Third Quarter 2016

Our quarterly review of the state of finance: bottom-line, we wait: wait for the Federal Reserve and interest rates, wait for U.S. Presidential elections, wait to see if the Cubs can win the World Series and we wait to see who wins Project Runway this fall.

Since the markets’ sharp retreat in January and February, stocks, bonds and many emerging-market assets have rallied, delivering solid gains in a year in which portfolio managers’ expectations started out very low. But substantial rallies in dissimilar assets such as stocks and government bonds are raising concerns that investors could be exposed to big losses if dynamics suddenly shift.

Some worry about a potential banking crisis in Europe and the prospect of volatility caused by U.S. elections or a Federal Reserve interest-rate increase. Others fear that years of monetary easing have drained central banks’ ability to shield economies from recessions or market shocks.

Despite a lengthy list of challenges — a drop in earnings at U.S. companies, high valuations for stocks, concern about rising interest rates — the benchmark S&P 500 Index rose more in the third quarter than it did in the first half of the year.

And although stocks have risen this year, the fundamentals are deteriorating.

The S&P 500 is trading at 19.99 times its trailing 12-month earnings as of Friday, up from 17.15 a year ago and compared with a 10-year average of 15.7.

Analysts expect earnings at companies in the S&P 500 to decline from a year earlier for a sixth consecutive quarter, raising concerns about the sustainability of any further advance.

The S&P 500 SPX, +0.56%  returned 4% for the third quarter (through Sept. 28). Here’s how the 10 sectors of the benchmark index performed:

Sector	Total return - third quarter, through Sept. 28	Total return - first half of 2016	Total return - 2016	Total return - 2015
Information Technology	12.9%	-0.3%	12.5%	5.9%
Financials	4.7%	-3.0%	1.5%	-1.5%
Industrials	4.1%	6.5%	10.8%	-2.5%
Materials	3.7%	7.5%	11.5%	-8.4%
Consumer Discretionary	2.7%	0.7%	3.3%	10.1%
Health Care	1.8%	0.4%	2.2%	6.9%
Energy	1.0%	16.1%	17.3%	-21.1%
Consumer Staples	-2.7%	10.5%	7.5%	6.6%
Utilities	-3.8%	23.4%	18.7%	-4.8%
Telecommunications	-5.1%	24.8%	18.4%	3.4%
S&P 500	4.0%	3.8%	8.0%	1.4%
Source: FactSet

Aside from the recovery for the energy sector, as oil prices have risen from their cycle lows in February, this year’s major themes have been investors’ flight to yield and low volatility, owing to seemingly eternal low interest rates. But the utilities and telecommunications sectors, which feature many stocks with high dividend yields, declined in the third quarter.

WELLS FARGO TROUBLES CONTINUE - California Treasurer John Chiang took center stage last Wednesday as a major player in the sordid scandal surrounding Wells Fargo, the oldest California-based financial institution, now battered by accusations that bank employees created millions of unauthorized credit card and bank accounts.

In a news conference, Chiang brought the hammer down, suspending state business ties with the banking giant for a year. That move by California -- the nation's largest issuer of municipal debt -- may eventually cost Wells Fargo millions in fees.

Chiang's tough words in an open letter to the bank's embattled chairman John Stumpf got play around the country: "How can I continue to entrust the public's money to an organization which has shown such little regard for the legions of Californians who placed their financial well-being in its care?"

THE TAKEAWAY: The national attention for Chiang will come in handy his 2018 race for governor against the other Democratic announced candidate, Gavin Newsom; the lieutenant governor has gotten plenty of attention this year with high-profile advocacy of tougher gun safety measure in Prop. 63, and Prop. 64, the legalization of recreational use of marijuana. So Chiang has signaled he won't be a wallflower -- and he has the podium and the statewide position -- to become a far more familiar name to state voters as 2018 approaches.

TOP THREE – Business Movies

            1). Wall Street (1987)

            2). The Big Short (2015)

            3). Barbarians at the Gate (1993)

TOP THREE PART DEUX – Common Sense Finances

            1). Don’t have debt rise faster than income.

