Global Macro Strategy

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    • #BuschUpdate Engage gets Congressman Peter Roskam

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      Engage with Andy Busch

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      The view from Washington

      May 16, 2014

      This week on Engage with Andy Busch, we turn our attention to our nation’s capital to understand current policy initiatives and the outlook for the elections in 2014 and 2016.
      First, we’ll have on Congressman Peter Roskam, (R, IL). Cong. Roskam represents the 6th district in Illinois. We’ll discuss Roskam’s current legislative push in Congress and what will be the agenda for the rest of the year in the US House of Representatives.
      Next, we’ll have on returning guest Greg Valliere, chief political strategist for Potomac Research. We’ll review the current landscape for the 2014 Midterm elections and how the Senate is shaping up. Also, we review the potential Republican candidates for the 2016 presidential election. Learn More »

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    • Engage Transcript State of Stocks with BMO’s Ablin

      Last week on the show, I had stock focused discussion with BMO Private Bank’s Jack Ablin. Below is the transcript from the show. I’ve highlighted a few sections. I think the part where Jack talks about the 5 metrics they use to analyze the markets is excellent. Also, he provides three ETFs he likes for investing in the US, Europe and frontier markets.

      I: interviewer Andy Busch
      R: responder Jack Ablin

      I: Welcome back to my foreign policy focused show for Engage. I’m your host, Andy Busch. I want to bring this full circle from foreign policy morass to what it means for the market. Joining us is returning guest Jack Ablin. Mr. Ablin is an executive and chief investment officer at the BMO Private Bank in Chicago. Jack welcome to the show.

      R: Thanks, Andy.

      I: You know, it’s shocking, I guess, when we look at the equity markets they appear to be disassociated with what’s happening with geopolitics. Is this how they should be reacting? Am I missing something here, Jack?

      R: No. It’s an excellent point. I mean, I do find it remarkable that the financial markets have been able to compartmentalize geopolitical risk from financial risk.

      I: It’s a little strange. I mean, it’s, I guess it’s a question of risk fatigue, for lack of a better phrase, from 2008 where, basically investors have reacted to everything from a US government default to the Euro zone breaking apart. They pretty much lost money and now are inured to the recent geopolitical events. Would you agree that’s an apt analysis?

      R: Yeah, I would agree. I think remarkably, even if you just take something as, you know, a microcosm of our markets is the Israeli market. You know, since the bombardment began at the beginning of July the Israeli market is up half a percent. And since the ground offensive began the market’s unchanged. So, you, know. I think that’s a just an indication of who investors are able to take geopolitical risk, put it on one side and financial risk on the other. And yeah, there is going to be some leaching through. For example, when there was uncertainty, unrest in the Ukraine, well, Ukraine is one of the big exporters of corn, so it wasn’t a surprise to see corn prices go up. When we saw uncertainty in Iraq, yeah, we saw crude oil prices rise. But slowly over time they sort of abate back to where they were. And the financial markets are carrying on.

      I: I guess the question is, are the markets focusing on the improving fundamentals? As I think that gets at the heart of this.

      R: Yeah. I think that a lot of it has to circle around liquidity. Your point is a good one that if these same events occurred let’s say in 2011 or even in late 2010 when we had kind of this heightened awareness I think we probably would have seen a very different reaction from investors. But given now that we’ve got a moderate recovery in earnings, we’ve got moderate recovery in the economy and low enough inflation to allow the Federal Reserve to keep the pedal to the metal for as long as they like, I think that investors are rallying around this liquidity surge.

      I: Right. I think that’s interesting because it seems to me this is a wonderful example of Fed supported portfolio effect geared to push up equity prices.

      R: Yeah, and that’s it. I think that, you know. My belief is that given the skewed outcomes, in other words, the Fed really has two risks. One is they let inflation run a little too hot. But they know they’ve got a 30 or 40 year track record of keeping inflation under control. On the other hand, they tighten too soon and things roll over and they risk a disinflation deflation environment and they don’t have that many matches to try to spark flame again. So I think given those skewed set of outcomes the Fed would clearly want to err on the side of stimulus. And even if they let the inflation gorilla out of the cage, I think they figure they can go trap it later. That said, the only thing, in my view, standing in the way of that strategy really is one, inflation, which we’re not seeing, or two, a bubble, which I think Chairman Yellin is certainly trying to be on top of. When she starts to see some excesses she’s going to be very hawkish in her rhetoric and try to be extremely dovish in her actions.

      I: Well let me ask you this. You sit at BMO Private Bank; you manage a lot of money. How much do you guys have under management now?

      R: About 66 billion.

      I: All right, so a sizable amount. What do you see on a money flow basis happening in your funds? I know you guys are one of the largest ETF investors on the planet.

      R: Yeah, we’re certainly seeing money come in. We have a willingness of investors to take risks. In fact, I’ve had two conversations today with clients who want to add more money to their existing accounts and they want to know what my take is on the equity market. And I explain to them what I just explained here. And they’re willing to look past any near term uncertainty or near term downturn and ride out a longer trajectory, higher.

      I: Right. So when you’re talking to people about investing, obviously when you’re looking out into the world and trying to figure out how to invest, there are probably about 3 or 4 things that you guys look at, maybe macro, fundamentals, valuations, and you just talked about sentiment which appears to be improving. What else do you guys, I mean, of those four, what do you focus on right now?

