A Bitcoin primer

Dressel 150 x 150Ryan Dressel, Investment Analyst

There is a famous scene in Seinfeld, where outspoken character George Costanza pitches a TV studio executive “a show about nothing.” When pressed to elaborate, he simply re-iterates “nothing!… that’s the show!” I jokingly refer to this scene when people ask about Bitcoin, and if it’s a good investment. The parallels to “nothing” are plentiful: Bitcoin is not tangible, it is hard to find, nobody is responsible for its success or failure, and the buyers and sellers in the marketplace are untraceable ghosts. If the above is true, how can one explain Bitcoin’s meteoric rise in price and press coverage?! The price of one Bitcoin has risen from approximately $1,000 to $13,600 over the past year. The number of searches for Bitcoin on Google has exploded by 4,200% since July.

What is Bitcoin and why are people so interested in it?

Bitcoin is one of many digital currencies that have gained popularity since 2009. It has no value by itself; it only has value because an ever-growing community of Bitcoin adopters have agreed to trade goods and services in exchange for a higher amount of the digital currency, to which the community has trusted each other to do the same. This basic concept is no different than the use of fiat currencies such as the US dollar or the British pound. But that’s where the similarities end.

Today’s fiat currencies are managed by central banks around the world. The US dollar is regulated by the Federal Reserve, the Yen is regulated by the Bank of Japan, and the Pound Sterling is regulated by the Bank of England, to name a few. Conversely, Bitcoin is autonomously managed within an open source network of computers known as “blockchain.” Think of blockchain as a community of referees that allow two parties to make an exchange. The rules that the referees use to enforce an exchange can be reviewed by anyone that is part of a network. Every transaction prior to the one being made must be reviewed before it can take place, hence the term “blockchain,” which is intended to make the network more secure with each transaction.

To visualize the application of blockchain, think about a transaction at a farmer’s market. If you use a dollar to buy a vegetable, the farmer puts his faith in you to truthfully hand over a dollar that can be used to buy other goods & services and assumes it is not fake and that you won’t just steal his vegetable. On the other end of the transaction, you put your faith in the farmer that his product has all the properties of a vegetable as advertised, and does not contain defects such as poisonous pesticides. Additionally, nobody but you and the farmer knew that transaction occurred and nobody reviewed the accuracy of the exchange except you and the farmer.

Conversely, a digitalized farmer’s market transaction using blockchain would be reviewed by every computer that is part of a network (consisting of digital farmers and digital vegetable buyers). The predefined rules of the blockchain are also reviewed to ensure that all qualifications are met by both parties before one item is exchanged for another. If any criteria are not met, the exchange will not occur. After all criteria have been met, each party is rewarded their contractual obligation. This technology can be used to exchange Bitcoin, as well as a seemingly infinite amount of applications involving two or more parties i.e. physical property exchange or even corporate mergers.

blockchain 2Graphic Source: Thomson Reuters

Why adopters love blockchain

The primary benefit of blockchain technology is that it breaks down the barriers of trust, allowing any two parties to transact directly with each other without the need for a third-party to broker a deal. This creates transparency that we simply do not have today. Our third-party brokers take many forms, ranging from banks to cashiers, to Facebook, to Lawyers. These intermediaries act as agents of two or more parties, but you cannot see every message, transaction, or exchange that happens within them. Blockchain provides complete transparency for all to see.

In the example of the farmer’s market exchange, the dollar that was used to buy a vegetable is an example of a central repository holding information. The dollar had a state-sponsored (US government) serial number on it that is part of a taxable transaction. In the case of Bitcoin, no third-party owns the record, there is no third-party manipulating the data or supply of a good or currency. Cryptocurrencies rely on this benefit and offer additional benefits such as the ability to make transfers without geographic limitation, the finality of settlement, lower transaction costs compared to other forms of payment, and the ability to publicly verify transactions.

Today’s fiat currencies are also underpinned by central banks, tax systems, judicial systems, militaries, and any number of other connections to a governing body. The freedom from these agencies is very enticing to Bitcoin users. In areas outside of the developed world, this technology could be life changing due to corrupt governments manipulating currencies or transactions.

Buyer beware

History has shown that innovation and competition are great for markets and consumers. If credit cards weren’t accepted, we’d still be using paper and coins to make purchases. Prior to paper and coins, different societies used items such as beaver pelts or stone carvings as currency. Without currency, one would have had to travel great distances to make physical exchanges with their personal items of value.   Despite the innovative allure of Bitcoin, it is important to recognize its shortcomings as well.

