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NCM Market Review: October 2017

By: Todd Centurino, CFA

The global growth story remained intact during October as developed market equities gained 2.6% and emerging market equities gained 3.9% bringing year-to-date returns up to 15.9% and 28.7% respectively for each region.

In the U.S., stocks increased 2.3% on the back of strong data during the month. Unemployment fell further, with a September reading of 4.2%, a level last seen in February 2001. While other metrics understandably dipped in September, due to hurricanes Harvey and Irma, the labor market picture remains healthy and is showing signs of rising wages. U.S. consumers were alive and well in September as the Consumer Spending and the University of Michigan Consumer Sentiment Indices reached their highest readings in 12 months.

European economic momentum continued to march higher and helped the region gain roughly 2% in October. Much like in the U.S., the Eurozone unemployment rate fell to an 8-year low and consumer confidence increased from the September reading. The biggest news for the region was the uptick in political uncertainty driven by the results of Catalonia’s referendum for independence from Spain on October 1st. The reaction from this event was largely contained in Spain which saw equities weaken and bond yields rise. Despite the increased volatility, Spanish government bond yields gained 0.9% on the month.

Emerging markets, up 3.9%, continued to benefit from the highly synchronized global growth recovery. Equity prices were lifted higher by continued expansion in the manufacturing sector and stronger commodity prices.

Looking Ahead
President Trump announced two important initiatives that markets will watch very closely over the next several months. First, is his nomination of Jerome Powell as Janet Yellen’s replacement at the Fed. This announcement is expected to be largely welcomed by investors as he is seen by many as the best candidate for continuity at the world’s most important central bank. Powell has been a Fed governor since 2012 and has supported Yellen’s policy of gradual interest rate increases. He is taking over the Fed at a time when growth is accelerating, inflation is tame and unemployment is at a 16-year low. A significant amount of pressure will be placed on him to sustain the current expansion.

Second, markets have initially responded positively to the Trump Tax Plan proposal aimed at slashing individual and corporate tax rates and adding a $1.5 trillion stimulus to the economy over the next 10 years. It is still early in the process, and many issues, most notably the mortgage interest and state and local tax deductions, still need to be ironed out. President Trump is asking this bill to be passed by Christmas. This may be an ambitious goal given the number of issues that are likely to create a divide among Republicans, especially the potential increase in the Federal debt that could result should this proposal become law.


Monthly Economic News

    Employment: September saw a loss of 33,000 jobs after averaging 172,000 new jobs over the prior 12 months. The unemployment rate fell slightly to 4.2%. The number of unemployed persons declined by 331,000 to 6.8 million. The labor participation rate increased from 62.9% in August to 63.1%. The average workweek for all employees remained at 34.4 hours in September. Average hourly earnings rose by $0.12 to $26.55. Over the 12 months ended in September, average hourly earnings have risen $0.74, or 2.9%. According to the Bureau of Labor Statistics, hurricanes Harvey and Irma impacted the number of jobs available, but not the national unemployment rate. This report appears to indicate that the labor market is tightening with fewer jobs available and increasing wages needed to attract workers.
    FOMC/interest rates: The Federal Open Market Committee met in September following its last meeting in July and left the target federal funds rate range at 1.00%-1.25%. However, some economic indicators are showing mild inflationary pressures, which, when coupled with a labor market that could be nearing full employment, may lead to another interest rate hike when the Committee next meets in early November.
    GDP/budget: The first estimate of the third-quarter gross domestic product showed expansion at an annual rate of 3.0%, according to the Bureau of Economic Analysis. The second-quarter GDP grew at an annualized rate of 3.1%. Gross domestic income, which estimates all income earned while producing goods and services, increased 1.8% in the third quarter compared to an increase of 0.9% in the second quarter. As to the government's budget, September marked the end of the fiscal year. The federal deficit for FY 2017 was $665.7 billion, more than $80 billion, or 13.7%, higher than the 2016 deficit. For the 2017 fiscal year, government expenses increased by about 3.0%, while receipts rose 1.5%.
    Inflation/consumer spending: Inflationary pressures may be mounting. The personal consumption expenditures (PCE) price index (a measure of what consumers pay for goods and services) ticked up 0.4% in September after climbing only 0.2% in August. The core PCE price index (excluding energy and food) inched ahead 0.1% for the month. Personal (pre-tax) income increased 0.4% and disposable personal (after-tax) income also gained 0.4% from the prior month. Personal consumption expenditures (the value of the goods and services purchased by consumers) jumped a robust 1.0%.
    According to the Consumer Price Index, consumer prices rose 0.5% in September, after recording a 0.4% gain in August. For the 12 months ended in September, consumer prices are up 2.2%, a mark that approaches the Fed's 2.0% target for inflation. Core prices, which exclude food and energy, edged up 0.1% in September, and are up 1.7% since September 2016.
    The Producer Price Index showed the prices companies receive for goods and services advanced 0.4% in September from August. Year-over-year, producer prices have increased 2.6%. Prices less food and energy increased 0.4% for the month and are up 2.2% over the past 12 months.
    Housing: The housing sector started to gain momentum heading into the fall season. Total existing-home sales climbed 0.7% for September following a 1.7% drop in August. Over the last 12 months, sales of existing homes are down 1.5%. The September median price for existing homes was $245,100, 3.4% lower than August's median price of $253,500 but up 4.2% from the median price last September. Inventory for existing homes rose 1.6% for the month following an August decline of 2.1%. The Census Bureau's latest report reveals sales of new single-family homes climbed a whopping 18.9% in September to an annual rate of 667,000 — far outpacing August's rate of 561,000. The median sales price of new houses sold in September was $319,700 compared to $300,200 in August. The average sales price was $385,200 ($368,100 in August). The number of houses for sale at the end of September was 279,000 (284,000 in August), which represents a supply of 5.0 months at the current sales rate.
    Manufacturing: Industrial production increased 0.3% in September following a 0.9% decline in August. The continued effects of Hurricane Harvey and, to a lesser degree, the effects of Hurricane Irma combined to hold down the growth in total production in September by 0.25 percentage point. Capacity utilization increased slightly from 75.8% in August to 76.0% in September. Manufacturing output edged up 0.1%. Mining output rose 0.4% in September after declining 0.8% in August. The index for utilities jumped 1.5% after falling 5.5% in August. New orders for manufactured durable goods increased 2.2% in September after climbing 1.7% in August. Shipments of manufactured goods increased 1.0%, while unfilled orders, which fell the prior two months, increased 0.2% in September.
    Imports and exports: The advance report on international trade in goods revealed that the trade gap for September was $64.138 billion, $0.8 billion (or about 1.3%) greater than the deficit in August. Exports of goods for September were $129.6 billion, $0.9 billion more than August exports. Imports of goods for September were $193.7 billion, $1.7 billion more than August imports.
    International markets: In a sign that the European economy is heading in the right direction, the European Central Bank is scaling back its bond-buying program, while extending its duration well into 2018. The ECB will continue to buy bonds into September of 2018, but at a slower pace. The province of Catalonia, Spain, held a controversial independence referendum on October 1, where voters were heavily in favor of splitting from Spain. The Spanish high court declared the referendum vote illegal. Nevertheless, Catalonia's regional president signed a declaration of independence about a week later, which has since prompted the Spanish prime minister to consider imposition of direct rule. Experts have estimated that a Catalonian break from Spain, a Catalexit, could have a significant impact on the Spanish economy.
    Consumer Sentiment: Consumer confidence in the economy rose in October, reaching its highest level in almost 17 years. The Conference Board Consumer Confidence Index® for October climbed to 125.9 from September's revised 120.6. Consumers expressed growing optimism about present economic conditions as well as future growth. A strong job market and improving business conditions were the primary reasons for the upbeat consumer sentiment.

The 2017 New Capital Annual Conference


Our 2017 Annual Conference was held October 26 and was well attended by approximately 50 clients.  Thank you to all of those who attended, and we look forward to seeing as many of you as possible at next year’s conference.  Our focus this year was on the value that our advisory work brings to our clients, so-called “advisor alpha”, a concept pioneered by Vanguard, with whom we have been working to adopt and even expand these concepts.  The basic idea is to quantify, in percentage terms, the value that New Capital brings to you on an annual basis.

Speaking of value, the Houston Astros were purchased at a “value stock” price of $680 million on November 17, 2011, and as is now well known, the new ownership and management set about to re-make the team with a radical housecleaning and rebuilding period.    On April 11, 2017 Forbes pegged the value of the Astros at $1.45 billion, implying a return to investors of 213% overall, and 13.45% annualized.    

I imagine that right now, the Astros may be valued well above Forbes’ April valuation.  And that, of course, is because, six years after being sold, the Houston Astros defeated, in order, the Boston Red Sox, New York Yankees, and Los Angeles Dodgers to become baseball world champions.  As I write this, approximately half a million (estimated) people are gathering in downtown Houston to celebrate this astonishing victory, earned in one of the most exciting and dramatic World Series ever played.  I grew up watching the Astros, and never thought they would ever win the World Series, even though they have had very good teams over the years, and made one trip there (they were swept in four games by the Chicago White Sox in 2005). 

The Astros were indeed a value investment for their owners, selling at a depressed price and low market value to book value.  But while New Capital can’t really obtain ownership for you in a major league baseball team (the Cleveland Indians were actually publicly traded until 1999), you should not feel too bad at missing buying into the Astros.  Over the same period from the sale of the Astros to the Forbes valuation, US small-cap value stocks (which the Astros would have qualified as when they were sold) returned 209%, or 13.1% annualized, very close to the return on Astros ownership.  New Capital includes a substantial overweighting in its equity portfolios to small-cap value US companies, and so your portfolio will have experienced gains similar to the increase in the value of the Astros from this segment of your investments.  They don’t, however, come with front row seats or a World Series championship, sorry.

The good news, however, is that the Astros victory, especially in the wake of Harvey’s terrible destruction, can be claimed by all of Houston.  As the crowds gather in downtown Houston for a parade about to kick off, you might feel satisfied at both your baseball team, and your small-cap value stocks. 


