mullins january 2015

JANUARY 2015Michael Mullins, President

1642 S. Trenton StreetDenver, CO 80231

303.337.2418/office303.514.8211/mobile

[email protected]

www.mullins-inv-mgmt.com

Paul Ferry, Director of Fixed IncomeChristopher Ferry, Invest Advisor Rep5100 Edina Industrial Blvd, Suite 225Edina, MN 55439612.327.0768 mobile/Paul952.200.0933 mobile/[email protected]@mullins-inv-mgnt.com

Market Update(all values as of 12.31.2014)

Stock Indices: Dow Jones 17,823S&P 500 2,058Nasdaq 4,736 Bond Sector Yields: 2 Yr Treasury 0.67%10 Yr Treasury 2.17%10 Yr Municipal 2.11%High Yield 6.61% YTD Market Returns: Dow Jones 7.52%S&P 500 11.39% Nasdaq 13.40%MSCI-EAFE -7.35%MSCI-Europe -8.59%MSCI-Pacific -5.19%MSCI-Emg Mkt -4.80%

US Agg Bond 5.88%US Corp Bond 7.39%US Gov’t Bond 5.92% Commodity Prices: Gold 1,184Silver 15.61Oil (WTI) 54.12 Currencies: Dollar / Euro 1.21Dollar / Pound 1.55Yen / Dollar 119.93Dollar / Canadian .86

The steep drop in oil prices led to risk aversion among the international mar-kets as volatility increased and assets sought the stability and transparency of U.S. markets. Considered to have the healthiest economy and financial mar-kets currently, the U.S. is also reaping the benefits of lower oil and gasoline prices.

Russia is experiencing a run on assets, as mass capital and assets are leaving the country in search of security and preser-vation of wealth. The massive devaluation of the Russian currency, the ruble, has prompted Russian citizens to panic buying of cars, washing machines, and computers hoping to maintain the value of their mon-ey in items rather than Russian rubles. Net capital outflows out of Russia are estimat-ed to have surpassed $134 billion in 2014, more than double of what left the country in 2013. A looming recession is also hin-dering any economic progress in Russia, as the ruble’s downward valuation is now affecting employment and businesses.The U.S. economy grew at the fastest pace in more than a decade, as Gross Domestic Product (GDP) expanded at a 5% annualized rate for the third

quarter of 2014. GDP data is compiled by the U.S. Commerce Department and released on a quarterly basis. It is one of the most critical data com-ponents used by economists in de-termining the health of the economy.

The number of Americans filing for unem-ployment continues to fall, as more em-ployers are hiring at the strongest pace since 1999. The Federal Reserve sees the strengthening labor market as the cat-alyst for inflation, led by higher wages.

U.S. manufacturing output in the Untied States recorded its largest increase in nine months, led by automobile and machinery production. Utilization rates, a measure of how efficiently companies are using their resources, surpassed a key threshold of 80 in December. Manufacturing account-ed for about 12 percent of the nation’s economic growth in 2014, half of the 25 percent it represented in the 1960s. Some economists and analysts see this as a growth opportunity as manufactur-ing returns to levels not seen in decades.

The Fed’s most recent Beige Book Report

Current Environment - Macro Overview

JANUARY 2015 www.mullins-inv-mgmt.com

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U.S. markets were among the best performing equity markets internationally, and the top per-forming among developed markets. The S&P 500 index closed at record levels 53 times in 2014, while the Dow Jones Average reached a new high 38 times throughout the year. A visual extraction of these highs would appear as a gradually in-creasing slope, with some pullbacks along the way.

Some analysts are expecting positive earn-ings revisions for U.S. companies that will ben-efit from lower oil prices. The steep and dra-matic drop in oil has also decreased operating costs for many companies where oil is a sig-

nificant component to their bottom-line. Air-lines, transportation, hospitality and food are among the industries that have traditionally benefited when oil and gasoline prices drop.

With 2014 results included, the S&P 500 Index has had the best three year returns including div-idends, since the late 1990s. Given the market symmetry in 2014, some market analysts expect to see similar patterns repeated as economic con-ditions and company earnings slowly improve.

Sources: Bloomberg, Reuters

Equity Overview - Domestic Equity Markets

sees U.S. economic expansion as broad based, measuring labor and economic improvements in all 12 districts of the Federal Reserve System. The Fed-eral Reserve sees a benefit in consumer demand and business demand strengthening together.

The output of utilities and automobiles grew to levels not seen in decades as cheap ener-gy and low utility costs encourage foreign man-ufacturers to enter the U.S. markets and take advantage of affordable American labor. Euro-pean auto makers with operations in the U.S. are benefiting as well from a weakened euro. Several large European car makers that man-ufacture cars in the U.S. export them interna-tionally, directly from ports in the U.S., yet sell autos in more affordable euros worldwide.

The U.S. government and corporate bond markets outperformed the majority of the world’s stock

markets in 2014, validating a continued flight to stability throughout the year. The decoupling of U.S. growth from other developed economies, also known as divergence, was the scenario go-ing into 2015 where the U.S. is in better econom-ic and financial shape than most other countries.

