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Speed Bumps

Speed Bumps

CPI may rise, but not because there is a true inflation process—rather, because some of the prices of goods in the CPI basket have gone up. The average of all prices will rise if some prices increase by a lot, even if most prices do not rise and some even fall a bit. If incomes do not rise to match, these relative price changes are actually deflationary. - Carl Weinberg With Federal Reserve Chairman, Jerome Powell, attempting to tame inflation with the only tool at his disposal: interest rates. FOMC meetings have turned into a game of Russian Roulette as each rate hike causes financial markets to test new lows. What started with inflation being transitory, has prompted the Fed to back-peddle, flipping the script on the definition of transitory, causing fear-induced fund outflows. In this month’s issue of The Samra Report we examine the probability of a recession and make the case for economic expansion. The world of finance is like the world of medicine, in that there are an infinite number of variables. However, in addition to these variables are parties, typically investment firms, with a vested interest for providing bias research and guidance. This explains the confusion of digesting research from Wall St analysts, and the dispersion of equity opinions amongst investments firms. Marco Kolanovic of J. P. Morgan has an S&P 500 price target of 4,900 for 2022, Mike Wilson with Morgan Stanley forecasts a 4,400, Goldman Sachs 4,700 and Bank of America’s Savita Subramanian forecasts 4,500, a far cry from the current sub 3,800 level. At Samra Wealth Management we believe the market is oversold, and although the Federal Reserve is laser-focused on reducing inflation by reducing demand, we believe the U.S. economy to be resilient. As we enter Bear market territory, the financial media shows blatant disregard for data, causing panic amongst investors with talks of recession, “as the correlation between stock returns and economic growth across countries can be negative.” The definition of a recession according to the National Bureau of Economic Research (NBER), which officially declares recessions, defines a recession as: “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” At Samra Wealth Management we believe the US economy is likely to experience a decline in GDP, however, the duration of which would be short-lived and probability of a recession low. With 2021 U.S. GDP growth of 5.7% and an S&P 500 gain of 26.89%, the Feds monetary policy stance should be viewed as a speedbump, as opposed to an attempt to derail the economy or financial markets. According to Factset, “although analysts were decreasing EPS estimates in aggregate for the second quarter, they were also increasing EPS estimates in aggregate for the next two quarters by small margins,” suggesting a return to trend in the S&P 500 by year-end. In addition, factset provides supporting evidence for an oversold market with the following statements, backing Benjamin Graham’s belief that investors are irrational. S&P 500 companies that have reported negative EPS surprises have seen a much larger negative price reaction than average reported by S&P 500 companies for a quarter since Q2 2011 (-8.0%). The largest average negative price reaction to positive EPS surprises reported by S&P 500 companies for a quarter since Q2 2011 (-2.1%). Of the 491 companies in the S&P 500 that have reported earnings to date for 22Q1, 77.6% have reported earnings above analyst estimates, according to Refinitiv. This compares to a long-term average of 66% and prior four quarter average of 83.1%. Should a recession be eminent, we would expect to see a deviation in key indicators. The Federal Reserve Bank of Philadelphia produces a monthly coincident index for each of the 50 states: The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP. The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2022. Over the past three months, the indexes increased in all 50 states, for a one-month diffusion index of 100. For compassion purposes, the Philadelphia Fed has also developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index increased 1.1 percent over the past three months and 0.3 percent in April, shown below. The image suggests; if a recession was eminent, we would expect to see economic slowdown in some states. According to Merrill Lynch: “Macroeconomic stress could cause the Fed to slow rate hikes.” However, we believe a deviation from the Feds plan would show a lack of confidence and could send markets into turmoil. Alternatively, we expect corporations to streamline operations; implementing cost-cutting measures including layoffs, followed-up by a significant increase in stock buybacks. As interest rates continue to rise, we further expect dividend-paying stocks to increase dividend ratios to compete against the “risk-free” return of owning treasuries, potentially setting up U.S. markets for a return to 2021 highs. In the short-term the idea of an economic expansion or return to financial market highs may appear improbable due to supply-chain issues, labor-shortages, and energy inflation. At Samra Wealth Management we believe these issues are transitory: We expect supply-chain issues to alleviate by the fourth quarter for most industries and expect an increase in retail sales due to increased inventories. We further expect labor-shortages to decrease from an increased labor force participation rate, stemming from wage increases to attract talent. Although we believe the volatility will continue until Q4, our sector rotational strategy remains intact, weighted highest towards technology, healthcare, financials, industrials and select e-commerce companies. We expect to reduce our tactical allocation towards energy, increasing allocations towards real estate, high yield fixed-income, and private equity. Finally, at Samra Wealth Management we strongly believe most of the burden will weigh heaviest on those on the lower end of the income spectrum. Although we’ve previously written about low interest rates serving as a tax on the wealthy, returning risk-free returns lower than inflation. Increased interest rates serve as a tax on the poor, and we expect to see many first-time homebuyers priced out of the market. Disclosures This material is provided as a courtesy and for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. Nasdaq is a global electronic marketplace for buying and selling securities. Originally an acronym for "National Association of Securities Dealers Automated Quotations"—it was a subsidiary of the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA). Indexes are unmanaged and do not incur management fees, costs or expenses. It is not possible to invest directly in an index. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Investing involves risk including loss of principal. Investment advisory services offered through Samra Wealth Management, a Member of Advisory Services Network, LLC. References Adinolfi, J., 2022. Why a top Wall Street quant sees S&P 500 taking back all its losses by year's end. [online] MarketWatch. Available at: <https://www.marketwatch.com/story/why-a-top-wall-street-quant-sees-s-p-500-taking-back-all-its-losses-by-yearend-11654117457> [Accessed 14 June 2022]. Alliancebernstein.com. 2022. Global Macro Outlook - Second Quarter 2022. [online] Available at: <https://www.alliancebernstein.com/gb/en-gb/adviser/insights/economic-perspectives/global-macro-outlook-second-quarter-2022.html> [Accessed 14 June 2022]. Butters, J., 2022. EARNINGS INSIGHT. [online] Advantage.factset.com. Available at: <https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_061022A.pdf> [Accessed 14 June 2022]. Dhillon, T. and Alonso, T., 2022. This Week in Earnings 22Q1 | May 20, 2022 | Lipper Alpha Insight | Refintiv. [online] Lipper Alpha Insight. Available at: <https://lipperalpha.refinitiv.com/2022/05/this-week-in-earnings-22q1-may-20-2022/> [Accessed 15 June 2022]. Insight.factset.com. 2022. Analysts Lowering EPS Estimates for Q2 2022 but Not Lowering EPS Estimates for 2H 2022. [online] Available at: <https://insight.factset.com/analysts-lowering-eps-estimates-for-q2-2022-but-not-lowering-eps-estimates-for-2h-2022> [Accessed 14 June 2022]. Lipperusfundflows.com. 2022. US Fund Flows Data Services. [online] Available at: <https://www.lipperusfundflows.com/#create:home:Home:/php/signup_trial.php> [Accessed 14 June 2022]. Msci.com. 2010. Is There a Link Between GDP Growth and Equity Returns?. [online] Available at: <https://www.msci.com/documents/10199/a134c5d5-dca0-420d-875d-06adb948f578> [Accessed 13 June 2022]. Philadelphiafed.org. 2022. State Coincident Indexes. [online] Available at: <https://www.philadelphiafed.org/-/media/frbp/assets/surveys-and-data/coincident/2022/coincidentindexes0422.pdf> [Accessed 14 June 2022]. Philadelphiafed.org. 2022. State Coincident Indexes. [online] Available at: <https://www.philadelphiafed.org/surveys-and-data/regional-economic-analysis/state-coincident-indexes> [Accessed 14 June 2022]. Weinberg, C., 2022. The worst of "inflation" is behind us - High Frequency Economics. [online] High Frequency Economics. Available at: <https://www.hifreqecon.com/the-worst-of-inflation-is-behind-us/> [Accessed 14 June 2022]. Zara, C., 2022. Crypto layoffs loom as tokens crash: Coinbase, Crypto.com, and others cut staff. [online] Fast Company. Available at: <https://www.fastcompany.com/90760988/crypto-layoffs-loom-as-tokens-crash-coinbase-crypto-com-and-others-cut-staff> [Accessed 14 June 2022].