The Economic Impact of the 2017 Hurricanes


Legal and Financial Considerations for Flood Impacted Homeowner's in Harvey's Wake


Post Harvey - Free Financial Counseling

By: Catherine Bahr

New Capital is offering free and confidential financial counseling to those affected by Hurricane Harvey. Counseling can provide guidance and support on issues like debt from property loss or damage, financial budgeting and saving, or any general financial concerns. We can work on financial planning, provide basic education on financial management, or simply provide a safe & confidential place to express financial concerns.

If you have family and friends, or know of others who would benefit from these services, please share our contact information with them or let us know and we will reach out to them.


NCM Market Review: August 2017

By: Todd Centurino, CFA

Equity markets finished the month of August in positive territory despite an upsurge of political risk led by mounting U.S.-North Korea tensions, terrorist attacks in Spain, the events in Charlottesville and one of the most destructive hurricanes ever to hit North America. Markets were initially rattled by each of these events as volatility, measured by the CBOE Volatility Index (VIX), reached a nine month high of 17.30 (mid-month) pushing some markets into negative territory. However, the VIX Index finished the month unchanged as strong macroeconomic data and stronger-than-expected growth in many regions around the world, pushed equity prices higher.

In the U.S., the S&P 500 ended the month up 0.3% as data continues to demonstrate solid growth. Second quarter GDP growth was revised up to 3.0%, while unemployment fell to 4.3%. Retail sales increased 4.2%, year over year, and the consumer sentiment index jumped to 97.6, returning to the peak it reached in January. Inflation (as measured by the CPI Index) disappointed, coming in below consensus at 1.7%, reducing the likelihood that the Fed will increase rates again in December.

In Europe, economic momentum improved, as the euro area posted second quarter GDP growth of 2.2%, its highest reading since 2011. The purchasing managers index (PMI) remained strong, posting a reading of 55.8 and consumer confidence increased to close to a 10-year high. The optimism of continued growth was reflected in the Euro as it reached 1.20 vs. the dollar.

Emerging Market Equities (helped by a falling dollar and positive GDP data out of China) outperformed developed markets as the MSCI Emerging Markets Index finished the month up 2.2%. Manufacturing PMI remained above 51, signaling continued expansion.

Looking ahead
It remains too early to fully understand the impact, both socially and economically, of hurricane Harvey. Houston represents approximately 3% of U.S. GDP, so it is in the country’s best interest to get the city back up and running. The costs are expected to far exceed that of hurricane Katrina and hurricane Sandy combined. The sheer magnitude of the dollars needed will likely increase political discord, calling into question any tax reform, which could weigh on stocks. The Federal Open Market Committee meets mid-month. While a rate hike is not expected during this meeting, much attention will be paid to how the Fed discusses the slowing inflation picture.


 Monthly Economic News

    Employment: The second half of the year began with a strong showing in the employment sector. In July, job growth expanded by 209,000 and the unemployment rate slid 0.1 percentage point to 4.3%, representing about 7.0 million unemployed persons. Employment growth has averaged 184,000 per month thus far this year, in line with the average monthly gain of 187,000 in 2016. Notable employment gains occurred in health care, professional and business services, and food services and drinking places. The labor participation rate was essentially unchanged at 62.9%. The average workweek for all employees was unchanged from June at 34.5 hours. Average hourly earnings rose by $0.09 to $26.36. Over the year, average hourly earnings have risen by $0.65, or 2.5%.
    FOMC/interest rates: The Federal Open Market Committee did not meet in August, so the target federal funds rate range remained at 1.00%-1.25%. If upward price inflation continues to stagger, the Committee may be hard-pressed to raise interest rates when it next meets in mid-September.
    GDP/budget: The gross domestic product expanded over the second quarter at an annual rate of 3.0%, according to the second estimate from the Bureau of Economic Analysis. The first-quarter GDP grew at an annualized rate of 1.2%. Consumer and government spending and business investment were positives in the report, offset by deceleration in residential investment and net exports. As to the government's budget, the federal deficit for July was $42.9 billion, $47.3 billion lower than the June deficit. Through the first 10 months of the fiscal year, the deficit sits at $566 billion, which is about 10.6% above the deficit over the same period last year.
    Inflation/consumer spending: Upward price inflation continues to be weak. Consumer spending, on the other hand, is increasing. The personal consumption expenditures (PCE) price index (a measure of what consumers pay for goods and services) ticked up only 0.1% in July. The core PCE (excluding energy and food) price index also inched ahead 0.1% for the month. Personal (pre-tax) income climbed 0.4% and disposable personal (after-tax) income increased 0.3% from the prior month. With increased income, consumer expenditures rose, climbing 0.3% in July. 
    The prices companies receive for goods and services fell 0.1% in July from June, according to the Producer Price Index. Year-over-year, producer prices have increased 1.9%. Over 80% of the July decrease in prices is attributable to services, which fell 0.2%. Prices for goods edged down 0.1%. Prices less food, energy, and trade were unchanged in July from the prior month and are up 1.9% over the last 12 months.
    Consumer prices rose a scant 0.1% in July, after recording no change in June. For the 12 months ended in July, consumer prices are up 1.7%, a mark that remains below the Fed's 2.0% target for inflation. Core prices, which exclude food and energy, edged up 0.1% in July, the same increase as June, and are up 1.7% year-over-year.
    Housing: Scant inventory and rising prices have slowed sales of new and existing homes in July. Total existing-home sales slipped 1.3% for the month and are up only 2.1% from a year ago. The July median price for existing homes was $258,300, which is 2.1% below June's median price of $263,800 but up 6.2% from the price last July. Housing inventory declined 1.0% for the month and is now 9.0% lower than a year ago. The Census Bureau's latest report reveals sales of new single-family homes fell 9.4% in July to an annual rate of 571,000 — down from June's upwardly revised rate of 630,000. The median sales price of new houses sold in July was $313,700 ($310,800 in June). The average sales price was $371,200 ($379,500 in June). The seasonally adjusted estimate of new houses for sale at the end of July was 276,000. This represents a supply of 5.8 months at the current sales rate, which is an increase in inventory from May and June (5.2 months).
    Manufacturing: Industrial production expanded by 0.2% in July following an increase of 0.4% in June, according to the Federal Reserve's monthly report on Industrial Production and Capacity Utilization. Manufacturing output edged down 0.1% after increasing 0.2% in June. Contributing to the recession in manufacturing output was a drop in production of motor vehicles and parts, which decreased 3.5%. Mining output was again strong, posting a gain of 0.5% in July after increasing 1.6% in June. The index for utilities rose 1.6% after remaining stagnant in June. Capacity utilization for the industrial sector was unchanged in July to 76.7%, a rate that is 3.2 percentage points below its long-run average. New orders for durable goods fell in July on the heels of a steep drop in aircraft orders. The Census Bureau reports new orders decreased $16.7 billion, or 6.8%, from June, which saw new orders increase 6.4%. However, excluding the transportation segment, new durable goods orders increased 0.5%. Orders for core capital goods (excluding defense and transportation) jumped 0.4% in July. Over the 12 months ended in July, core capital goods orders are up 3.5%.
    Imports and exports: The advance report on international trade in goods revealed that the trade gap widened 1.7% in July over June. The overall trade deficit was $65.1, up $1.1 billion from the prior month. The total volume of exports of goods decreased $1.6 billion to $127.1 billion. Imports of goods fell $0.5 billion to $192.2 billion. Prices for U.S. imports edged up 0.1% in July, led by higher fuel prices, which more than offset lower prices for nonfuel imports. The July increase in import prices followed declines in each of the two previous months. U.S. export prices advanced 0.4% in July, after decreasing 0.2% in June.
    International markets: In anticipation of its departure from the European Union, the United Kingdom's Department for Business, Energy and Industrial Strategy published a set of reforms aimed at strengthening the country's image as a leader in corporate governance. Negotiations between the UK and the EU continued with nothing of substance resolved to date. China's stocks surged on strong corporate earnings reports. Otherwise, world markets were mixed, particularly at the end of August as investors wait for the economic impact of Hurricane Harvey.
    Consumer Sentiment: The Conference Board Consumer Confidence Index® for August rose to 122.9, up from July's revised 120.0. Consumers expressed growing confidence in current economic conditions, but were reticent about future economic prospects.

Harvey's Aftermath

The tropical storm that hit Houston the Texas and Louisiana Gulf Coasts last week was a devastating blow to this city and region.  Luckily, all of New Capital’s systems, office, and personnel were unaffected.  We have been in contact with all affected clients and can report that a small minority of our Houston clients experienced damage.  But on the whole, the damage to the city and its citizens’ homes and psyches has been widespread and catastrophic.  The images of our fellow citizens’ traumas and suffering are indelible and our hearts are heavy.  May they receive the resources, compassion, comfort, and peace that they need to rebuild their lives and overcome their suffering.  If we can help you plan any charitable giving around this event, please let us know.  We have contacts at several organizations that will be focused on recovery.  Also, we are offering financial advisory assistance to those who need to speak with someone in the wake of this disaster – if you feel we can help someone, please let us know and we will be pleased to help them if we can.

As the water recedes, the damage is assessed, and the remediation begins, people are beginning to talk about what it means.



In 1900, a hurricane arrived unannounced at night and drowned and destroyed the city of Galveston, which had been built on a barrier island situated right in the Gulf of Mexico; this storm remains the deadliest in US history with over 6000 fatalities.  And while the city, at that time the largest in Texas, would rebuild, including a massive seawall to block tidal surges, it would never again regain its size and stature – how many would risk life, limb, and property for the chance to live on an island paradise?  From that point on, Houston, Galveston’s small neighbor inland at the northern shore of Galveston Bay, would grow into a colossal metropolis of over six million people spreading out over a vast coastal prairie.  Houston represented the high ground in comparison to a barrier island in the gulf.

