headlines both at home and abroad, and consequently markets were a bit volatile through the first three months. But by quarter end, most asset classes finished relatively flat if not slightly positive. The outlier was commodities, which broke out with an almost 7 percent gain for the quarter. Emerging markets, which were down 4 percent back in late February on worries over Turkey and other fragile emerging economies, rallied to finish the quarter just slightly negative at -0.43 percent (as of May 2, the emerging markets index is now in positive territory at 0.74 percent). Towards quarter end and through April we have seen a defensive rotation in domestic equities, as momentum stocks (Internet, biotech) have sold off and more conservative dividend paying stocks have taken the lead.
The biggest global news headline has of course been the Russia/Ukraine conflict, which continues to unfold. This geopolitical event has contributed to commodities’ rise, jitters in the emerging markets and has spurred several flight-to-quality rallies in U.S. Treasuries, pushing yields down. Adding to Treasury volatility has been the Fed’s confusing communication since the March FOMC meeting. At the March meeting, the Fed came off much more hawkish than markets expected. Ten-year Treasury yields spiked as the markets started pricing in a more rapid timetable for fed funds rate hikes than previously anticipated. Later in the month, Fed Chair Janet Yellen attempted to walk this back a bit, and made an appeal that the Fed will continue their accommodative stance as long as necessary, reiterating that all decisions are data dependent. Yields fell back after the release of the March FOMC minutes in April.
Elsewhere, growth in China continues to slow. Initiatives to tighten credit to clean up a massive bad loan problem, and an anti-corruption campaign targeting some senior officials and elites, will likely both crimp growth at least in the near-term. Deflation in Europe is also a growing concern.
The severe winter weather here in the U.S. certainly affected Q1 GDP, coming in at a paltry 0.1 percent, well below consensus. The only positive contributor was consumer spending. However, recent data shows economic activity is picking up: retail sales, industrial production, consumer sentiment, income and consumption all recently came in with strong numbers. Housing is still the big question – while building permits soared in February, new home sales came in far below expectations in March, bringing into question how much housing will add to economic growth in the near-term.
On a relative basis, we continue to favor stocks over bonds, as the eventual rise in interest rates will negatively affect bond values.
John A. Karas is the president & CEO of Riverview Asset Management & Trust Co. He can be reached at johnkaras@riverbank.com or 360.693.7442.
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