The Fed, China, Grexit, Bonds

The Fed, China, Grexit, Bonds

2nd Quarter 2015

Download the PDF to view the Hoisington insert.

The stock market continued to be almost flat in the first half of the year as well as the bond market. The concern about the Federal Reserve (Fed) raising interest rates continued as well as the Chinese economy slowing down and the possibility of a Greek exit (“Grexit”) from the euro.  We are also entering the second quarter earnings reporting period.  In the long-term, earnings determine the direction of the stocks and the stock market.

As we have reported in the past PIMCO believes that the Fed will raise rates this year, probably in September, by 0.25% and then wait to see what effect this raise has on the markets.  They believe that the Fed Funds Rate will be at 2.50% in five years.  Inflation is not an issue at this point so the Fed can afford to be slow in raising rates.  

As we know the European Union (EU) has initiated Quantitative Easing (QE) and this is having a positive effect on European stocks. The Grexit was a huge concern early in July but once again the Union has kicked the can down the road by giving Greece another bailout.  We saw volatility in the markets as the drama played out, but now that it is over the markets are rising again to new highs.  In our opinion Greece will never be able to pay its debts.  This problem will rise again later this year.  We believe that ultimately the EU will allow Greece to default on part of its debt and stay in the EU and the euro. It is too politically risky to let Greece leave the EU and the euro.

The Chinese economy is slowing and this is having a negative effect on all countries and companies that sell products to China.  This also contributed to volatility in early July.

It will be interesting to see what earnings look like for the second quarter.  Those companies that gain a significant percentage of their earnings from outside the U.S. may see lower earnings due to the strong dollar.

The price of oil could go lower as the treaty with Iran allows Iran to export oil.  This will contribute to the already existing oversupply of oil in the world.


In their “Quarterly Review and Outlook -Second Quarter 2015” Hoisington addresses four misconceptions that have pushed Treasury bond yields to higher levels.  Please see their attached report.

“SEC Cranks Up Investigation Into Fund Firms’ Fees”

On Friday, July 17, 2015 the Wall Street Journal carried an article with this title.  The article leads off as follows:

“U.S. securities regulators are examining whether mutual fund managers are dipping more deeply than allowed into their investors’ money to compensate the brokerages that distribute their products, according to people familiar with the matter.”

It goes on to say:

“Money managers rely heavily on Wall Street brokerages, insurers and other middlemen to feed their products to Main Street and employ thousands of salespeople to push their funds.”

“The SEC now wants to know whether mutual fund companies are drumming up ways to make extra payments by tapping the assets they manage for investors to pay for services such as consolidating their clients’ trading records.”

“The SEC’s concern is these additional fees aren’t disclosed properly to investors, and that brokers may be more likely to recommend funds that pay for such services, the people said.”

“It creates the notion of pay to play,” says a representative of Cerulli Associates, which gathers data about the financial-services industry.

“This year, a top SEC official cited industry conflicts as one of the agency’s biggest priorities for 2015 and highlighted fund distribution as a ‘particular concern’.” 

It is very interesting but not surprising that the SEC is finally getting around to dealing with this conflict of interest on the part of the mutual-fund industry, the brokerage firms, the insurance companies and others. As our clients know, Monroe Vos discloses all fees collected from mutual funds quarterly in writing in the Fee Analysis section of the Performance Report, and we give credit for 12b-1 fees and finder’s fees against our hard dollar fee.  In fact we have been documenting the fees collected since 1988 when Tim Vos and I became partners.  We have always believed it is unethical and dishonest not to let our clients know what they are paying, not only for our consulting services but all of their other providers/vendors as well.  We have been ahead of the industry for 27 years.


The excessive debt burden worldwide, slow money growth, declining money velocity and high real interest rates versus historical averages indicate that there is downward pressure on inflation and that Treasury yields will stay low.  This continues to be a good environment for stocks as an investment compared to other alternatives.


Jamison Monroe
Chairman & CEO
Director of Consulting


Released: July 22nd, 2015 10:45 AM

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