Laissez-Faire

Laissez-Faire

What started as a strong tone from the Fed, has translated to turmoil in the global financial markets, as Federal Reserve Chairman Jerome Powell and James Bullard, President of the Federal Reserve Bank of St. Louis unleash panic, verbalizing the need for rapid rate hikes to combat inflation. Although 2021 closed out with the S&P 500 up 26.89%, 2022 has served a wake-up call to conservative investors, as U.S. Government Bonds believed to provide immunity from volatility, are down year-to-date over 10%, while the S&P 500 has fallen -12.8%. Recessionary fears are no longer a headline, as Q1 GDP declines to 1.4%, a sharp reversal from a 6.9% annual growth rate in the fourth quarter. Since 1977, the Federal Reserve has operated under a mandate from Congress to "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates". With the Fed focused on run-away inflation, an issue at Samra Wealth Management we believe to be transitory and to subside later this year, they have pivoted to fight inflation and reducing demand, demand investors believed would be pent-up from covid lockdowns. As the Fed focuses on combatting inflation by increasing key interest rates, investors should understand the cause of recent inflation was related to supply-chain and the incursion into Ukraine, not related to low-interest rates, as the chart below depicts. Although the U.S. economy has shown resilience, Powell’s two-dimensional strategy is overcompensating, from doing too little too late. In our August 2021 issue of The Samra Report we wrote the following forecasting the strength of the U.S. Dollar, short-term inflation, and the impact of interest rate hikes: In a domestic economy, should the central bank raise interest rates, relative to foreign economies. The domestic economy in this case would experience an influx of capital, pushing up the relative strength of the domestic economy’s currency, offsetting foreign trade. In our current scenario, low interest rates help to ensure domestically produced goods are accessible in global trade. At Samra Wealth Management, we believe interest rates will start to tick-up in November, due to an announcement by the Treasury, it could begin cutting the size of government debt sales in the fall, as funding needs for economic relief efforts ease, in a move that would pave the way for the first reductions in five years. We believe the Fed is likely to follow suit in its April meeting, as talks of tapering start to solidify. A rise in interest rates, combined with a tax increase could deal a blow to select sectors in the near term, specifically: Healthcare, Technology, financials, industrials, and consumer discretionary, prompting a change in our sector rotational strategy. However, although we expect interest rates to rise moderately in Q4 into Q12022, we believe the Fed’s plan will be contingent on unemployment, as it emphasizes returning to pre-pandemic levels, while keeping an eye on run-away inflation. We expect short-term inflation to increase, given pent up demand and supply-chain constraints due to logistics and shortages. We further expect the above-mentioned sectors to recover swiftly given the go-ahead of an infrastructure spending bill, and increased stimulus measures. Conservative investors in search of yield, in an interest rate environment where the 10-year fell below 1.14% in July, and the real interest rate (10-year U.S. Treasury indexed for inflation) fell to -1.19%, a multi-decade low, need to rethink their investment strategy. (Fred.stlouisfed.org) A conservative allocation weighted heavily towards fixed income, places these investors at increased risk, as interest rates start to rise while prices of bonds fall. At Samra Wealth Management, we expect increased volatility across asset classes over the next 12-months, suggesting a managed strategy is likely to outperform that of passive investments. In April we stated: “we believe the Fed’s approach to monetary policy is too little, too late, and an attempt to play catch-up could send the US economy into a recession.” While the Fed focuses-in on controlling inflation, at Samra Wealth Management we believe there are two components flying under the radar: (1) a strengthening dollar, and (2) the U.S. Labor market. Year-to-date the dollar has surged 8% to its highest levels in two decades, as investors ramped up bets that aggressive interest rate rises from the Federal Reserve will leave other central banks trailing far behind. The dollar's appreciation is leaving a trail of destruction in its wake, exacerbating inflation in other countries, and tightening financial conditions just as the world economy confronts the prospect of a slowdown in growth. (Reuters) Domestically, the United States in the short-term could benefit, as a stronger dollar benefits the buy-side of the equation with regards to foreign trade, however, as U.S. exports become more expensive in relative terms, global demand for U.S. goods and services could fall to a multi-decade low. In our January edition of The Samra Report, we issued a “recommendation focusing on domestic holdings with little exposure to foreign exchange risk.” A strengthening dollar not only weakens trade, however, impacts domestic corporations yielding revenue from abroad. This becomes concerning for corporations accepting foreign currency, where the cost of bringing dollars back to the US becomes more expensive. Think of companies such as Walmart, McDonalds, and Starbucks, with vast international operations, there is significant risk in foreign exchange. This scenario also impacts foreign trade as American goods become more expensive to foreign consumers. According to the Wall St. Journal: “The Labor Department on Tuesday reported a seasonally adjusted 11.5 million job openings in March, an increase from 11.3 million the prior month. The number of times workers quit their jobs rose to 4.5 million in the same month, slightly higher than the previous record in November of last year.” Although enhanced unemployment benefits may have delayed some employees from returning to the workforce, at Samra Wealth Management we believe the “great resignation” is fueled by the work from home and hybrid models. During the lockdown, employees were afforded the freedom of time, time saved commuting to the office and no-longer having someone looking over your shoulder. Although speculation, we believe this may have increased the pace employees converted their part-time gigs to full-time business operations. We do not believe there has been a mass exodus from the workforce, and alternatively we are seeing mass migration by entrepreneurs, our consensus strengthened with the below data from the Bureau of Labor Statistics. As employers incentivize the workforce, we may end up experiencing the textbook definition of wage-push inflation: the general increase in prices caused by wages rising in society, prompting the Fed to again tighten the money supply, testing the resilience of the U.S. financial markets. Disclosures This material is provided as a courtesy and for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. Nasdaq is a global electronic marketplace for buying and selling securities. Originally an acronym for "National Association of Securities Dealers Automated Quotations"—it was a subsidiary of the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA). Indexes are unmanaged and do not incur management fees, costs or expenses. It is not possible to invest directly in an index. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Investing involves risk including loss of principal. Investment advisory services offered through Samra Wealth Management, a Member of Advisory Services Network, LLC. References Census.gov. 2022. Business Formation Statistics. [online] Available at: <https://www.census.gov/econ/bfs/index.html> [Accessed 29 April 2022]. Chaney Cambon, S., 2022. U.S. GDP Falls 1.4% as Economy Shrinks for First Time Since Early in Pandemic. [online] WSJ. Available at: <https://www.wsj.com/articles/us-economy-gdp-growth-q1-11651108351> [Accessed 28 April 2022]. Chatterjee, S. and Rao, S., 2022. Dollar surge leaves trail of destruction. [online] Reuters.com. Available at: <https://www.reuters.com/business/dollar-surge-leaves-trail-destruction-2022-04-29/> [Accessed 29 April 2022]. Fred.stlouisfed.org. 2022. Federal Funds Effective Rate. [online] Available at: <https://fred.stlouisfed.org/series/FEDFUNDS#0> [Accessed 29 April 2022]. Fred.stlouisfed.org. 2022. FRED Graph | FRED | St. Louis Fed. [online] Available at: <https://fred.stlouisfed.org/graph/?g=rocU#> [Accessed 29 April 2022]. Mena, B., 2022. U.S. Job Openings, Quits Reached Records in March. [online] WSJ. Available at: <https://www.wsj.com/articles/job-openings-us-growth-labor-market-turnover-march-2022-11651529531> [Accessed 3 May 2022]. Reuters.com. 2022. U.S. Treasury sees economy still expanding in 2022 despite Q1 GDP drop. [online] Available at: <https://www.reuters.com/world/us/us-treasury-sees-economy-still-expanding-2022-despite-q1-gdp-drop-2022-05-02/> [Accessed 2 May 2022]. Samra, I., 2022. Collateral Damage. [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/collateral-damage> [Accessed 29 April 2022]. Samra, I., 2022. The Year Ahead. [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/the-road-ahead> [Accessed 29 April 2022]. Samra, I., 2022. 2022: The Year Ahead… (Post Fed Meeting). [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/2022-the-year-ahead-post-fed-meeting> [Accessed 29 April 2022]. Stubbington, T., 2022. Dollar surges to highest level in 20 years. [online] Ft.com. Available at: <https://www.ft.com/content/54f5231e-6157-4312-b3e4-a74335ca9bcc> [Accessed 28 April 2022]. *Last Updated May 4, 2022.

Collateral Damage

Collateral Damage

“There is no instance of a nation benefitting from prolonged warfare.” --Sun Tzu Contrary to the Russian ceasefire, the invasion of Ukraine shows little signs of slowing, and although consumers are feeling the impact of inflation at the gas pump, this pales in comparison to the impact of European nations. As global central banks follow the Feds lead of combating inflation with a limited toolkit, this balancing act may drive the US economy into a recession. In this month’s issue of The Samra Report we focus on policy mistakes with regards to inflation and our plan to hedge against volatility. As we close out the first quarter, the media has been quick to plant the seed of concern around inflation. With headlines from the Wall St. Journal reading “U.S. Inflation Rises to 40-Year Peak in February by Fed’s Preferred Measure.” At Samra Wealth Management we believe core Personal Consumption Expenditures (PCE), inflation excluding volatile food and energy, may have already peaked. Investors with a foundational understanding of economics grasp that in the short-term this trend is transitory, caused less by economic growth or expansion of the money supply, and more correlated towards supply-chain shortages driving up prices. Investors have reason to be confused, as hiking rates will not solve the supply-chain dilemma. According to Goldman Sachs there are two major growth risks against the backdrop of alarmingly high inflation: (1) the prospect of a policy mistake as the Fed embarks on a tightening cycle to rein in inflation, and whether the Fed will be able to pull off a soft landing in a challenging macro environment. (2) The prospect that the Russian-Ukraine conflict deals a crippling economic blow to Europe, given Europe’s dependency on Russian energy. In our March issue of The Samra Report, we recommended a systematic rotation out of treasuries into technology, increased exposure towards energy, real estate and precious metals, and an emphasis on investing in US Stocks. With US bond funds experiencing large outflows the week of March 9th, in the amount of $7.8 billion with $4.49 billion in purchases of equity funds, institutional investors recognize the negative real returns, when factoring in inflation and are opting towards riskier assets. Our recommendation is to invest in quality companies and hold throughout the volatile market cycle, and do not attempt to time the market. Investors may find themselves confused, as many of the mega-cap technology companies are trading far below their recent all-time highs. Investors should understand that select equities may be trading below all-time highs, however, this does not place them in the category of value. At Samra Wealth Management we recommend investors look towards quality, and our sector rotation strategy has seen little change, weighted highest towards Technology, Healthcare, Financials, industrials and select consumer discretionary stocks. With the volatility in energy prices, energy has become a tactical component as revenues of energy companies are strongly correlated to their underlying commodities. Furthermore, we expect little hesitation from Congress approving additional funds for defense and expect defense contractors and cybersecurity firms to benefit in the near-term. Conservative investors, those invested in treasuries may continue to see their portfolios shed value throughout the remainder of the year. With the Federal Reserve Chairman, Jerome Powell, stating the US economy has exhibited resilience, signaling further rate hikes. We believe the Fed’s approach to monetary policy is too little, too late, and an attempt to play catch-up could send the US economy into a recession, an issue that could negatively impact the Biden administration’s chances for a second term. At Samra Wealth Management, we believe it is unlikely President Biden can secure a second term in office without some form of the Build Back America bill, and a comprehensive immigration policy to help alleviate the labor shortage. Disclosures This material is provided as a courtesy and for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. Nasdaq is a global electronic marketplace for buying and selling securities. Originally an acronym for "National Association of Securities Dealers Automated Quotations"—it was a subsidiary of the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA). Indexes are unmanaged and do not incur management fees, costs or expenses. It is not possible to invest directly in an index. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Investing involves risk including loss of principal. Investment advisory services offered through Samra Wealth Management, a Member of Advisory Services Network, LLC. References Edelberg, W., 2022. What does current inflation tell us about the future?. [online] Brookings. Available at: <https://www.brookings.edu/blog/up-front/2021/11/16/what-does-current-inflation-tell-us-about-the-future/> [Accessed 31 March 2022]. Guilford, G., 2022. U.S. bond funds see large outflows in the week to March 9. [online] Reuters. Available at: <https://www.reuters.com/business/finance/us-bond-funds-see-large-outflows-week-march-9-2022-03-11/> [Accessed 31 March 2022]. Guilford, G., 2022. U.S. bond funds see large outflows in the week to March 9. [online] Reuters. Available at: <https://www.wsj.com/articles/annual-inflation-measure-accelerates-to-6-4-highest-since-1982-by-feds-preferred-measure-11648733717?mod=pls_whats_news_us_business_f> [Accessed 31 March 2022]. Mankiw, G., Ball, L. and Romer, D., 2022. The New Keynesian Economics and the Output- Inflation Trade-off. [online] Brookings.edu. Available at: <https://www.brookings.edu/wp-content/uploads/1988/01/1988a_bpea_ball_mankiw_romer_akerlof_rose_yellen.pdf> [Accessed 31 March 2022]. Rosengren, E. and Hildebrand, P., 2022. Top of Mind: Stagflation Risk. [online] Goldman Sachs. Available at: <https://www.goldmansachs.com/insights/pages/gs-research/top-of-mind-stagflation-risk/report.pdf> [Accessed 31 March 2022]. Samra, I. and Chawla, P., 2022. The Samra Report" 2022 The Year Ahead. [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/2022-the-year-ahead-post-fed-meeting> [Accessed 31 March 2022]. Seddon, M., 2022. Russia no longer requesting Ukraine be ‘denazified’ as part of ceasefire talks. [online] Ft.com. Available at: <https://www.ft.com/content/7f14efe8-2f4c-47a2-aa6b-9a755a39b626> [Accessed 31 March 2022]. The Economist. 2022. The Biden administration’s defence-spending proposal is a muddle. [online] Available at: <https://www.economist.com/united-states/2022/04/02/the-biden-administrations-defence-spending-proposal-is-a-muddle> [Accessed 1 April 2022]. Wittenstein, J., 2022. Meta Trades Like Value Stock After $500 Billion Rout. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/articles/2022-03-24/meta-trades-like-value-stock-after-500-billion-rout-tech-watch> [Accessed 31 March 2022]. Woodard, J. and Deverey, J., 2022. The RIC Report: Peace through strength. [online] ML.com. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12389551-2%26segment%3DDIRECT> [Accessed 31 March 2022].