Deflation worries in Europe and slowing economic conditions continued into 2015, prompted a revisit to the Euro Crisis as Greece struggled with political issues and the possibility of an exit from the euro.

The International Energy Association (IEA) is fore-casting weaker oil consumption in 2015, lead-ing to increasing worldwide inventories and continued low prices. When oil hit a high of $107 a barrel in June 2014, not many thought that it would have fallen by half by year end.

Sources: Commerce Dept., FED Beige Book

Fixed Income Overview - Bond Markets

Even as the U.S. economy grew in 2014 and the Federal Reserve terminated its stimulus program, Q.E., U.S. govern-ment bonds had their best year since 2011.

The consensus at the beginning of 2014 was that rates were surely heading higher with the end of Q.E. in sight and inflationary pressures

heating up. The 10-year Treasury bond start-ed the year at 3% and ended 2014 at 2.17%.

The U.S. 30-year Treasury bond dropped to its lowest yields in two years, closing 2014 at 2.75%. Numerous analysts at the beginning of the year were expecting an increase from its then cur-rent yield of 3.92%, a dramatic miscalculation.


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Geopolitical events worldwide, slowing econo-mies in Japan and Europe, and the lure for sta-bility all helped propel the U.S. dollar to its single best year since 1989. The dollar advanced against all of its 31 major counterparts for 2014. Defla-tion concerns in Europe and Japan drove down the euro and yen, and tumbling oil prices sent the

Russian ruble down 44 percent against the dollar.

A challenge at home when the dollar rises is the dynamic of U.S. exports becoming more expen-sive worldwide. As the dollar increases in value versus other currencies, U.S. exported goods be-come less affordable in the international markets.

Conversely, the strengthening dol-lar has also made it more affordable for imported goods, which become less expensive as the dollar elevates. The single most significant bene-fit to Americans from a rising dollar has been the dramatic drop in oil prices, which the U.S. still imports about a third of the oil consumed.

Sources: U.S. Commerce Dept., Eurostat

The Dollar’s Supremacy – Currency Market Dynamics

A flight to quality continued to reduce U.S. Trea-sury yields, yet with its 2.17% yield at year end, the 10-year U.S. Treasury is the highest yielding 10-year government bond among the Group of Seven countries. By contrast, Germany’s 10-year government bond yield fell to nearly .50 percent due to deflationary concerns in the euro zone.

A flattening yield curve of U.S. Treasuries has created a divergence between short term and long term bonds, where short term rates in-creased and long term rates decreased. A flatten-ing yield curve signifies an increase in Fed rates while long rates are dictated by the markets, which now sees lower inflation expectations. A decrease in long term rates (which are mar-ket dictated) tells us that the market doesn’t ex-pect interest rates to rise that much from where we are now, while an increase in short term rates (which are dictated by the Fed) tells us that

the Fed is preparing for inflationary pressures.

As oil prices tumbled towards the end of 2014, high yield corporate bond prices were affect-ed by oil’s decent. The reason is that a large por-tion of outstanding high yield bonds are in the energy sector, specifically shale related com-panies throughout the country. It was the high yield bond market that afforded many start up shale drillers in the late 2000s to establish and build out their infrastructure. The drop in oil prices has reduced operating margins for some of the companies thus adding pressure to their underlying debt. Some analysts expect mar-gins for many of these companies to improve even with continued low oil prices due to new technology allowing for reduced expenses.

Sources: U.S. Treasury, Bloomberg


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In order to stem the ruble’s dramatic devalua-tion, Russia’s central bank raised its key rate from 10.5 percent to 17 percent on December 15th. It was Russia’s sixth time in 2014 that it had raised its key rate aimed at limiting addi-tional currency losses and keeping inflation contained. The ruble’s tumble has lifted in-flation in Russia to its highest levels in more than five years, with consumer prices rising over 11% alone in the month of December.

Some believe that Russia’s dire c i rcumstances may lead to geo-political tensions as Putin shifts the blame to sanc-tions imposed by the U.S. and its Western allies.A revisit of Rus-sia’s debt default in 1998 became a focal point again as inter-national curren-cy traders sug-gested that such a threat may again be probable.

Standard & Poor’s, a credit agency, said that it is considering reducing Russia’s debt rating to junk for the first time in over 10 years. Moody’s, another credit agency, has placed 16 Russian banks on review for a possible downgrade as well. Such implications don’t bode well for Rus-sia’s financial markets and the ruble, which will likely continue to struggle for quite some time.

Belarus imposed capital controls, a process where a nation’s government can regulate flows from capital markets in order to stem a run on

assets. The central bank said that it was react-ing to the situation in neighboring countries, primarily in Russia. Belarus is the first ex-So-viet republic to fence off its economy as Rus-sia’s financial crisis ripples through the region. Many are concerned that other former Soviet satellite countries may replicate Belarus. Such actions create a difficult environment for citi-zens of a country where capital controls have been imposed. Imported goods become much more expensive and difficult to get and revenue

from exports shrink.