To date, no cryptocurrencies have been registered with the SEC, whose stated mission is to protect investors, maintain fair, orderly, and efficient markets, and to facilitate capital formation. As such, no licenses are required to sell Bitcoin, which makes the cryptocurrency market subject to volatile market manipulation and scams such as scalping, “pump and dump,” and other types of fraudulent schemes.[1]

Cryptocurrencies such as Bitcoin are not backed by any government body, and thus are not regulated and could be subject to illicit transactions. Buyers and sellers remain anonymous, which holds nobody liable if a transaction fails on either side (Kim Jong Un has even been linked to the marketplace[2]). The ability to exchange Bitcoin for traditional currency is subject to change at any time, without notice. Cryptocurrency networks are also subject to malware and hacking.

Even though the number of exchange platforms is emerging, it is still not very easy to trade Bitcoins for goods and services. Bitcoin and other cryptocurrencies are also extremely volatile, which displaces one of the most important features of fiat currency: a stable store of value. How can buyers and sellers expect to make a transaction if the exchange rate of Bitcoin changes substantially every 2 minutes?

Despite the innovative advances in blockchain, it is important to remember that the technology is in its infancy. Both improvements and loopholes are being added every day. Bitcoin shares features of a currency, commodity, or a security, but is nothing more than a figment of our human imagination. One might say it’s a show about nothing!

[1] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11
[2] http://money.cnn.com/2017/12/12/technology/north-korea-bitcoin-hoard/index.html


What we can learn from Hurricanes Harvey, Irma

Dressel 150 x 150Ryan Dressel, Investment Analyst

Over the past few weeks, Hurricanes Harvey & Irma grabbed our collective attention as we watched the fury of mother nature unfold in Texas and Florida. While images of the damage can be jaw dropping, what’s more amazing is the strength of communities coming together to assist those affected. In today’s digital age, acts of heroism, generosity, and courage were on display via social media for the world to see. Examples included neighbors forming a human chain through floodwaters to help a woman in labor make it to a fire department truck; drones that located stranded families on roof-tops; a Delta Airlines pilot who flew into the violent, outer bands of Irma to pick up one last group of passengers desperate to flee the island of Puerto Rico; and Houston Texans star J.J. Watt, who single-handedly generated $30 million in aid (and counting).

The financial impacts of the two storms will no doubt be meaningful. Fortune estimates the loss could be as high as $180 billion for Harvey[1], while estimates for Irma range from $30 to $60 billion. This includes damages to property, infrastructure, crops, natural resources, small businesses, transportation, and unemployment. Political hurdles stand in the way, but the United States has the resources to rebuild.

As an investor, these events remind us that storms can be unpredictable, no different than financial markets. Government officials have many tools at their disposal to handle the unexpected, such as communications, shelters, curfews, utility companies on standby, rescue vehicles, and storm monitoring to name a few. Money managers and fiduciaries also have tools, such as asset allocation, diversification, performance analysis, or monitoring financial conditions including interest rates, liquidity, political risks, valuations, and corporate growth rates among many more.

The emotional mindset of an investor is no different than that of anyone awaiting a hurricane. Prepare for the worst, hope for the best, and expect to be surprised. Or, as Benjamin Franklin said, “by failing to prepare, you are preparing to fail.”

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

[1] http://fortune.com/2017/09/03/hurricane-harvey-damages-cost/

Inflation is back

Dressel2Ryan Dressel, Investment Analyst

For the better part of the past five years, inflation growth rates in developed economies have barely budged, hovering below 1.5%. Coming out of the global financial crisis, global gross domestic product (GDP) growth was stuck below its long term average of 3% from 2011 to 2015. This extended period of low growth kept inflationary factors at depressed levels. In particular, tightened credit markets and low confidence in the broad economy had the most adverse effects on inflation. These factors limited both businesses and consumers from spending more, driving prices higher. Furthermore, the end of a decade-long commodity cycle kept input costs at extremely low levels.

Source: The World Bank

Source: The World Bank

Recently however, economic signs of life indicate that inflation is on the verge of returning to normal levels. The price of oil has rebounded off of its lowest point since 2008. The housing market is healthy. Purchases of consumer durable goods such as automobiles surged 11% over the past year. And, according to FactSet Research Systems, wages have begun to rise as the labor force has regained traction after massive displacements caused by the global financial crisis. These economic data points have led the U.S. Consumer Price Index (CPI) to rise 2.1% in the 12 months through December 2016, the largest increase since June 2014. Additionally, inflation accelerated for the fifth consecutive month.

