Atlantic Divergence

As we head into the close of 2015, the world’s two largest central banks, the U.S. Federal Reserve and the European Central Bank, may be heading in opposite directions, at least as it relates to their monetary policies.  Given the strengthening US economy, coupled with an anticipated better-than-expected jobs report to be released on Friday, December 4, the Federal Reserve may look to lift interest rates when they meet later in December.  However, across the Atlantic, the Eurozone economy is still sputtering, trying to gain traction after the initial stimulus earlier this year.  As such, in order to decrease the likelihood of a further slowdown, the ECB is expected to increase stimulus measures on Thursday, December 3.  These simultaneous actions would create a large divergence in monetary policies between the world’s foremost central banks and create an interesting shift in foreign exchange, financial, and geopolitical events.

‘Too Big To Fail’ Is Still A Concern

Federal Reserve Bank of New York President William Dudley stated that large banks and regulators have made important progress toward ending the “too big to fail” perception, but that more work is required to make sure that any failure could be done in an orderly manner without taxpayer assistance. Mr. Dudley went on to mention a recently proposed Fed rule which would require banks to add more loss absorbing debt to their balance sheet to lessen the likelihood of financial system contagion. Mr. Dudley also said firms need to simplify complex legal structures and be able to prove that they can obtain funding to remain open during a bankruptcy, while regulators should adopt rules regarding banks’ derivative contracts with nonbank counterparties which would make it more difficult for non-banks to immediately close out contracts in times of stress.1 Although we are seven years removed from the financial crisis, the perception of “too big to fail” is still very much alive and many believe continues to pose a significant risk to our financial system. It will be interesting to see if banks and regulators can finally agree on a framework that removes the risk of future taxpayer-funded bailouts.

Wall Street Journal – Fed’s Dudley: Work Remains on ‘Too Big To Fail’

Negative Inventories?

As of October 28, 2015, according to the Federal Reserve Bank of New York, large U.S. banks reported holding negative $1.4 billion of investment-grade corporate bonds maturing in at least 13 months. Since the New York Fed began accumulating and reporting this data since the spring of 2013, this is the first time that inventories have turned negative. Prior to new capital and leverage rules, banks used to hold a lot more bonds in order to fill orders from clients; however, these new rules have made it more costly for firms to hold those corporate bonds, thus forcing some firms to completely exit the market. Is this a sign to come regarding the liquidity of corporate bond markets or just a byproduct of the artificially low interest rate environment?

Social Security Update

The recent passage of the “Bipartisan Budget Act of 2015” which was signed into law by President Obama on November 2, 2015, changed some very popular Social Security planning strategies that now need to be re-examined.  For many, this will require that action steps be taken to protect the ability to maximize future Social Security planning.

Prior to this law change, a popular strategy for maximizing Social Security benefits was to utilize the “file-and-suspend” rules, which permitted an individual – upon reaching full retirement age – to file for benefits but then suspend them immediately, allowing delayed retirement credits to be earned while simultaneously still allowing a spouse to begin to receive spousal benefits including family benefits for minor children.  A typical additional strategy was to then have one’s spouse, upon reaching their full retirement age, to file a “restricted” application which would allow their benefits (based on their work record) to continue to grow by allowing delayed retirements credits to compound and yet commence their spousal benefit – based on their spouse’s full retirement age benefit. This “cake and eat it too” strategy is what forced Congress, at the urging of the President, to change the rules. The “file-and-suspend” strategy was very straight forward but did have some downsides including:

  • Suspending resulted in a suspension of all benefits (which limits couples from crisscrossing spousal benefits by having each file and suspend);
  • Suspending triggered the onset of Medicare Part A benefits, which can render someone who chooses to file and suspend to be ineligible to make any more contributions to a Health Savings Account (HSA).

The new law changes the above rules and strategies essentially denying any benefits being paid to a spouse or other person based on a worker’s earning record if the worker’s benefit is suspended. Furthermore the new law will allow a spouse to file a restrictive application for benefits only if they are age 62 by the end of 2015. These two changes severely limit the ability to obtain any social security benefits while still earning delayed retirements benefits. These changes and the law’s effective date may require that a protective “file and suspend” application be filed within a short six month window. Some highlights that need to be considered include:

  • Beginning 6 months after the passage of the bill, no one will be able to implement a “file and suspend” strategy. Benefits based on a worker’s earnings record will no longer be paid to any spouse or other dependent if the worker’s benefit is suspended.
  • If a client has already claimed benefits using a “file and suspend” strategy, they will be “grandfathered” and may continue receiving benefits as they are now. Any benefits being paid on the earnings of a worker who has suspended benefits will continue in this circumstance.
  • If a client implements a “file and suspend” strategy within 6 months of the passage of the budget bill, they will be allowed to continue with the benefit claiming strategy, and benefits that begin being paid to a spouse from the suspended benefits of a worker will continue.
  • If a client will have already reached age 62 before the beginning of 2016, he or she will still have the option of filing a “restricted application” at full retirement age. This will allow the claiming of a spousal benefit while their own benefit will accrue delayed retirement credits. It will be possible for the client to switch to his or her own higher benefit at a later date.

Based on this and subject to future regulations it may be important that one consider the following action steps based on one’s personal situation and considering the aforementioned downsides:

  1. If you are currently over full retirement age (66) and have not started receiving your social security benefits you may want to file a protective  application to “file and suspend”  before May 1, 2016.
  2. If you will turn age 66 before May 1, 2016 you may want to file a protective application to “file and suspend” immediately upon turning age 66.

This is a very new law and regulations have not been drafted so please consult your wealth or tax advisor to maximize planning opportunities.

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client’s specific financial needs, goals and objectives, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.