WAR GAMES

WAR GAMES

The Russian incursion into Ukraine has swiftly stolen the headlines from the inflation story, as President Vladimir Putin’s bluff has turned into a tantrum against Ukraine and Democracy. Shocked global markets were not expecting a war scenario, as algorithms and model portfolios appear to be confused, with some investors turning to the Pentagon’s War Game outcomes. At Samra Wealth Management, we double-down on our February 2022 consensus, the year-to-date volatility is a reminder to investors of the fragility of the financial markets. With Putin playing his hand, it is now over to Fed Chair Jerome Powell, as the stability of the global financial markets has become a geopolitical game of poker. What was expected to be a swift take-over of Ukraine has resulted in heavy early losses, questioning Russia’s military capabilities. With Russia dedicating 4.3% of GDP to military spending, an untested military favoring rockets over precision guided missiles prompts a greater concern. Vladimir Putin wrote the doctrine on “escalate to deescalate”, creating concerns of a low-yield nuclear attack. Russian foreign policy may have caused irreparable damage to the Russian economy and financial markets, as Russia cancelled trading of stocks in Moscow, on Monday. Global sanctions against Russia caused the (Ruble denominated) Russian stock market (MOEX) to decline -45.66%, causing greater concerns for foreign investors as the Ruble fell -28.36% against the US Dollar YTD. With Russia’s credit called into question, the Bank of Russia has hiked its key interest rate to 20% from 9.5%. With Russian stocks on the London Stock Exchange plummeting, a prolonged closure of Russian markets, may present a déjà vu scenario, creating an environment of illiquidity and hyperinflation where currency becomes worthless, and Russians re-live trading vodka for bread through the remainder of winter. As global banks, governments and corporations shun Russia, Robinhood strategies from hacking organizations such as Anonymous are disrupting Russian infrastructure. With the S&P 500 falling into correction territory and the NASDAQ in a Bear Market, investors should invest with a great deal of caution, as what has worked in the past may not work this time. As global investors seek safe havens, we would typically see a rotation towards tech behemoths. With the Fed expected to raise rates in March the tech sector has priced in lower future valuations and as the bond yield rises, bond prices find themselves on a downward trend, as investors rotate out of “risky” assets, into cash and fixed income. The Fed now has a balancing act, finding an equilibrium between raising rates and sending the US economy into a recession. During a typical recession, the Fed would lower the key interest rate to help stimulate the economy, however, with rates still near all-time highs, this is not an option. At Samra Wealth Management, we believe the recent Russian incursion may slow, not stop, the Fed’s interest rate strategy, and investors should discuss with their advisors about: A systematic rotation out of treasuries, into technology: we believe a slowing of the Fed’s interest rate policy will see positive repricing of Technology, Consumer Discretion and Communications. According to Merrill Lynch: Stock splits historically are bullish for the companies that enact them. Average returns one year later are 25% (vs. 9% for the market). Recently, splits have become scarce with returns more subdued, but still well above benchmarks. A benefit to large corporations changing their names, for example Google to Alphabet and Facebook to Meta, may be viewed more positively amongst law makers, spawning the potential for future growth. Increased exposure into Energy, Real Estate and Precious Metals: In the near-term we forecast oil consumption to outpace oil demand, however oil consumption could decline in the coming months causing downward pressure on prices in late Q2 to early Q3. We expect inflation to positively impact real estate and precious metals. America First Harsher sanctions will likely follow from both Europe and the US, however, given the lack of exposure the United States has to Europe, domestic investments may provide a sense of immunity to investors. Given the fluid situation in Ukraine, we believe a strong offense is the best defense and recommend investing in US stocks. Although the Russian invasion of Ukraine will likely have little disruption to the US economy, we believe the Fed would be wise to slow their interest rate policy, increasing no-more than 1.50% in 2022. As supply chains disruptions ease and demand for semiconductors settle, we expect inflationary fears to dissipate by Q3, as consumption for energy falls. Investors of multinational corporations deriving their income from Europe should be concerned with the lack of returns, as the dollar strengthens or consider investing utilizing a currency hedged strategy. Disclosures This material is provided as a courtesy and for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. Nasdaq is a global electronic marketplace for buying and selling securities. Originally an acronym for "National Association of Securities Dealers Automated Quotations"—it was a subsidiary of the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA). Indexes are unmanaged and do not incur management fees, costs or expenses. It is not possible to invest directly in an index. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Investing involves risk including loss of principal. Investment advisory services offered through Samra Wealth Management, a Member of Advisory Services Network, LLC. References Amundi US Institutional Investors & Consultants. 2022. Russia attacks Ukraine: Markets will have to adjust to the shock. [online] Available at: <https://www.amundi.com/usinstitutional/Local-Content/News/Russia-attacks-Ukraine-Markets-will-have-to-adjust-to-the-shock> [Accessed 28 February 2022]. BlackRock. 2022. Global Weekly Commentary - Insights | BlackRock: Upgrading Stocks, Downgrading Credit. [online] Available at: <https://www.blackrock.com/us/financial-professionals/insights/weekly-commentary#> [Accessed 28 February 2022]. Borger, J., 2022. US staged 'limited' nuclear battle against Russia in war game. [online] the Guardian. Available at: <https://www.theguardian.com/world/2020/feb/24/limited-nuclear-war-game-us-russia> [Accessed 28 February 2022]. Easton, J. and Maki, S., 2022. Russian Stocks Plummet in London with Moscow Exchange Shut. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/articles/2022-02-28/russian-stocks-plummet-in-london-with-moscow-exchange-shut> [Accessed 28 February 2022]. Harris, E. and Bhave, A., 2022. US Economic Week: Fading the Russian Shock. [online] Merrill Lynch. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12387613-1%26segment%3DDIRECT> [Accessed 28 February 2022]. Kendall-Taylor, A. and Trenin, D., 2022. Top of Mind: Russia Risks. [online] Goldman Sachs. Available at: <https://www.goldmansachs.com/insights/pages/gs-research/russia-risk/report.pdf> [Accessed 28 February 2022]. Reuters.com. 2022. Russian Central Bank Hikes to 20% in Emergency Move Tells Firms to Sell FX. [online] Available at: <https://www.reuters.com/business/finance/russia-hikes-key-rate-20-tells-companies-sell-fx-2022-02-28/> [Accessed 28 February 2022]. Samra, I., 2022. The Samra Report: 2022: The Year Ahead… (Post Fed Meeting). [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/2022-the-year-ahead-post-fed-meeting> [Accessed 28 February 2022]. Woodard, J., Devery, J. and Harris, D., 2022. THE RIC REPORT: Bullish stock splits, bearish rate hits. [online] Merrill Lynch. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12378019-1%26segment%3DDIRECT> [Accessed 28 February 2022].

2022: The Year Ahead… (Post Fed Meeting)

2022: The Year Ahead… (Post Fed Meeting)