Over a century later, it is no longer so easy to view Houston and its vast environs as high ground.  Harvey dropped torrential rains for days straight, and many parts of Houston flooded.  Perhaps no city could endure such rain without flooding.  But not all cities are at risk of such rain, since not all cities lie in the path of tropical storms. Houston lies about 35 feet above sea level, higher than Miami, Boston, New York and many other coastal cities.  But the vast amount of rain that tropical storms deliver require ample drainage, and Houston’s network of bayous can only shed copious water so fast.  Buffalo Bayou itself courses through the heart of Houston’s most affluent neighborhoods, its downtown, and its industrial core east side, and for that reason retention reservoirs and dams were built at Barker-Addicks to control Buffalo Bayou’s flow.  Other bayous, including Braes, have been altered over many years to enhance flow rates, and yet still are overmatched in many storms.  Billions have been spent on flood control projects in Houston, and yet Harvey overwhelmed many if not most of them.  The storm destroyed property in areas immediately proximate to bayous (for example, Meyerland); areas secondarily proximate to bayous (for example, Bellaire); areas proximate to man-made reservoirs (for example, Lake Conroe); and more.  Perhaps most dismaying is the intentional (and ongoing) dam release flooding of areas around the Barker-Addicks reservoirs, in order to save the core of the city.  Maps of the destruction, at least to these eyes, show an area astonishingly equal to perhaps 50% of Houston’s land area to be affected.

Most of the damage, estimated at 80%, appears not to be covered by the National Flood Insurance Program, and could well result in total financial ruination of those impacted if the federal government does not massively inject capital into the region, as it is currently expected to do (as of today $8 billion has been approved as an initial payment).  Even with assistance, it is unlikely that homeowners will be made whole.  Given the precarious financial state that many Americans live in, with little to nothing in savings except for their home equity, even modest shortfalls in financial remediation could prove to be ruinous.  The financial stress on many of Houston’s inhabitants, many of them ill-conditioned to absorb this blow, could be extreme.  Of New Capital’s approximately 60 Houston-based clients, approximately 5 experienced flooding in their homes.  We are very sorry for these clients, but are also relieved more were not impacted.

Houston has always been built on a resilient and can-do spirit.  Many believe that this will be enough to bring the city back.  My cousin in his mid-70’s emails me that “like the htowners b-4 us...when going gets tough...the tough get going.”  And maybe that is the case here, time will tell.  But I cannot help but conclude that Harvey represents a “watershed” moment that will forever alter Houston’s course.  And that may not be a bad thing.

Past disasters have altered the course of many cities, including the Great Chicago fire of 1871, the San Francisco earthquake of 1906, and the Galveston hurricane of 1900.  Many other cities have been destroyed by the insanity of war, in which humans intentionally destroy their own capital and those of other humans.  These cities rebuilt in the wake of these historical calamities, and re-built more mindful of geography and building methods.  Chicago changed is construction methods to be far more fire resistant.  San Francisco invented construction more durable to earthquakes.  Galveston constructed a sea wall.  Both Chicago and San Francisco have gone on to become global cities.  Galveston, which had grand ambitions in 1900 even as the murderous hurricane churned up in the gulf, was never the same city again, and was relegated to a moderately sized port and recreation community.


The Questions We Now Face

Just as these cities once did, Houston now faces major questions:

  • “Out or Up?” – Houston has been built to sprawl over as wide a land mass as possible, with single family homeownership preferred.  Given the broad rainfall and flooding of Harvey, should Houston build up instead?  Inside the 610 Loop, that trend had already begun years ago.
  • “Regulated or Not?” – Houston has been built with the slimmest of construction regulations.  Given the vast destruction of the housing stock most affected in low lying areas, and given the enormous amount of concrete that has been placed over the coastal prairie, should stricter regulation now be both accepted and embraced?
  • “Big or Right?” – Houston has always wanted to be big, and its bigness was severely punished by Harvey.  Should Houston seek to be right-sized, whatever that means, allowing just the number of people who comfortably fit in flood free areas?
  • Growing or Being? - Houston has always gone for growth, it is in the very conception of the city.  Hard as it may be to imagine, should Houston instead focus on moderate growth, similar to a city like Minneapolis?  Is there anything wrong with that?
  • Green or Brown?  Houston has been an industrial city, and a port city.  Should it instead focus on green development, taking advantage of its year round warm climate, abundant rainfall, and tree-friendly environment?
  • Global or Local?  Houston has become a global city with its vast immigration, and that has added extraordinary depth of character in the past two decades.  Should the city continue to welcome immigrants with the same open arms? 


My Opinion

If it was me, I would pick: Up, Regulated, Right, Being, Green, and Global.  Houston has traditionally been almost completely the opposite: Out, Not Regulated, Big, Growing, and Brown (it has, however, always been a globally interested city) .  In other words, in my judgment, the Houston Storm of 2017 is not just a storm, but the event that may cause Houston to do a 180.

Like manufacturing plants seeking “six sigma” quality, Houston should adopt a goal and a slogan: “No one floods” – and it should take all reasonable steps to reach that goal.  If a structure or area cannot be reasonably guaranteed to not flood under Harvey-like conditions, then it should be evaluated for long term planning overhaul.  Capital should not flow to structures and areas where the returns are likely to be bitter.  The City and County should do an about face and adopt some of the strictest development ordinances in the United States.  Owners in areas that consistently flood should be made reasonably whole by our citizens, and the land should be returned to its natural state.  Bayous should not be settled but should instead be re-developed as greenbelt jewels that draw people from all over the world to hike, bike, and explore.  Plants and trees grow very well here, and our urban forest should be re-vitalized and urban gardens developed.  Our urban center should be built up with attractive, energy efficient high rises, just as is occurring in so many other cities in the world.  Our freeways in the core should, wherever possible, be depressed below grade to be able to do double duty as flood channels during storms, and should carry aesthetically attractive bridges such as those between Hazard and Montrose over US 69.  Billboards should be more restricted, and driving in Houston should become a visual delight, not a depressing ad.  Go-go growth should give way to beautification and right-sizing.

Houstonians may reject these ideas.  But to do so is to jeopardize the long term.  Houston does not have a flood control problem.  It has a zoning problem, that is now perfectly clear.  Storms like Harvey cannot be controlled, they can only be avoided.  Our family had a fairly uneventful storm.  We took swims and hot tubs outdoors both during and between the rain, walks in our neighborhood, and watched family movies together.  We were able to do so only because our home did not come even close to flooding.  Many more Houstonians should have that benefit than just my family.

Houston should be a place where its residents don’t fear and flee from nature’s largest storms, but instead calmly wait for them, confident that we can cakewalk through even an 800 year flood.  Houston and Texas are utterly dependent on tropical moisture from the Gulf of Mexico.  Without it, our region would be a desert.  We got a taste of that in 2011, when no tropical moisture reached Texas between February and October.  With no rain at all, Texas literally burned up; the town of Bastrop east of Austin exploded in flames and a 10,000 year old pine forest was completely destroyed.  At my ranch between Houston and Austin, wildlife was silent, the ground baked, and old growth trees died.  In contrast, on my visit right after Harvey, this land was green and lush, ponds were full, and wildflowers bloomed.  Tropical moisture gives far more life to Texas than it takes, and we should be grateful for it, and respect it.

Expressing that respect by adjusting our settlement habits will take years, decades, even generations, to bring about.  Whether Houston has the vision, energy, and capital to bring about these changes is completely unknown.  There will be many “business as usual” arguments by those both with and without special interests, and they may well prevail.  The good news is that these changes have already begun with things like the Bayou Greenways initiative, renovation of old and creation of new parks, roadside tree plantings, remediation of Galveston Bay, and the increasing high-rise development in our urban core.  There are non-profit organizations, such as Trees for Houston and Galveston Bay Foundation that have spent years honing their ideas, and they should now be put in the highest leadership roles, and we should listen to them.  The city and its citizens should now throw their full weight behind the concepts and vision represented in these early prototype efforts.  They were the future, and now must be the present as well.


The Storm’s Reach

Harvey raises national and global questions as well.

It is difficult to argue that go it alone rugged individualism is the sole acceptable sociology in the face of this communal tragedy, and happily Houstonians of all political persuasions have not done so but have instead everywhere provided care and support. 

It is hard to argue for the elimination of FEMA or of the government itself when it is so clearly needed in the face of communal distress. 

It is hard to argue that climate change is either a “hoax” or has no real world effects when Harvey’s rainfall shatters records, and may some day be eclipsed by even worse and more frequent storms. 

It is hard to argue that low income skilled immigrants should be banned or expelled, rather than at the very least offered valid work permits, when they are needed every day to do jobs in the Houston region, especially now. 

It is hard to argue that the many industrial and petrochemical plants should not be highly regulated when they are vulnerable to almost immediate destruction. 

It is hard to argue that residents near these facilities do not deserve measures of protection when they can be exposed to contamination over both short and long term. 

It is difficult to argue that victims of Hurricane Sandy should be denied federal financial assistance but the victims of Hurricane Harvey should get all they need. 

And yet these and other similar arguments have been made, and when the press leaves Houston in a few weeks, will likely be made again.  Hopefully, such arguments will now be less accepted. 

The subject of climate change, especially, should no longer be controversial.  The scientific evidence against a human induced changing climate was already tenuous at best before Harvey.  Those tenuous arguments are in the process of being completely demolished both by authoritative empirical scientific research and now by reality.  The United States now needs to respond with leadership and innovation to this challenge, and yet the current government shows no inclination whatsoever to accept reality, much less address it.

Houston itself faces difficult decisions with regard to its carbon based economy.  Vehicular transportation, which constitutes the vast majority of use for petroleum, is undergoing its most dramatic period of change since the advent of the automobile over a century ago.  The confluence of electric cars, self driving cars, and ride sharing will dramatically alter the demand for internal combustion cars, and with it, gas and oil.  Though Houston’s economy is far more diversified than it was during the devastating depression it suffered in the 1980’s, it is still highly reliant on the fossil fuels industry.  How Houston responds to changes in the energy business will largely determine its economic future, and to date, the record is mixed.  Houston will never challenge Austin’s pre-eminence in information technology, which has been decades in the making.  Dallas has developed a highly diversified economy, and with Harvey, the Dallas-Fort Worth area will logically be able to make the case that it alone is the Texas mega-city that can both attract business and protect its employees’ investments in their own homes.  San Antonio may also benefit from any reluctance of businesses to locate in Houston given the evident risks to property here.  Houston’s vital port and medical industry are critical assets, and yet it is difficult to envision Houston’s future without a strong energy industry.