Source: FactSet Research Systems

Source: FactSet Research Systems

Additional factors have also raised inflation expectations in 2017 and beyond. Fed Chair Janet Yellen has long-held a position of allowing inflation to run past its 2% target in order to reverse the negative effects of the great recession. Proposed policies of President Donald J. Trump are expected to further drive inflation rates higher. President Trump is expected to push for up to $1 trillion from Congress to upgrade infrastructure, introduce major tax cuts, de-regulate industry, and implement a number of protectionist trade policies in the coming year. These factors are all expected to drive inflation higher.

Outside the U.S., other signs are surfacing as well. The Eurozone recorded a 1.8% rise in consumer prices (YoY) in January, despite a turbulent Brexit vote and plummeting currencies. Factory prices in China are rising and wages in Japan have risen to their highest levels since 2010.

Why should investors care about inflation?

  • Rising inflation positively impacts borrowers of existing debt (if real interest rates are negative), producers that experience prices rising faster than costs, and workers with strong wage bargaining power.
  • Adversely, inflation negatively impacts workers with low wage bargaining power (including fixed incomes), lenders, businesses with high wage pressures, and investors whose returns cannot outpace inflation over the long term.

How can investors prepare?

Investors should remain invested in a diversified portfolio over a reasonably long period of time in order to protect and grow purchasing power to sustain their standard of living in the future. Brinker Capital is committed to helping investors create the purchasing power needed to pay for personal, financial or lifestyle goals.

For 30 years, Brinker Capital has provided investment solutions based on ideas generated from listening to the needs of advisors and investors. From being a pioneer of multi-asset class investments to using behavioral finance to manage the emotions of investing, our disciplined approach is the key to helping clients achieve better outcomes.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

An Update on Oil

Ryan DresselRyan Dressel, Investment Analyst, Brinker Capital

As of January 29, 2015, the price per barrel of West Texas Intermediate crude oil stands at $44, down just about 60% since its 52-week high in June 2014 (See chart below). For each 10% drop in oil, forecasters seemed to gawk at the possibility of further price decline, citing global demand projections, U.S. energy independence from The Organization of Petroleum Exporting Countries (OPEC), and increased consumption from emerging markets. What they omitted from their projections, however, was the impact that U.S. and Canadian production had on OPEC from a political standpoint.

Crude Oil WTI (NYM $/bbl) Continuous (CL00-USA)

Source: FactSet

OEPC has not adhered to an individual country production quota since 2011, but with oil prices around $100 per barrel in recent years, it was relatively insignificant news. These high prices actually worked against OPEC by encouraging too much competition from North America. During that time, North American energy companies were in the midst of ramping up production from shale, oil sands and other sources that were previously expensive to produce (refer to graphic below). In fact, United States domestic production has nearly doubled over the past six years[1]. Eventually in mid-2014, global demand for oil began to lag supply, caused by weak economic growth in Asia and Europe, which sent the price of oil plummeting.

Source: BofA Merrill Lynch Global Commodity Research

Source: BofA Merrill Lynch Global Commodity Research

Facing pressure from these new low prices, OPEC met on November 27, 2014 to discuss curbing production in an effort to support higher price levels. Since OPEC’s production quota was abandoned, each member country was unwilling to reduce its output.

The indecisiveness at this meeting signaled some very profound conclusions to the market. First, it re-confirmed that OPEC continues to become a disorganized collection of countries, rather than an organized cartel. This is important because it implies that OPEC is no longer acting as a balancing agent in global markets, which can significantly increase volatility. The second conclusion made by the market was that Saudi Arabia is unwilling to cede its crude oil market share (12.2% of global production as of September 2014[2]). In a bold statement made last December, Saudi Arabia’s oil minister, Ali Al-Naimi, confirmed these assumptions:

“If I reduce, what happens to my market share? The price will go up, and the Russians, the Brazilians, U.S. shale oil producers will take my share,” Al-Naimi told the Middle East Economic Survey last month. “Whether it goes down to $20 a barrel, $40 a barrel, $50 a barrel, $60 a barrel, it is irrelevant.”

The final conclusion from the November meeting was that smaller countries who depend on oil as a large part of their government revenue, cannot afford to cut production. These countries include Iran, Iraq, UAE, Venezuela and Nigeria among others. Due to the fact that Saudi Arabia’s reserves far exceed other OPEC members (See graphic below), they can afford to wait out low oil prices while others cannot.