Barely out of the gates in 2022 and the volatility is reminiscent of Q1 2020, serving as a reminder to investors the fragility of the financial markets. Although 2021 closed out with the S&P 500 up 26.89%, January provided a chilling glimpse of what may lie ahead in the coming months, as Federal Reserve Chairman, Jerome Powell dampened sentiment with some strong remarks. As investors flock towards safety, according to Merrill Lynch “safe assets don’t look so safe. High-quality government bonds, corporate bonds, munis, and growth stocks all face serious risk as the Fed raises rates.” In this month’s issue of The Samra Report, we analyze some of the underlying causes of the volatility, and highlight areas of potential concern and opportunity. The keyword as of late has been inflation, caused by a prolonged low interest rate environment, irresponsible government stimulus, in a low tax climate. These factors have caused a domino effect spilling over into sectors such as real estate, as investors and economist brace for the potential bubble to burst. But why now? Aiding the recent inflation hike has been fewer workers in the labor force with an appetite for higher wages, combined with supply chain disruptions and the increasing cost of fuel. Although inflation is not uniform across sector and geography, neither is wage inflation, leading to a wider gap in inequality, further exacerbated with the expiration of monthly child tax credits. Early pandemic responses led to a widening income gap, as skilled workers continued to work remotely, earning a salary while decreasing expenditures such as travel, dining, and childcare. Unskilled workers however collected unemployment benefits, without an option for remote employment. The Feds primary tool to help dampen inflation is Monetary Policy: increasing interest rates. Low interest rates have served as a tax on the wealthy, peaking this past October as PCE inflation reached 4.59%, while the Federal Funds rate hovered at a low of 0.08%. Although Chairman Powell has cited data exhibiting the strength and resilience of the economy, at Samra Wealth Management we believe the Fed’s interest rate decisions missed the boat, and conservative rate increases should have commenced in early 2019. Analyst now speculate whether the fed will raise rates 4 to 7 times over the next 7 meetings by 0.25%, or is it just rhetoric from the Fed, enough to spook the markets. Although the past few weeks have seen an increase in interest rates and a fall in equities from their all-time highs, it’s important consumers and investors understand the difference between expectation and reality. Although the Fed has signaled a rate hike as early as March, the market has priced in this information causing bond yields to rise, a concern for all investors regardless of risk appetite. Conservative investors, those who predominantly hold fixed-income investments, understand the inverse relationship between rising interest rates, and declining bond prices. What may be less familiar, is the Discounted Cash Flow (DCF) model used to determine valuation. According to McKinsey: Discounted-cash-flow valuation, though it may sound stodgily old school, works where other methods fail, since the core principles of economics and finance apply even in uncharted territories, such as start-ups. The truth is that alternatives, such as price- to-earnings or value-to-sales multiples, are of little use when earnings are negative and when there aren’t good benchmarks for sales multiples. More important, these shorthand methods can’t account for the unique characteristics of each company in a fast-changing environment, and they provide little insight into what drives valuation. A hike in interest rates in the DCF model causes an increase in the denominator, causing valuations to plunge, exhibited shortly after the summary by Chairman Powell January 26th. At Samra Wealth Management we believe the volatility is likely to continue into late Q2, and caution investors to rethink their investment strategy, since the top 8 S&P 500 companies by market capitalization are Technology companies, making up over 26% of total S&P 500 capitalization. (We included Amazon and Facebook as Technology companies, although GLICS classifications do not). We recommend focusing on domestic holdings with little exposure to foreign exchange risk. On the most fundamental level in economics, when you raise interest rates in a domestic economy, relative to foreign economies. Demand increases for the domestic economy’s financial instruments, becoming the recipient of increased investment, strengthening the currency of the domestic economy’s currency on a relative basis. This becomes concerning for corporations accepting foreign currency, where the cost of bringing dollars back to the US becomes more expensive. Think of companies such as Walmart, McDonalds, and Starbucks, with vast international operations, there is significant risk in foreign exchange. This scenario also impacts foreign trade as American goods become more expensive to foreign consumers. Over the past 5 years, our sector rotational strategy has seen little change: Health Care Health Care as a sector is in expensive Federal government spending for health care grew 36.0% in 2020, significantly faster than the 5.9% growth in 2019. This faster growth was largely in response to the COVID-19 pandemic. Prescription drug spending increased 3.0% to $348.4 billion in 2020. According to the Centers for Medicare & Medicaid Services National health spending is projected to grow at an average annual rate of 5.4 percent for 2019-28 and to reach $6.2 trillion by 2028. Wearable technology and smart phone apps collecting real time health data, is providing healthcare providers with vast amounts of data that could be monetized. Financials Beneficiary of rising interest rates Lower dependence on labor from the inclusion of fintech, reduced usage of brick and mortar for retail banking. Increased M&A activity in 2021 rose by 102 percent vs the previous year, totaling $2.1T in US-to-US transactions. Increased loan growth due to inflation pushing up prices, and as companies replenish inventories. Recent volatility in markets is likely to push some self-directed investors to seek professional management. Energy Revenues of energy companies are strongly correlated to their underlying commodities, oil & gas, providing a natural hedge against inflation. Recent cold weather bouts across the United States have caused utilities companies to move natural gas from storage. In January, the price of natural gas increased in a single day by 72%, with a year-to-date increase of 34%. According to the late Senator John McCain, “Russia is a Gas Station masquerading as a country”. Although Russia has come a long way since this quote, President Putin has plenty of monetary motivation to cause havoc in Europe. With sanctions in place, Putin’s pipeline, Nord Stream 2, could paralyze much of Europe. Combining this with a conflict in Ukraine could see the price of Brent surpass $100 a barrel. With Shell and BP cutting dividends, expect fixed income investors to rotate out of bonds, into energy with the return of dividends. In the near-term we forecast oil consumption to outpace oil demand, however oil consumption could decline in the coming months causing downward pressure on prices. Technology Although the sector has fallen into correction territory, we believe Monetary Policy will be accommodative, and technology will prove resilient. Although neutral on the sector, we believe select areas of technology will outperform, and investors should be selective, with a focus on cloud, cybersecurity and companies collecting and utilizing vast amounts of data for automation, robotics, fintech and healthcare related. As EV’s become mainstream, increased usage, infrastructure, and tax credits could be greatly beneficial to new entrants, as recent margins have been attractive. The semi-conductor space is transforming; however, this move is too little too late, and companies such as Intel will need large government grants and tax credits to compete with Asian rivals. Although domestic chip manufacturers may be able to provide silicon for a vast array of computers and household appliances, advanced semi-conductor independence could be a decade away. At Samra Wealth Management, we believe large scale immigration reform and legislation focused on tech start-ups is key. Industrials Although we project inflation to be a problem up through late Q2, we believe the Infrastructure Bill, pent up demand, and improvements in supply chain will alleviate downward pressure. Less dependence on labor and utilizing technology will increase profit margins. Ecommerce Select e-commerce companies Amazon, Walmart, Shopify, Mecardo Libre stand to benefit from global internet penetration and smartphone adoption. With rising rates on the horizon, bond portfolios are already feeling the impact, similar to our January 2020 Samra Report, “we recommend hedging portfolio risk with exposure to Net Lease Commercial Real Estate and following social migration patterns for multifamily residential real estate, specifically around metro areas of D.C., Charlotte, Atlanta and Tampa”, as real estate provides inflation protection. We are bearish on treasuries and prefer high-yield and emerging market debt for those able to hedge currency risk. Disclosures This material is provided as a courtesy and for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Investing involves risk including loss of principal. Investment advisory services offered through Samra Wealth Management, a Member of Advisory Services Network, LLC. References Armenta, A., 2022. Global Macro Outlook - First Quarter 2022. [online] https://www.alliancebernstein.com. Available at: <https://www.alliancebernstein.com/library/global-macro-outlook-first-quarter-2022.htm> [Accessed 30 January 2022]. Chang, J., 2022. Vaccines, Recovery and Innovation in the Healthcare Sector. [online] Goldman Sachs. Available at: <https://www.goldmansachs.com/insights/pages/from_briefings_20-may-2021.html> [Accessed 30 January 2022]. Cms.gov. 2022. NHE Fact Sheet | CMS. [online] Available at: <https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet#:~:text=Federal%20government%20spending%20for%20health,the%206.3%25%20growth%20in%202019.> [Accessed 29 January 2022]. Divisino, S., 2022. Explainer: Why U.S. natural gas prices spiked by a record 70% on Thursday. [online] Reuters. Available at: <https://www.reuters.com/business/energy/why-us-natural-gas-prices-spiked-by-record-70-thursday-2022-01-28/> [Accessed 29 January 2022]. Eia.gov. 2022. Short-Term Energy Outlook - U.S. Energy Information Administration (EIA). [online] Available at: <https://www.eia.gov/outlooks/steo/report/global_oil.php> [Accessed 31 January 2022]. Fred.stlouisfed.org. 2022. FRED Graph | FRED | St. Louis Fed. [online] Available at: <https://fred.stlouisfed.org/graph/?g=1ED0> [Accessed 30 January 2022]. Lebenthal, J., 2022. Interest Rates and the Effect on Technology Stocks - Cerity Partners. [online] Cerity Partners. Available at: <https://ceritypartners.com/thought-leadership/interest-rates-and-the-effect-on-technology-stocks/> [Accessed 30 January 2022]. Markowicz, S., 2022. Which equity sectors can combat higher inflation?. [online] Which equity sectors can combat higher inflation?. Available at: <https://www.schroders.com/en/insights/economics/which-equity-sectors-can-combat-higher-inflation/> [Accessed 30 January 2022]. McKinsey. 2022. Valuing High-Tech Companies. [online] Available at: <https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/valuing-high-tech-companies> [Accessed 30 January 2022]. Pew Research Center’s Social & Demographic Trends Project. 2022. Trends in U.S. income and wealth inequality. [online] Available at: <https://www.pewresearch.org/social-trends/2020/01/09/trends-in-income-and-wealth-inequality/> [Accessed 30 January 2022]. Rubin, G., 2022. Why Do Prices Keep Going Up and What’s the Cause of Inflation?. [online] WSJ. Available at: <https://www.wsj.com/articles/what-is-inflation-cause-stock-market-11637623703> [Accessed 30 January 2022]. Samra, I., 2022. The Samra Report 2020:The Year Ahead. [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/2020-the-year-ahead> [Accessed 29 January 2022]. Seigel, R., 2022. Fed ready to tackle inflation with interest rate increase in March, pointing to strong job growth amid pandemic. [online] The Washington Post. Available at: <https://www.washingtonpost.com/us-policy/2022/01/26/fed-powell-interest-rate/> [Accessed 31 January 2022]. Woodard, J., 2022. The RIC Report: Get Paid to Wait A Primer on Prudent Yield. [online] Olui2.fs.ml.com. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12364366-1%26segment%3DDIRECT> [Accessed 30 January 2022].

The Road Ahead...

The Road Ahead...