A few days ago, Amazon announced it is seeking to build a second headquarters.  It states requirements including access to a modern (young, technologically advanced) labor pool, high quality of life, access to quality education, and ample public transportation.  It may be that Houston can offer many of these things, and yet initial reactions in the press almost completely discount the possibility that Houston might even be strongly in the running.  Houston’s decades-long aversion to planning its future may now hinder it in the sweepstakes to attract the nation’s most prominent company.  Time will tell.

In many ways, the future of Houston now lies in the hands of the federal government, because no other entity can make good on $180 billion in losses and counting.  The City’s and County’s coffers are already stretched to breaking by police and fire, schools, and infrastructure, and residents show no inclination to pay more in property taxes than those that already annually outrage them.  The State will provide no assistance given its longstanding aversion to taxes.  That leaves the Federal government, currently in the control of a party that is, at least in its rhetoric, inveterately opposed to government spending and taxation, holding the bag to, literally, bail Houston out.  It is a situation that could be financially precarious for Houston for some time to come.  While the Federal wallet is opening in these early days after the storm, it is not hard to envision it closing in the months ahead as life gets back to “normal.”


Financial Implications

The financial implications for individual homeowners are immediate and potentially dismal.  Home equity, often thought to be an inviolable good in the United States, has been destroyed in great measure by Harvey.  How many Houstonians now wish they had been apartment renters, and instead invested their equity in a diversified global liquid portfolio?  The lesson of home equity volatility was brought home in the financial crisis, and is now amplified again.  No one should think that home equity does not bear risk.  As the owner of two homes in Houston and a ranch halfway to Austin, the approach of Harvey gave me great anxiety.  I count myself as one of the luckiest in Houston, and I am cognizant that it may not always be so.

The National Flood Insurance Program (NFIP) faces many questions in Harvey’s wake, as it has for a long time.  With a $25 billion debt and growing, many are waking up to the fact that the program is not run to make a profit, but instead has political incentives and pressures to underwrite insurance for properties that are highly likely to flood, and many of which have flooded multiple times in the past.  The program, therefore, creates “moral hazard”, inducing and subsidizing people to settle in areas that may best be left unsettled.

For those who have federal flood insurance, the road to collecting it can be long and difficult, requiring copious documentation, and above all delivering the funds to mortgage banks that have control over disbursements pending documentation.  This painful process will force homeowners to pay out of their own pockets, and then seek reimbursement.  This will not be a pretty sight at all, as already financially stressed Houstonians grow even more stressed by raiding their savings to pay to renovate.

And there are the many, estimated at 80% of Houston’s residents, who have no flood insurance and who flooded.  The potential for financial distress and ruin for these residents is amplified even more.

Aid, therefore is vital, and while the signs are good, they are nowhere near the almost $200 billion that will be required.  It is a staggering number, though Houston’s 2015 GDP was about $500 billion, so it therefore represents almost 5 months of Houston capital activity and formation.  It is therefore survivable.  By contrast, New Orleans 2005 GDP was about $80 billion, and approximately $60 billion in damage was incurred from Katrina.  If you want to think about these numbers in practical terms, think about the entire city of Houston working for five months, and at the end of five months having absolutely nothing to show for it as the capital was destroyed at the end.

Property insurance in Houston, already among the most expensive in the nation, is likely to rocket upwards even more, adding yet more financial burden to already reeling homeowners.  I am not looking forward to the renewal rates for my home.  The reaction by many homeowners may be to raise their deductibles or lower their coverages in order to better afford premiums, thereby even further transferring risk onto themselves.


Personal Experience

My heart goes out to anyone who flooded.  My family has vast personal experience with flooding.  My grandparents bought a wonderful modern home in the 1960’s, on South Braeswood right across from Braes Bayou.  The home provided wonderful times for visits and holidays.  Later, my parents would themselves buy and move into this home, and it was here that I grew up.  One day in 1983 as a high school senior and while traveling with my mother on the east coast to visit colleges, we got a call from my father who informed us that our house had flooded with a foot of water, ruining much.  I still remember how upset and traumatized my mother was – we cut our visit short and returned home.  Our home was fixed and we continued on with life, spending many more happy times there.

By the time Harvey roared out of the gulf, this home had flooded another three or four times, including twice recently in the Memorial Day and Tax Day floods.  My parents moved to higher ground in West University after the Memorial Day floods, and thankfully incurred no damage to their new home from Harvey (well, almost none – my dad accidentally left his four car windows cracked and in the driveway before departing for a three week vacation, but at least it’s progress). 

Harvey of course flooded the Braeswood house again up to four feet.  Abby and I drove over and looked at it after the water receded, drawn to see the latest indignity inflicted on this structure that held such quantity and force of memory.  I stood, yet again, in astonished silence, looking here and there at the soggy damage, and it made me sad.

Our homes should not make us sad.  They should places of joy, safety, and reliability.  And they should be those things especially in the face of storms.  If they are not, then like all investments, we should put aside our feelings and consider what is prudent.  My hope is that Houston and its people will now, finally, start to do just that.


Hurricane Harvey

Dear Clients,

Overnight, Hurricane Harvey has devastated Houston, our city, with its unprecedented rainfall.  More is to come over the next few days, but we are hoping that the worst may soon be over.  Reports of flooding come in from all over the city, and the nation itself is watching this extraordinary event.  Most of New Capital’s clients are in Houston, a number are in Austin, San Antonio, Dallas, and other central Texas locations that have encountered this awesome storm, as well as scattered across the United States.  I am thinking about all of you right now, wherever you are, and hoping you are as safe and well as can be.  Our family members and friends spread all over the country have been sending urgent texts as they watch the unfolding news of hurricane Harvey.

Our family is fine at home right now, a 1923 two story brick craftsman built like a tank in Houston’s Museum District.  We are lucky and grateful, to be, for now, free of floodwaters.  Unfortunately, overnight the rain came in band after band of storms, culminating in several of these bands stalling and then bonding together in a deluge of biblical proportions.  Harvey, even more than the astounding tropical storm Allison before it, has brought too much too fast, and it is piling up all over the city, far too fast for our network of storm sewers, bayous, and bays to accept it as fast as it is delivered.  

We are deeply rooted in the Houston area.  Our family owns three properties in the storm’s area: our old home which we rent out, our current home two blocks away, and a ranch property between Houston and Austin.  My parents own a home here and so does my brother.  We own some commercial warehouses too.    My parents’ old home, a home that was my childhood home and before that my grandparent’s home, sadly flooded multiple times over the years (it is located right next to Braes Bayou), so we are well familiar with floods and have felt their pain and trauma too many times.  Our hearts go out to all of our friends, family, fellow Houstonians, and fellow Texans in this moment of need.

There will be many, far too many, who will experience loss and destruction from Hurricane Harvey.  This storm has charged into one of the most populated and rapidly growing areas in the United States.  From Corpus Christi to Houston, across to Austin and San Antonio, almost 20 million people will have experienced its power.  In this time when scientists are constantly, insistently, and demonstrably warning that such storms could become more commonplace, it is incumbent upon all of us to at least consider, with open minds, the risks we are taking, whatever they may be, and whether they are worth it.  As someone who is in the daily business of exploring risk and return, and cost and benefit, this exercise should always be primary to good decision making.  Houston itself, a city which has always preferred liberal development practices, may need to adopt more conservative approaches in the future – but I will leave that to the engineering and planning experts.  I have full confidence that this dynamic city, one of our nation’s fastest growing, and home to extraordinarily resilient, creative, industrious, and generous people from all over the world, will move forward from Harvey with even more determination to live in harmony with our Gulf Coast prairie, so that the storms which come our way contribute rain and cooler temperatures in the summer, without the destruction of valuable property.

I will do my best to communicate with you as advisable over the next days, and in the storm’s aftermath.  We are ready to assist any client in need.  I expect our office to be at least partially staffed this coming week, and everyone at New Capital is on notice to be ready to assist with any documentation, administrative needs, or simply to render advice.  Please do not hesitate to ask, we will turn away no request that we can reasonably complete, whether that involves moving money or getting information for you.

As the rain continues in Houston, please put your safety first, and we wish everyone health, safety, and a quick recovery from hurricane Harvey.

With best wishes,

Leonard M. Golub, CFA


Our Summer Road Trip: Chicago to Quebec

by Leonard Golub, CFA

Our family returned a few days ago from a fantastic car trip: Chicago, Detroit, Niagara, Toronto, Ottawa, Montreal, Quebec, and ending in western Massachusetts.  We saw and learned many new things, and much of it, for me, resonated with current events.

Chicago, Detroit, Niagara, Toronto, Ottowa, Montreal, & Quebec - 1,172 Miles

Hannah herself was traveling in Eastern Europe for two weeks prior to meeting me and the kids in Chicago, our starting point.  With her two cousins, she retraced her family’s roots before her grandfather arrived as an immigrant in Detroit Memorial Plaquejust before the doors to America shut with the enactment of the Immigration Act of 1924.  What she found in little towns in Ukraine, Belarus, and Lithuania was the result of the failure of a majority to respect the culture, identity, and ultimately the right to live of a small minority.   Where Jews once lived as integral members of communities, all that remains are a few elders and a few dilapidated structures.  Sadly, Hannah and her cousins took several long walks across forests and meadows to reach ravines, into which the victims of prejudice – men, women, and children, including Hannah’s [great grandmother] – were forced to give up their lives to hateful murderers.

Hannah’s grandfather, Norman Shulevitz, managed to get out of this cauldron and began his life in Detroit with $25.  When that quickly ran out, he ate food scraps from garbage.  Almost 100 years later, he has left many successful, accomplished, and contributing children, grandchildren, and great grandchildren.  His granddaughter and two great grandchildren, my children Abby and August, began our own journey through the Great Lakes region in Chicago.

Abby & August in ChicagoChicago is today in the very vanguard of the transformation of American cities, a transformation characterized by an explosive and dynamic re-birth of the central city, after having been abandoned for the suburbs starting in the 1950’s.  Now, construction of residential and commercial high rises, new restaurants, new parks, and an electric summer vibe makes Chicago a major destination for young people seeking work and companies seeking to employ them.  Chicago is consistently ranked one of the top places for workers and companies.  Young generations want to live near each other, and they want to be entertained by their city.  Chicago is meeting that demand.  Legendary for its architecture, Chicago’s skyline gleams and astonishes.  We spent days walking and sightseeing.  I had a good meeting at Morningstar.

