EQM Capital Blog

Market Recap for Week Ending 8-29-14

Posted by on Aug 30, 2014 in EQM Capital Blog


U.S. economic data drives modest stock market gains

The major indices recorded modestly positive returns as enthusiasm about positive economic data was partially offset by heightened concerns about the conflict between Russia and Ukraine.  The S&P 500 Index closed above the 2,000 mark for the first time. The S&P MidCap 400 Index stayed below its late-July peak, and the small-cap Russell 2000 Index remains well below the highs it established early in the year. However, small-caps moved back into positive territory for the year. Trading was generally light ahead of the holiday weekend.

Business investment gaining strength

There was a 22.6% surge in durable goods orders in July. While this increase was driven almost entirely by a boost in aircraft orders, an upward revision to May and June figures showed a broad increase in consumer and business demand for items such as electronics and machinery. Rising order backlogs suggest that momentum on capex will continue higher in the second half of the year.

2Q GDP revised upward

The good news on capital investment was reflected in an upward revision to economic growth in the second quarter. The Commerce Department reported that GDP grew at an annualized pace of 4.2% from May to June, better than its 4.0% preliminary estimate. Investors also received some good news on the housing front. Pending home sales surprised by rising in July to their highest level in nearly a year.

Less austerity in Europe?

Ironically, weakness in the European economy might have provided U.S. stocks their biggest boost last week. Investors were reacting to a speech by European Central Bank head Mario Draghi. The bank chairman called for fiscal policy to play a role alongside monetary policy in boosting eurozone economies, raising hopes among some investors that fewer austerity measures might help improve the economic picture in the eurozone.

Deteriorating Ukraine situation dampens gains

The week’s gains might have been greater had it not been for the overhang of the conflict in Ukraine. Stocks fell sharply at the start of trading last Thursday on news  that more Russian soldiers had crossed the border and opened a new front in the fighting. These actions raised fears that the West would respond with further economic sanctions, which could harm the European economies with strong economic ties to Russia even further.

U.S. Stocks1
Index Friday’s Close Week’s Change % Change Year-to-Date
DJIA 17098.38 97.16 3.15%
S&P 500 2003.36 14.95 8.39%
NASDAQ Composite 4580.27 41.72 9.67%
S&P MidCap 400 1438.44 11.52 7.14%
Russell 2000 1174.18 12.91 0.91%
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.1Source of data Reuters, obtained through Yahoo! Finance Closing data as of 4 p.m. ET.

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Read my latest articles from The Street and Seeking Alpha

Posted by on Jul 11, 2014 in EQM Capital Blog

For my latest articles on The Street and Seeking Alpha, click below:





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Is Your Portfolio Like a Storage Unit?

Posted by on Jun 18, 2014 in EQM Capital Blog

Are You a Hoarder?

I am not quite ready to be cast on the TV show “Hoarders“, but I do have a hard time letting go of my old possessions.  Each item seems to have a fond memory associated with it or must be retained for some unknown, but important future purpose.  Which is how I ended up with a storage unit, paying a monthly fee to keep all these past and future gems.  This segues into the topic of investment portfolios.

How many folks out there have a portfolio that resembles a storage unit?

Take a look at your investment portfolio.  Are there some stocks or mutual funds in there that you have fallen in love with and just cannot bring yourself to part with?  Or what about those names you continue to hold because some day they are going to work again and be worth something?  In behavioral finance terms, these actions are akin to “anchoring” on the past and being “overconfident” about the future.

It is easy for even professional money managers to fall into these patterns.  I was a portfolio manager for more than 10 years and would see it all the time among my co-workers.  There were some names managers could not part with, evidence to the contrary such as missed earnings, deteriorating fundamentals, and/or secular change.

Sometimes those managers were fixated on the stock’s past glory.  “I have made a lot of money in that stock over the years!”  Other times, they were hoping to be vindicated.  “That stock is going to get bought out by someone!”

Unfortunately, these behavioral biases result in sub-par performance and inefficient portfolios which you end up paying a monthly storage fee for month after month.

Just Go Passive?

So what’s the answer?  As an investor, do you just throw in the towel on skill and index everything?

That investment method works well in an up market, but guarantees you most of the downside in a down market unless you are magically diversified into exactly the right asset classes, countries, and sectors.

Passive management offers the illusion of objectivity, but  there are still asset allocation decision and timing calls to be made which are subject to the same behavioral biases.  So passive management is not a panacea either.

Stay Active?

Mind you, I am probably subject to my own biases as a so-called “active manager”, but I still think that regardless of what investment vehicles you use, investors need to stay diligent, flexible, open-minded, and objective.

One way to achieve this end is to have an objective investment process or model in place that helps you time what to buy and when to sell and how to structure your portfolio efficiently and tactically.  In addition, portfolios need to be rebalanced on a regular basis or they really will start to look like a storage unit due to neglect.

Take Inventory!

So take a look at your investment portfolio.  Does it resemble a storage unit? Portfolios are not supposed to be a collection of items, but a structured, tactical selection of investments designed to meet specific goals and objectives.

It may be time to take inventory of your portfolio, reduce the clutter, and get organized!


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Sell in May? No Way!

Posted by on Jun 2, 2014 in EQM Capital Blog

The market refrain “sell in May and go away” failed to apply again this year as the stock market continues to teeter at record highs. The notion that investors should take their profits ahead of warmer weather and return, presumably when markets are lower, in the fall has not worked the last couple of years.