As Goldman Sachs raises its 2021 target on the S&P 500 from 4,300 to 4,700, further fueling investor sentiment, concerns of new cases and hospitalizations caused by the Delta variant have taken a backseat under a new norm. (Mozee) Although a hybrid work model may avert the need for an economic shutdown, the road ahead could reveal fragility in the U.S. economy. This month’s issue of The Samra Report focuses on several variables and provides insight as to their impact on the U.S economy and Global Financial System. At Samra Wealth Management our outlook for the next several years is bullish, however, strained trade relationships with China and the Delta variant have exposed vulnerabilities. According to the Center for Infectious Disease Research and Policy: With vaccinations reaching a critical point, declines earlier this year serves as proof that the virus and variants can be stopped, but confusion, complacency, and inconsistently applied public health measures are driving transmission. Dr. Anthony Fauci warned that upcoming coronavirus mutations could be even more contagious than delta, which has a viral load about 1,000 times higher than the alpha variant. With a Delta Plus variant detected in South Korea, Americans should consider themselves on notice to fear the unknown. Numerous factors play a role in the spread of covid, for example proximity to a travel hub and state population density. A positive correlation between state vaccination rates and new covid cases by population indicates those states with conservative leadership, prioritizing constitutional rights and religious freedoms over science and human rights, have experienced the greatest uptick in new cases as a percentage of population. A deeper dive into the numbers further indicates a correlation between state education ranking and vaccinations, where New Jersey, Connecticut and Massachusetts, the highest ranked states for education by Education Week Research Center, average 12 new covid cases per 100,000, whereas Mississippi, Louisiana, Alabama and neighboring Florida average 68.5 new cases per 100,000. Further concerning as the latter states have a statistically significant lower population density. As the Delta variant continues to rage, the Biden Administration’s plan to stimulate the economy focuses on an infrastructure spending bill, and student loan deferment. In a low interest rate environment, where skilled and intermediate workers are profiting from the hybrid work environment, the refinancing of debt and ability to reroute student loan payments towards mortgage principal payments, aids in widening the wealth gap. The hybrid work environment has also spawned a shift from real estate in urban areas to the suburbs, prompting the question, “are we in a real estate bubble?” With negative real rates, and an under supply of single-family homes, investors are less concerned with a housing bubble, and focused on how long rates can stay low. Although there’s little rationale for the argument, that rates must go up, at Samra Wealth Management, we believe low rates have been necessary given the fragility of the economy. In a domestic economy, should the central bank raise interest rates, relative to foreign economies. The domestic economy in this case would experience an influx of capital, pushing up the relative strength of the domestic economy’s currency, offsetting foreign trade. In our current scenario, low interest rates help to ensure domestically produced goods are accessible in global trade. At Samra Wealth Management, we believe interest rates will start to tick-up in November, due to an announcement by the Treasury, it could begin cutting the size of government debt sales in the fall, as funding needs for economic relief efforts ease, in a move that would pave the way for the first reductions in five years. We believe the Fed is likely to follow suit in its April meeting, as talks of tapering start to solidify. A rise in interest rates, combined with a tax increase could deal a blow to select sectors in the near term, specifically: Healthcare, Technology, financials, industrials, and consumer discretionary, prompting a change in our sector rotational strategy. However, although we expect interest rates to rise moderately in Q4 into Q12022, we believe the Fed’s plan will be contingent on unemployment, as it emphasizes returning to pre-pandemic levels, while keeping an eye on run away inflation. We expect short-term inflation to increase, given pent up demand and supply-chain constraints due to logistics and shortages. We further expect the above-mentioned sectors to recover swiftly given the go-ahead of an infrastructure spending bill, and increased stimulus measures. Conservative investors in search of yield, in an interest rate environment where the 10-year fell below 1.14% in July, and the real interest rate (10-year U.S. Treasury indexed for inflation) fell to -1.19%, a multi-decade low, need to rethink their investment strategy. (Fred.stlouisfed.org) A conservative allocation weighted heavily towards fixed income, places these investors at increased risk, as interest rates start to rise while prices of bonds fall. At Samra Wealth Management, we expect increased volatility across asset classes over the next 12-months, suggesting a managed strategy is likely to outperform that of passive investments. Last Revised: August 5, 2021 Disclosures: This material is provided as a courtesy and for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Investing involves risk including loss of principal. Investment advisory services offered through Samra Wealth Management, a Member of Advisory Services Network, LLC References BlackRock. 2021. Global Weekly Commentary - Insights | BlackRock. [online] Available at: <https://www.blackrock.com/us/financial-professionals/insights/weekly-commentary> [Accessed 29 July 2021]. Brynjolfsson, E., 2021. Top of Mind: THE POST-PANDEMIC FUTURE OF WORK. [online] GoldmanSachs.com. Available at: <https://www.goldmansachs.com/insights/pages/top-of-mind/post-pandemic-future-of-work/report.pdf> [Accessed 29 July 2021]. Centers for Disease Control and Prevention. 2021. COVID Data Tracker. [online] Available at: <https://covid.cdc.gov/covid-data-tracker/#vaccinations_vacc-people-onedose-percent-pop12> [Accessed 29 July 2021]. Cha, S., 2021. S.Korea on alert for new Delta Plus COVID-19 variant. [online] Reuters. Available at: <https://www.reuters.com/world/asia-pacific/skorea-detects-its-first-two-cases-delta-plus-covid-19-variant-2021-08-03/> [Accessed 5 August 2021]. Education Week. 2021. In National Ranking of School Systems, a New State Is On Top. [online] Available at: <https://www.edweek.org/policy-politics/in-national-ranking-of-school-systems-a-new-state-is-on-top/2019/09> [Accessed 29 July 2021]. Fred.stlouisfed.org. 2021. Consumer Loans: Credit Cards and Other Revolving Plans, All Commercial Banks. [online] Available at: <https://fred.stlouisfed.org/series/CCLACBW027NBOG> [Accessed 29 July 2021]. Fred.stlouisfed.org. 2021. 10-Year Treasury Inflation-Indexed Security, Constant Maturity. [online] Available at: <https://fred.stlouisfed.org/series/DFII10> [Accessed 29 July 2021]. Knutson, R., 2021. Anthony Fauci: Delta Variant Has 'Exposed Our Vulnerability' - The Journal. - WSJ Podcasts. [online] WSJ. Available at: <https://www.wsj.com/podcasts/the-journal/anthony-fauci-delta-variant-has-exposed-our-vulnerability/a12a5fcf-0afd-433c-92bb-7b5159ff54ed> [Accessed 5 August 2021]. Mayo Clinic. 2021. U.S. Coronavirus Map: Tracking the Trends. [online] Available at: <https://www.mayoclinic.org/coronavirus-covid-19/map?mc_id=google&campaign=12619887048&geo=9003941&kw=us%20covid%20map&ad=509662149025&network=g&sitetarget=&adgroup=120372570216&extension=&target=kwd-1126203074153&matchtype=e&device=c&account=7470347919&placementsite=enterprise&gclid=Cj0KCQjwu7OIBhCsARIsALxCUaNSA1_QR8MV_8HXDJnYhQTx8lZGxwkYwgCQcihOuAcUvRQ0In8KiuYaAk9nEALw_wcB> [Accessed 29 July 2021]. Mozee, C., 2021. Goldman Sachs is now the biggest stock bull on Wall Street after adjusting its S&P 500 target to forecast a 7% gain by year-end. [online] markets.businessinsider.com. Available at: <https://markets.businessinsider.com/news/stocks/stock-market-outlook-goldman-sachs-sp-500-price-targets-2021-2021-8> [Accessed 5 August 2021]. Sandler, R., 2021. Credit card use is still declining compared to pre-pandemic levels | Consumer Financial Protection Bureau. [online] Consumer Financial Protection Bureau. Available at: <https://www.consumerfinance.gov/about-us/blog/credit-card-use-still-declining-compared-to-pre-pandemic-levels/> [Accessed 29 July 2021]. Schirring, L., 2021. WHO: Growing COVID-19 surge hits critical point. [online] CIDRAP. Available at: <https://www.cidrap.umn.edu/news-perspective/2021/04/who-growing-covid-19-surge-hits-critical-point> [Accessed 29 July 2021]. Smith, C., 2021. US sets stage for first Treasury sales reduction in five years. [online] Ft.com. Available at: <https://www.ft.com/content/01af0d56-572e-42cd-8375-1cc4e8d0cc58> [Accessed 29 July 2021]. Wessel, D. and Milstein, E., 2021. What does the Federal Reserve mean when it talks about tapering?. [online] Brookings. Available at: <https://www.brookings.edu/blog/up-front/2021/07/15/what-does-the-federal-reserve-mean-when-it-talks-about-tapering/> [Accessed 29 July 2021]. Woodard, J., 2021. The RIC Report If you want less of something, tax it. [online] ml.com. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12291545-2%26segment%3DDIRECT> [Accessed 29 July 2021].

Lockdown 2.0

Lockdown 2.0

As coronavirus cases in October surged to end the month at 99,784, the financial markets paid little attention shedding only 1.96% for the month, shrugging off lockdown warnings from the UK, the Netherlands, Germany, Austria, Spain, Italy and Israel. As financial markets appear to be distracted by the election, at Samra Wealth Management we are deeply concerned about the upwards trend in new Covid-19 cases, of 120,504 (updated November 6th, 2020) that appear to be flying under the radar. This month we highlight factors that may significantly impact your portfolio. In October we asked, “If a vaccine was available would you take it? Would you allow your children to take it?” Prior to answering, we ask you take the following factors into consideration: There is an increased likelihood the administration of a covid-19 vaccine would require multiple doses. A vaccine would require refrigerated storage and logistics capabilities, within a specific temperature range. Logistics capabilities at this point in time do not exist for effective wide-scale distribution. FDA EUA (Emergency Use Authorization) would approve a vaccine for emergency use that may not have passed FDA approval under normal circumstances, where vaccines are tested on a larger population, with diversification in age, ethnicity and pre-existing conditions. With the election behind us, we believe there is a heightened probability individual states are likely to mandate further lockdowns. In October’s issue of The Samra Report we shared unemployment figures reflect a state of recovery, we believe the structural changes made causing temporary unemployment, are likely to become permanent. The United States as well as other economies are in the midst of an economic revolution: concerts, professional sporting events and other large gatherings have more than close proximity in common. They support many other ancillary services including janitorial services, printing, tourism, food and beverage, as well as many others. Last month Goldman Sachs and J. P. Morgan announced they were preparing for their employees to return to their offices across the globe. However, days after returning to work, J. P. Morgan sent some employees home. Since October, a number of companies have followed suit, As the election smoke clears, we expect an abundance of economic data to make headlines. Should the election outcome result in a new administration, we believe it is highly unlikely the Trump Administration will release a new stimulus bill. We caution investors that a second lockdown would not only impact hourly low-skilled positions as we saw earlier this year, a second lockdown would likely see a furlough of skilled employees. Removing non-essential salaried employees from private payrolls to that of government unemployment. In October Disney and major airline carriers announced layoffs, following trend in the last few days, ESPN, ExxonMobil, Chevron, Charles Schwab, Nike and Raytheon have announced plans to cut thousands of white-collar jobs. That's on top of major layoffs already announced or reported in the press at Wells Fargo, Goldman Sachs, Salesforce, Allstate and CNN owner WarnerMedia. In our November 2019 issue of The Samra Report: “Winter is Coming” we stated: “consumption spending makes up 68% of the United States GDP equation, insinuating a reduction in wages translates to a reduction in economic output. Although economic data does little to support our view, we remind investors that economic data did little to predict the last financial crisis.” 2020 has shown a disconnect of epic proportion when comparing Unemployment (U-6) to the stock market (S&P 500). With stocks riding near all-time highs, investors may not be aware of what’s to come, however, corporations are taking measures to dampen the impact of a prolonged recession. Disclosures: All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor. Investing involves risk including loss of principal. No investment strategy, such as rebalancing, can guarantee a profit or protect against loss. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. References Business Insider. 2020. The Coronavirus Outbreak Has Triggered Unprecedented Mass Layoffs And Furloughs. Here Are The Major Companies That Have Announced They Are Downsizing Their Workforces.. [online] Available at: <https://www.businessinsider.com/coronavirus-layoffs-furloughs-hospitality-service-travel-unemployment-2020#maersk-the-shipping-giant-announced-that-it-will-cut-at-least-2000-jobs-in-restructuring-on-october-13-in-september-the-company-said-that-up-to-27000-jobs-or-roughly-a-third-of-its-global-workforce-could-be-impacted-by-the-changes-1> [Accessed 30 October 2020]. Egan, M., 2020. From Exxon To Charles Schwab, White-Collar Job Cuts Are Mounting. [online] CNN. Available at: <https://www.cnn.com/2020/10/30/business/jobs-white-collar-layoffs/index.html> [Accessed 30 October 2020]. Fda.gov. 2020. Development And Licensure Of Vaccines To Prevent COVID-19 Guidance For Industry. [online] Available at: <https://www.fda.gov/media/139638/download> [Accessed 30 October 2020]. Nytimes.com. 2020. Covid In The U.S. Latest Case Count. [online] Available at: <https://www.nytimes.com/interactive/2020/us/coronavirus-us-cases.html> [Accessed 5 November 2020]. Samra, I., 2020. The Samra Report: Winter Is Here. [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/winter-is-here> [Accessed 30 October 2020]. Samra, I., 2020. The Samra Report: Winter Is Coming. [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/winter-is-coming> [Accessed 5 November 2020]. U.S. Food and Drug Administration. 2020. Emergency Use Authorization For Vaccines To Prevent COVID-19. [online] Available at: <https://www.fda.gov/regulatory-information/search-fda-guidance-documents/emergency-use-authorization-vaccines-prevent-covid-19> [Accessed 30 October 2020]. U.S. Food and Drug Administration. 2020. Pooled Sample Testing And Screening Testing For COVID-19. [online] Available at: <https://www.fda.gov/medical-devices/coronavirus-covid-19-and-medical-devices/pooled-sample-testing-and-screening-testing-covid-19#pooled> [Accessed 30 October 2020].

Winter is Here...

Winter is Here...

