Throw Back Thursday #tbt

One of Coldstream’s distinguished Portfolio Managers:

Robert Frazier

Third Quarter Choppiness – Where Do We Go from Here?

With a back drop of an increasingly solid economic landscape in the US, deflation fears in Europe, and geopolitical uncertainty in the Middle East, Ukraine and Hong Kong, it is not surprising that the third quarter was tumultuous. European equity markets, responding to slowing growth, were weak across the board. In the United States, the trend favored large cap stocks over small, Japan struggled to keep its economy growing, and emerging markets were mixed. The nearby chart shows the performance for global markets for the third quarter and year to date.Market Commentary

The S&P 500 hit an all-time high in September before retracing some of those gains in the final week of the quarter to end 1.1% higher on the quarter and 8.3% higher for the year to date. Despite hitting that new high, the S&P traded in a 60 point range after recovering from the late July sell off. Conversely, small cap stocks, as measured by the Russell 2000 Index, declined 7.4% in the third quarter and 4.4% for the first nine months.

Six years after the economic crisis, the US economy is starting to look more normal: in absolute numbers, the number of individuals employed has finally surpassed pre-recession levels, although the unemployment level is still 6.1%. Consumer spending is growing, home builder confidence is at its highest levels since late 2005, the small business survey continues to improve and businesses are spending on capital goods. On the heels of a very weak first quarter when US Gross Domestic Product (GDP) contracted 2.1% due to the harsh winter, second quarter GDP rebounded to grow a solid 4.6%. We believe the GDP results will be at a more normalized 3%, plus or minus, for the third quarter.

Economic growth has slowed in Europe. At the start of the year we thought Europe was poised to emerge from recession; the crisis in the Ukraine tilted the apple cart. In the second quarter, economic activity contracted in Germany (-0.6%), France (-0.1%) and Italy (-0.7%), only Spain exhibited positive growth of 2.3%. We remain cautious in committing additional dollars to Europe and Russia until the geopolitical issues are resolved.

The US bond markets have been skittish. As the economic recovery gained momentum, the Federal Reserve unwound, or tapered, the extraordinary interest rate measures they took to keep long term interest rates low. The Fed has long broadcast that the taper will be complete in October, which means that long term interest rates will be determined by market forces. To offset the impact of market driven interest rates, the Fed has also broadcast that they will keep short term interest rates low for an extended period. While inflation remains low and therefore not a rationale for the Fed to raise rates in the near term, most pundits believe that the Fed will start to raise short term rates in late 2015. As a result, we have noticed some tightening of credit, some widening of the spreads between high quality and high yield bonds and a fixed income market that reacts to any news story.

On a valuation basis, we continue to like large domestic stocks, but as we wrote in another article in this edition of the Guardian, we reduced our exposure to small cap stocks due to high valuations in that sector in the spring. With this low interest rate environment, we are looking for alternative income ideas including master limited partnerships and unique bond structures. That said, we still believe that one of the most attractive assets to generate income remains dividend paying stocks; the combination of dividend yield, dividend growth and the underlying growth of the companies provides a solid trifecta for investors looking for growth and income.

The fourth quarter is typically a positive quarter, and the S&P 500 has not declined in the 12 months following a midterm election since 1948, so despite the recent weakness in the markets, we view using any market dips as a buying opportunity.

New Hire

Tiffany Weymouth, CFP, joined Coldstream in September as a Private Client Services Associate on the Joe Cervantes relationship management team. She brings a depth and breadth of financial services experience to the role including private client services expertise, most recently from Key Bank Private Client Services in Bellevue, WA. She holds a Bachelor of Arts degree in Art History from the University of Washington.

Fall’s Arrival and the Return to School of Kids and Grandkids

Young adults are on the move – you’ve packed them up, bubble wrapped precious treasures, the sound of packing tape howling as it seals another box headed to college. The SUV completely stuffed – perhaps a U-Haul Truck depending on the size of the move. Whether it’s a dorm room, off campus housing, fraternity or sorority row house – some insurance considerations come into play.

Does it make sense for your college student to start a renter’s insurance policy (a baby homeowners policy for those away from home) – providing coverage for their household contents and personal liability?

Twenty years ago a boom box, a CD player, Sony Walkman were the most valuable items a young adult took off to school. Today a MacBook Air may run upwards of $3,000. A tablet computer – also in the 3 to 4 figure range. And then factor in an entire wardrobe of everyday apparel of favorite shoes, accessories, briefcase and hand bags. And it’s not uncommon to find that the totals push north of $10,000 or more.

Most homeowners policy extend coverage to your dependent at school. But – here’s the ‘uh-oh’ moment – the deductible (i.e. the out of pocket expense); most individuals today have homeowner’s deductibles of $1,000 to $25,000 depending on the value of the home. For you, the higher deductible plans are a sound strategy that leverages your purchasing power and rewards you with significant discounts. But this deductible is so very high for a young adult that their loss will typically not ever crest your deductible.

And then factor in youth – it’s an amazing time – studying late, on an athletic team, a member of the band or orchestra, working a part time job, juggling classes and social commitments. At times scattered, and fatigued – personal judgment may take a hit. Without even thinking – stepping away from the laptop at the University library and discovering it’s gone moments later… the victim of theft. Rushing out the door to class – forgetting to lock the door behind them. Coming home to an apartment burgled of everything – including their roommate’s stuff which immediately segues to personal liability.

