1. Client Advisory Committee Meeting December 10th 2015

2. Agenda Welcome – Introductions What’s New at Invariant
Investment Review
Money Coaching
New Management Fee Opportunities
Advisory Committee Member Input
Other

3. Market Review
Halfway through 2015, global financial markets could be aptly summed up as “Much Ado About Nothing.”
However, as we look forward to 2016 and beyond, there have been a number of developments that demand consideration.
These include continued carnage across the commodity complex, a persistent rise in the U.S. dollar, Chinese currency devaluation, anemic economic growth, significant narrowing of equity market leadership, and a re-pricing of risk across the credit spectrum.

4. Market Review – Commodity Carnage
Bloomberg Commodity Index at decade lows:

5. Market Review – Commodity Carnage
Crude oil: few signs of a bottom. OPEC has declared war on U.S. producers, and they continue to pump.

6. Market Review – Master Limited Partnerships (MLP’s)
Starting to have a real impact on companies, including those previously thought immune to commodity fluctuations, such as Kinder Morgan, which recently cut its dividend by 75%.

7. Market Review – U.S. Dollar $
U.S. dollar continues its persistent rise. This is an impediment to U.S. exports and increasingly a problem for how the rest of the world finances itself.

8. Market Review - China
China’s economic woes are well known by now. And, despite political ramblings by some U.S. Senators who shall remain nameless, their intervention in currency markets has strengthened the yuan, not weakened it.
Their real effective exchange rate has risen by 30% since mid Wages have been rising at near double-digit rates. Both squeeze corporate profit margins.
Now that the IMF has announced it will be including their currency in the SDR, less reason to prop up currency.

9. Market Review – Chinese Yuan
In response, the PBOC/Beijing has started a “stealth” devaluation of their currency. We think there is risk that this process accelerates over coming quarters, creating under-appreciated risks to the system.

10. Market Review – US Economic Growth
All U.S. sectors slowing, manufacturing the worst. Global economic growth best characterized by slowing trade and accelerating deflationary pressures.
ISM Manufacturing PMI decreased to 48.6 in November, its first contraction since November 2012.
The Fed appears committed to raising interest rates into a softening economic environment. This would not be the first time.

11. Market Review – US Economic Growth
U.S. industrial production, YoY:

12. Market Review – Market Breadth
Breadth of U.S. equity markets has narrowed significantly. This is consistent with later stages of a bull market. Former leaders have also begun to “crack,” as seen in the relative performance of biotechnology stocks.
As Seth has discussed, gains from here tend to be “rented,” not “owned.” ie given back over the intermediate term

13. Market Review – Credit Conditions
The Fed appears committed to raising interest rates into a softening economic environment.
Not just a softening economic environment, but a softening credit market.
And it’s not just energy-related issues:

14. Market Review – HY Spreads and Recessions
A number of warning signs are flashing, raising the risk of a recession.
As always, timing remains the most difficult thing to forecast.

15. Market Review – S&P 500 Net Profit Margins and Recessions

16. What Does This All Mean for Clients Going Forward?
All this basically means that as the Fed looks to raise interest rates for the first time in nearly a decade, risks to the outlook for economic and financial market conditions have increased.
Rich valuations are now accompanied by a deterioration in risk appetite across asset classes.
This does not mean equity markets cannot deliver gains over the next months, as has happened in the terminal stages of some previous bull markets.
However, it means the “core” part of moderate risk portfolios will be somewhat more defensive, and the “tactical” part will be more active in seeking to protect against significant losses, as well as opportunistic in seeking to take advantage of opportunities as they may arise.
Traditional places investors have gone to get a safe yield may end up being some of the more vulnerable parts of the market.
We are currently monitoring several opportunities for intermediate-long term allocations, but remain patient.

17. Agenda Welcome – Introductions What’s New at Invariant
Investment Review
Money Coaching
New Management Fee Opportunities
Advisory Committee Member Input
Other