Markets Beginning

As we have noted elsewhere, the markets began 2016 by behaving badly. The major domestic indices are off 7% to 8%, the DAX is off about 10%, the FTSE is off more than 20%, and most Asian markets are off in the 9% to 10% range.

This only matters, of course, if you have invested your cash reserves in the market. Otherwise, 2016 will probably be one of the best years in several to put money to work in the public markets. Our household has already increased what we are investing, through dollar cost averaging.

The earnings reporting season has started. Starbucks reported a 12% increase in revenue for the quarter, to $5.4 billion, and a 15% increase in EPS, to $0.46 per share. Simply put, this means that for each additional dollar of revenue generated, they generated $1.25 in income. This is a good allocation of resources.

Alcoa reported Q4 and full year 2015 results on January 11th. The company reported a fourth quarter loss of $500 million, with $565 million of expenses being special items attributable to closures or curtailments of capacity of certain operations. Excluding special items, the company reported full year net income of $787 million on revenue of $22.5 billion.

According to a recent report, Fitch Ratings expects mortgage interest rates to increase in 2016, with these increased rates forcing lenders to further open the credit box, as refinance volume slows. Fitch is also predicting that housing prices will experience slow and steady growth. Their research suggests that home prices remain 20% below 2006 levels, on an inflation adjusted basis, that incomes are up by 25% in nominal terms, and that the country’s population has increased by 20 million.

Fitch also sees a continuing decline in affordability for most households, a continuing recovery in mortgage performance, and a decrease in mortgage volume.

On the economic front, the DOL is reporting 292,000 new jobs in December, with the official unemployment rate remaining at 5%, and the labor forcing growing by 466,000 participants. Top line CPI, which includes food and energy, dropped 0.1% in December, while Core CPI, which excludes food and energy, showed an increase of 0.7%.

Auto sales have always been a solid gauge of economic health, and last year, U.S. car sales were nearly 18 million, an all-time high. It would appear, based on auto sales, and the crowds we see at restaurants, that the economy is healthy. The unease seems to have more to do with political uncertainty, and its impact on election outcomes and government interaction with citizens, than anything else.

Foreign investment in the U.S. continues to be strong, with net investment of $31.6 billion in November. Most of this has gone into U.S. Treasury and Agency bonds. As we have said before, while the U.S. has its challenges, it remains the premier economy in the world.

401(k) plans continue to get cheaper. According to an analysis of Form 5500 data by the Investment Company Institute and Brightscope, total plan costs for all plan sizes averaged 89 basis points in 2013, down from 102 basis points in 2009. Larger plans cost less, as plans with more than $1 billion in assets had plan costs of 31 basis points. Small plans, those with between $1 million and $10 million, had average plan costs of 108 basis points.

We were recently called in on a consulting engagement for a plan with more than $8 million in assets. We were able to help them reduce plan costs to less than 75 basis points, more than 25% less than the average for plans their size.

At the end of the second quarter of 2015, 401(k)’s held $4.7 trillion in assets, accounting for nearly one-fifth of all retirement assets. And, according to the DOL, there are more than 525,000 401(k) plans, with more than 94% of plans having less than $10 million in assets. Of course, as these things work, 541 plans, or 0.10% of all plans, hold $1.9 trillion, or 45% of all plan assets.

Joke Of The Week:

We had a power outage last week and my PC, TV, and game console shut down immediately. It was raining, so I couldn’t play golf, so I talked to my wife for a few hours. She seems like a nice person.

Quote of the Week:

“The man who removes a mountain begins by carrying away small stones.” – Chinese Proverb


Randy Brunson
Randy Brunson is the founding shareholder of Centurion Advisory Group. Mr. Brunson
has invested most of his thirty five year career in the area of financial services.

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