"Bank of America Sector Analysts estimate it could be 2024 before spending volumes on Airlines and Lodging are at 2019 levels, and a full recovery is dependent on a vaccine being available and widely administered”. A sentiment we strongly disagree with; although financial markets are in the green for the year, at Samra Wealth Management, it is our belief that an FDA fast-tracked vaccine will do little to dampen the economic blow Covid-19 has served. The key premise of this month’s issue of The Samra Report is: If a vaccine was available today, would you take it? Would you allow your children to take it? Although unemployment figures reflect a state of recovery, we believe the structural changes made causing temporary unemployment, are likely to become permanent. The United States as well as other economies are in the midst of an economic revolution: concerts, professional sporting events and other large gatherings have more than close proximity in common. They support many other ancillary services including janitorial services, printing, tourism, food and beverage, as well as many others. Last month Goldman Sachs and J. P. Morgan announced they were preparing for their employees to return to their offices across the globe. However, days after returning to work, J. P. Morgan sent some employees home. In our November 2019 issue of The Samra Report: “Winter is Coming” we stated: “consumption spending makes up 68% of the United States GDP equation, insinuating a reduction in wages translates to a reduction in economic output. Although economic data does little to support our view, we remind investors that economic data did little to predict the last financial crisis.” 2020 has shown a disconnect of epic proportion when comparing Unemployment (U-6) to the stock market (S&P 500). With stocks riding near all-time highs, investors may not be aware of what’s to come, however, corporations are taking measures to dampen the impact of a prolonged recession. Firms are not ramping up for the holiday season, this past week: Disney said it will lay off 28,000 employees across its parks, experiences and consumer products divisions Royal Dutch Shell said it’s cutting between 7,000 and 9,000 jobs, while Dow Inc. said it will reduce its workforce costs by 6% United Airlines, Alaska Airlines, American Airlines announced furloughs to over 60,000 employees. At Samra Wealth Management we expect heightened volatility for the remainder of 2020, carrying-over into the first quarter of 2021. We believe the risk of a resurgence of Covid-19 would be seriously exacerbated during cold and flu season, creating a risk-off consensus. We recommend investors looking to invest in gold do so tactically, as the price of gold and other commodities is measured in US Dollars. Fundamentally speaking, lower interest rates lead to a weaker US Dollar, impacting the price of gold. With news of President Trump testing positive for Covid-19 and his transfer to Walter Reed National Military Hospital, the uncertainty of the Presidents health solidifies these times are unprecedented. With less than a month left until the Presidential election, the risk of invoking the 25th Amendment, voters and investors questioning the President’s ability to govern and campaign, and a recent surge in Covid-19 in global hotspots such as Paris, London and New York, are leading to further restrictions. Restrictions that could cause the economy a second, more destructive, blow, should the government fail to pass a timely stimulus bill. Politicians concerned about the federal deficit would be wise to familiarize themselves with Modern Monetary Theory (MMT) by reading the Deficit Myth by Stephanie Kelton. * Last edited October 4, 2020. Disclosures: All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor. Investing involves risk including loss of principal. No investment strategy, such as rebalancing, can guarantee a profit or protect against loss. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. References Beilfuss, L., 2020. Temporary Layoffs Are Starting To Look Permanent. That’S Bad For The Recovery.. [online] Barrons.com. Available at: <https://www.barrons.com/articles/temporary-layoffs-are-starting-to-look-permanent-thats-bad-for-the-recovery-51599256801> [Accessed 29 September 2020]. Chaney, S., 2020. U.S. Job Gains Slow As More Layoffs Become Permanent. [online] WSJ. Available at: <https://www.wsj.com/articles/september-jobs-report-unemployment-rate-2020-11601593020> [Accessed 30 September 2020]. Fisher, I. and Yang, Y., 2020. New York Cracks Down On Hot Spots As Cases Surge: Virus Update. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/articles/2020-10-03/new-york-surge-rises-third-senator-tests-positive-virus-update> [Accessed 4 October 2020]. Harris, D. and Hopkins, T., 2020. Global Research Highlights: Atom & Steve. [online] Olui2.fs.ml.com. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12192145-1%26segment%3DDIRECT> [Accessed 30 September 2020]. Nathan, A., 2020. COVID-19: Where We Go From Here. [online] Goldman Sachs. Available at: <https://www.goldmansachs.com/insights/pages/covid-19-where-we-go-from-here.html> [Accessed 30 September 2020]. Samra, I., 2020. The Samra Report: The Calm Before The Storm.... [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/the-calm-before-the-storm> [Accessed 30 September 2020]. Samra, I., 2020. The Samra Report: Winter Is Coming. [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/winter-is-coming> [Accessed 30 September 2020]. Stevens, P., 2020. Disney Leads Companies Announcing Layoffs; Big Airline Job Cuts Loom. [online] CNBC. Available at: <https://www.cnbc.com/2020/09/30/disney-leads-companies-announcing-layoffs-big-airline-job-cuts-loom.html> [Accessed 30 September 2020].

The Calm Before the Storm…

The Calm Before the Storm…

As August closes at a record high for the S&P 500, we remain bearish heading into the final stretch of the third quarter. With the Federal Reserve signaling a pivot towards a more accommodative stance, “Chair Jerome Powell unveiled a new approach to setting U.S. Monetary Policy, letting inflation and employment run higher,” a shift that will likely keep interest rates lower for longer. This proactive stance should have investors concerned, however, may be beneficial to those with a higher appetite for risk. 2020 has shown a disconnect of epic proportion when comparing Unemployment (U-6) to the stock market (S&P 500). A stark comparison depicted below, as the S&P 500 seamlessly advances above 3000, while Unemployment U-6 peaks early in Q2, above 14%. At Samra Wealth Management, it is our opinion that politicians and Wall St. professionals appear to lack in common sense and good judgement. In our May issue of The Samra Report we shared the following excerpt: In an interview at the Economic Club of Washington, D.C., Federal Reserve Chair Jerome Powell stated that he does not see a recession. A statement echoed by Treasury Secretary Steven Mnuchin, who “sees the stock market riding a wave of demand once the outbreak is contained”. We believe the term forced recession has been used to help alleviate the pain of losses and reassure investors that a recovery will be swift. Investors would be wise to understand that a forced recession is still a recession, regardless of how we arrived here. In our November 2019 issue of The Samra Report: “Winter is Coming” we stated: “consumption spending makes up 68% of the United States GDP equation, insinuating a reduction in wages translates to a reduction in economic output. Although economic data does little to support our view, we remind investors that economic data did little to predict the last financial crisis.” Fast-Forward to H2 2020, the disparity between valuations and economic data become even more concerning: The stock market continues on an upward trajectory while Americans are being laid-off at the fastest rate since the great financial crisis, yet, delinquencies on residential loans are nearing 2007 lows. Digging deeper into the data, you will find single-family residential mortgage and credit card loans experienced an uptick up until Q1 2020, indicating government stimulus measures are working. However, continue to peel back the layers, and you will learn 32% of Americans had outstanding housing payments at the beginning of August 2020. At first glance, this may not appear troubling until you factor in: Most residential mortgages are packaged and securitized, creating investment products. “In the second quarter of 2005, credit card delinquencies hit an all-time high – even though house prices had boomed.” According to Michael Lewis in his book The Big Short, signaling a fundamental weakness in the strength of our economy. Readers should at this point be asking themselves two questions: (1) Does the current economic and financial climate echo similarities to that prior to the Great Financial Crisis. (2) What portion of your fixed income portfolio Is backed by residential mortgages. The impact of unemployment has temporarily been bridged by government stimulus measures, specifically the treasuries ability to print money. In the near-term a low interest rate environment signals a thriving residential real estate market; however, the longer-term effects of low or negative yields will impact the strength of the US Dollar, while access to “cheap” capital creates upwards pressure on inflation. Investors should similarly ask themselves two additional questions: (1) How sensitive is your portfolio to interest rates; (2) how to hedge foreign currency risk in your portfolio. Although not the most volatile year in terms of market history, 2020 has been a year filled with volatility. The disparity between the S&P 495 vs the 5 largest companies in the S&P 500 shows cause for concern. According to Charles Schwab’s Chief Global Investment Strategist, Jeffrey Kleintop: Take market value out of the equation and U.S. stocks are faltering after years of global dominance. A version of the S&P 500 Index that gives equal weight to each stock dropped 2.9% this year through Friday, according to data compiled by Bloomberg. At the same time, an equally weighted MSCI index of non-U.S. shares fell just 2.3%. The S&P 500 gauge led the last seven years, except for 2017. “The outperformance by the biggest U.S. stocks is hiding a change in leadership by the average stock. At Samra Wealth Management, our risk-off philosophy is risk-on, and we recommend investors talk to their financial advisor about considering how the below strategies may provide some downside protection against possible loss and volatility: Positions in Leveraged Gold Positions mirroring the S&P 500 VIX Short-Term Futures Index Selling Put options on High-Quality equities, following the Samra Wealth Management Sector Rotational Strategy on the areas of Technology, Healthcare, Industrials, Financials and specific consumer related holdings.* Purchasing Put Options for downside insurance.** Disclosure: All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. The information contained here does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. *, ** The strategy discussed above is for illustrative and educational purposes only and should not be construed as an endorsement, recommendation or solicitation to buy or sell any particular security.  Options involve risk and are not suitable for all investors.  Certain complex options strategies carry additional risk.  Please read the options disclosure document titles Characteristics and Risks of Standardized Options by clicking on this hyperlink text https://www.theocc.com/about/publications/character-risks.jspbefore considering any options transactions. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. References Adamczyk, A., 2020. 32% Of Americans Had Outstanding Housing Payments At The Beginning Of August. [online] CNBC. Available at: <https://www.cnbc.com/2020/08/06/32-percent-of-americans-had-outstanding-housing-payments-at-beginning-of-august.html> [Accessed 31 August 2020]. Fred.stlouisfed.org. 2020. Unemployment Rate Vs S&P 500. [online] Available at: <https://fred.stlouisfed.org/series/UNRATE#0> [Accessed 31 August 2020]. Lewis, M., 2020. The Big Short. [online] Real-economics.blogspot.com. Available at: <https://real-economics.blogspot.com/2011/06/michael-lewis-big-short-obamas-mistake.html> [Accessed 31 August 2020]. Samra, I., 2020. The Samra Report: What If It Returns.... [online] Samra Wealth Management. Available at: <https://www.samrawealthmanagement.com/post/what-if-it-returns> [Accessed 30 August 2020]. Samra, I., 2020. The Samra Report: Winter Is Coming. [online] Samra Wealth Management. Available at: <https://www.samrawealthmanagement.com/post/winter-is-coming> [Accessed 30 August 2020]. Torres, C., 2020. Fed Paves Way For Low-Rate Era With Inflation Able To Run Higher. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/articles/2020-08-27/powell-says-fed-to-seek-inflation-that-averages-2-over-time> [Accessed 31 August 2020]. Wenger, J. and Edwards, K., 2020. The Historic Economic Effects Of COVID-19. [online] Rand.org. Available at: <https://www.rand.org/blog/2020/05/is-the-unemployment-rate-now-higher-than-it-was-in.html> [Accessed 31 August 2020]. Wilson, D., 2020. U.S. Stocks Lose Worldwide Dominance When Counted Equally. [online] Bloomberg Radio's Dave Wilson. Available at: <https://theonedave.tumblr.com/post/628078974792351744/us-stocks-lose-worldwide-dominance-when-counted> [Accessed 31 August 2020].

