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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Rigged!

 

2014 Quarter 1 Market Review

Most of you know that I have been “Anti-Wall Street” for many years. The work we have done for our clients has uncovered many situations where exorbitant and non-transparent fees are being charged to unsuspecting investors. A new book, Flash Boys: A Wall Street Revolt, was just released by Michael Lewis, one of my favorite authors. In his book, Lewis uncovers a currently legal form of “front-running” being conducted on a daily basis by high-frequency traders (HFTs). Front-running refers to the illegal practice of a broker trading a stock based on advance information before placing trades or providing such information to its clients. This is slightly different than insider trading, which is typically based on non-public information. HFTs have developed incredibly sophisticated computers that trade stocks based on algorithms they develop, and trades are done at lightning speed. Lewis exposed a practice in which HFTs take advantage of small timing differences between stock orders being executed on multiple stock exchanges. Here’s how it works:

High-frequency trading

Assume that a large buy order for General Electric (GE) is entered by an institutional investor at the current market price of $25.67. A HFT will read that order, anticipate that this large buy request will temporarily lift the price of GE stock, and will place its own buy order for GE at $25.67 before the institutional investor’s order can hit the first stock market exchange (there are many exchanges all around the U.S.). A micro-fraction of a second later, the initial buy order arrives at the first stock market exchange…but can no longer be filled at that price. The remaining GE stock is now priced at $25.68 or $25.69, producing a small profit of one or two pennies for the HFT. This might not sound like much, but it is happening to everyone’s trades millions of times a day.

Lewis describes the stock market as rigged to benefit a group of insiders that have made tens of billions of dollars exploiting computerized trading. The New York attorney general and the Commodities Futures Trading Commission in Washington have recently launched investigations into this practice. By many estimates, high-frequency computerized stock trading now controls more than half the market.

So, is the stock market rigged by HFTs and if so, who is harmed by this activity? In broad terms, HFTs provide needed liquidity to the stock market and electronic trading has helped shrink bid/ask spreads and reduce the cost of making trades, which helps all investors. In the “old days” all trades had to be placed with a broker, who collected a commission for the service. Not that long ago, stock prices were quoted in eighths (12.5 cent increments) rather than pennies and market insiders pocketed the spread. HFTs don’t bother front-running small orders of say, 100 shares of a stock, so retail investors are not directly affected by their activity. It seems that large hedge funds with active trading patterns are most harmed by the HFT activity and some mutual funds might also be affected. All things considered, the reduced costs and increased liquidity created by computerized trading are probably a net positive for stock market investors.

Even so, a new exchange has been created by Brad Katsuyama, the primary subject of Flash Boys. A former head trader at RBC, Mr. Katsuyama launched “the investors’ exchange” (IEX) in October with the support of large institutional investors who believe it will further reduce their trading costs, enhance transparency and eliminate electronic front-running. We’ll see how successful this new exchange becomes, but it is good that there is a free-market solution developed for this problem. At the same time, it seems to me that front-running is front-running whether it is being done by a computer program or a human being, and it should be made illegal.

There is always something to be wary of in the investment world as greed permeates the system and the bad guys are always looking for ways to make more money, often at the expense of others. As we’ve learned, however (see Bernie Madoff), the bad guys often get caught and punished sooner or later. We can be thankful for that.

First Quarter 2014 Review

While the first quarter of 2014 saw only modest returns in the U.S. stock market, it still represented the seventh consecutive quarter in positive territory. The best performing sectors included Utilities (+10.1%), Health Care (+5.8%) and Materials (+2.9%). The worst performing sectors during the quarter were Consumer Discretionary (-2.8%), Industrials (+0.1%) and Consumer Staples and Telecom (+0.5%).

Stocks of developed foreign countries posted mixed returns during the quarter. As you might expect given Russia’s annexation of the Crimean region of Ukraine, the Russian stock market fell (-9.7%) in Q1, helping to drive broad emerging markets stock funds into slightly negative territory. Erratic weather in both North and South America hurt agricultural harvests and the broad commodities market posted its first gain in many quarters with a resounding +7.0% return.

Bond markets around the world rallied in the first quarter, based on mixed economic news and the situation in Ukraine. Nearly all fixed income sectors realized positive returns during the quarter. The U.S. dollar was generally weaker versus developed foreign currencies, which helped U.S. investors in international securities. Overall, most balanced portfolios enjoyed small gains during the quarter.

Here are the returns for select market indices for Q1 2014 (as stated in U.S. dollars):


Outlook

U.S. economic growth continues on its very slow and very long pace…the current expansion is now the fifth longest since the Civil War. Slower than expected GDP growth in the first quarter is being largely attributed to the inclement weather conditions throughout this brutal winter, which may lead to pent-up demand for the spring quarter. During the Great Recession, the U.S. experienced a $639 billion loss of output in a very short period of time. So far in the current expansion, over $1.5 trillion of economic output has been recovered. During the recession, we lost 8.8 million jobs in the U.S. and we have now gained back 8.7 million jobs, bringing the civilian unemployment rate down to 6.7%. Consumer spending is expected to be strong for most of 2014, as household net worth is near an all-time high and the household debt service ratio is very low. Of course, one concern is the widening income gap which could be detrimental to the overall economy going forward.

With headwinds in the fixed income marketplace, and U.S. stocks having reached near historical average valuations, it seems as prudent as ever to have globally diversified investment portfolios. U.S. investors have often thought of global diversification as being invested in stocks of companies that are headquartered in foreign countries. The newer school of thought is that investors should “follow the money, not just the mail” and consider how much of a given company’s revenues are generated from other countries. For example, investors can access emerging markets consumer demand by investing in multinational companies with significant emerging markets revenues. More professional investment managers are recognizing that using such a strategy allows them greater flexibility and a wider opportunity set.

In order to take advantage of the multitude of opportunities in the global marketplace and to reduce portfolio volatility, it is not only important to diversify an investment portfolio among broad asset classes but also to diversify within each broad asset class. For example, within the broad U.S. equities asset class, the returns of the S&P 500 Index sub-industries varied dramatically in the first quarter, ranging from +24% for Airlines to -13% for Leisure Products. By investing in a mutual fund or professionally managed account, investors will automatically achieve some level of diversification within that fund’s asset class. Of course, it is our job to assess and monitor each client situation and recommend investment strategies that are appropriately diversified. We conduct extensive research to truly understand the portfolios of every investment manager we recommend. The result of this research is a sound asset allocation based on the goals and objectives of each of our clients.

We very much appreciate that you are a client of Falcons Rock.

Greg Wait, President of Falcons Rock

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

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