Source: IEA, BofA Merrill Lynch Global Commodity Research

Source: IEA, BofA Merrill Lynch Global Commodity Research

What to Watch For:

There are many factors to watch as it relates to oil and its impact on various asset classes, interest rates, credit quality, and foreign exchange rates. The two most important factors are U.S. producer inventories and the Saudi production rate.

As of January 23, 2015, U.S. oil inventories reached their highest December levels since 1930 (383.5 million barrels)[3]. According to Bank of America Merrill Lynch, it takes U.S. shale producers 6 -12 months to react to rising or falling prices. If aggregate inventory levels remain near max capacity while the U.S. production rate falls, it would indicate that drilling projects are being cancelled and would likely have a large impact on small, highly-levered shale players. In turn, this could increase the number of defaults on energy company debt, which would have a negative impact on fixed income markets. The timing of these potential defaults could be accelerated as the foreign exchange rate of the U.S. dollar continues to rise. A stronger U.S. dollar makes it more expensive to finance debt levels[4]. As previously mentioned, it is clear that the Saudis want to retain their market share and continue to drive out production from their competitors.

Internationally, it will be important to monitor global economic growth (especially in China and India), which affects demand. If demand stays relatively low, it will put additional pressure on smaller OPEC members to plead with the Saudis to cut production or take unprecedented actions to support their economies. Those countries may have their patience tested, as the International Energy Agency forecast an annual demand increase of just 900,000 barrels per day in their January report (unchanged from December)[5].

Geopolitical risk is also an important factor to watch. The instability in neighboring Yemen could threaten Saudi Arabia’s production. Elsewhere, ISIS and the conflict between Ukraine and Russia add uncertainty to the global crude oil supply.

As the price of oil continues to decline, investors are attempting to take advantage. The four biggest oil exchange-traded products listed in the U.S. received a combined $1.23 billion in December, the most since May 2010, according to Bloomberg[6]. Regardless, the market may require patience as the Saudis’ political chess game plays itself out while crude oil prices continue to decline.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

[1] International Energy Agency, 2014

[2] U.S. Energy Information Administration, 2014. http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=50&pid=57&aid=1&cid=&syid=2010&eyid=2014&freq=M&unit=TBPD

[3] American Petroleum Institute, January 23, 2015

[4] Drilling, producing, and transporting oil is a very expensive process. As such, many U.S. energy producers require debt financing to fund capital investment. The total debt level of energy companies is approximately 16% of the U.S. High Yield Debt Market, which is almost four times higher than in 2004. Tudor, Pickering, Holt & Co. (TPH) has determined that at least 40 publicly held North American-focused E&Ps have reduced their 2015 capital expenditure guidance since December 8th by an average 31% from 2014 spending levels.http://www.naturalgasintel.com/articles/100977-domino-effect-of-lower-oilgas-ep-capex-now-hitting-offshore-midstream

[5] Oil Market Report, International Energy Agency. January 16, 2015. http://www.iea.org/newsroomandevents/news/2015/january/iea-releases-oil-market-report-for-january.html

[6] http://www.bloomberg.com/news/articles/2015-01-07/oil-investors-pour-most-money-into-funds-in-4-years

The Fed’s Dilemma

Ryan DresselRyan Dressel, Investment Analyst, Brinker Capital

In the summer of 2013, there was a lot of uncertainty surrounding the actions of the Federal Reserve. At the time, Larry Summers and Janet Yellen (among others) were potential candidates to replace Ben Bernanke as the next Chairman of the Federal Reserve. It seemed like every day was a guessing game as to how the new Fed chair would act; specifically around the subject of tapering its $85 billion-a-month bond buying program known as “QE.” As early as May, 2013 investors began to speculate when tapering would begin, and by how much. The markets would hold their collective breath leading up to the release of the latest FOMC meeting minutes, and subsequently rally each time tapering was deferred. All the while, fear of a market correction and a spike in interest rates plagued the minds of U.S. investors. When it was all said and done, tapering did not start until January, 2014 at a rate of $10 billion per month.

Dressel_Fed_9.26.14Fast forward to today, and the discussion surrounding when the Fed will raise the Federal funds rate is beginning to percolate. To date, details surrounding the Fed’s timeline have been vague, simply pledging a commitment to keep rates low for a “considerable amount of time.” The Fed funds rate has been held close to zero since December, 2008 in an effort to rejuvenate economic growth following the financial crisis. The U.S. economy has improved significantly since then, but is still facing some challenges which could have a significant impact on Yellen’s course of action.

