Summitview summer 2013

SCCSummit Creek Capital

summitVIEW |Summer 2013

DEMAND I RESPONSEIf Federal Reserve demand for bonds changes, what is the response?

DEMAND I CONNECTIVITYOnline Versus Brick & Mortar

Carbon Foot Prints on the Way to the Store.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Neither the information nor any opinion expressed constitutes a solicitation by us for the purchase or sale of any securities. Advisory services are offered through CONCERT Wealth Management, Inc., a Registered Investment Advisor. Registration does not imply a certain level of skill or training. Past results are no guar-antee of future performance. Investments inherently carry risks including the loss of principle which the client should be prepared to bear. Persons considering an investment should seek independent advice on the suitability or otherwise of the particular investment.

“Who wins the battle over interest rates, Federal Reserve Doves or Federal Reserve hawks?”

www.summitcreekcapital.com | 208-928-7500Advisory services provided through CONCERT Wealth Management, Inc., an SEC Registered Investment Advisor


What is the takeaway from all the talk about removing the spiked punchbowl? The party will deflate faster than a room full of Cinderallas as the clock strikes midnight. Let’s review the evidence by examining some charts that reflect market sensitivities.

First up is the MSCI US REIT Index. Obviously, owners of REITs in the US are quite concerned about the leverage that funds this portfolio of real assets, if rates rise due to the Fed tapering or ending QE.

Source: Bloomberg | Summit Creek Capital LLC

FEDERAL RESERVE DOVE-HAWKS(a multi-headed animal blathering opinions wantonly)

MAKE MARKETS MOVE

DEMAND I RESPONSE



Now let’s have a look at the bond market, specifically the 30 year US Treasury, where much of the market action is concentrated. In the first chart, a one year chart of the 30 year interest rate, the recent move is dramatic. Take a little bit of talk of dimming the lights, and the response is a rush to the exits that’s faster than if someone had yelled “’movie’ in a crowded firehouse.”


Next, the 30 year Treasury interest rate viewed over a long term time horizon. As one can see the interest rate has been in a falling trend channel for many moons. The recent upward move in the rate does not alter the downward trend.




Stepping back to view the recent market mania within a context of reason, what does one conclude about the recent spikes in volatility in financial markets, namely in the US Treasury market, REITs, utility stocks, emerging market debt, and high yield debt? The effect of Taper Talk by Federal Reserve Chairman Ben Bernanke was likely an intentional shot across the bow to global investors. The Fed would like to ratchet back its monthly purchases of mortgage backed securities (MBS) and US Treasuries. If economic indicators can stabilize, then tapering likely proceeds. However, recent public comments by Bernanke et al indicate the Governors are highly aware of the tenuous state of the economy.

Currently, the Fed’s full year GDP forecast remains at 3.0 percent for 2013. BNY Mellon Capital Markets LLC calculates, based on recent economic performance, the second half GDP growth of 2013 needs to print between 3.75 percent and 4.0 percent in order to hit the Fed’s 3.0 percent annual growth rate. Current real GDP is 1.7 percent, meaningfully below the Fed forecast. Considering this data reality check, the Taper Talk may be all smoke and mirrors.

The next chart demonstrates how Fed QE policy drives inflation expectations. When the Fed mentions tapering QE, the market responds by collapsing inflation expectations. The chart captures the change in a zero coupon fixed rate component of an Inflation Swap, a good proxy of inflation expectations over the next five years. As the chart shows, inflation expectations take a dive when the Fed makes Taper Talk.


If inflation expectations don’t materialize in combination with US real GDP in second half of 2013, not hitting the rates required to meet the Fed’s forecast for annual GDP growth in 2013, yields may find their way trading back down within the long term trend.



When using the moniker of Demand to represent consumerism, we are not touting one side of the macroeconomic debate on supply side economics versus demand stimulus through government transfer payments. We leave that debate up to those who are tenured and have no obligation to manage a bottom line. Our view is that whether one makes widgets, serves coffee, or writes software code, there is no purpose to create

products if there is no market to sell products. In short, our view on demand is largely couched within the framework of the Consumer Nation that has been fueled by credit expansion. We study the effects of the credit expansion within the context of domestic and global economies. Since we’ve seen the limit of the credit and debt fueled expansion, what occurs on the other side?

ONLINE VERSUS BRICK & MORTARCARBON FOOT PRINTS ON THE WAY TO THE STORE

Efficiency

Sustainability

Mobility

Connectivity

+

Energy

Resources

FoodHealthcare

Demand

DEMAND I CONNECTIVITY


We view investment opportunity using lenses of efficiency and sustainability. For example, what are the best ways to develop economic centers so that resource utilization is as efficient as possible? Coming out of a constrained living environment as a consequence of World War II, residential developers relied on the love of the automobile to drive (pun intended) demand for their neighborhoods that were sprawled away from urban settings, creating the sub-urban lifestyle. We are not saying that this lifestyle model is dead in its tracks. What we are suggesting is now that the cost of driving is higher than it was when these suburban enclaves were developed, what living arrangements will spring up to engender a more efficient way to live. What development models will be created that result in sustainable living arrangements?

One place within the broad economy to view the struggle for efficient development and resource utilization is in the battle for dollars in the retail space, specifically between brick-and-mortar shopping and online shopping. The following is the opening paragraph of a story published in The Economist on July 13, 2013:

“With that parting shot

plastered to the front door of one

of its shops, Jessops, a company that had been selling cameras in Britain for 78 years shut down in January. The bitter note sums up the mood of many who

work on high streets and in shopping centres (malls) across Europe and America. As sales migrate to Amazon and other online vendors, shop after shop is closing down, chain after chain is cutting back. Borders, a chain of American bookshops, is gone. So is Comet, a British white-goods and electronics retailer. Virgin Megastores have vanished from France, Tower Records from America. In just two weeks in June and July, five retail chains with a total turnover of £600m ($900m) failed in Britain.”

Certainly, if my livelihood depended on consumers and their “shopping experience,” I would be worried about my future. Trends in retailing are changing. With competition and a threat to existence, one is forced to adapt or die a slow death. Our interest is the behavior of the consumer.



Viewing consumerism (aka The Consumer Nation) as a series of cost/benefit decisions and incentives for the buyer, one can begin to link consumers’ desires and needs within the context of community development. Development of the Consumer Nation is linked to the automobile. Cities are a patchwork of developments threaded together by asphalt. In order for consumers to acquire basic necessities like food, often a car is required to get to the grocery store. Our fascination with the unfolding challenge in the race for consumer dollars is not focused solely

on brick-and-mortar stores and online stores. What underlies the decision making to shop

online versus driving to a store so one can handle the good before purchasing the

item? Considering the amount of time, effort, and energy required

to drive to a store, particularly if it’s a store in a shopping mall. Making the decision to have a person dressed in

brown bring the item to you is compelling on many levels. Perhaps parcel delivery is not only a model about just in time delivery, but it is also a model to increase efficiency in the Consumer Nation shopping habits.


SCCSummit Creek Capital

Duncan Morton III, CFA491 North Main Street, Suite 200B

Ketchum, ID 83340

208-928-7500 | www.summitcreekcapital.com

Summitview summer 2013

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