Chicago, of course, suffers from ongoing poverty and race discrimination especially on its South Side.  But the city possesses an extraordinarily vibrant core that gives me hope that it will in time solve these problems. 

We drove across Southern Michigan to reach Detroit.  The Michigan countryside is lovely, with well-kept fields and farms, and stands of forest all along the way. We stopped in Ann Arbor, home to the UniversityThe world famous Zingerman's deli of Michigan, and enjoyed sandwiches at world famous Zingerman’s deli, before arriving in Detroit. The lodgings I arranged for were in an Airbnb apartment in one of the many blighted areas of the central city.  A young couple had purchased this property and fixed it up.  A wonderful missionary family lived below, after having left Boise Idaho a year ago seeking a challenging experience to use their faith.  From this neighborhood, we got a sense of the ongoing trauma of Detroit: the 1967 riots, the ensuing white flight to the suburbs, the massive and catastrophic job losses in the automotive industry, all culminating in the literal disintegration of Detroit’s urban core.  We were staggered by the sheer quantity of vacant lots, skeletal homes and buildings, and boarded up commercial strips.  And many told us this was far better than several years ago.

Detroit is the American city with the largest percentage black population – almost 85%.  In the mid 1800’s the city was code-named “Midnight” by the Underground Railroad, and was where slaves were smuggled across the Detroit River and into Canada to freedom. Dilapidated structures of DetroitIn the early 1900’s it was where Southern blacks flocked to find jobs and leave behind Jim Crow.  It was where the sounds of the blues, jazz, and pop came together in the incomparable sounds of Motown.  And it is where the pain of the African American experience in America has been both left behind and maintained, both triumph and tragedy.  We were proud to visit Detroit, and we encourage others to go also to see the Ford Rouge plant in action building F-150 trucks, the extraordinary Henry Ford Museum, and the period settings of Greenfield Village, among others.  I am planning to see Katherine Bigelow’s new film Detroit, and if it is as good as her previous The Hurt Locker and Zero Dark Thirty, it will be good indeed.

There are signs of rebirth in Detroit.  Downtown is renovating like other American cities; young people are moving there attracted to the low real estate prices; dilapidated structures are being removed; the auto industry has stabilized after the catharsis of 2008.  Detroit sits in an extraordinarily bountiful location: surrounded by natural landscapes perfect for farming, blessed with an infinite water supply, it is our busiest commercial border with Canada, with trucks lining up with us at the border to enter Windsor, Ontario.

We crossed the Detroit River into Canada and immediately saw mile Abby, August & Hannah at Niagara Fallsafter mile of wind turbines as far as the eye could see.  Our drive took us to see the extraordinary power of Niagara Falls, though it wasn’t simple to ignore the commercialization all around one of the world’s extraordinary natural wonders. We enjoyed the charming town of Niagara On the Lake, started by American Loyalists who left an American Revolution that they felt was treasonous to their King.  We took in the charms of Toronto, a financial powerhouse and famous for its ethnic diversity and inclusiveness – the dinner we had in Chinatown was wonderful.

Ottawa is the national capital of Canada, and I cannot recommend enough a visit there.  It sits on the Ottawa River, the boundary between English speaking Ontario and French speaking Quebec, and it graciously avoids taking sides: we were constantly greeted with “Good day bon jour” – all one sentence, no division, you answer in your language of choice and so the conversation will go.  At midday an endless expanse of spandex clad did yoga in front of the gorgeous Parliament, noted for its Peace Clock Tower.  Ottawa is a city that teaches the world how to accept separate cultures.

Yoga at Parliament Hill in Ottawa 

Montreal, a city I have visited twice before and loved from the first minute, was bursting with energy, with its famous street festivals and café culture.  This French speaking city has within it a historic Anglophone community, descended from those who fled the violent American Revolution and other immigrants who arrived later.  Montreal is a stylish and urbane capital, with 50,000 people working in the fashion industry; it is also the world’s largest grain port, passing the bounty of Formula E RacingCanada’s vast interior on to the world.  We got very lucky: the Formula E Grand Prix racing circuit of all electric cars, took place while we were there and we got great seats to see exciting professional racing without the loud engines and fumes, taking place right in the streets.

The Old City of Quebec is the only remaining walled city in North America, and is rightfully a UNESCO World Heritage City.  Its cobble streets lined with cafes and galleries are one of the most romantic places in North America.  Not only is it beautiful, but it is extraordinary historical: it is the place where French dominance in the Great Lakes was built, and also where it was lost, in an astounding 20 minutes, to the British in the Battle of the Plains of Abraham.  In a few minutes in 1759, over 250 years ago, 60,000 residents of New France – farmers, tradesmen, trappers, traders, clergy, women, children – suddenly became subjects of the King of England.  They have remained so since then, not always happy about it, but calculating that the benefits of civility, integration, cooperation, partnership, and peace outweigh the costs.  Indeed, though they are different, they have been permitted to retain their culture, language, religion, and ways.  Quebec is a place to go to see how a minority peacefully and productively stakes it claim in the world, and how a majority dominion gives it the air and space it needs to be free and live.

We crossed the border into Vermont, a gorgeous place, had lunch with some good friends and clients in Williamstown, MA, and ended our trip visiting Amherst College where I went to college, and Smith College, where Hannah obtained her graduate degree.  Our trusty rental carDespite the belief among (too) many these days that colleges and universities are “counterproductive”, I’ll be very happy if my kids attend either of these.  We had pizza at the best – Joe’s Pizza in Northampton.  We returned our rented VW Jetta and flew back on Southwest.

Our trip took us through the incredibly vital Great Lakes and St. Lawrence waterways.  Incredibly, they began to be formed only 14,000 years ago, practically yesterday in geologic time, when Ice Age glaciers retreated during a time of great climate warming, ushering in the modern climate age.  99% of the water in the Great Lakes remains from the melt of those glaciers.  The region is bountiful in minerals, fresh water, farmland, cities, and industrious and courteous people, regardless of which side of the border.  While a number of cities – Detroit, Buffalo, Rochester – have experienced hard times, they are coming back fast given their extraordinary advantages.  Canada is a country the size of Russia with the population size of California, and I can report that I found its civility and politeness to be the biggest respite from the pervasive ugliness often present in the United States.  We can learn a lot from our neighbors to the north.

We can learn a lot from the rest of the world.  The rest of the world is not an unexceptional mass, but a deep resource available for our learning, and our investment.  And invest we do, all over the world.  In 2017, that is paying dividends and then some.  Your international stock holdings are up about 20% year to date, versus 8% for your US stock holdings.  Of that 20%, approximately 10% is from returns on the investments themselves; the other 10% is from the rapid depreciation of the US dollar against foreign currencies since President Trump’s inauguration.  While no one can make accurate predictions about the future direction of currency rates, Todd Centurino, our new Chief Investment Officer, and I expect that this trend may well continue.

We are getting strong attendance response for our October 26 conference.  We have been working on so many new initiatives here at New Capital, and I hope to have the chance to present them to you in person then.  Learn more or register now.


Pursuing a Better Investment Experience

Key Principles to Improve Your Odds of Success

1. Embrace Market Pricing

The market is an effective information-processing machine. Millions of participants buy and sell securities in the world markets every day, and the real-time information they bring helps set prices.



2. Don't Try to Outguess the Market

The market’s pricing power works against mutual fund managers who try to outperform through stock picking or market timing. As evidence, only 17% of US equity mutual funds and 18% of fixed income funds have survived and outperformed their benchmarks over the past 15 years.


3. Resist Chasing Past Performance

Some investors select mutual funds based on past returns. However, research shows that most funds in the top quartile (25%) of previous five-year returns did not maintain a top-quartile ranking for one-year returns in the following year. Past performance offers little insight into a fund’s future returns.


4. Let Markets Work for You
The financial markets have rewarded long-term investors. People expect a positive return on the capital they supply, and historically, the equity and bond markets have provided growth of wealth that has more than offset inflation.


5. Consider the Drivers of Returns
Academic research has identified these equity and fixed income dimensions, which point to differences in expected returns. Investors can pursue higher expected returns by structuring their portfolio around these dimensions.


6. Practice Smart Diversification

Diversification helps reduce risks that have no expected return, but diversifying within your home market is not enough. Global diversification can broaden your investment universe.


7. Avoid Market Timing
You never know which market segments will outperform from year to year. By holding a globally diversified portfolio, investors are well positioned to seek returns wherever they occur.


8. Manage Your Emotions
Many people struggle to separate their emotions from investing. Markets go up and down. Reacting to current market conditions may lead to making poor investment decisions


9. Look Beyond the Headlines
Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. When headlines unsettle you, consider the source and maintain a long-term perspective.


10. Focus on What You Can Control

A financial advisor can offer expertise and guidance to help you focus on actions that add value. This can lead to a better investment experience.



Quarterly Market Review: April-June 2017

The Markets

The second quarter proved to be a bit bumpy for equities, but each of the benchmarks listed here closed the quarter ahead of their first-quarter closing values. April saw equities close the month ahead of March, buoyed by favorable corporate earnings reports, proposed tax cuts, and strong foreign economic advances. Nasdaq led the way posting monthly gains of 2.30%, followed by the Global Dow, which gained almost 1.50%. The large-cap Dow advanced 1.34%, ahead of the S&P 500, which increased close to 1.00% for the month. Even the small-cap Russell 2000, which has had some rough weeks, closed April 1.05% ahead of its March close.

May was a slower month as consumer spending and wage growth were relatively weak, with only 138,000 new jobs added in May, compared with an average monthly gain of 181,000 over the prior 12 months. Nevertheless, only the Russell 2000 lost value, falling 2.16% from its April closing mark. Nasdaq continued to surge, ending May with a monthly gain of 2.50%.

June saw mixed results for the indexes listed here. The Nasdaq lost almost 1.00%, while the Russell 2000 made up for its May losses, advancing almost 4.00% over May. The Dow had a strong June, closing the month up 1.62%, while the S&P 500 and the Global Dow failed to advance 0.50% over May. Long-term bond prices increased in the second quarter with the yield on 10-year Treasuries falling 8 basis points. The price of gold fell during the second quarter, closing June at $1,241.40, down from its $1,251.60 closing price at the end of the first quarter.