The U.S. is on pace to add 2.58 million jobs in 2014, which would be the largest annual increase since 1999. The total unemployment rate has receded to 6.1%, coming down from a high of 10% in 2009. On the surface this would seem to satisfy the employment picture; but if we look a little deeper, it isn’t quite as rosy.

According to calculations by Bloomberg, only three of the nine monthly U.S. labor market indicators are at pre-recession levels. Wages (especially hourly) are still far below pre-recession levels; and finally, the historical average unemployment rate runs around 5.2% – 5.5%. These facts combined with a declining labor participation rate would imply that there is still slack in the labor market.

Dressel_Fed_9.26.14_3The year over year headline Consumer Price Index (CPI) currently sits at 1.7%, after an unexpected dip in August. While inflation is beginning to trend upwards, it’s important to note that there haven’t been any alarming spikes higher. As history has shown, the Fed will most likely only consider tightening monetary policy when year over year inflation is at least 2%. Furthermore, recent inflation has been driven primarily by prices of shelter, rather than then food, energy, and other items. If interest rates rise too early, it would put a strain on household budgets and could hurt the overall recovery.


Initiation of tightening marked by red X’s

The conclusion of this data is that it puts the Fed in a dilemma as it simultaneously tries to alleviate price pressures and ease the loss of employment/overall output. On Wednesday, Yellen announced a median Fed funds rate projection of 3.75% through 2017. With this added clarity, the timing of Yellen’s tightening will determine how gradual rates will rise. Given that there is no pre-determined course and Yellen’s limited track record, we will continue to keep a close eye on economic data as our best guide going forward.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

Eurozone Crisis Report Card

Ryan DresselRyan Dressel, Investment Analyst, Brinker Capital

In January 2013 Amy Magnotta wrote in detail about how the actions of the European Central Bank (ECB) finally gave the markets confidence that policy makers could get their sovereign debt problems under control.[1] The purpose of this blog is to measure the progress of the ECB’s actions, as well as other critical steps taken to resolve the Eurozone crisis.

Maintaining the Euro: A+
The markets put a lot of faith in the comments made by the head of the ECB Mario Draghi in July, 2012. Draghi stated that he would “Pledge to do whatever it takes to preserve the euro.” These words have proven to be monumental in preserving the euro as a currency. Following his announcement, the ECB still had to put together a plan that would be approved by the ECB’s governing council (comprised of banking representatives from each of the 18 EU countries)[2]. The politics of the approval essentially boiled down to whether or not each council member supported the euro as a currency. Draghi’s plan ultimately passed when Germany’s Chancellor, Angela Merkel, endorsed it in September 2012.[3] The stabilization of the euro boosted lending and borrowing for European banks, and allowed governments to introduce necessary economic reforms outlined in the plan.

Since the plan was approved, the euro’s value versus the U.S. Dollar has continued to rise; reaching levels last seen in 2011. There is still some debate as to whether or not the currency will last over the long term, but for now its stability has helped avoid the worst possible outcome (financial collapse). There are several key elections coming up over the next month, which could renew the threat of breaking up the currency if anti-EU officials are elected.

Government Deficit Levels: B
The average Eurozone government deficit came in at 3.0% in 2013, which was down from 3.7% in 2012. Budgets will need to remain tight for years to come.

Corporate Earnings: B
The MSCI Europe All Cap Index has returned 27.46% in 2013 and 5.01% so far in 2014 (as of last week). The Euro area also recorded first quarter 2014 GDP growth at +0.2% (-1.2% in Q1 2013).[4] This indicates that companies in Europe have established some positive earnings growth since the peak of the crisis. On a global scale, Europe looks like an attractive market for growth.


Unemployment: C
Unemployment in the Eurozone has stabilized, but has not improved significantly enough to overcome its structural problems. The best improvements have come out of Spain, Ireland and Portugal due to a variety of reasons. In Ireland, emigration has helped reduce jobless claims while a majority of economic sectors increased employment growth. In Spain, the increased competitiveness in the manufacturing sector has been a large contributor. Portugal has seen a broad reduction in unemployment stemming from the strict labor reforms mandated by the ECB in exchange for bailout packages. These reforms are increasing worker hours, cutting overtime payments, reducing holidays, and giving companies the ability to replace poorly performing employees.[5]


There are also some important fundamental factors detracting from the overall labor market recovery. The large divide between temporary workers and permanent workers in many Eurozone countries has made labor markets especially difficult to reform. This is likely due to a mismatch of skills between employers and workers. High employment taxes and conservative decision-making by local governments and corporations have also created challenges for the recovery.