            2). Don’t have income rise faster than productivity.

            3). Do all that you can to raise your productivity.

TRUMP'S DECLINE REVEALED - Abraham Wallach thought he had scored a major career break when Donald J. Trump hired him in 1990 for a senior executive role. Based on Mr. Trump's boasting and gaudy lifestyle, Mr. Wallach imagined he would soon be leading impressive construction projects around the globe. ... Instead, he found an array of failing enterprises ..

That year, he would later learn, was the beginning of Mr. Trump's reckoning with a decade of rapid, debt-fueled expansion. The eclectic empire Mr. Trump had built with leverage from his father's brick-and-mortar fortune began to fail, generating enormous losses and bringing him to the brink of personal bankruptcy. The full magnitude of the financial hemorrhaging was a closely held secret until this weekend, when The New York Times published portions of Mr. Trump's 1995 tax records that showed business losses of $916 million ... For a single businessman to declare losses approaching $1 billion is so extraordinary that it caused several accountants and lawyers consulted by The Times to blanch.

Days until the 2016 election: 33.

Days until the presidential debate: 3.

U.N. WATCH -- Antonio Guterres, a socialist former prime minister of Portugal, is the unanimous choice of the United Nations security council to lead the organization, from 2017 to 2021, U.N. ambassadors announced Wednesday ... In choosing Guterres, the U.N., has set aside an informal tradition of rotating the presidency by region (this term would have been for an eastern European had the tradition been observed). Eastern Europe will remain the only region never to have held the post of secretary-general. The Security Council also bypassed pressure to select a woman to hold the post.

OUT AND ABOUT – The empty, fenced-off lot across the street from the Packing House (Claremont, California) could become a parking lot.

The news comes from Director of Community Development Brian Desatnik, who said that the lot, if approved by the city, would be a temporary placeholder for the Village Lofts development that is now put on hold.

The Village Lofts was a planned multi-story mixed-use project with seventy four one and two bedroom apartments, retail space and on-site parking located at the former Rich Products building, which was torn down on June 2015.

Mr. Desatnik said the developer, Los Angeles-based Denley Investments, indicated their need to postpone development a month ago. The idea of building a parking lot came up shortly after. Denley said that it was too uncomfortable with the current market to move forward with the project.

BIRTHDAYS THIS WEEK – Birthday wishes and thoughts this week to Karen Hasse ….famous health consultant; Devorah Lieberman …famous POTULV.

DEAR RINK RATS –

Recently I received a robo-call with an urgent voice mail message, telling me to call a phone number to “settle” my tax bill with the Internal Revenue Service (I.R.S.). They also indicated this is the “last warning” before legal action. When calling back I was threatened with arrest and revocation of my driver’s license. How can I tell if a tax call is legitimate and what should I do? And I thought NPR fundraising calls were tough!

Signed,

Confused in Santa Barbara, California

Dear Confused –

Consumers should be wary of any unexpected call supposedly from the I.R.S., the Federal Trade Commission warns, because the agency generally initiates contact with taxpayers by United States mail. The I.R.S. says it will “never” call to demand immediate payment by a specific method, like wire transfer, and it won’t ask for credit or debit card numbers.

Do not give out any information, and hang up immediately, the I.R.S. advices. If  you get a voice mail message, don’t call back, the F.T.C. (Federal Trade Commission) advises. Also you should contact the Treasury Inspector general for tax administration to report the call.

Signed,

Rink Rats

COLLEGE CHRONICLES - DEFAULT RATES KEEP DROPPING: Student loan default rates are continuing their steady decline, the Education Department announced Wednesday. The department's three-year federal student loan default rate fell half a percentage point, to 11.3 percent, for students who entered repayment in fiscal 2013. It marked the third straight year the default rate decreased. Meanwhile, nine for-profit colleges and one nonprofit school, mostly small cosmetology schools, could lose access to federal loans after large portions of their students defaulted during the last three years. Default rates at those schools either exceeded 40 percent or were higher than 30 percent for three straight years.