Market/Index 2016 Close As of June 30
Month Change
Quarter Change
YTD Change
DJIA 19762.60 21349.63 1.62% 3.32% 8.03%
Nasdaq 5383.12 6140.42 -0.94% 3.87% 14.07%
S&P 500 2238.83 2423.41 0.48% 2.57% 8.24%
Russell 2000 1357.13 1415.36 3.30% 2.12% 4.29%
Global Dow 2528.21 2769.39 0.38% 2.90% 9.54%
Fed. Funds 0.50%-0.75% 1.00%-1.25% 25 bps 25 bps 50 bps
10-year Treasuries 2.44% 2.30% 10 bps -8 bps -14 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.


 Monthly Economic News

  • Employment: May's employment report showed unexpected weakness in the labor sector with 138,000 new jobs added in the month, on the heels of 174,000 new jobs added in April, revised. April and March were downwardly revised a combined 66,000, which, when coupled with the average gain of 181,000 over the prior 12 months, clearly shows that job growth is slowing. For May, job gains occurred in health care, mining, and professional and business services. The unemployment rate dipped to 4.3% — down from 4.4% in April. There were 6.9 million unemployed persons in May. The labor participation rate inched down 0.2 percentage point to 62.7%. The average workweek was unchanged at 34.4 hours. Average hourly earnings increased by $0.04 to $26.22. Over the last 12 months ended in May, average hourly earnings have risen by $0.63, or 2.5%.
  • FOMC/interest rates: Following its meeting in June, the Federal Open Market Committee raised the target range for the federal funds rate by 25 basis points to 1.00%-1.25%. This is the second interest rate hike in 2017, with the first coming in March. In support of its decision to raise interest rates, the Committee observed that economic activity has been rising moderately so far in 2017, business spending has continued to expand, and, while job gains have moderated, the unemployment rate has declined. Noting that inflation has slowed in the short term, the Committee expects inflation to stabilize around 2.0% over the medium term.
  • Oil: The price of crude oil (WTI) closed June at $46.33 per barrel, down from its end of May value of $48.63. The national average retail regular gasoline price was $2.288 per gallon on June 26, 2017, $0.118 lower than the May 29 price but $0.145 more than a year ago.
  • GDP/budget: Expansion of the U.S. economy slowed over the first three months of 2017. According to the Bureau of Economic Analysis, the first-quarter 2017 gross domestic product grew at an annualized rate of 1.4% compared to the fourth-quarter GDP, which grew at an annualized rate of 2.1%. Growth in the GDP was slowed by downturns in private inventory investment, a deceleration in consumer spending, and a slowing in state and local government spending that were partly offset by an upturn in exports, an acceleration in nonresidential (commercial and business) fixed investment, and a deceleration in imports. As to the government's budget, the federal deficit for May was $88.4 billion. Through the first eight months of the fiscal year, the deficit sits at $432.9 billion, which is more than $27 billion above the deficit over the same period last year.
  • Inflation/consumer spending: Inflationary growth is slowing. Consumer spending, as measured by personal consumption expenditures, expanded at a rate of 0.1% in May. In contrast, PCE climbed 0.4% in both April and March. Core PCE (excluding energy and food) inched ahead 0.1% for the month. Personal income (pre-tax earnings) rose 0.4% for the month, and disposable personal income (income less taxes) enjoyed a 0.5% increase over April. However, wages and salaries moved very little in May, inching up 0.1%. Year-on-year, both the PCE price index and core prices have increased 1.4%.
  • The prices companies receive for goods and services were unchanged in May from April, according to the Producer Price Index. Year-over-year, producer prices have increased 2.4%. Energy prices, which fell 3.0% for the month, have played a large part in the lack of movement of the PPI. Prices less food and energy climbed 0.3% in May over April. The PPI less food and energy has risen 2.1% since last May.
  • Consumer prices fell 0.1% in May following a 0.2% increase in April. For the 12 months ended in May, consumer prices are up 1.9% for the year, a mark that remains below the Fed's 2.0% target for inflation. Even the core rate, which excludes food and energy, climbed 0.1% in May and is up 1.7% year-over-year.
  • Housing: Sales of new and existing homes, which had slowed during the first quarter of the year, may have picked up the pace in May. Generally, a lack of available homes for sale is driving home prices higher. The median price for existing homes reached its highest recorded level, coming in at $252,800 — 5.8% higher than the price last May. Sales of existing homes climbed 1.1% in May to a seasonally adjusted annual rate of 5.62 million from a downwardly revised 5.56 million in April. May's sales pace is 2.7% above a year ago and is the third highest over the past year. The Census Bureau's latest report reveals sales of new single-family homes increased 2.9% in May to an annual rate of 610,000 — up from April's rate of 593,000. The median sales price of new houses sold in May was $345,800. The average sales price was $406,400. The seasonally adjusted estimate of new houses for sale at the end of May was 268,000. This represents a supply of 5.3 months at the current sales rate, which is essentially unchanged from April.
  • Manufacturing: One of the reasons the Fed raised interest rates in June was due to expansion in business fixed investment. However, manufacturing did not expand in May according to the Federal Reserve's monthly index of industrial production (which includes factories, mines, and utilities). Manufacturing output declined 0.4% in May following an April increase of 1.1%. Overall, industrial production was unchanged in May, as declines in manufacturing were offset by gains in mining (1.6%) and utilities (0.4%). Total industrial production in May was 2.2% above its year-earlier level. Capacity utilization for the industrial sector edged down 0.1 percentage point in May to 76.6%, a rate that is 3.3 percentage points below its long-run average. As for durable goods, May's report from the Census Bureau shows new orders decreased $2.5 billion, or 1.7%, from the prior month. Excluding the volatile transportation segment, new durable goods orders increased 0.1%. Orders for core capital goods (excluding defense and transportation) dropped 0.2% in May, but are up 5.0% over May 2016.
  • Imports and exports: The advance report on international trade in goods revealed that the trade gap narrowed by 1.8% in May. The overall trade deficit was $65.9 billion in May, down $1.2 billion from April. Exports increased 0.4% to $127.1 billion, $0.4 billion more than April exports. Imports fell 0.4% to $193.0 billion, $0.8 billion less than April imports. Both import and export prices fell in May. Import prices fell 0.3%, led by a sharp 3.9% fall in petroleum imports. This was the largest monthly drop since import prices fell 0.5% in February 2016. U.S. export prices declined 0.7% in May, after advancing 0.2% the prior two months. The May decrease was the first monthly drop since August 2016 when the export prices fell 0.8%.
  • International markets:Major elections during the month were held in France (Emmanuel Macron and his party were elected) and the UK (Theresa May was reelected, but her Conservative Party lost parliamentary seats). Brexit negotiations began during the third week of June, although European markets had little reaction. Japan's economic growth slowed in the first quarter on the heels of weaker consumer spending, softening what had been the country's longest run of economic expansion since 2006. China has attempted to expand its financial markets and entice more foreign capital, which may help drive that country's GDP and stock markets.
  • Consumer Sentiment: The Conference Board Consumer Confidence Index® for June rose 1.3 points to 118.9. Consumers expressed confidence in current economic conditions, but were somewhat reticent about their expectations for future economic growth. The Index of Consumer Sentiment from The Surveys of Consumers of the University of Michigan dipped from 97.1 in May to 95.1 in June. Keeping in line with The Conference Board's report, consumers indicated current economic conditions were favorable, but respondents were less certain about future expectations.

 Eye on the Month Ahead

There are many economic indicators that could improve in July and for the remainder of the year. The stock market generally have been steady through the first half of 2017, despite domestic and global turmoil. Oil prices continue to tumble, driving down energy prices and inflation. The housing market, which had stalled after a strong 2016, may be gaining steam, at least as to increasing home prices. The FOMC meets again in July following this year's second interest rate hike in June. If inflation and economic growth continue to show signs of slowing, it is likely the Fed will wait until it meets again in September to consider another rate increase.



Chief Investment Officer: Todd Centurino, CFA

Todd C. Centurino, CFA - Chief Investment OfficerAs New Capital has grown past $300 million in assets under management and over 75 client households, it has become more important to bring aboard a permanent full-time Chief Investment Officer so that my workload as founder is appropriately balanced between investments, advisory, innovation, and firm growth.

In the fourth quarter of 2016 Todd Centurino began to provide investment consulting services to New Capital. At the time, I viewed Todd’s assistance as an important way to get a “second opinion” during a time of rapidly increasing political risk. Over the last months, Todd and I have developed an excellent and productive working relationship, and it is my pleasure to announce that Todd, as of July 1st, is joining New Capital Management as its Chief Investment Officer. Todd’s qualifications for this position are notable:

    • He is open minded and willing to listen
    • He is willing to change his mind given new credible information
    • He requires rational approaches and evidence
    • He welcomes calculated risk, and avoids uncompensated risk
    • He wants what is best for clients

These are exactly the traits that you want in someone managing your money. Notably, Todd has helped me remain committed to your investments since the election, and as a result New Capital’s clients continued to experience substantial gains since then. As a fiduciary, I cannot ever allow my personal political biases to affect my investment judgment. Todd has been instrumental during this period in complementing my perspective and in closely monitoring the reaction of markets to geopolitical upheavals. We have worked exceedingly well as a team, and will now continue and expand that effort.

Welcoming Todd to New Capital After a transition period, Todd will assume primary responsibility for New Capital’s investment research, portfolio management, designing and implementing model portfolios, trading, investment reporting, fund company relationships, and more. Todd and I will also serve on New Capital’s Investment Committee (as we have been doing since January), and all changes in policy and strategy will be decided jointly by us. Todd’s gradual assumption of responsibilities will eventually allow me to focus most of my time on advising clients and further building New Capital.