The S&P 500 gained 2% in the month of May and now sits near an all-time high position, up 4.5% for the year. The bond market has also been rallying this month as well, with bond yields on the 10-Year Treasury Index hovering at 2.5%. Investors continue to be concerned about the pace of economic growth which had been expected to be more robust. Investors caution and growing expectations that Fed policy will continue to be accommodative has helped drive demand for Treasury bonds and kept interest rates low.

The other factor driving bond market gains is that many investors were caught on the wrong side of the bond trade, expecting rates to rise. They are now forced to buy into the market to cover these positions. The end result is that both the equity and bond markets climbed in May on very little economic news.

Investors also appear to be favoring safety and low valuation over risk and momentum these days. The S&P 400 MidCap Index advanced 1.7% in May, now up 2.9% for the year. Small Cap stocks by contrast continue to be down for the year, down 2.8%. So in terms of opportunities in the US market, large and mid cap names continue to be favored.


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EQM Capital LLC Mid Cap Quant Portfolio Kicks Off Year in Positive Territory

Posted by on Feb 3, 2014 in EQM Capital Blog

There is almost no debating that January was a rough month for the equity markets. Turmoil in emerging markets, mediocre corporate earnings results, weak economic data, and bad weather all created a tough start of the year for the stock market. The Dow was down 5.3% and the S&P 500 declined 3.6% – their worst monthly percentage declines since May of 2012.  The NASDAQ weathered the storm better, declining only 1.7%, but it still had its worst month since October 2012.

The Mid Cap indices also did not go unscathed, with the S&P 400 Index declining 2.2% and the Russell Mid Cap Index sliding almost 2%.  But despite a challenging market environment, Mid Cap Quant managed to eke out a positive return in January, delivering a return of 1%.  Top portfolio performers in January included SolarCity (SCTY), Under Armour (UA), and Alkermes (ALKS) which were all up more than 20% for the month.

SolarCity (SCTY) is one of the pioneers in residential solar leasing and is poised to benefit from accelerating industry growth as retail electricity customers switch to solar and an increasing number of states in the U.S. attempt to achieve grid parity by 2016.  Deutsche Bank, who just initiated coverage with a BUY rating, expects the company’s installed base of solar customers to double by the end of 2014.  Helping along this trend are declining costs, coupled with rising volumes which are driving increased scalability and operating leverage.

Shares of portfolio holding Under Armour (UA) rose to an all-time high after posting exceptionally strong earnings results.  Results were boosted by the recent cold weather, but the company has posted at least 20% revenue growth over the last 15 quarters.  Under Armour continues to be an innovator in athletic apparel, having just launched a new line of ColdGear apparel and its lightweight Speedform running shoes.  Having successfully built the brand in the U.S., the company expects to extend its reach globally over the coming quarters.

Drug manufacturer Alkermes (ALKS) was another top performing holding for the month, as it continues to benefit from integration of its Elan acquisition.  It recently received an additional infusion of cash from an investment by Invesco Perpetual, which may set the stage for more opportunistic acquisitions in the CNS (central nervous system) drug space.  The company already has many promising drugs in its late-stage CNS pipeline, including one to treat schizophrenia and another for major depressive disorder.

Admittedly, not all the stocks in the portfolio avoided the January downturn in the market.  Portfolio holdings Groupon (GRPN), Fifth and Pacific Companies (FNP), and Ubiquiti Networks (UBNT) all suffered declines in January.  Groupon and Fifth and Pacific, both retail related stocks, were hurt by the bad weather blanketing most of the country.  Ubiquiti’s decline was likely attributable to profit-taking and de-risking in the current market environment, after experiencing strong returns in 2013.


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EQM Capital LLC Year in Review

Posted by on Jan 6, 2014 in EQM Capital Blog

2013 marked a record year for the US equity markets, fueled by an improving economic outlook helped along by Fed stimulus.  Here are a few of the economic catalysts that propelled the US markets this year:

  • US GDP growth remains slow but resilient.
  • The employment picture is steadily improving.
  • Corporate profits are on the rise.
  • Inflation remains subdued.
  • Housing has staged an impressive recovery.

Because of this economic improvement, in the coming year we can expect a rise in interest rates.  This should be good for stocks, but it will be a negative headwind for bonds.  Which leads to the question:  if we know interest rates are likely to rise, why own bonds at all?  The answer is quite simple:  holding bonds acts as a hedge or downside insurance should the stock market experience a correction.

The other thing to realize is that bonds are less volatile than stocks.  In 1994 for example, when interest rates increased significantly over a short span of time, the Barclay’s Aggregate Bond Index declined only 2.9% for the year.  That magnitude is hardly disastrous.  And by utilizing active fixed income managers who are managing the duration of their bond portfolios, interest rate risk may be minimized further.  So in essence, holding bonds in the current environment is necessary to minimize overall portfolio risk.

Outside of the US, Japan’s economy is performing well and Europe is in the early stages of an economic recovery.  The outlook for Emerging Markets also appears to be improving. Whereas the US was the place to be in 2013, there may be better opportunities overseas in the coming year.

Investors should remain well diversified in order to maximize investment opportunities.  A diversified portfolio helps smooth returns while facilitating long term appreciation.

Most equity strategists believe 2014 will be a good year for the market, but not a great year.  According to S&P Capital IQ, if the market follows history, on average the market rises 10% after a great year of 20% gains or more.

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