The First Domino

The First Domino

“In just two months the unemployment rate has gone from the lowest rate in 50 years to the highest rate in almost 90 years.” Gus Faucher, Chief Economist at PNC Financial The global health pandemic has exposed fundamental weaknesses in world financial markets and economies. As the stock market (S&P 500) has recovered with a slight gain year-to-date, it may have lured smaller investors into a false sense of security that the worst is behind us. However, for those tracking the S&P 500, according to Bloomberg’s Dave Wilson, “there’s a distinction to be made between the S&P 500 index’s five biggest companies and all the rest. Amazon, Apple, Facebook, Alphabet, and Microsoft’s combined values have increased 266% from the start of 2015, whereas the remaining 495 rose just 25%.” In 2020 they closed Disneyland and it is uncertain if there will be a Super Bowl. According to Chairman Jerome Powell, “A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement. The result could be an extended period of low productivity growth and stagnant incomes.” The textbook definition of a recession is “two consecutive quarters of economic decline”, however, in differentiating the textbook definition to the real-world scenario, we urge our readers to consider the following: In 2020 they closed Disneyland and it is uncertain if there will be a Super Bowl. This week we learned from testimony given by Jerome Powell, “Among people who were working in February, almost 40 percent of those in households making less than $40,000 a year had lost a job in March. This reversal of economic fortune has caused a level of pain that is hard to capture in words, as lives are upended amid great uncertainty about the future.” There exists a common misconception that the economy and financial markets are strongly correlated. With 1 in 5 Americans claiming unemployment benefits, not factoring in illegal workers, those not declaring income and those business owners not eligible, we have a large portion of Americans with lower household income, where income is a function of household spending. As consumption makes up 68% of U.S. GDP, similarly business spending, known as investment spending, makes up an additional 20% of U.S. GDP. The risks remain significant: with less income paid to households, households consume less, leading to less corporate revenue, leading to layoff, creating a snowball effect of further decreases in household income. With government stimulus measures in place, Q2 GDP is -32.9%, the sharpest decline since modern tracking began in 1947, with the next worst drop of 10% coming in 1958. The questions investors should be asking is, what happens to the economy should government stimulus measures stop. The depth of economic devastation our nation is experiencing is not an act of God, it's a failure of Presidential leadership As part of the stimulus plan expired July 31st, many Americans face the risk of losing the supplemental $600 of unemployment benefits. As Senate Democrats and Republicans negotiate for a solution satisfying both sides, we believe it is unlikely we will see a solution this week. Furthermore, we believe Senate Democrats may prolong negotiations, undermining the current administration, as Americans feel further financial discomfort. Presidential Candidate Joe Biden was swift in commenting on historical GDP numbers: "The depth of economic devastation our nation is experiencing is not an act of God, it's a failure of Presidential leadership. Had President Trump taken immediate & decisive action, 10’s of thousands of lives & millions of jobs would never have been lost". We expect Democrats in the coming months to leverage a full-scale attack on the Presidency, with the use of conventional and social media. President Trump recently remarked “if Americans wanted their 401(k) and stocks to disintegrate and disappear, they should vote for Joe Biden”. In the immediate term we could see an initial shock to the market, however, recent data suggests the markets may be pricing in a Biden Presidency, and the question investors should be asking is, how will business activity and consumption spending fare in a low interest rate, low tax environment? At Samra Wealth Management we expect heightened volatility over the summer months, with the U.S. Covid-19 related death toll surpassing 150,000 and increased travel restrictions against the U.S., it has become evident that there is a resurgence of the coronavirus based on data provided by the Department of Health & Human Services, showing hospital inpatient hospital beds in Southern States, occupied by Covid-19 patients at over 20%. It could be suggested that there exists a correlation between conservative state leadership, prioritizing constitutional rights and religious beliefs over science and human rights, with the growing spread of the virus. Furthermore, we expect market volatility to be exacerbated in Q3 from a number of factors as we approach flu season, research pointing to a heightened hurricane season, and the number of smaller investors moving markets as institutional investors remain on the sidelines. We further believe clients of large wire houses such as Merrill Lynch, Morgan Stanley and UBS, in search of higher yields, stand to experience higher losses, as Merrill Lynch recently reported: “US equities are not cheap but we are still bullish because there is no alternative (record 77% of S&P 500 stocks pay higher dividends than Treasuries)”. Mike Wilson, Chief Investment Officer at Morgan Stanley believes the worst is likely behind us, as markets have likely priced-in fears of a recession, recommending investors look towards equities. While Mark Haefele, Chief Investment Officer of UBS believes “fiscal stimulus, pent-up consumer demand, and negative real interest rates should provide further upside for stocks in the months ahead.” Sentiments we do not share, as we stated in our June issue of The Samra Report: Where’s Warren, Mr. Buffett has amassed a war-chest of $137B in cash. Investors should ask themselves why would the ‘Oracle of Omaha’ be sitting on $137B in cash, could it be that Mr. Buffett believes the worst is yet to come? With Q2 GDP coming in at negative 32.9%, we would argue the first domino may have already fallen, and investors would be wise to meet with their financial advisors sooner, as opposed to later... Disclosure: All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. The information contained here does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. References Centers for Disease Control and Prevention. 2020. COVID-19 Data Dashboard – Patient Impact & Hospital Capacity. [online] Available at: <https://www.cdc.gov/nhsn/covid19/report-patient-impact.html> [Accessed 30 July 2020]. Haefele, M., 2020. Narrow Market Rally Can Broaden Out In Second Half, UBS’S Haefele Says. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/videos/2020-07-23/narrow-market-rally-can-broaden-out-in-second-half-ubs-video> [Accessed 30 July 2020]. Oaklye, D., 2020. Hunt For Yield Pushes More Investors Into Riskier Assets. [online] Ft.com. Available at: <https://www.ft.com/content/9ab40034-a4db-11e6-8898-79a99e2a4de6> [Accessed 30 July 2020]. Powell, J., 2020. Speech By Chair Powell On Current Economic Issues. [online] Board of Governors of the Federal Reserve System. Available at: <https://www.federalreserve.gov/newsevents/speech/powell20200513a.htm> [Accessed 30 July 2020]. Samra, I., 2020. The Samra Report: Where's Warren. [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/where-s-warren> [Accessed 30 July 2020]. Schwartz, K., 2020. I’M A U.S. Citizen. Where In The World Can I Go?. [online] Nytimes.com. Available at: <https://www.nytimes.com/2020/07/07/travel/american-travelers-restrictions-coronavirus.html> [Accessed 30 July 2020]. Woodard, J., Young, J. and Devery, J., 2020. The RIC Report: Where To Go When Yields Are Low. [online] ml.com. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12160077-1%26segment%3DDIRECT> [Accessed 30 July 2020].