Todd is from Duxbury, Massachusetts near Boston and graduated from Clemson University. Like me, he has a Masters in Business Administration (his is from Rice University), and, like me, he holds the Chartered Financial Analyst designation. Todd has helped manage very large sums of money - in the billions - for institutional clients like the Teacher’s Retirement System of Texas. He spent several years at Fidelity Investments as an advisor, and most recently held several positions including Chief Portfolio Strategist at Salient Partners, a large and successful Houston asset management firm.

Todd has a very balanced investment style. He strongly believes in market efficiency, asset class diversification, and low costs, as we practice here at New Capital. He also has extraordinarily strong skills in analyzing historical performance of investment funds and understanding their value proposition – he has analyzed hundreds, maybe thousands, of investment funds as an institutional asset manager. Todd will also enhance New Capital’s private investments capabilities, which I expect to become more important over time. Todd regularly reads a tremendous amount of financial information and can absorb data and derive meaning about markets from it. He pays a lot of attention to risk, its sources, and its management. His skills performing financial analysis with Excel for reporting purposes are top notch.

I’m delighted to welcome Todd, and delighted that you will benefit immediately and directly from his work. In the coming weeks, Todd may reach out to you after we discuss you and your accounts in detail; he may want to clarify your risk tolerance or risk capacity; propose or execute some trades in your accounts; or just introduce himself. In all cases, I’d like to ask you to please be as responsive as possible so that Todd can complete his initial work on your behalf.

New Capital's Team: Catherine, Leonard, Todd, & JayceeWe have many innovations occurring at New Capital. On October 26 we will hold our 3rd Annual Conference at the Hyatt Regency Galleria (where I expect Todd to offer some comments on the market environment), and we will be presenting the many initiatives we are calling the “New” New Capital. We have been very hard at work over the last year innovating our services, technology, processes, and personnel and are looking forward to describing these very positive changes to you at the conference – feel free to bring friends and family who you believe deserve the very best in a modern financial advisory firm. We hope to see you there.

New Capital enjoys extraordinary advantages over most other firms: upon meeting with us, prospective clients almost immediately wish to become permanent clients, because they understand we have gotten to know them better than any other advisor ever has; as clients, they want to remain clients, because they understand that we put their interests first and safeguard their trust; and clients give us consistently high marks in all elements of our business, because we always work to improve ourselves.

We offer top notch fiduciary advisory, investments, and service and our team – Catherine, Jaycee, Todd, and I - look forward to continuing to offer these to our clients and others in the years ahead.




When Rates Go Up, Do Stocks Go Down?

June 2017

Should stock investors worry about changes in interest rates? Research shows that, like stock prices, changes in interest rates and bond prices are largely unpredictable.1 It follows that an investment strategy based upon attempting to exploit these sorts of changes isn’t likely to be a fruitful endeavor. Despite the unpredictable nature of interest rate changes, investors may still be curious about what might happen to stocks if interest rates go up.

Unlike bond prices, which tend to go down when yields go up, stock prices might rise or fall with changes in interest rates. For stocks, it can go either way because a stock’s price depends on both future cash flows to investors and the discount rate they apply to those expected cash flows. When interest rates rise, the discount rate may increase, which in turn could cause the price of the stock to fall.

However, it is also possible that when interest rates change, expectations about future cash flows expected from holding a stock also change. So, if theory doesn’t tell us what the overall effect should be, the next question is what does the data say?

Recent research performed by Dimensional Fund Advisors helps provide insight into this question.2 The research examines the correlation between monthly US stock returns and changes in interest rates.3 Exhibit 1 shows that while there is a lot of noise in stock returns and no clear pattern, not much of that variation appears to be related to changes in the effective federal funds rate.4For example, in months when the federal funds rate rose, stock returns were as low as –15.56% and as high as 14.27%.


Exhibit 1.  Monthly US Stock Returns against Monthly Changes in Effective Federal Funds Rate, August 1954 – December 2016

Monthly US stock returns are defined as the monthly return of the Fama/French Total US Market Index and are compared to contemporaneous monthly changes in the effective federal funds rate. Bond yield changes are obtained from the Federal Reserve Bank of St. Louis.

In months when rates fell, returns ranged from –22.41% to 16.52%. Given that there are many other interest rates besides just the federal funds rate, Dai also examined longer-term interest rates and found similar results. So to address our initial question: when rates go up, do stock prices go down? The answer is yes, but only about 40% of the time. In the remaining 60% of months, stock returns were positive. This split between positive and negative returns was about the same when examining all months, not just those in which rates went up. In other words, there is not a clear link between stock returns and interest rate changes.

There's no evidence that investors can reliably predict changes in interest rates. Even with perfect knowledge of what will happen with future interest rate changes, this information provides little guidance about subsequent stock returns. Instead, staying invested and avoiding the temptation to make changes based on short-term predictions may increase the likelihood of consistently capturing what the stock market has to offer.

1. See, for example, Fama 1976, Fama 1984, Fama and Bliss 1987, Campbell and Shiller 1991, and Duffee 2002. 
2. Wei Dai, “Interest Rates and Equity Returns” (Dimensional Fund Advisors, April 2017).
3. US stock market defined as Fama/French Total US Market Index. 
4. The federal funds rate is the interest rate at which depository institutions lend funds maintained at the Federal Reserve to another depository institution overnight.



Discount Rate: Also known as the “required rate of return,” this is the expected return investors demand for holding a stock.
Correlation: A statistical measure that indicates the extent to which two variables are related or move together. Correlation is positive when two variables tend to move in the same direction and negative when they tend to move in opposite directions.

Fama/French Total US Market Index: Provided by Fama/French from CRSP securities data. Includes all US operating companies trading on the NYSE, AMEX, or Nasdaq NMS. Excludes ADRs, investment companies, tracking stocks, non-US incorporated companies, closed-end funds, certificates, shares of beneficial interests, and Berkshire Hathaway Inc. (Permco 540).


Market Month: May 2017

The Markets

May provided a bumpy ride for investors. However, by the end of the month, each of the indexes listed here posted monthly gains with the exception of the Russell 2000, which lost over 2.0%. Technology shares continued to climb as the Nasdaq climbed 2.50% in May over April and has risen over 15% since the start of the year. Despite terrorist attacks, mundane oil prices, a rocky first quarter in Washington, and a slowdown in economic growth, U.S. stocks closed the month in positive territory, spurred by generally favorable quarterly corporate earnings reports. May saw the Dow and S&P 500 post monthly gains for the second consecutive month, while the Nasdaq increased in value for the seventh month in a row. Long-term bond prices rose in May over April, evidenced by the falling yield on 10-year Treasuries.

By the close of trading on May 31, the price of crude oil (WTI) was $48.63 per barrel, down from the April 28 price of $49.19 per barrel. The national average retail regular gasoline price was $2.406 per gallon on the last day of May, down from the May 1 selling price of $2.411 but $0.138 more than a year ago. The price of gold increased by the end of May, closing at $1,271.40 on the last trading day of the month, up from its April 28 price of $1,269.50.

Market/Index 2016 Close Prior Month
As of May 31
Month Change
YTD Change
DJIA 19762.60 20940.51 21008.65 0.33% 6.31%
Nasdaq 5383.12 6047.61 6198.52 2.50% 15.15%
S&P 500 2238.83 2384.20 2411.80 1.16% 7.73%
Russell 2000 1357.13 1400.43 1370.21 -2.16% 0.96%
Global Dow 2528.21 2731.15 2758.92 1.02% 9.13%
Fed. Funds 0.50%-0.75% 0.75%-1.00% 0.75%-1.00% 0 bps 25 bps
10-year Treasuries 2.44% 2.28% 2.20% -8 bps -24 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.


