July 17, 2017

Market Commentary

The Pelican Bay Group

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Dovish comments last week from Janet Yellen were apparently interpreted

by some market participants as an “all clear” to take on risk…markets rose. This has

been a theme since 2009…as central banks prime the pump, easy money has helped

inflate the value of paper assets (stocks and bonds) as well as real estate. In some

circles, the acronym TINA has become popular to describe why investors are putting

money into equities.

While some believe “There Is No Alternative” is new, it actually is 150 years

old and was posited by the English intellectual, Herbert Spencer (1820-1903):

“He believed in laissez-faire government and positivism – the ability of technological

and social progress to solve society's problems – and thought Darwin's theory of

"survival of the fittest" should apply to human interactions. To critics of capitalism,

free markets and democracy, he frequently responded, "There is no alternative."

(www.investopedia.com)

Ironic that a phrase originally extolling the virtues of a free and open market

is now applied to investing in equity markets featuring the heavy hand of central

planning and government intervention.

TINA implies that you have weighed various alternatives, and this is the best

among them. It doesn’t mean you’re getting a bargain, just that nothing else makes

any sense, or, everything else is more expensive. In our current environment, with

interest rates bouncing at lows (Belgium’s 5-year treasury carries a negative

yield…Reuters) and given current equity valuations (at clearly elevated levels), one

can assume that the application today is something like this:

“Stocks may be no bargain, but they’re the best of a bad choice.”

After all, as we often say, a 5-year, 8% CD would create its own TINA…buy

the CD.

Last week, three major banks announced earnings. All three surprised to the

upside, all three fell after their announcements. Because their forward-looking

guidance disappointed investors. The forward guidance was for a slowing in loan

growth. But investors should not have been surprised. This has been going on for

some time now, it’s just that people have (until last week), tended to ignore it:

Source: Federal Reserve Bank of St. Louis

Portfolio Management Team

The Pelican Bay Group assists high net worth

individuals and institutional clients in meeting

their financial objectives by offering

customized portfolio management strategies.

The Pelican Bay Group, a team of Morgan

Stanley Financial Advisors, has four

experienced portfolio managers covering an

array of disciplines and offering a variety of

strategies designed to optimize risk to help

meet their clients’ investment objectives.

These investment styles are offered as fully

discretionary strategies with a comprehensive

fee based on the asset value being managed.

The team currently manages over $2 billion in

client assets.

Why is this important? Because historically, recessions (gray bars) have generally been signaled by slowing, or

stalling loan growth:

Source: Federal Reserve Bank of St. Louis

Of course, nothing is ever easy. Not all stalling out of the growth rate created a recession. 1982-1990 is notable,

for example. Yes, stalling of commercial and industrial loans preceded the 1991 recession, but it took nine years! And there

were two false signals in 1983 and 1985…a contraction in loans did not result in recession, and they eventually rebounded.

But on average, when loans have stopped growing, recession has been an increasing possibility. So is this operative today?

We check further. The Atlanta Federal Reserve is our go-to for GDP estimates:

You can see that estimates have been tailing down for the second quarter, with Atlanta Fed near the bottom of the

range of all economists (the Blue Chip consensus). Why are estimates dropping? Here’s an example:

Source: Federal Reserve Bank of St. Louis

Note the tailing off of retail sales since April (yes, online sales are included). There are similar indications of

softness in some other areas, but you get the idea.

So when you have softness in retail sales, banks giving downbeat forecasts, loan growth slowing, it all adds up, in

our opinion, to a softening economy. Clearly, one not accelerating. And this is why, mostly, the Fed indicates that it will

take it’s time about interest rate increases…slow growth with no inflation does not generally create the energy to be

aggressive about rates.

The bearish case is that if you have an economy that can’t meaningfully grow and so, a perpetuation of low interest

rates, you get caught in a dilemma. Slow growth indicates slow earnings growth and that smacks into the valuation issue.