Forgetting to lock that door – and now all of the roommates are looted. How much is the liability? Rushing out the door – and forgetting to turn off the breakfast Panini maker and a house fire blazes – what does that total?

The renter’s insurance policy provides coverage for property (aka stuff) and personal liability (an angel’s halo for damage to third parties). The personal liability component of the renter’s insurance policy provides 24/7 coverage for your young adult. An exhausted, irritable student fatigued by the push for finals during exam season – posts an unflattering remark about a professor on Facebook or Twitter. It goes viral – University Administration becomes involved. Allegations of personal injury and slander raised by the Professor. And voilà – with the properly configured renter’s insurance policy, coverage is activated.

This renter’s insurance policy teaches our young adults valuable lessons – in the care of their stuff; care of their environment. Making smart decisions about liability exposures: hosting a party and evaluating the role of alcohol and its possible implications. In addition it provides a deductible that is scaled to a young adult’s finances ($500 is fairly standard deductible on these policies). Most importantly it backstops a claim against the parent’s homeowners policy, leaving your policy unimpaired by claim and preserving your highly preferable rating for premium discounts. You retain a sterling no-claims record, reserving your homeowners policy for large losses.

The renter’s insurance policy is typically $20 per month or less in cost. And often coverage may be coordinated with your existing insurance agent or procured on campus. For more information please contact Coldstream’s Fit Insurance specialists: Peter Beeson or Sabrina Cross. Contact information at

Coldstream Tactical Allocation Decisions: An Example

Investment decisions at Coldstream are made by our Investment Strategies Group (ISG), which is composed of client portfolio managers, as well as managers of other Coldstream investment vehicles such as our 401K and alternative investment products. ISG sets strategic parameters for its asset allocation decisions. These parameters are designed so that client accounts are balanced and diversifi ed among asset classes. Within these strategic parameters, ISG also makes tactical decisions. These tactical decisions all fall within ISG’s strategic framework, but we will overweight and underweight asset classes based on ISG’s view of the near to medium term prospects for each particular asset class.

At the beginning of 2014, ISG made the decision to reduce small and mid cap stock (SMID) exposure in client portfolios in favor of increasing exposure to large cap stocks. This decision added value to client portfolios, particularly in the third quarter when small cap stocks, as measured by the Russell 2000 index, declined 7.4% and mid cap stocks, as measured by the S&P 400 index declined 4.0% compared to a 1.1% gain for the S&P 500 index.

In 2013, small cap stocks outperformed large cap stocks, with the small cap index gaining 38.82% on a total return basis while the S&P 500 index gained 32.28%. However, ISG felt this outperformance was due more to momentum than it was to fundamental valuation. The trailing price to earnings ratio (p/e) for SMID at the end of 2013 was 23.6, while the p/e for large cap stocks was 17.4. On a forward looking basis, large cap stocks appeared relatively undervalued as compared to SMID with an estimated 2014 p/e for SMID of 18.8 as compared to 15.5 for large cap stocks. While it is not unusual for small and mid cap stocks to have higher p/e ratios than large cap stocks (as investors often think the growth prospects for SMID are greater than those for large caps), ISG believed the degree of disparity at the end of 2013 did not have a fundamental basis. In addition, several market pundits were warning that small cap stocks could underperform large cap stocks if interest rates rose, as typically, small cap companies are more dependent on debt financing than large cap companies are. While this view was not central to ISG’s determination, it provided support for its thinking. In early 2014, ISG closely reviewed the data and recommended reducing the weight to SMID and increasing the weight to large cap stocks in client portfolios.

This tactical allocation decision worked well. At the end of the third quarter, large cap stocks generated an 8.3% return YTD, while small cap stocks have declined 4.4% YTD and mid cap stocks have gained 3.2%.

We do want to emphasize that these allocation changes do not affect the strategic parameters in client portfolios. We did not eliminate portfolio allocations to SMID, as ISG does not take big market “bets.” It tries instead to make tactical decisions, within a strategic framework that increases exposure to those asset classes that it believes will outperform in the near to medium term.

Coldstream’s Throwback Thursday Picture of the Week:

Business Development Officer Detlef Schrempf #tbt

Company Retreat

Our company retreat this September took us to Mountain Springs Lodge in Plain, Washington where, during an active yet relaxing weekend, we fly-fished, rode horseback, and zip-lined. More importantly, the retreat provided a great opportunity to hone the cooperative and team-building skills vital to serving our clients. We were able to work and re-charge our…



Coldstream proudly carries on our rich tradition of supporting future Northwest business leaders by sponsoring the Foster Sales Certificate Program Golf Tournament, held recently at the Golf Club at Redmond Ridge. The Foster Sales Certificate Program has graduated over 725 sales professionals in the past 15 years. Last year, a record 300 students applied to…

September Market Commentary

September started out great and ended with a whimper. The market as measured by the S&P 500 reached an all-time high two weeks ago when the S&P closed at 2011. Subsequently we have corrected 4% on an intra-day basis. Most pundits have been calling for a correction for months and the majority are looking for…