 Monthly Economic News

  • Employment: The employment sector picked up the pace in April following a weak March. There were 211,000 new hires in April in contrast to March's revised total of only 79,000. For April, employment growth occurred in leisure and hospitality (+55,000), food services and drinking places (+26,000), health care and social assistance (+37,000), and professional and business services (+39,000). The unemployment rate dipped to 4.4% — the lowest rate since May 2001. Over the year, the unemployment rate has declined by 0.6 percentage point, and the number of unemployed has fallen by 854,000. There were 7.056 million unemployed persons in April (7.202 million in March). The labor participation rate remained at 62.9%. The average workweek was 34.4 hours in April. Average hourly earnings increased by $0.07 to $26.19, following a $0.05 increase in March. Over the last 12 months ended in April, average hourly earnings have risen by $0.65, or 2.5%.
  • FOMC/interest rates: The Federal Open Market Committee conceded that consumer spending may have slowed in the first quarter, prompting the Committee to leave interest rates unchanged at 0.75%-1.00%. However, labor has remained strong, nearing full employment, while a dip in consumer spending and consumer prices was deemed transitory by the Committee. Continued strength in employment and increases in consumer spending and inflation next month may prompt the FOMC to consider a rate increase when it next meets in June.
  • GDP/budget: Expansion of the U.S. economy slowed over the first three months of 2017. According to the Bureau of Economic Analysis, the first-quarter 2017 gross domestic product grew at an annualized rate of 1.2%. The fourth-quarter 2016 GDP grew at an annual rate of 2.1%. The first-quarter GDP reflected positive contributions from nonresidential fixed investment, exports, residential fixed investment, and personal consumption expenditures that were partly offset by negative contributions from private inventory investment, federal government spending, and state and local government spending. Imports, which are a subtraction in the calculation of the GDP, increased. An indicator of inflationary trends, the price index for gross domestic purchases increased 2.6% in the first quarter, compared to an increase of 2.0% in the fourth quarter. As to the government's budget, the federal deficit through the first eight months of fiscal 2017 was $344 billion — $8 billion less than the deficit over the same period last year. For the month of April, the government realized a budget surplus of $182.4 billion, which is $76 billion more than the April 2016 surplus.
  • Inflation/consumer spending: Inflation, as measured by personal consumption expenditures, picked up in April. For the 12 months ended in April 2017, the personal consumption expenditures price index expanded at a rate of 1.7%. For April, personal income increased 0.4% over March. Disposable personal (after-tax) income increased 0.4%. Personal consumption expenditures (the value of goods and services purchased by consumers) also increased 0.4% for the month. The prices companies receive for goods and services showed improvement in April from March, as the Producer Price Index increased 0.5% in April following a 0.1% dip the prior month. Year-over-year, producer prices have increased 2.5%. In April, energy prices climbed 0.8% while food prices increased 0.9%. The PPI less food and energy increased 0.4% for the month and has risen 1.9% over the last 12 months. Consumer prices, which retreated in March, increased 0.2% in April. For the year, consumer prices are up 2.2%. Core prices, which exclude volatile food and energy, increased 0.1% for the month and have climbed 1.9% since April 2016.
  • Housing: The housing sector, which had showed strength over the first three months of 2017, slowed considerably in April. Existing home sales plunged 2.3% to a seasonally adjusted annual rate of 5.570 million, down from March's revised annual rate of 5.700 million. Existing home sales are only 1.6% ahead of the sales pace from a year ago. The median sales price for existing homes rose to $244,800 from the March price of $236,400. Total housing inventory at the end of April climbed 7.2% to 1.93 million existing homes available for sale (9.0% lower than a year ago). Sales of newly constructed homes also dropped in April, according to the Census Bureau. Sales of new single-family homes fell 11.4% in April to an annual rate of 569,000 — down from March's revised rate of 642,000. The median sales price of new houses sold in April was $309,200 ($318,700 in March), while the average sales price was $368,300 ($388,200 in March). The seasonally adjusted estimate of new houses for sale at the end of April was 268,000. This represents a supply of 5.7 months at the current sales rate.
  • Manufacturing: According to the Federal Reserve, industrial production ticked up 1.0% in April. Manufacturing output increased 1.0% following a 0.4% decline in March. Manufacturing gains were led by production of motor vehicles, business equipment, and consumer goods. The indexes for mining and utilities posted gains of 1.2% and 0.7%, respectively. Total industrial production for April was 2.2% above its year-earlier level. Capacity utilization increased 0.6 percentage point to 76.7%, which is 3.2 percentage points below its long-run average. As for durable goods, the Census Bureau report reveals that new orders dropped 0.7% in April following a 2.3% revised increase in March. Excluding the volatile transportation segment, new durable goods orders fell 0.4%. Orders for core capital goods (excluding defense and transportation) had no change from March, but are up 2.9% over the past 12 months.
  • Imports and exports: The advance report on international trade in goods revealed that the trade gap grew by $2.5 billion in April. The overall trade deficit was $67.6 billion, up from March's deficit of $65.1 billion. Exports declined 0.9% to $125.9 billion. Imports increased by 0.7% to $193.4 billion in April. The prices for U.S. imports of goods showed strength in April following a weak March. Import prices jumped 0.5% for the month, led by a 1.6% increase in petroleum prices. U.S. export prices rose 0.2% after advancing a revised 0.1% in March. Export prices haven't recorded a monthly decline since the index fell 0.8% in August 2016.
  • International markets:The election of Emmanuel Macron as France's president was greeted favorably by eurozone investors early in May. Despite the tragic terrorist attack in Manchester, England, investors maintained a "steady-as-she-goes" approach with moderate trading throughout the month. OPEC and Russia agreed to extend the cut in oil output. However, oil prices haven't climbed appreciably as investors apparently were hoping for deeper cuts than those announced. Moody's Investors Service cut China's sovereign credit rating for the first time since 1989 on the premise that the country's financial strength is expected to weaken as debt continues to rise and the economy slows.
  • Consumer Sentiment: Consumer confidence is holding steady in May. The Conference Board Consumer Confidence Index® for May fell slightly to 117.9 from April's 119.4. While consumers continued to express optimism about both the current state of the economy and its future, their enthusiasm has waned some from earlier in the year. The Surveys of Consumers of the University of Michigan Index of Consumer Sentiment also dropped marginally to 97.1 in May from 97.6 in April.

 Eye on the Month Ahead

Economic signs were mixed last month, so it isn't certain that the FOMC will raise interest rates when it meets in June. The final GDP figures for the first quarter are out in June. Consumer spending has been relatively weak through much of the first part of 2017, causing inflation to slow a bit.



Climate Change Change

President Trump has announced the withdrawal of the United States from the Paris Climate Accords.  I disagree with the decision and believe that its costs will exceed its benefits, perhaps substantially so.  I am concerned about the rapid rise in CO2 in the atmosphere and oceans, and its effects on the planet.  As regards this decision, I am also concerned about a potential backlash against the United States, its companies, and their products and services.  Many prominent CEO's made this point directly to the President, but their arguments did not prevail.  We are closely monitoring the news, Twitter, and Facebook for any signs of boycotts.  Sales of soda by Coca Cola, shoes by Nike, movies and amusements by Disney, smartphones by Apple, software by Microsoft, airplanes by Boeing, retail gas by ExxonMobil, and so many more are often dependent upon goodwill in global markets.  I believe this decision significantly risks unnecessarily (because the US economy is already de-carbonizing) global goodwill, and substantial impairment of global goodwill could negatively impact sales by American companies.  Since Election Day, revenue in foreign travel to the United States is down approximately 15% over prior periods at a time when global economic growth has been strengthening.

Another important decision on climate change has also just been made this week.  ExxonMobil just held its annual shareholder meeting, and at that meeting 62.3% of shareholder votes were cast in favor of the company producing more detailed disclosure about the risks posed by climate change to its business.  Last year, the same vote failed to pass with only 38% in favor.

Why the change?  In part, because massive and growing shareholders like Blackrock, Vanguard, and DFA with whom New Capital invests your funds, are getting the message from advisors like us that we want them to be more active stewards, as we get that message from you.  Often when our sales representatives visit I emphasize to them that we and our clients expect them to represent our interests to the boards of companies in which our funds have ownership - which means pretty much every company in the world given the broad index funds we employ in your portfolios.  I tell them that we want our investees to be focused not only on strong profitability, but also on fair employee jobs and pay, proportional executive compensation, good community relations, moral and ethical responsibility, and environmental sustainability.  We want our fund companies to be more than simply conduits for client money, and we want them to vote company proxies in support of these principles, even if it means voting against management's positions.

As the ExxonMobil vote indicates, our business partners are listening.  The almost 25% jump in the Exxon vote tally is a staggering increase that can only be attributed to rapidly changing attitudes.

As your advisor, I hear your voice when you speak to me about what's important to you in your investments, and I forcefully and clearly express your values to our important fund business partners, who have no choice but to listen if they wish to keep our business.  I began making these points to them several years ago, I've been patient as my and others' views have made their way up the chain, and we are now seeing the fruits of those efforts.  While some clients want to go further and hold "ESG" (Environmental, Social, Governance) portfolios, which we are happy to provide, all clients benefit from our work with the large fund companies.  In fact, I would argue, our work as influential investment intermediaries may have more direct impact than divestment.

The ExxonMobil vote is non-binding.  Management can decide to disclose more about climate change risks or not.  But just as I listen to you, and Vanguard, Blackrock, and DFA listen to me, ExxonMobil's management should listen to their largest shareholders.  To his credit, Darren Woods, the company's new CEO, indicates that the board will at least consider the result because it reflects the view of a majority of shareholders.  In a time when many in our country are concerned whether the voice of the majority is being heard, I applaud Mr. Woods' initial recognition of the voice of the majority, and in the case of Exxon Mobil shareholders, the clear majority.  Hopefully, he will heed it, too.



Market Comments

Hello all,

In recent letters and on our recent client conference call, I have discussed political risk and its prominent place right now in portfolios.  In this light, the Trump Administration is foundering and on the defensive on several fronts: Comey firing and subsequent confused official rationales; Russia investigations, Comey's private discussions with Trump and memo thereon; the President's leak of Israeli intelligence to Russian Foreign Minister Lavrov and Ambassador Kislyak; and substantial weakening of President Trump's support system within the Administration, in the Republican Party, in the government, and in the electorate.

The implications of this foundering are that legislative initiatives in taxation; health care; trade; immigration; infrastructure; employment; and economy will likely be effectively sidelined as political matters accelerate and increasingly occupy the entire government.  Speculation runs the gamut:
  • Hard core Trump supporters (including Trump himself) believe Trump is the victim of a media conspiracy to destabilize his Administration
  • Strong right allies (such as Mitch McConnell) believe that the Administration simply needs to make personnel changes to right the ship 
  • Moderate Republicans (such as John McCain) believe that concerted bi-partisan efforts need to be made to establish facts in the various matters
  • Moderate Democrats (such as Mark Warner) believe that concerted bi-partisan efforts need to be made to establish facts in the various matters
  • Strong left opponents (such as Nancy Pelosi) believe that impeachment proceedings may need to begin
  • Hard core Trump opponents believe that criminal indictments should be and possibly are imminent against a broad array of senior political figures.
Prior to today, markets have exhibited very low volatility in response to political chaos, and appear to be doing their job of focusing on future cash flows from businesses, taxation, and other projects.  Our interpretation is that market systems are functioning well and relatively calmly even if political systems are convoluted.  Today the mood changed, with markets around the world down approximately 1.5%.  Notably, the dollar has weakened by 3% since the beginning of the year, which could suggest some weakening confidence in the United States by the rest of the world.  We are also watching the yield curve and credit spreads closely for signs of weakness in the US economy - the yield curve is showing some signs of flattening.

For a number of months we (Todd Centurino and I) have discussed our belief that the investment opportunity set is meaningfully stronger outside the United States based upon valuations alone.  With France's recent election of the pro-EU Emmanuel Macron to the Presidency, enhanced stability within the Eurozone is becoming clearer.  Global growth, including in emerging markets, has been strengthening.  And now, with the growing political problems in the United States, we have a preference for a global market weight (without an overweighting to the US) in equity portfolios.  We do not mind holding some additional cash in portfolios right now.

Like many, we are watching events in Washington DC very closely, and will be prepared to report to you as they change.  In the meantime, please do not hesitate to contact me if you have any questions or concerns.


Client Conference Call - April 26, 2017 Long-term Investing in a Risky Political Environment

Thank you to all of you who were able to join us on New Capital's first Client Conference Call. We are very pleased that this event was a success and we are looking forward to the next one, tentatively scheduled for mid-July. We will confirm the date and time as soon as possible.

Link to recording

Presentation Slides
• Long Term Investing and Political Risk, by Leonard Golub, CFA
• Market Review and Outlook, by Todd Centurino, CFA

Survey Results