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Intelligent Investor January 23, 2017

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The Intelligent Investor
Newsletter


A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser)                                                      January 23, 2017

myrnaIA                                                                                                                                                                  Myrna Rivera, CIMA®

From the Executive Desk                                                                         Founder & Chief Executive Officer

For those of us waking up every morning to the financial news, 2017 is starting out as a promising year mixed with illusion and confusion. As highlighted in Ed Yardeni’s newsletter, the S&P 500 exemplifies the prevailing bullish sentiment after the elections, rising to a new record high of 2276.98 on January 6 (See graph I below). However, skeptics point-out that the market is naively betting that the incoming administration’s economic policies will be implemented swiftly and that they will have the desired effect. Implementing new policies will often require legislation, so we could start comparing the President Elect’s views with Capitol Hill’s. Last summer House Speaker Paul Ryan unveiled the party’s tax reform plan in a report called “A Better Way”. It called for lowering the top statutory corporate tax rate from 35% to 20%. It would terminate the tax deductibility of net interest expenses, but would allow for immediate expensing of capital spending. Ryan explained their rationale; “Allowing investments to be immediately written off provides a greater incentive to invest than is provided through interest deductions under current law”. While on the campaign trail last year, Trump proposed a lower tax rate, boasting that “no American company will pay more than 15% off their business income in taxes”. Under Trump’s plan, businesses could either expense equipment or take a net interest deduction. Which would work better? Let’s look at the data. According to the Bureau of Economic Analysis (BEA) the S&P 500 corporations had interest expense of $19.87 per share during 2015, which amounted to only 8.8% of their EBITDA. The BEA also reported that monetary interest paid by nonfinancial corporations totaled $486.6 billion during 2015, and that spending on equipment totaled $1.05 trillion during Q3-2016. It would seem obvious that deducting equipment outlays rather than interest expense would serve as a greater stimulus. However it remains to be seen if it is as obvious for President Trump, and if the Oval Office and the Legislature will see eye to eye on this and other economic matters.

 Graph I

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Edmundo J. GarzaEdmundoIA

Economic Perspectives                                                                         President

The post-election trend of rising equities, falling Treasuries, and a strengthening dollar continued in the final month of 2016. U.S. stock performance was positive, with the major averages climbing to record highs throughout December and the Dow Jones Industrial Average finishing 237 points from the “psychologically important” 20,000 point level. The Federal Reserve (Fed) raised interest rates for only the second time in a decade, deepening the post-election sell-off in U.S. Treasuries and inspiring a rally in the U.S. dollar against its major peers. Fed Chair Janet Yellen provided an optimistic outlook, mentioning a strong labor market and a resilient economy. The Fed rate hike had a positive effect on the U.S. dollar, which traded at its highest level against the euro since the European Union introduced its single currency in 1999. December economic reports in the U.S. continued to show signs of growth; existing home sales increased by 0.7%, manufacturing expanded above analyst estimates, and producer prices rose 0.4%. Also, inflation edged closer to the Fed’s 2% stated target rate and a Commerce Department release showed the U.S. economy expanded at a robust 3.5% annualized rate in the third-quarter, above the previously reported 3.2% increase. Fed officials forecast a steeper path for borrowing costs in 2017, stating that inflation expectations have increased considerably.

 

 Indicators

(As of December 13, 2016)

United States:

CPI: +2.1% Chg. from yr. ago

Unemployment Rate: 4.7%

GDP: 3.5% Comp. Annual rate of Chg. on 2016:Q3

Ind.Prod.Index: -0.8% change from previous month

Source: St. Louis Fed. Res.