Additional Reading: Euro Area Labor Markets

Debt Levels: D
Total accumulated public debt in the Eurozone has actually gotten worse since the ECB’s plan was introduced. In 2013 it was 92.6% of gross domestic product, up from 90.7% in 2012. The stated European Union limit is 60%, which reflects the extremely high amount of government borrowing required to stabilize their economies.

Overall Recovery Progress: B-
On a positive note, governments are finally able to participate in bond markets without the fear of bankruptcy looming. Banks are lending again. Unemployment appears to have peaked and political officials recognize the importance of improving economic progress.

Unlike the 2008 U.S. recovery however, progress is noticeably slower. The social unrest, slow decision making, low confidence levels, and now geopolitical risks in Ukraine have hampered the recovery. When you consider the financial state of Europe less than two years ago, you have to give the ECB, and Europe in general, some credit. Things are slowly heading in the right direction.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

[1] January 4, 2013. “Is Europe on the Mend?” https://blog.brinkercapital.com/2013/01/04/is-europe-on-the-mend/
European Central Bank. http://www.ecb.europa.eu/ecb/orga/decisions/govc/html/index.en.html
[3] September 6, 2012. “Technical features of Outright Monetary Transactions. European Central Bank.” http://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html
[4] Eurostat
[5] August 6, 2012. “Portugal Enforces Labour Reforms but More Demanded.” http://www.wsws.org/en/articles/2012/08/port-a06.html
[6] Eurostat (provided by Google Public Data)

Volatility: Why it Matters

Ryan Dressel Ryan Dressel, Investment Analyst, Brinker Capital

Have you ever noticed how many commercials on TV use blind comparison tests to prove that their products are better than their competitors? Soft drinks, washing detergents, tablets, air fresheners, fast food chains, and even web sites all use this marketing tool on a fairly regular basis. One reason companies do this is to try to change your perception about their product. It’s human nature to associate a good or bad feeling about a product, brand, or company based on personal experiences. If you got sick from food at a restaurant for example, chances are you won’t return to that restaurant again, even if it changes the staff, menu, and décor. A blind comparison test is an attempt to convince you that a product isn’t as bad as you might think.

How can this be applied to your investments? You’ll hear dozens of mutual fund companies advertise that they are beating an index, benchmark, or peer group (such as Lipper) over a specific time frame. You could also open the Wall Street Journal and read about a mutual fund manager boasting smart decisions with regard to short-term news, such as the S&P 500 rising or falling in any given week. If you try to interpret headline news or those T.V. commercials without any context, there’s a good chance you could misjudge your portfolio and even worse, make an irrational decision! What you will rarely hear on T.V. or read in the papers is an advertisement for a portfolio that provides steady and consistent returns by managing volatility.

Why does volatility matter? To demonstrate the value of volatility, we’ll do a blind comparison using two hypothetical portfolios (you saw that coming right?). Both Portfolio A and Portfolio B started with an initial investment of $100,000 and have a sum of returns of 65% over a 10-year time period. The portfolios have the following annual returns over that time frame:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Portfolio A +2% +13% +5% +20% 7% 4% -7% -1% +16% +6%
Portfolio B +6% +25% -10% +36% -15% +11% -25% -7% +33% +11%

Which portfolio would you predict to have a higher balance at the end of the 10-year time frame? Looking at the returns we can observe a few things that jump out. Portfolio B managed to achieve extremely high gains in years 2, 4 and 9. Conversely, it also had a couple of really bad years in year 5, and year 7. It also finished the last two years with a combined +44%. Looking at Portfolio A, we can see that it never topped 20% in a given year, and never lost more than 7% in a year. It also finished seven out of the 10 years with a return of +7% or less.

If you chose Portfolio A, you would be correct!


As demonstrated in the charts above and below, Portfolio A has a much lower level of volatility. Through the power of compounding, this allowed Portfolio A to finish with a higher balance despite the fact that both portfolios have identical sum of returns. In reality, this is typically achieved by constructing a well-diversified portfolio using a wide array of asset classes. This is also a good reminder of how fixed income and absolute return strategies are beneficial to your portfolio in any market environment.


