History Has Steered Folks to Environmental, Social and Governance Investing.
In this Milwaukee Journal Sentinel article from July 15th, Tom Saler explores socially responsible investing (SRI) and breaks down some recent high-profile examples.
Read July article.

 

New Firm Targets Socially Responsible Investors.
In this article from January 9th, Milwaukee Journal Sentinel reporter Kathleen Gallagher explores Greg Wait's launch of a new company that combines socially responsible investing and online investment advice.
Read January article.

 

Investment Trends, with insights by Greg Wait. In the Milwaukee Journal Sentinel's October 17th article, Kathleen Gallagher and Greg Wait discuss the recent rise of environmental, social and governance, or ESG investing. Greg provides insight into how reduced risk and improved returns are causing money managers to include ESG investing in their portfolios. Read October article.

 

Responsible Investing: Creating Financial and Non-Financial Value by Greg Wait. Do investors sacrifice returns in pursuit of their goal of advocating for a better world in which to live?
Learn more.

 

Ten-Year History of Investment Manager Performance by Greg Wait. As part of our process, we have conducted investment manager research and due diligence resulting in manager or fund recommendations to our clients. Here are our findings.

 

The month of September, 2013 marked the 10-year anniversary of Falcons Rock serving our clients and building relationships. We are grateful for all the years of friendship, loyalty, and support, and look forward to our next decade!

 

Investment Trends, with insights by Greg Wait. In the Milwaukee Journal Sentinel's July 20th article, Kathleen Gallagher and Greg Wait discuss the rising U.S. Treasury rates and using duration as a measure of risk. Greg's comments relate to whether we'll be "looking back on this short-term increase in yields as the warning shot for the much-anticipated longer-term rise in interest rates." Read July article.

 

Dec 9, 2012, Journal Sentinel's Kathleen Gallagher interviewed Greg Wait on current Investment Trends. Read the full article: "Low-quality stocks continue to provide strong returns."

 

We've Grown! Meet our new investment consultant: Tony Sebranek.

 

Investment Trends column of Milwaukee Journal-Sentinel shows Top-Down investment strategies are achieving positive results.
Read article on Top-Down Investing

 

Additional articles in the Milwaukee Journal Sentinel featuring Falcons Rock:
One is a fascinating story about a Mequon drug development company, which has a few of our clients as private investors.
Read article about our angel investors

 

Another features us in the Market Trends column: Strategy targets uncertain economy - and how Falcons Rock confronts specter of slow growth.
Read how we help clients get ready

 

There is a great deal of debate in the investment industry regarding active vs. passive (indexing) investment management.  We researched this topic and the results might be surprising to you.  Please see our research paper on this subject...more

 

We have experienced interesting situations with our clients. To update you on our firm’s activities, check out examples of recent work we have done for our clients...more

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US SIF Member 2017

A Plane on the Tarmac (or A Truck Heading for a Cliff)

 

2012 Quarter 2 Market Review

Recently, on a flight from Raleigh, NC to Atlanta, GA, the plane that I boarded rolled out to its position on the tarmac and then suddenly slowed to a halt. The Flight of the US EconomyThe pilot soon announced that bad weather had hit Atlanta, but we were going to wait it out as the thunderstorm seemed likely to pass through quickly.

Five hours later, with lots of fidgety (or angry) passengers, the plane finally resumed its path and took off to Atlanta.

That flight experience was similar to the path taken by the U.S. economy in the second quarter of this year. After a string of slow but positive economic indicators heading into the quarter, the economy suddenly slowed a bit more and with heightened concerns in Europe, consumer confidence fell again. The question now is whether the U.S. economy is back on the tarmac ready to take off, or if it is heading for a "fiscal cliff."

The reality is that the Great Recession ended in June, 2009, and we are now entering the 4th year of economic recovery in the U.S. The fact that this recovery has been characterized by boring, slow economic growth (real GDP growth has averaged just 2.4%) feels depressing but is really fine, all things considered. The fact that our government has been addressing the budget deficit has actually contributed to slow growth, as public sector spending is way down. The federal budget deficit has shrunk from 10.2% of GDP in fiscal 2009 to roughly 7.6% of GDP in fiscal 2012, mainly reflecting cutbacks in government spending. Since the start of the expansion, private sector real GDP has grown 3.3% annualized, while real government purchases have fallen by 1.3% annualized.

You may have read about the so-called fiscal cliff that could occur in 2013. Under current law, as of January 1, 2013, all the Bush-era tax cuts expire, the payroll tax cut expires, and new taxes on upper income households to pay for the president's new health care plan, take effect. Furthermore, discretionary spending cuts agreed to by politicians last fall are scheduled to begin. According to the Congressional Budget Office (CBO), the net effect of these changes would be to cut the deficit from 7.6% of GDP to 3.8% in fiscal 2013. On the surface, this sounds great, although in reality tax increases and spending cuts of this magnitude would drive us into another recession, and this fiscal cliff scenario is not politically appealing to either party.

This fiscal cliff is not likely to be addressed before the November elections. Regardless of the outcome of the elections, it seems that both parties have ample incentive to compromise (although I don't think that word is in any politician's vocabulary these days). My guess is that a more mild policy will ensue, with the goal being to continue today's slow glide path toward reducing the deficit (see "Alternative" forecast on the Federal Finances chart below).