The Greek debt crisis re-emerged in Decem-ber as some politi-cal leaders in Greece questioned the aus-terity measures put in place last year to avoid a probable debt default. Concerns sur-rounding the exit of Greece from the euro has once again become a topic of conversation for banks and finance entities in Europe.

Lithuania became the 19th member country to adopt

the euro as its official currency on January 1st. Citizens swapped Lithuanian litas for euros with cheer in hopes of building an economic shield against the Russian ruble’s fall and its affect throughout former Soviet block countries. This was Lithuania’s second attempt to join since it was turned down in 2006. The Baltic coun-try of 3 million people is wedged between Po-land and Latvia and is a former Soviet Republic.

Sources: Eurostat, S&P

Deflation In Europe & A New Member To The Euro - International Markets

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Job Trends in 2015 - Labor Market Review

In the first nine months of 2014, U.S. com-panies created roughly 2,000,000 new jobs. However companies had a difficult time fill-ing their posted positions with qualified can-didates. One in three open positions now re-mains unfilled for longer than three months.

The demand for qualified workers is starting to create a longer period for open positions, where companies seek specific skills. There are several industries where positions remain open for longer than average periods of time.

Accommodation and food service jobs re-main open and unfilled the longest of any industry. Some believe that the low pay-ing positions of the industry are driving qual-ified workers to higher paying industries.

Mining and logging jobs tend to be physi-cally demanding and requiring some tech-nical experience. As the shale exploration in North Dakota and Texas have continued, so has the demand for knowledgeable candi-dates. As the economy slowly improves, the demand for paper and wood building materi-als increases, thus requiring more logging labor.

Transportation, warehousing and utilities all prosper from a recovering economy. As the de-mand for shipping and storing products increas-es, more energy is consumed driving up utility usage. The wholesale and retail sectors also do much better as the economy and job market improves, allowing consumers to spend more.

Sources: Centre for Economic & Business Re-search, Labor Dept.

A measure of an economy’s efficient use of its capital assets and labor force is the capacity uti-lization rate. This figure is released by the Fed-eral Reserve each month and is closely watched for indications of a tight supply of re-sources, which can lead to higher labor and capital costs. As supply con-straints develop, inflationary pres-sures can appear due to higher wages and operat-ing expenses. Essentially, if market demand grows, capacity utilization will rise, if demand weakens, capacity utilization will slacken.

The financial markets can be directly influenced by capacity utilization rates, where increasing

rates create inflationary pressures thus push-ing bond yields higher. An increase in capacity utilization rates may also translate into more efficiently run companies, thus increasing eq-

uity valuations.

The most recent capacity utilization rates released by the Federal Reserve show the rate sur-passing 80% for the first time since 2007. It is believed that when the utilization

rate rises somewhere between 82% and 85%, com-panies are operating efficiently and productively allowing them to raise prices and increase margins and eventually leading to overall price inflation.

Source: Federal Reserve

What The Capacity Utilization Rate Tells Us - Domestic Economy

JUNE 2013

*Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period. Index data sources; MSCI, DJ-UBSCI,WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offeror solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriateand/or suitable for all investors. This material is meant solely for informational purposes, and is not intended to suffice as any type of accounting, legal,tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.

www.mullins-inv-mgmt.comJANUARY 2015

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Contrary to what we hear about conserva-tive practices with energy consumption, energy use in American homes has actu-ally increased over the past 30 years. Data compiled by the U.S. Energy Department identified various reasons as to why we’re using more energy, primarily electricity.

The use of more energy has been originating from homes all over the country, driving up usage and even straining grid ca-pacities at certain times of the year.

The culprit to el-evated electrici-ty consumption is the plethora of smaller electron-ic devices that have encroached upon American homes over the past few years.

As technologi-cal advancements have created more elec-tronic devices, and at affordable prices, the increased use of plug in outlets and power strips has also increased. The Energy Depart-ment estimates that energy used in house-holds for appliances and electronic devices accounted for about 21% of total household consumption throughout the 1980s. It now estimates that over 35% of total consump-

tion is appliance and electronic device driven.

Over the years a multitude of regulations and laws have been enacted to curtail the use of electricity by larger and widely used applianc-es such as refrigerators and washing machines. The challenge has been the ongoing prolifer-ation of smaller electronic devices and the dif-

ficulty to identify and regulate them.

Bigger homes have become more of the norm since the late 90s, where homes built in the 1970s and 1980s were typically less than 1800 sq ft. In the 1990s the av-erage size of a new home increased to 2200 sq ft and rose to 2400 sq ft in the 2000s. Even though homes built in the 90s and 2000s con-tain more energy efficient technolo-gy, the larger area and higher ceilings

consume more energy to heat and cool, out-weighing some of the technology benefits.

The Energy Information Agency (EIA), which also reports on energy usage, proj-ects that current home energy consumption will remain the same for another 30 years.

Sources: U.S. Energy Dept., U.S. Census Bureau

Why We’re Using More Energy - Home Energy Review

mullins january 2015

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