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Weekly Flash Report
The Markets and Economy
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The U.S. economy GDP shrank 0.7% in the first-quarter due to
trade and inventory data.
Durable goods orders were down a seasonally adjusted 0.5% in
April from the previous month.
The pending home sales index rose 3.4% in April from the
previous month.
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New home sales rose a larger-than-expected 6.8% in April.
The FIFA scandal is now being turned on the banks that were
used to pay $150 million in bribes. Banks involved include: JP
Morgan, Citigroup, HSBC, Bank of America, to name a few.
Initial unemployment claims rose by 7,000 to 282,000.
Regulatory Chatter and Industry Trends
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The DOL filed a suit against Alfred and Judy Chan the fiduciaries
of a pension plan for employees of their medical corporation. The
Chans relocated to Taiwan to avoid an indictment for Medicare
fraud. The Chans used pension plan assets to pay for personal
debts, personal legal fees and other non-plan expenses and
investments. Specifically a $200k investment in Facebook.
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SEC charges Laurence Gray and Robert C. Hubbard IV of
fraud for breaching their fiduciary duty by selling unsuitable
investments to Atlanta’s Pension Fund.
A group of retired teachers from Wisconsin are suing over
illegal post-retirement 403(b) contributions that were subject to
taxes because they didn’t follow 403(b) regulations.
Investment Manager News
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Abu Dhabi Investment Authority hires John Pandtle as head of
U.S. in its internal equities group.
PIMCO Australia names David Erdonmez as account manager
and head of the firm’s investment due diligence group.
SEC brings back former investment management director Andrew
J. “Buddy” Donohue as chief of staff.
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FINRA CEO Richard Ketchum said the Labor Department’s
April proposal would create new legal risks for brokers and
reduce the number of investment options offered to clients.
Mass Mutual hires Michele Baldasarre as VP of institutional
markets for MassMutual Retirement Services, in charge of
relationship management for retirement plan clients.
What’s Ahead
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PMI Services Flash – June 1, 2015
ISM Mfg Index – June 1, 2015
Factory Orders – June 2, 2015
ADP Employment Report – June 3, 2015
EIA Petroleum Report – June 3, 2015
Jobless Claims – June 4, 2015
EIA Natural Gas Report – June 4, 2015
Bloomberg Consumer Comfort Index – June 4, 2015
Employment Situation – June 5, 2015
Consumer Credit – June 5, 2015
Please visit www.westminster-consulting.com for our newsletters, blogs, and other musings.
Every week, we send out a Flash Report to interested
individuals. The Flash Report is put together to keep
ourselves and our clients informed and updated on
timely occurrences in the market/economy, regulatory
changes, industry trends and investment manager
news. We also help you plan for the future by including
a “what’s ahead” section in the report. This Flash
Report is just a quick slide sent to our clients via email,
taking only a couple moments to read while informing
you efficiently about an entire week’s happenings in
the industry.
Email [email protected] to receive
the Weekly Flash Report!
Hard currency:
the strong US dollar
Gabriel Potter, AIF
Senior Investment Research Associate
May 2015
Page 1 of 2
Cause of weakness in corporate earnings
T
he United States corporate earnings numbers have
suffered relative weakness in the 4th quarter of 2014
and the 1st quarter of 2015. Some of the causes of
weak earnings are one-time irregular actions, such as the
increased corporate pension liabilities stemming from updated
actuarial rules of 2014. Beyond these one-shot issues, there
are two ongoing factors which appear conducive to economic
growth, but have led to recent problems: the price of energy
and the strong dollar.
We have directly considered the falling price of energy in
our blog posts (“The Price Ceiling on Oil” - December 31,
2014) and in our monthly articles (“The Energy Sector” –
December 2014). On the other hand, we have only tangentially
addressed the implications of a strong US dollar. So, in this
paper, we will review the strong US dollar and what it means
for investors.
Pros and cons of a strong dollar
First, let’s define a strong dollar and then enumerate some
of its advantages and disadvantages. Simply put, a strong
currency, or a “hard” currency, has a great deal of buying
power. A strong currency maintains its buying power over
time, so it is strongly associated with an inflation-averse,
“tight”, restrictive monetary policy from that government’s
central bank. A strong currency is stable and widely used
between global trading partners. Conversely, a weak currency,
or a “soft” currency, is subject to price swings, instability,
and is associated with potential loss in trading value versus
other currencies or inflation.
A quick review of this definition makes it appear as if there
are no disadvantages with a strong dollar. There is, however,
a key disadvantage to stronger currency: exporting. If your
country derives most of its revenue from international trade, a
strong currency gives you the opportunity to buy (or import)
goods and services inexpensively. However, a strong currency
means that your exporters are at a disadvantage because the
goods or services they are trying to sell on the open market
are relatively expensive.
A quick review of this definition makes it appear as if there
are no disadvantages with a strong dollar. There is, however,
a key disadvantage to stronger currency: exporting. If your
country derives most of its revenue from international trade, a
strong currency gives you the opportunity to buy (or import)
goods and services inexpensively. However, a strong currency
means that your exporters are at a disadvantage because the
goods or services they are trying to sell on the open market
are relatively expensive.
Correcting the dollar with trade
So, we’ve been talking about the dollar being strong, relative
to other currencies, but what determines whether a currency
is strong or weak? Like everything else in economics, it is
a case of supply and demand. Global investors engage in
currency trading for a variety of reasons, including hedging
their current exposure, speculating on currency like any
other investment, or conducting carry trades. For a greater
understanding of this practice, we encourage you to read our
March 25th blog post, “The Carry Trade”.
Global investors can buy, sell, and trade currencies, just
like other goods. Global investors determine a currency’s
value by making and accepting trades on a free, open capital
market. The relative value of each currency is determined
by daily market sentiment, optimism for a country’s growth
prospects, analysis of monetary policy and macroeconomics,
and a fair dash of random chance. As the supply and demand
for various currencies equalize on the open market, the
global investment community determines which currencies
get stronger and weaker. Imagine, for a moment, you start
off the year with a strong currency, wherein your importing
power is high and your competitive exporting power is low.
This creates a trade deficit, where your country buys more
goods and services than it sells to other nations. Economic
theory suggests, over time, this trade deficit should increase
the supply of your currency (let’s say, dollars) being used
across the globe. Again, an increase in supply should thus
reduce the currency’s relative value. In other words, a trade
deficit – in theory – should be a self-correcting phenomenon
as a temporarily strong currency pushes so many dollars into
the world.
11 Centre Park, Suite 303 • Rochester, NY 14614-1115 • 585.246.3750 • 800.237.0076 • Fax: 585.246.3759 • www.westminster-consulting.com
Monthly Newsletter
On top of the Weekly Flash Report, once a month
our research analyst compiles a monthly newsletter.
Entitled, Westminster Academy, this newsletter consists
of a longer white paper on a relevant topic such as the
positioning of U.S. currency, an analysis of alternative
energy, and quarterly updates. The Westminster
Consulting newsletter keeps you in touch with important
issues around finance, the economy, retirement planning,
and other relevant world topics.
Visit http://westminster-consulting.com/Resources to
see an archive of our monthly newsletters. Click on an
article to sign up and receive the newsletter directly to
your inbox!
Blog
We put out a weekly blog post on our company
website as well. The post is just a few short
paragraphs on a current topic in the industry,
and is intended to keep visitors to our site
engaged and informed on relevant issues.
Visit http://westminster-consulting.com/Blog
to view our recent blog posts, written by our
senior investment research associate Gabriel
Potter
Re-engineering Fiduciary | 13