Eurozone:

CPI: 1.1% Chg. from yr. ago

Unemployment Rate: 9.8%

GDP: 0.3%, Comp. Annual rate of Chg. on 2016:Q3

Ind.Prod.Index: 1.5% change from previous month

Source: Moody’s Analytics

Japan:

CPI: -0.4% Chg. from yr. ago

Unemployment Rate: 3.1%

GDP: 0.3%, Comp. Annual rate of Chg. on 2016:Q3

Ind.Prod.Index: 1.5% change from previous month

Source: Moody’s Analytics

Puerto Rico:

CPI: 0.2% Chg. from yr. ago

Unemployment Rate: 11%

Payroll Employment: -0.7 Chg. from yr. ago

GDB Econ. Act. Index: -1.0% Chg. from yr. ago

Source: P.R. GDB

EvangelineIAEvangeline Dávila, CIMA®

Market Update                                                                                                         Chief Research & Investment Officer

Stocks:          In the U.S., the Dow Jones finished December 3.4% higher, and the S&P 500 added 2.0% with Telecom stocks pacing the gains. Overseas, European equities advanced as the European Central Bank announced it would extend its bond-buying program through next year. The MSCI EAFE Index went up +3.4% for the month. In the developing world, the MSCI Emerging Markets Index delivered a small gain in December (+0.2%) experiencing its first annual gain in 4 years.

Bonds:        Following the Fed’s December rate-hike decision, the yield on the benchmark 10-year U.S. Treasury note spiked to 2.59%, the highest since 2014. The yield on the two-year note, which is traditionally more sensitive to Federal Reserve expectations, climbed to the highest level since 2009 (1.60%). Overall, U.S. Treasuries declined for a fifth consecutive month.

Alternatives:Gold dropped 1.6% for its third-straight monthly decline as the U.S. dollar strengthened after the Fed rate hike. An 8.7% December climb in West Texas Intermediate crude pushed energy investments up. A major catalyst for the rally was OPEC’s agreement to reduce crude production on the final trading day of November, the first cut in eight years for the cartel. The Goldman Sachs Commodities Index was up 5.8%, as was the Bloomberg Commodity Price Index (2.5%).

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Source: Callan Associates

DavidIADavid L. Alvarez

The Advisor’s Corner                                              Senior Investment Adviser

Being your own boss is part of the dream that many entrepreneurs pursue. But are small business owners thinking about saving for their own retirement? A recent article in the Washington Post summarized the results from a study on business owner’s retirement planning practices. According to the survey 75% of small business owners in the U.S. had saved less than $100,000 in retirement funds, and only 8% had saved more than $500,000. Business owners not preparing for retirement face serious retirement risks. Chief among these is longevity risk; underestimating how long you will live, and outliving your wealth and capacity to generate income. If you own a business, there are several sources of income that can combine to allow you to seek the standard of living when you decide to retire, these are the value of your investments, the value of your business and the value of your house. Focusing on investments, most business owners are familiar with government-sanctioned retirement savings accounts: IRAs, 401(k)s, and Keogh accounts, among other “qualified” options. Each of these is different as every business owner is different, so comparisons are to be made on fees, your current age, yearly contribution amounts and employee participation. After determining which instrument is the most appropriate, determine how well diversified the solution is. Retirement options aren’t limited to mutual funds and CDs, they can be set up to include other types of investments. They can also be selected from socially responsible options that better reflect your values such as, funds that focus on businesses that empower women, support a cleaner environment or promote fair trade.

What to Do?


Overall, U.S. equities have continued their postelection surge. Investors continue to anticipate pro-business policies, and were spurred by the Federal Reserve’s decision to increase interest rates. Political and economic analysts however are concerned that Trump’s new policies might stray away from the Republican Party’s stance on the economy, thus becoming hard if not impossible to implement in the short-term. Amid an uncertain scenariowe continue to recommend prudent asset allocation and risk assessment, based on future capital needs, for plan sponsors, institutions and individual investors. Due diligence reviews and an adherence to a well-developed investment policy remain the most prudent course for long-term investors. Continued fiduciary education is paramount. 

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DISCLAIMER:

Consultiva is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training. Consultiva has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. Global and international investments may carry additional risks that are generally not associated with U.S. investments, such as currency fluctuations, political instability, economic conditions and varying accounting standards. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation.

 

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