TESLA OF SPORTS TECH - The gleaming new Sacramento Kings home, Northern California's first new major indoor sports center in more than two decades, is packed with state-of-the-art technology...Perhaps more important for younger fans, the 17,500-seat arena is designed with enough Wi-Fi capacity to upload 500,000 Snapchat photos per second.

MAJOR LEAGUE BASEBALL PLAYOFFS – The Swami likes:

Division Playoffs – Dodgers over Nationals in Four, Giants over the Cubbies in five, Boston over Cleveland in five, and Texas over the Blue Jays (sorry Cat) in five.

League Championship – Giants over the Dodgers in seven, Texas over Boston in six.

World Series – San Francisco Giants over the Texas Rangers in six.

NFL GAME OF THE WEEK – Sunday 10/9, 1:00 PM ET, Fox; Houston Texans (3-1) at Minnesota Vikings (4-0). Vikings are for real, U.S. Bank Stadium will be rocking; 28 – 17 Vikings. Season to date (3-1)

COLLEGE FOOTBALL PICK OF THE WEEK – Saturday 10/8, 3:30 PM ET, CBS: #9 Tennessee Volunteers (5-0) visit #8 Texas A & M Aggies (5-0), huge SEC matchup; we like the Aggies 32 – 28. Season to date (4-1)

SMALL COLLEGE FOOTBALL PICK OF THE WEEK – Saturday 10/8, 3:00 PM ET, HGTV: #5 Univ. of Wisconsin Oshkosh Titans (4-0) at Univ. of Wisconsin Whitewater Warhawks (4-0), WIAC Conference at its best. Warhawks win a wild one 38 – 35.  Season to date (2-3)

COLLEGE HOCKEY PICK OF THE WEEK – Saturday 10/8, 7:00 PM ET: #15 Northeastern Huskies (0-0) visit #2 Quinnipiac Bobcats (0-0). A pretty good game to start the college hockey season, Cats win 5 – 2. Season to date (0-0)

THE SWAMI’S WEEK TOP PICKS –

(NFL, Oct. 9) Atlanta Falcons (3-1) at Denver Broncos (4-0); now we shall see how good  the Falcon offense against a real defense. Denver wins 24 – 10.

(NCAA-SCIAC, Oct. 8) Pomona-Pitzer Endowments (2-1) vs. California Lutheran Kingsmen (1-2); the Endowments take a loss, 35 – 17.

(NCAA BCS, Oct. 8) #5 Washington Huskies (5-0) vs. Oregon Ducks (2-3); are the Huskies for real in the Pac 12? Yes, 32 – 28.

(MLB, Oct. 8) Divisional Playoffs – San Francisco Giants (88-75) at Chicago Cubs (103-58); Cubs win this one but not the series, 5 – 4.

Season to date (67 - 63)

DRIVING THE WEEK - Following record ratings for last week's first presidential debate and this coming Sunday's clash of Trump and Clinton, their running-mates Mike Pence and Tim Kaine met in a feisty debate on Monday.

The results of the presidential race could shape the Supreme Court for decades to come. The high court begins its 2016 term today, with the seat vacated by the death of conservative justice Antonin Scalia still open.

Prime Minister Theresa May has set Britain on course to leave the EU by 2019 in her first major speech on Brexit, saying the U.K. would become a "fully independent, sovereign" country.

It's a fairly busy week for U.S. economic data, in the run-up to Friday's release of the September jobs report.

GoPro's (GPRO) new actions cameras, the Hero 5 Black and the more compact Hero 5 Session, went on sale this weekend. The Starbucks (SBUX) pay increase for partners and store managers in the U.S., announced in July, goes into effect. They're receiving an increase in base pay of 5 percent or greater.

Next week: National Hockey League preseason picks. What is on the iPod? Educating the unbanked.

Until Next Time, Adios.

Claremont, CA

October 6, 2016

#VII-18-320

CARTOON OF THE WEEK – Peanuts, by Charles Schulz