QCI 3rd Quarter Economic Update 2013
Article By Joshua E. BetancourtPortfolio Manager/Financial Planner

 

The end of the 3rd quarter was very rewarding for QCI clients as our European recovery play provided substantial growth that exceeded expectaionts for the QCI portfolios. Other investments that continued to strengthen were consumer retail and healthcare. These sectors outperformed the overall market as 2nd quarter earnings of retailers improved, propelling the retail ETF XRT to new highs. Healthcare and Insurers were big winners as our FXH ETF and IAK ETF holdings increased dramatically. Our choice to overweight small cap stocks over large caps also outperformed the broader markets.

Given our rising rate expectations, we steered clear of low interest rate bonds, municipal bonds, & US Treasuries which had a turbulent 3rd quarter. QCI’s fixed income concentration continues to be high yield short duration bond ETF SJNK and JNK ETF. Our high yield bonds were shielded from the spike in interest rates and have allowed us to collect a annualized yield of 6% to 7% with no principal value decline. We also sold cash secured puts and covered calls on the High Yield bond ETFs, all of which expired worthless and allowed QCI to generate income holding the ETF as well as via collection of option premium. Despite the bump in rates, interest rates are far below historical levels.

Commodity markets slid in Q3 but our natural gas ETF FCG, Global shipping and clean energy ETFs all continued to inch higher as the already low natural gas prices began to catch buying interest while supplies dwindled. Despite the run up in domestic energy, we believe certain emerging marker energy players continue to provide attractive dividends, growth, and are valued attractively based on trailing and forward price to earnings multiples. Given our rising interest rate expectations, we believe the property refinancing boom is over. However, we are bullish on Emerging market international real estate and are allocating as such. The slow in domestic real estate should prohibit consumers from continuing to use their property as an ATM while profitably flipping real estate in the US will becomes more difficult. Additionally, refinancing profits of mortgage banks and real estate lending institutions are likely to deteriorate by the next quarter, putting pressure on future earnings. This should also stymie consumer spending, further pressuring retail sales and consumer discretionary sectors in the US. Having sold out of 100% of all US financials in September, we seek to slowly allocate this capital to international sectors currently in value territory and trading at substantially lower earnings multiples. We have also diminished our Retail ETF holdings in October.

Schiller Price to Earnings ratio on US stock market no longer in value territory  Current Shiller PE Ratio: 23.67  Mean: 16.49   Median: 15.89

Based on projections, we will continue to re-balancing into international value sectors not dependent on US consumption. We believe earnings growth, particularly in US domestic financials and retail should slow, making these sectors overvalued. US sectors still poised for growth are net exporters of materials, steel, and industrial chemicals. We are now seeing the first signs of a recovery in Brazil, Russia, China, the Middle East, Japan, and emerging market real estate and will begin allocating into these sectors.
While our QCI proprietary portfolio outperformed all managers,  similar themes emerged in our Sub Advised accounts.  Clark Capital, our selected Bond ETF manager remained in high-yield bonds and cash due to rising interest rates. F Squared focused on the highest performing domestic sectors including Energy and Consumer Discretionary.  F Squared’s global portfolio had concentrations in Japan, Europe, Emerging Markets and Canada.  Good Harbor, maintained a focus on Small Caps and Mid Cap companies – the highest growth sectors of the economy. If you have any questions regarding our 3rd Quarter economic recap and Outlook please feel free to contact us.
 
Kindest Regards,
Joshua E. Betancourt

Chief Portfolio Strategist/Financial Planner

 

 

Tags: , , , ,