Solis Wealth Management Report – October 28, 2013

The Markets

Contrarians probably are waiting for the other shoe – or, in this case, U.S. stock markets – to drop.

If you’re not familiar with contrarian investing, the theory goes something like this: Consensus opinion is often wrong. When the majority of investors have a bullish outlook and believe stocks are going to move higher, the chances are stock values will drop. Likewise, when the majority has a bearish outlook and believes stocks are going to move lower, the chances are stock values will rise.

Why would Contrarians expect markets to head south? One reason is bullish sentiment is high. On October 23, the American Association of Individual Investors’ Investor Sentiment Survey, which measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months, shows 49.2 percent are bullish and just 17.6 percent are bearish (the rest are neutral). The long-term averages for bullish and bearish sentiment are 39 percent and 30.5 percent, respectively.

Contrarians also are eyeballing the fact that stock markets in the United States have run up for 519 sessions without as much as a 10 percent correction, according to Barron’s. That means markets have weathered bombs at the Boston marathon, chemical weapons in Syria, monetary policy uncertainty, U.S. government shutdown, and Miley Cyrus’ VMA performance. Of course, 519 sessions is not the longest winning streak ever, not even close. In fact, if we assume about 250 trading sessions in a year, then the current rally would have to last until about 2018 to match the record (1,767 sessions) set between October 1990 and October 1997.

Investors aren’t the only bullish faction. Money managers who participated in Barron’s latest big money poll also seem to have adopted Alfred E. Neuman’s motto: What, me worry? Their outlook seems to focus on the Fed’s loose monetary policy. According to Barron’s, “Four of five money managers in our big-money poll expect stocks to be the best-performing asset over the next year, even as 71 percent see U.S. shares as already fairly valued. Thanks to unending central bank support, we all expect above-par stock returns from sub-par economic growth.”

So, what’s going to happen? Only time will tell.

Data as of 10/25/13

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.9%

23.4%

24.5%

14.1%

15.7%

5.5%

10-year Treasury Note (Yield Only)

2.5

NA

1.8

2.6

3.7

4.3

Gold (per ounce)

2.4

-20.4

-21.4

0.3

13.9

13.3

DJ-UBS Commodity Index

-0.9

-8.3

-11.2

-4.5

0.0

0.1

DJ Equity All REIT TR Index

0.5

9.2

13.3

12.2

21.1

10.2

Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WHERE ARE INTEREST RATES HEADED? According to the Federal Reserve, economists assume interest rates will move toward equilibrium or a ‘natural’ real rate of interest that takes into account inflation over the long term.

The idea of a natural rate of interest was first introduced by Swedish economist Knut Wicksell.  Recognized as an economist’s economist in the late 1800s and early 1900s, Wicksell is known for his macroeconomic text Interest and Prices which noted the difference between the real rate of return on capital (aka: the natural rate of interest) and the market rate of interest (aka: the rate borrowers pay). According toThe Economist:

“If the financial rate is below the natural rate, businesses can reap unlimited profits by borrowing as much as they can and plowing it into high-returning projects. Eventually, though, all that additional spending pushes up prices, money and credit, and, eventually, financial interest rates.

Wicksell saw financial rates as those set by banks competing to make loans. That job is now performed by central banks. They still think in Wicksellian terms: the natural rate prevails when the economy is at full employment. Set the policy rate above the natural rate and the economy tips into depression. Set it below, and inflation results – or, some worry, speculative credit booms.”

So, where are interest rates headed? Apparently, they’re going to move higher. According to the Federal Reserve’s September 2013 economic projections, the federal funds rate (the rate at which banks lend to each other overnight) is expected to reach 2 percent by the end of 2016. Currently, it is at 0.25 percent. (The Fed also expects the United States will be close to full employment at that time with the unemployment rate nearing its long-term average of 5.2 to 5.8 percent.)

Weekly Focus – Think About It

“It has always seemed strange to me… the things we admire in men, kindness and generosity, openness, honesty, understanding and feeling, are the concomitants of failure in our system. And those traits we detest, sharpness, greed, acquisitiveness, meanness, egotism and self-interest, are the traits of success. And, while men admire the quality of the first, they love the produce of the second.”

John Steinbeck, Pulitzer and Nobel Prize-winning American author

Please enjoy this week’s commentary from ~ Kris Placencia, Director of Client Relations

I love October!  Not only do we see the temperature drop to just about perfect and the stores fill up with beautiful autumn decor but I also celebrate my birthday along with several other family members and friends.  My birthday consisted of a couple of special dinner celebrations with good friends, “Happy Birthday” calls and texts, and of course, many Facebook greetings.  (I don’t think I’ve gotten so many “Happy Birthdays” in my entire life combined as I have on one birthday…gotta love Facebook!)

This October has been especially wonderful as I was able to spend two weekends with Hannah.  She came home for the first time a few weeks ago.  She brought her roommate and it is so fun to watch them interact.  They are so very different from each other yet they do really well living together.  We took a drive out to “SalvationMountain” in Niland.  If you have not been there, you really should put it on your “bucket list”.   It’s just an hour and a half east of the Desert on the north shore of the Salton Sea.   It is a hill in the middle of the Desert that a man decided to paint. Yes…quite a sight to see!

This past weekend I went to visit Hannah at school.  I took my cot and stayed in her dorm room.  That is an experience in and of itself!  Lots of laughing and screaming into the late hours of the night, a communal bathroom, limited storage and closet space….oh to be young!   We did of course have a great time!  When I asked her prior to visiting what she wanted to do for the weekend she responded, “Eat good food!” And that we did!  There are so many great options in Santa Barbaraand Montecito.  We also did a photo shoot….she has a love of photography so we spent a few hours in various outfits taking pictures of one another and setting up the tripod for some great mother-daughter shots.  We had a blast and I’m pretty sure one of those pix will end up in our Christmas letter this year.

As October ends and we look forward to the holiday season, it becomes a time of great reflection for me and again I am reminded of how blessed I am.  Besides a great job, a car that runs well, a roof over my head and a refrigerator and closet that are full, the greatest blessing lies in the relationships that enrich my life.  I trust that you too are looking forward in grateful anticipation as you we approach this holiday season. ~Kris

Best regards,

Greg R. Solis, AIF®
President

78-075 Main Street
Suite 204
La Quinta, CA 92253
Office: (760) 771-3339
Fax: (760) 771-3181www.soliswealth.com
E-Mail: greg.solis@lpl.com

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The Wealth Advisors of Solis Wealth Management are also Registered Representatives with and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC

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* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index

* Consult your financial professional before making any investment decision.

* To unsubscribe from the Solis Wealth Management Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject line.

Sources:

http://www.investopedia.com/terms/c/contrarian.asp

http://www.aaii.com/sentimentsurvey

http://online.barrons.com/article/SB50001424053111904897104579149482465343894.html?mod=googlenews_barrons (Or go tohttp://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/10-28-13_Barrons-The_Rally_That_Just_Wont_Quit.pdf)

http://www.frbsf.org/economic-research/publications/economic-letter/2003/october/the-natural-rate-of-interest/

http://www.econlib.org/library/Enc/bios/Wicksell.html

http://www.economist.com/news/finance-and-economics/21588354-central-banks-ignore-century-old-observation-their-peril-natural

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130918.pdf

http://www.bankrate.com/rates/interest-rates/prime-rate.aspx

http://www.brainyquote.com/quotes/authors/j/john_steinbeck.html#FU0ZPZMKKk5pwDOJ.99