      R: Sure. In fact there are actually five things that I track when I look at a market; valuation, the economic backdrop, liquidity, psychology and momentum. So let me just take you through where we stand in the US. Valuation, somewhat expensive. With the S&P 500 probably trading, depending on what measure you want to use, you know, 20-25 percentage points above the median level on a price to sales basis. But I will tell you that we’ve spent years above median and so certainly we don’t use valuation as a timing tool. The economic backdrop, improving; we’ve created nearly nine million jobs since the bottom. In fact I just did piece that showed that roughly seven of those nine million were created in companies of 50 employees or fewer. So we really do need to pay more attention and offer a little more tender loving care to the small businesses in this country.

      I: Hear, here. I heartily agree.

      R: And– yep. Liquidity, enormous. One of the best ways for me to track liquidity on a real time basis is simply credit spread. So if you just look at the spread between 10 year treasuries and 10 year triple B bond rates, that suggests that investors are still tripping over themselves to try to extend credit to low credit– low quality borrowers. Investor psychology, interesting. It’s generally only useful in extremes. We are not in an extreme. If I were to just give you a percentile of bullishness right now we’re probably in the mid 60, maybe 70th percentile of bullishness. So it’s high. But generally I only get a little concerned, or at least I tend to try to go the other way when you’re either in the 90th percentile or higher or the 10th percentile or lower. And obviously a good contrary indicator, but one probably not in an extreme quite yet. And then lastly momentum. It’s been a great. In a risk on risk off environment, momentum has been a fantastic risk modifier. And the fact is momentum is positive. It went positive back in June of 2009. We had a little hiccup in ‘11. But it’s very, very powerfully to the upside. So when you put all of it together, you know, you have to hold your nose and continue to stay in.

      I: Yeah, I like to tell people I’ve chewed off both of my arms over the last 18 months trying to stop myself from selling out in my portfolios. Although I’m armless, I’m much wealthier because of it. So it’s a very difficult thing to do, right, as you go up 30% and then this year another 7%. Well let’s talk about the second quarter earnings that are coming out. Obviously we’re in the midst of it. If investors are to be cheered, where on the balance sheet do you look for signs of progress? Is it margin sales, net income, top line sales growth? What do you guys like to look for?

      R: Yeah, our number one metric on the income statement is certainly revenue.

      I: Revenue.

      R: The fact is that of all of the metrics that accountants can get their arms on, revenue is the one– with the exception of maybe a groupon or something– is one where the accountants can’t tamper with it too much. So for us, that gives us a great read on organic growth. And right now, going into this quarter, yeah they were beaten down. I think that the, at the beginning of the year or the beginning of the quarter, I should say– put it in a different way. The end of the first quarter analysts had expected revenues to be up 5% year over year in the second quarter. By the time of quarter end and we were about to enter earning season, that number was knocked down to 3%. Actually numbers coming with roughly a hundred companies reporting were probably around closer to 4%, 3.8, you know. So a little bit better than these lower expectations. Earnings coming in at around 5, 6% or so. We started the quarter at roughly, end of last quarter around 7% expectations. That dropped to 5. And so 5-6% meeting these lower expectations. So again, solid growth, nothing stellar. But there is certainly a fair amount of operating leverage built into these companies. There’s a fair amount of financial leverage built into these companies. So if we can just get top line growth to go 4 or 5% that’s really going to push to the bottom line. Where you could see 10% earnings gains on that. So that’s really what we’re looking for.

      I: I think as we came out of the first quarter, obviously, with the polar vortex and the negative impact it had on all sorts of industries broad based, we looked at companies and tried to figure out what they were going to do in the second quarter. So the second quarter should be a snap back. And as we get beyond the second quarter, because we’re always forward looking in the financial markets, what should we look for, Jack, for guidance? I mean, are we looking for, you know, what kind of improvements should we be expecting from these companies as they give their conference calls?

      R: I mean, that’s really the key for me, is to hear what they’re guiding, um, you know. The consumer companies are generally pretty downbeat. The tech companies appear to be a little more optimistic. I want to hear from a company like Fedex or UPS or IBM. These are companies that are the circulatory system of the business world. And they will give us some pretty good indication of where things stand and where things are likely to go. I mean, they’re certainly early indicators in that space. So I’m encouraged. I think businesses are taking that stockpile of cash that they’ve got and they’re starting to spend it a little bit. And hopefully that will translate into increased business activity. Perhaps improving industrials and some of the other groups that support businesses, rather that have to rely on the consumer.

      I: Well just in the minute we have left, BMO is a multi-asset investor. Are you overweight equities? How are you structured right now?

      R: Sure. We’re overweight equities. Our preference is still US large cap. The one market that we really, one major equity market that really don’t like or trust is small cap. There we’re pretty much at maximum underweight in that and we’ve been that way for the last probably year or so. Incrementally more money is moving into developed international, most notably Europe. There we like European equities but we’re hedging the euro back to the US dollar. There is an ETF HTDJ that is a euro hedged ETF that will allow investors to invest in Europe and hedge the euro back. We also still like the emerging markets. It’s been a rough go for the last couple of years, but we think they’ve found their footing and they appear to be moving higher. And then incrementally we like frontier markets. It’s a new world out there, it’s a liquid market, doesn’t trade. And that, with a lot of liquidity. But I will say it’s really promising. So the frontier market is probably a good lent terms play.

      I: One the frontier side is there an ETF you like?

      R: There is. It is an ETF that’s somewhat in transition as the MSCI, Morgan Stanley Index kind of moves countries around out of frontier and into emerging. But that ticker symbol is FM, like radio FM. That stands for Frontier Markets.

      I: Sure. All right, Jack Ablin from BMO Private Bank. Thanks for coming on the show today.

      R: My pleasure, Andy. Thanks again for the invitation.

      I: All right, you bet. We’ll take a break and when we get back I’ll give you my final thoughts. This is Engage.

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