If these were actual investment products, there is no doubt that you would hear Portfolio B being advertised as an outperformer during a time frame that captures those years of strong performance. In the end however, the only thing that matters is the balance of your portfolio and that you are on track towards achieving your investment goals. Be sure to review your portfolio in the right context, especially during times of market “noise.”

Source: The data used and shown above is hypothetical in nature and shown for illustrative purposes. Not intended as investment advice.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

When in Doubt, Blame the Weather

Ryan Dressel Ryan Dressel, Investment Analyst, Brinker Capital

The 2013-2014 winter has been nothing short of a worse-case scenario for the eastern half of the U.S. In Chicago, temperatures fell below zero an astounding 22 times (the Chicago record for a winter is 25), and let’s not forget the combined 67 inches of snow. In Atlanta, the city literally came to a halt during what became known as “Icepocalypse.” In Philadelphia, we’ve seen a total of 58 inches of snow (third highest on record) including 11 different snow storms dropping one inch or more.[1]

Source: TheAtlantic.com

Source: TheAtlantic.com

Those three locales give you a pretty good idea of just how wide spread the wrath of winter is this year. While it is difficult to measure the exact impact of the weather on the economy, we can conclude that economic activity will certainly lag in January, February and March. Despite the fact that most economic indices account for seasonal effects, they do not account for outlier years like this one. Weather has been blamed for poor economic reports ranging from job growth, to new housing starts, to manufacturing—but is it justified?

A 2010 study by the American Meteorological Society determined which U.S. states are most sensitive to extreme weather variability as it relates to economic output.[2]

Dressel_Weather_2.21.14_1The research concluded that the location with the most sensitive industries had the largest total economic effect. For example, agriculture is the most sensitive on an absolute basis, but the fact that agriculture makes up such a small percentage of most states’ Gross State Product (GSP) means that extreme weather has a small total effect on sensitivity. Conversely, manufacturing, financial services, and real estate have a large relative sensitivity because of their GSP impact. As you can see on the map, the states where these industries have a significant economic impact, translates in higher sensitivity to extreme weather.

The severity of winter in the states colored red and yellow justifies the weather-related hype, while the ones in blue can be ignored for economic purposes. If you include the effects of the Government shutdown, we’ve had four consecutive months of cloudy data that we can’t put into clear context!

[1] National Oceanic and Atmospheric Administration.
[2] U.S. Economic Sensitivity to Weather Variability. Jeffrey K. Lazo, Megan Lawson, Peter Larsen, Donald Waldman. December 28, 2010.

A Mixed Start to 2014

Ryan Dressel Ryan Dressel, Investment Analyst, Brinker Capital

With 2013 in the rear view mirror, investors are looking for signs that the U.S. economy has enough steam to keep up the impressive growth pace for equities set last year.  This means maintaining sustainable growth in 2014 with less assistance from the Federal Reserve in the form of its asset purchasing program, quantitative easing.  Based on economic data and corporate earnings released so far in January, investors have had a difficult time reaching a conclusion on where we stand.

To date, 101 of the S&P 500 Index companies have reported fourth quarter 2013 earnings (as of this writing).  71% have exceeded consensus earnings per share (EPS) estimates, yielding an aggregate growth rate 5.83% above analyst estimates (Bloomberg).  The four-year average is 73% according to FactSet, indicating that Wall Street’s expectations are still low compared to actual corporate performance.  Information technology and healthcare have been big reasons why, with 85% and 89% of companies beating fourth quarter EPS estimates respectively.

Despite these positive numbers, two industries that are failing to meet analyst estimates are consumer discretionary and materials.  Both of these sectors tend to outperform the broad market during the recovery stage of a business cycle, which we currently find ourselves in.  If they begin to underperform or are in line with the market, then it could indicate the beginning of a potential short-term market top.

S&P500 Index - Earnings Growth vs. Predicted

Click to enlarge

There has been mixed data on the macro front as well:

Positive Data

  • Annualized U.S. December housing starts were stronger than expected (999,000 vs. Bloomberg analyst consensus 985,000).
  • U.S. Industrial production rose 0.3% in December, marking five consecutive monthly increases.[1]
  • U.S. December jobless claims fell 3.9% to 335,000; the lowest total in five weeks.
  • The HSBC Purchasing Managers’ Index (PMI) was above 50 for most of the developed and emerging markets.  An index reading above 50 indicates expansion from a production standpoint.  This data supports a broad-based global economic recovery.