Unquestionably, government spending will have to be cut further, and it also seems inevitable that some level of tax increases will be necessary to balance the budget. The increases could be in the form of higher income taxes, higher capital gains taxes, higher dividend taxes, or higher estate taxes.

From the "Tax hikes on the wealthy…" chart below, you can see the potential tax rate changes based on the current fiscal cliff scenario. Most economists believe it is unlikely that the substantial tax on dividend income will occur, but an increase in the capital gains tax seems possible under a compromise scenario. The tax chart below is also helpful to gain some historical perspective on the relatively low level of our current maximum (income/dividend/capital gains) tax rates.

Looking at these charts, it is no wonder that consumers are feeling gloomy. However, the four main cyclical sectors in our economy (light vehicle sales, housing starts, manufacturing and trade inventories, and real capital goods orders) continue to build pent-up demand. Each of these indicators appears to have bottomed and shows signs of a rebound.

  • Lower oil prices are acting like a tax cut for U.S. consumers and there has been real progress made to reduce our independence on foreign oil in the future (creating employment opportunities in the energy sector).
  • Home prices are beginning to rise nationally. Consumer balance sheets are stronger and interest rates on debt remain low.
  • U.S. banks (unlike European banks) are now extremely well-capitalized, and they should be able to resume providing capital to the economy going forward.

Federal Finances: Deficits and Debt

Tax Rates and Distribution of Income and Taxes

Second Quarter 2012 Review

For the third consecutive year, the U.S. stock market experienced a mid-year slowdown. Following the spectacular returns of the first quarter, stocks of most sizes and styles declined in value in Q2. Only defensive stock sectors generated positive returns for investors during the quarter. The seemingly never-ending financial crunch in Europe, an unexpected slowdown in U.S. job creation, and negative press about financial firms all created skepticism among investors. International stocks fared no better during the quarter, with losses exceeding those of U.S. stocks. Although the market retreated during Q2, year-to-date returns are still solidly positive (the S&P 500 Index is +9.5% since 1/1/2012).

Commodities continued their volatility during the quarter, with mixed results among sectors. Energy prices fell during the quarter, as slowing growth in China lead to concerns about global demand. Agricultural commodities spiked in the back half of the quarter, with corn specifically rallying due to the extreme heat and dry conditions in the Midwest, leading analysts to lower their yield projections for the year.

Bond returns were relatively subdued, although positive, during the quarter. As concerns in the global stock market increased, a typical flight to quality ensued, with investors again seeking the relative safety of U.S. government bonds. Here are the returns for selected market indices for Q2 2012 (as stated in U.S. dollars):

2012 Qtr 2 Returns on Market Indices

Outlook

U.S. equities are at valuations that are near historic lows, and the expected risk premium relative to bonds is the highest on record. There is a developing renaissance of U.S. industrial manufacturing, as stable and competitive labor costs are enticing global companies to relocate manufacturing capacity to North America (recent new plant announcements include BMW, Airbus, and Shell). Manufacturing had fallen as a percent of GDP for over 30 years until 2008, but has risen since. U.S. industrial machinery shipments and exports are at all-time highs, and are up over 50% in the past two years. There is an extraordinary rate of growth in the supply of shale gas and oil in the U.S. and we will need to build out infrastructure to transport these new oil/gas supplies, leading to a multiplier economic effect from these new discoveries. Innovations in technology for mobility are still in the early stages of growth, driven by strong demand for smart phones and tablets globally. There is a growing global demand for basic consumer products as middle classes are forming in emerging market countries.

Fixed income investors face a challenging environment. Nominal yields on 10-year U.S. Treasury bonds are at 1.67%, and real yields are currently negative (-0.44%) and 3 percentage points below their 50-year average. Based on current duration measures, if interest rates rose by 1%, the price of 10-year U.S. Treasuries would decline 9%. It seems that the risk of heavy allocations to high-quality fixed income exceeds the reward, after a 30-year bull market in bonds.

Huge debt loads and negative economic growth are persistent in the Euro-zone, and there is no easy answer to their problem. Investors must be selective when investing in stocks of European companies and it is wise to seek those companies that sell to global markets. Emerging market countries are showing signs of slowing economic growth. For example, China's GDP growth in Q1 2012 is reported at 8.1%, down from its 10-year average of about 10%. China now accounts for roughly 28% of global economic growth (from around 5% in the 1990's), so the world has taken notice. The European recession is hurting Chinese exports. Although China is experiencing slower growth, it is still expanding and their government has room for stimulus, if needed. Their consumer base is growing, creating opportunities for Chinese and multinational companies alike.

As always, there are plenty of mixed economic and market signals to confuse any investor. During my visit to Raleigh, I met with one Chief Investment Officer who is boldly predicting another recession in the U.S. in the near future. That is certainly possible, especially if we fall off the fiscal cliff. As the range of potential outcomes continues to be very wide, it is imperative that investors remain diversified and balanced with their investment portfolios. Most importantly, like those of us who were stuck on that plane for hours, patience is the best way to ride out the storms that are inherent in the marketplace. We're here to help! Thank you for being a client of Falcons Rock.

Greg Wait, President of Falcons Rock

Gregory D. Wait, President
Falcons Rock Investment Counsel, LLC

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