At some point, do investors become alarmed over economic growth prospects? They certainly have some reason to at this

juncture (there are soft winds that have begun to blow). And yet, the economy is growing, interest rates are low and

earnings continue to surprise to the upside:

Source: EIKON EARN Function

With 32 companies in the S&P 500 reporting (32/505=6%), 75% have beat earnings estimates (blue columns) and

78% beat revenue estimates (yellow). But as we’ve noted recently, note the stock reaction. When Earnings beat, the 2-day

price reaction has been only +0.2% (pink). When they met estimates, a decline of -3.2% and when missed a decline of -

1.9%. More, estimates for 3Q are now trailing off, except in Technology and Industrials (3Q Earnings Revision). Most

especially in Consumer Cyclicals (-7%) and Consumer Non-Cyclicals (-3.3%). Since the consumer is roughly 65% of the

economy, these sectors are very important.

So here’s our summation:

The economy continues to slowly expand, and earnings, the preferred measure of stock prices, have been just fine.

But the price action of stocks after earnings are announced point to a sense that its often been priced in and so, “sell on the

news” appears more dominant now than “buy on the news.”

If you’re inclined to be bearish, you can look at softening GDP numbers, at the action of stocks upon earnings

announcements, upon loan growth and bankers’ comments and find confirmation of your bearish view. If you are bullish,

you can point to the continued growth in the economy, low interest rates, sparkling earnings and conclude that any near-

term weakness is merely some people cashing in profits, in what is an ongoing move higher.

As investment managers, we’ve been through this cycle too many times to pound the table on a point of view.

Uncertainties always abound and it is prudent to take note of them, perhaps not be too aggressive in a market call. If you

find yourself unsure, we are as well and most probably always will be. Experience in markets teaches you that.

Thus, our tactical investment advice still holds: Own the very best quality because significant market declines are

only identified in the rear view mirror…the car you’d be sitting in will be your portfolio. Have some cash for opportunities

and to help further control risk. Seek undervalued markets and assets for new cash commitment…very often, today’s

orphan is tomorrow’s cool kid. This continues to point us to a slow accumulation of positions in gold.

There is an old saying and we ascribe to it: What counts is not timing markets, its your time in the market. Do not

test yourself beyond your risk tolerance. If you don’t, you’ll be able to ride through the inevitable market decline. This is

why we counsel high quality. You sleep easier and it tests you less.

For all the worries of the last 120 years, stocks are at all-time highs. Of this, we are reminded.

Tony

Who Is The Pelican Bay Group?

Our team of financial professionals is national in scope with Financial Advisors stationed in strategic locations across the country. As

part of Morgan Stanley, one of the world’s most respected financial services firms, we offer access to extensive resources that can prove

instrumental in helping you meet even your most complex financial challenges. Our team members include:

Anthony M. Gallea Richard J. DiMarzo, CPM®

Managing Director-Wealth Management Senior Vice President-Wealth Management

Senior Portfolio Management Director Senior Portfolio Management Director

Financial Advisor Financial Advisor

Jennifer D. Hartmann, CIMA® Paul M. Hanrahan, CRPS®

Managing Director-Wealth Management Senior Vice President-Wealth Management

Senior Portfolio Management Director Senior Portfolio Management Director

Financial Advisor Professional Alliance Group Director

Financial Advisor

Stephen Stribling, CPM® Shelley Ford

Executive Director-Wealth Management Financial Advisor

Senior Portfolio Management Director

Financial Advisor

Teresa Bustamante Jeff Praino, CFP®

Senior Vice President-Wealth Management Certified Divorce Financial Analyst

Senior Investment Management Consultant Financial Planning Specialist

Financial Advisor Financial Advisor

Marcia Bonnet William VandenBrul

Associate Vice President Vice President-Wealth Management

Financial Planning Specialist Wealth Advisor

Family Wealth Advisor

Financial Advisor

Mark S. Ryan, CFP® Jeanine Delgadillo

First Vice President-Wealth Management Financial Advisor

Portfolio Management Director

Financial Advisor

Cynthia Walker-Laroche

Vice President-Wealth Management

Financial Advisor

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Date of first use: 07/17/2017

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