Negative Data:

  • The Thomson Reuters/University of Michigan index of U.S. consumer confidence unexpectedly fell to 80.4 from 82.5 in December.
  • The average hourly wages of private sector U.S. works (adjusted for inflation) fell -0.03% compared to a 0.3% increase in CPI for December, 2013.  Wages have risen just 0.02% over the last 12 months indicating that American workers have not been benefiting from low inflation.
  • Preliminary Chinese PMI fell to 49.6 in January, compared to 50.5 in December and the lowest since July 2013.
S&P Performance Jan 2014

Click to enlarge

The mixed corporate and economic data released in January has led to a sideways trend for the S&P 500 so far in 2014.  We remain optimistic for the year ahead, but are managing our portfolios with an eye on the inherent risks previously mentioned.

[1]  The statistics in this release cover output, capacity, and capacity utilization in the U.S. industrial sector, which is defined by the Federal Reserve to comprise manufacturing, mining, and electric and gas utilities. Mining is defined as all industries in sector 21 of the North American Industry Classification System (NAICS); electric and gas utilities are those in NAICS sectors 2211 and 2212. Manufacturing comprises NAICS manufacturing industries (sector 31-33) plus the logging industry and the newspaper, periodical, book, and directory publishing industries. Logging and publishing are classified elsewhere in NAICS (under agriculture and information respectively), but historically they were considered to be manufacturing and were included in the industrial sector under the Standard Industrial Classification (SIC) system. In December 2002 the Federal Reserve reclassified all its industrial output data from the SIC system to NAICS.

Demographic Changes Looming (Part Two)

10.17.13_BlogRyan Dressel, Investment Analyst, Brinker Capital

Part two of a two-part blog series. Head here to read part one.

Another noticeable change has been the amount of people living in urban versus rural areas.  The world is undergoing the largest wave of urban growth in history.  For the first time in history, more than half of the world’s population lives in towns or cities.[1]  In 1970, 73.6% of the population lived in urban areas in the U.S., compared to 79% in 2012.  In China, the shift has been even greater; 51% of people live in urban areas today, compared to just 20.6% in 1982.  Other major nations have experienced similar degrees of urbanization (percentage of population living in urban areas below)[2]


Cities provide numerous economic benefits and challenges; some of which include: entrepreneurialism, education opportunities, traffic congestion, pollution, and poverty to name a few.  Perhaps the biggest challenge as a result of this trend will be a spike in food, water and commodity prices, which are already high.[3][4]  Some Governments, scientists and environmentalists are already working on solutions to these problems (such as China’s plan for a massive new desalination plant[5]), but in many areas resources are limited and solutions are inefficient on a large scale.

Wealth Inequality
Finally, the trend of wealth inequality in the United States is approaching an all-time high.  For perspective, in 1928 the top 1% of the population earned nearly 20% of all income.  The wealth gap was at its lowest in the 1960s and 1970s, but has been steadily widening since then.


This trend has been made public in the U.S. as demonstrated by the Occupy Wall Street movement in 2012.  Regardless of your opinion surrounding the subject, wealth inequality has created noticeable economic challenges.

Some of the nationwide problems associated with wealth inequality include deteriorating health,[6] the potential for corruption (in many different facets), and a relatively weaker middle class which has historically fueled the most economic growth in the U.S.

The income gap has been blamed on everything from computers, to immigration, to global competition, but simply stated there is no clear consensus regarding the cause.[7]  This needs to be kept in mind by investors, economists and especially politicians before we spend public dollars on initiatives that aren’t effective at reducing the problems previously mentioned.

These changing demographic trends will no doubt provide challenges, but can also present exciting opportunities for generations to come if they are properly prepared for.

[1] The United nations Population Fund.  http://www.unfpa.org/pds/urbanization.htm  May, 2007.

[2] Population Reference Bureau, 2012 World Population Data Sheet, 2012.

[4] New York Times Online.  http://www.nytimes.com/2006/08/22/world/22water.html?_r=0  Celia Dugger. August 22, 2006.

[5] China Daily.  http://usa.chinadaily.com.cn/china/2011-04/09/content_12298084.htm  Cheng Yingqi.  September 4, 2011.

[6] American Medical Association.  http://www.who.int/social_determinants/publications/health_in_an_unequal_world_marmott_lancet.pdf Michael Marmot.  December 9, 2006.

[7] The Great Divergence.  Timothy Noah,  2012