Second Wave

Second Wave

"We are now having 40-plus thousand new cases a day; I would not be surprised if we go up to 100,000 a day if this does not turn around” Anthony Fauci, director of the National Institute for Allergy and Infectious Diseases The global financial markets continue to defy the rising number of coronavirus cases, causing investors with cash on the sidelines to question, if they have missed the boat. Although an election year, at Samra Wealth Management we believe there is a heightened probability of a pull-back in Q3. In our March issue of The Samra Report, “Black Swan Event: Coronavirus (Covid-19)”, we presented our view “it will likely get worse, before it gets better, then slightly worse again.” Our consensus remains unchanged, as select economic data may have investors viewing the markets through rose-colored glasses. This month’s issue of The Samra Report aims to provide investors with a look through our lens, in layman terms. As a consumer thinking of making a big-ticket purchase this year, whether it be trading-in your car for a newer model, taking a vacation, or upgrading home appliances (these purchases fall into the consumption spending portion of our nations GDP, at 68%). Given the current economic climate, financial uncertainty, and barriers to transact you’re likely thinking of putting these purchases off until you have reassurances of stable income, safety, and freedom to utilize your purchases. Now, think of a corporation or government agency through the same lens. Corporations such as PSE&G or government agencies such as the United States Forest Service are likely to delay such purchases. These purchases referred to as capital expenditure fall into the investment spending portion of our nations GDP, at 20.3%. Although the economy and the financial markets have little correlation, investors should consider the impact lower consumption and lower investment spending has on employment. Under normal circumstances, without government intervention in terms of stimulus measures, a decrease in employment would correlate to a decrease in Gross Domestic Income, or income per capita. This past Friday, investors once again appeared optimistic as household spending on goods and services rose a record 8.2% in May, more than double the prior all-time high on records dating back to 1959. Record household spending in May, while first quarter Real Gross Domestic Income decreased 4.4%, should have investors cautious. Furthermore, the areas of tourism, entertainment, retail, food & beverage, and automobiles have come to a near halt, suggesting a fundamental flaw in how data is perceived. What many may fail to understand is Household Spending reported by the Bureau of Labor Statistics is survey based, and not accurately data driven. This week the Dallas Fed Manufacturing Index painted another positive picture, suggesting a V-shaped recovery in manufacturing. However, a closer look into the underlying (survey) data shows how businesses are doing in comparison to the prior month, and not an absolute level. U.S. Manufacturing is getting worse, with only 29% of survey respondents seeing a better economic future than they saw the previous month. As the coronavirus continues to plague Texas, Arizona, California and Florida, we expect manufacturers to lower output and to continue with employee lay-offs. The U.S. Bureau of Labor Statistics reported “total non-farm payroll employment rose by 2.5 million in May, and the unemployment rate declined to 13.3%”. At Samra Wealth Management we believe payroll numbers were artificially inflated due to government stimulus measures, specifically the Paycheck Protection Program (PPP), that provided a loan with a requirement funds had to be paid out as wages within 8-weeks of receipt. At the close of 2019, we believe there were few hurdles in the path of President Trump securing a second term in office. However, a perfect storm scenario with the coronavirus impact on national health and the economy, combined with a Black Lives Matter movement with little signs of slowing down, now has political pundits and investment firms factoring in the potential for a Biden win. A Democratic win, in the near term would likely shock financial markets, essentially hitting the reset button on trade deals and capital expenditure, however, in the intermediate and long-term a move away from trickle-down economics could prove for a sustainably healthier financial market. Finally, June’s issue of The Samra Report: Where’s Warren, should have caused investors to ask why Warren Buffett and Berkshire Hathaway is holding $137B in cash, that could have been used for stock repurchases or new acquisitions. Is it possible Mr. Buffett does not believe this is a great time to buy? At Samra Wealth Management, our consensus remains unchanged, and the economic climate is likely to get worse before it gets better. As the media highlights a potential second wave of the coronavirus, we would argue the data suggest we are still in the midst of the first wave. As of June 23rd, the Financial Times reported California, Arizona, Texas and Florida were 85 days behind New York and New Jersey, in terms of new cases on a seven-day rolling average, suggesting a first-in, first out scenario. With California ranking first in GDP by State, Texas second, and Florida fourth, the economic impact could be catastrophic. "Analysts are flying blind, since many companies have stopped providing earnings guidance, citing the uncertainties of the pandemic. Nearly 200 companies in the S&P 500 have withdrawn their customary forecasts for the year" Andrew Ross Sorkin, CNBC co-anchor, founder & editor of DealBook, author of Too Big to Fail. Disclosure: All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. The information contained here does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. References Bea.gov. 2020. Gross Domestic Product, 1St Quarter 2020 (Third Estimate); Corporate Profits, 1St Quarter 2020 (Revised Estimate) | U.S. Bureau Of Economic Analysis (BEA). [online] Available at: <https://www.bea.gov/news/2020/gross-domestic-product-1st-quarter-2020-third-estimate-corporate-profits-1st-quarter-2020> [Accessed 30 June 2020]. Bls.gov. 2020. Employment Situation Summary. [online] Available at: <https://www.bls.gov/news.release/empsit.nr0.htm> [Accessed 30 June 2020]. Ceicdata.com. 2020. United States Investment: % Of GDP [1947 - 2020] [Data & Charts]. [online] Available at: <https://www.ceicdata.com/en/indicator/united-states/investment--nominal-gdp> [Accessed 30 June 2020]. Desjardins, J., 2020. The 20 Largest State Economies By GDP In The Last 50 Years. [online] Visual Capitalist. Available at: <https://www.visualcapitalist.com/animation-the-20-largest-state-economies-by-gdp-in-the-last-50-years/> [Accessed 30 June 2020]. DeSpirito, T., 2020. Taking Stock: Q3 Equity Market Outlook | Blackrock. [online] BlackRock. Available at: <https://www.blackrock.com/us/financial-professionals/insights/taking-stock-quarterly-outlook?cid=emc%3AMIATJune29%3AFA%3AENL%3AUS%3ANA&elq_mid=46326&elq_cid=786293&elq_cmp=14971> [Accessed 30 June 2020]. Fox, B., 2020. Coronavirus Tracked: Has The Epidemic Peaked Near You?. [online] Ig.ft.com. Available at: <https://ig.ft.com/coronavirus-chart/?areas=usa&areas=gbr&areas=bra&areasRegional=usny&areasRegional=usca&areasRegional=usfl&areasRegional=ustx&areasRegional=usaz&areasRegional=usnj&cumulative=0&logScale=1&perMillion=1&values=deaths> [Accessed 30 June 2020]. Fred.stlouisfed.org. 2020. Business Tendency Surveys For Manufacturing: Confidence Indicators: Composite Indicators: OECD Indicator For The United States. [online] Available at: <https://fred.stlouisfed.org/series/BSCICP03USM665S> [Accessed 30 June 2020]. Home.treasury.gov. 2020. PPP Factsheet. [online] Available at: <https://home.treasury.gov/system/files/136/PPP--Fact-Sheet.pdf> [Accessed 30 June 2020]. Kelly, L., 2020. Bloomberg - Are You A Robot?. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/newsletters/2020-06-30/five-things-you-need-to-know-to-start-your-day> [Accessed 30 June 2020]. Mitchell, J., 2020. U.S. Consumer Spending Rebounded In May, But Virus Surge Poses Economic Threat. [online] WSJ. Available at: <https://www.wsj.com/articles/consumer-spending-personal-income-coronavirus-may-2020-11593131872> [Accessed 30 June 2020]. Nathan, A., 2020. Top Of Mind: Daunting Debt Dynamics. [online] Goldmansachs.com. Available at: <https://www.goldmansachs.com/insights/pages/daunting-debt-dynamics-f/report.pdf> [Accessed 30 June 2020]. Prnewswire.com. 2020. The U.S. Economy & COVID-19: Deviation & Trends In Automobile, Energy, Food & Beverage, Electrical & Electronics, Aviation, Healthcare, Retail & E-Commerce, Travel & Tourism, And Other Verticals. [online] Available at: <https://www.prnewswire.com/news-releases/the-us-economy--covid-19-deviation--trends-in-automobile-energy-food--beverage-electrical--electronics-aviation-healthcare-retail--e-commerce-travel--tourism-and-other-verticals-301043503.html> [Accessed 30 June 2020]. Samra, I., 2020. The Samra Report: Black Swan Event. [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/black-swan-event-coronavirus-covid-19> [Accessed 30 June 2020]. Samra, I., 2020. The Samra Report: Where's Warren. [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/where-s-warren> [Accessed 30 June 2020]. Woodard, J., Devery, J. and Young, J., 2020. The RIC Report: The Build America Boom. [online] Merrill Lynch. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12151745-1%26segment%3DDIRECT> [Accessed 30 June 2020].

Where’s Warren…

Where’s Warren…

March saw the stock market (S&P 500) decline over 30% year-to-date, and although many investors found this as an opportunity to buy at prices not seen since February 2017, the message from the ‘Oracle of Omaha’ seems to carry confusion. In his annual letter to shareholders, Buffett said “it is almost certain that equities will over time perform far better than long-term, fixed-rate” bonds, given the attractive corporate tax environment. Mr. Buffett’s guidance, however, appears to conflict with the asset allocation of Berkshire Hathaway (BRK.A), amassing $137B in cash, of which $1.8B has been used for stock repurchases. This month’s issue of The Samra Report provides our consensus for June and beyond. According to the Global Macro Outlook from Alliance Bernstein “early indications confirm that the hit to the global economy from measures to contain the coronavirus is likely to be unprecedented.” Leading to the company lowering their global growth forecast to -4.6%, almost twice as large as the decline seen in 2009. At Samra Wealth Management, we believe investors have reason to be concerned as the forward 12-month P/E Ratio for the S&P 500 is above 20.0, reaching levels not seen since 2002, in the midst of falling earnings per share. In our May issue of The Samra Report, we stated “investors would be wise to understand the economic make-up of our nations GDP. 68% of U.S. GDP is derived from consumption spending, with an economy on the brink of shut down, a minimal decrease in Gross Domestic Income will likely lead to a downshift in consumer confidence, proving demand is a function of income. In the near term, the case for economic expansion is correlated to population growth and productivity. With the nation on lockdown, the script for economic expansion is flawed.” Investors are now placing too great of an emphasis on a vaccine, investors would be wise to understand that a vaccine may work to prevent further outbreaks, unless the virus evolves, however a vaccine will not replace household income per capita. Furthermore, consumption spending is not only a function of household consumption; however, investors should understand that similarly corporation are likely to limit capital expenditures throughout the remainder of 2020. With the latest unemployment numbers showing 40.8 million workers out of work, representing 26% of the civilian workforce. Investors should be asking themselves the same question that prompted an on-air heated exchange between Andrew Ross Sorkin and Joe Kernan on CNBC’s Squawk Box: “How can stocks be where they are right now based on: oil prices, interest rates, economic indicators, and earnings?” The below chart from Bank of America shows the market blindly appreciating as the number of unemployed continue to grow. As the Federal Government assists with numbing the pain through stimulus measures, placing a further strain on the public-sector balance sheet, investors should be prepared for the interest rate environment to stay lower, for longer. A case for potential weakening of the trade weighted dollar, currently at a historic high, creating an environment for an increasing trade deficit. At Samra Wealth Management, we are sitting in the most conservative position since our inception. We are choosing to hold higher levels of cash over short-duration bonds. Similarly, to Warren Buffett (Berkshire Hathaway) and Bill Ackman of Pershing Square Capital Management, the liquidation orders significantly outweigh the purchase orders. Suggesting some of the names most synonymous with Wall St, do not believe it is a great time to buy stocks or bonds. Furthermore, it is our belief that conservative investors, pension funds and endowments are at the most (opportunity) risk, in an environment with low interest rates, uncertain commercial real estate returns, questionable dividends and mandates to limit risk exposure. At Samra Wealth Management, we believe an active management strategy is likely to out-perform passive investments as we venture into uncharted territory. Disclosure: All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. The information contained here does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor. Investing involves risk including loss of principal. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. References Armenta, A., Bruten, G. and Butt, K., 2020. GLOBAL MACRO OUTLOOK MAY 2020. [online] Alliancebernstein.com. Available at: <http://www.alliancebernstein.com/abcom/email/internal/2020/documents/may-2020-global-outlook-monthly.pdf> [Accessed 28 May 2020]. Butters, J., 2020. Highest Forward 12-Month P/E Ratio For S&P 500 Since 2002. [online] Insight.factset.com. Available at: <https://insight.factset.com/highest-forward-12-month-p/e-ratio-for-sp-500-since-2002> [Accessed 28 May 2020]. Butters, J., 2020. S&P 500 Forward P/E Ratio Rises Above 20.0 As EPS Estimates Continue To Fall. [online] Insight.factset.com. Available at: <https://insight.factset.com/sp-500-forward-p/e-ratio-rises-above-20.0-as-eps-estimates-continue-to-fall> [Accessed 28 May 2020]. English, C., 2020. Bill Ackman Sold His Stake In Warren Buffett’S Berkshire Hathaway. Here’S Why.. [online] Barrons.com. Available at: <https://www.barrons.com/articles/roth-ira-conversions-rise-amid-covid-19-pandemic-51590527979> [Accessed 28 May 2020]. Fred.stlouisfed.org. 2020. Delinquency Rate On Consumer Loans, All Commercial Banks. [online] Available at: <https://fred.stlouisfed.org/series/DRCLACBS> [Accessed 28 May 2020]. Rocco, M., 2020. US Jobless Claims Top 40M As Economy Struggles To Reopen. [online] Ft.com. Available at: <https://www.ft.com/content/32b5d491-d38c-4f17-bec3-a7309bb6c939> [Accessed 28 May 2020]. Samra, I., 2020. What If It Returns.... [online] Samrawealthmanagement.com. Available at: <https://www.samrawealthmanagement.com/post/what-if-it-returns> [Accessed 28 May 2020]. Woodard, J., Young, J., Devery, J. and Harris, D., 2020. The RIC Report: The Gaps Of Wrath. [online] ml.com. Available at: <https://olui2.fs.ml.com/MDWSODUtility/PdfLoader.aspx?src=%2Fnet%2Futil%2FGetPdfFile%3Fdockey%3D6208-12137625-1%26segment%3DDIRECT> [Accessed 28 May 2020]. Zimmerman, C., 2020. The Many Flavors Of Unemployment | FRED Blog. [online] Fredblog.stlouisfed.org. Available at: <https://fredblog.stlouisfed.org/2015/05/the-many-flavors-of-unemployment/?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=fredblog> [Accessed 28 May 2020].