Fed’s Yellen Suggesting Live Possibility for December Liftoff

Federal Reserve Chairwoman Janet Yellen stated that the Fed may raise short term rates at its December meeting, but stressed that no final decision has been made. She also added that they expect the U.S. economy to grow enough to realize further improvements in the labor market and a return to 2% target inflation over the medium term. The Fed has also emphasized that any move will be done at a gradual and measured pace. Overall, the Fed’s more hawkish tone as of late has resulted in a 52% probability of a December rate increase as measured by fed-funds futures.1 Place close attention to the next two employment reports that will be released prior to the December Fed meeting as they will certainly influence policy decision as to whether we have rate liftoff in 2015.

Wall Street Journal – Fed’s Yellen: December is ‘Live Possibility’ for First Rate Increase


Telemus Weekly – Investment Committee

Last week
Last week was holiday-shortened and rather lackluster. Today marks the official end of November and December looks promising, at least historically. Capital IQ reports that since WWII in the month of December the S&P 500 has risen 1.8% on average versus 0.7% for the other months. Such a return would be welcomed considering the tepid performance of the equity markets YTD. On the heels of the Paris terrorist attacks and others around the world, as well as the Russian fighter jet being shot down by Turkey, it is no wonder that some more positive economic data was offset by geopolitical uncertainty. Last week the S&P 500 and the NASDAQ were up 0.04% and 0.44%, respectively, while the Dow Jones Industrial Average finished down 0.14%. Foreign markets fared better than the domestic markets trading up on the week, with the ACWI up 2.7% and the ACWX up 2.2% for the week.

In a relatively uneventful Thanksgiving-shortened week the bond market was fairly quiet. The short end of the Treasury yield curve moved up with expectations of a Fed rate hike in December and the mid to long end of the curve moved down as the Fed has telegraphed subsequent rate hikes will be slow and data dependent. With inflation readings remaining below the 2% target there seems little likelihood of upward pressure on the mid to long term Treasury yield curve. In spite of a second quarter in a row of negative corporate earnings, corporate bond spreads narrowed. For the week, the benchmark 10-year US Treasury bond yield dropped 4 bps on the week ending on Friday at 2.22%. For the same period, the 2-year Treasury yield was up at tick to 0.92%, while the 5-year yield was down a tick to 1.65%. The 20 and 30-year Treasury yields were also down on the week closing at 2.64% and 3.00%, respectively.

The USD continues to run strong against the EUR and other major currencies as the Fed continues to lean towards raising interest rates and other central banks talk about further easing. For the week, the EUR/USD closed at 1.059 up 1.7% over the past two weeks. Against
a broader basket of currencies the dollar was up as well with the DXY closing at 100.08, up 1.2% over the past two weeks.

The holiday shortened week had some news, but most everyone is waiting for the employment numbers to be announced this week. 1) Tensions rose after Turkey shot down a Russian fighter jet that had violated Turkey’s airspace. The fallout was less than expected, but creates additional geopolitical fragility. 2) Market PMI manufacturing for October was reported and disappointed with the lowest reading since October 2013. The November flash number for manufacturing was lower than October and lower than the November expectation. 3) The Chicago National Activity index remained below zero and the three month average number declined, indicating year ahead inflation should be subdued. 4) The November flash numbers for Eurozone PMI (manufacturing and services) were better than expected. 5) Real Q3 GDP was revised upward from 1.5% to 2.1% due to an inventory adjustment. The Case-Shiller home price index rose 5.5% y/y. In the meantime, consumer confidence posted a sharp and unexpected decline from 99.1 in October to 90.4 in November. 6) Core capital goods orders were reported up 1.3% (well ahead of expectations), and personal income was up as expected, but consumer spending was down, consistent with the downward adjustment in October’s Michigan consumer sentiment number.

With 98% of companies in the S&P 500 reporting earnings to date for Q3 2015, 74% have reported earnings above the mean estimate and 45% have reported sales above the mean estimate. So far for Q3 the blended y/y earnings decline has been -1.3%, marking the first back-to-back quarters of earnings declines since 2009. At this point 81 companies have issued negative EPS guidance for Q4 and 26 companies have issued positive EPS guidance. The 12-month forward P/E ratio for the S&P 500 is 16.4 based on a projected forward 12-month EPS estimate of $127.14. The S&P 500 forward P/E multiple is above the five-year average and
10-year average of 14.1.

Oil prices remained weak again last week with WTI closing $41.77 and Brent at $44.86. Brent closed at $47.42 down from over $48 the week before. Lower oil prices across the country means more money in consumers’ pockets, but we will have to wait until the end of December to see if any of that money translates to retail revenue or healthcare payments. Over-supply is the reason for the downward pressure on prices and slow global growth doesn’t offer any immediate change to the situation.

This Week

Monday: The Chicago Purchasing Managers index for November is reported; The IMF will announce its decision to include the Chinese Yuan in the reserve currency basket.

Tuesday: The ISM manufacturing Index for November is reported; Big US automakers report vehicle sales for November – expectations are that they will decline from the two previous months, but remain robust.

Wednesday: The ADP employment report for November is released; The Fed Beige Book of regional economic activity is released; Fed Chair Yellen speaks in front of the Economic Club of Washington just two weeks before the highly anticipated December Fed meeting.

Thursday: Fed Chair Yellen testifies before the Joint Economic Committee of Congress on the economic outlook; Fed vice Chair Stanley Fischer speaks at a conference; the ECB meets and may announce further economic stimulus; Challenger, Gray, and Christmas issue November job-cut announcements.

Friday: The highly anticipated non-farm payrolls are reported for November and are expected to come in at 200,000. Also reported is the jobless number is expected to come in at 5%.