2nd Quarter 2015 Commentary


For the second year in a row, the U.S. economy has had to rescue itself from a desperately hard winter whose climate put economic activity into a “deep freeze”.  First quarter GDP (gross domestic product) shrank 0.2% – just as Q1 2014 GDP was set back. Additionally this year, the U.S. had to deal with a prolonged port strike on the West coast and a strong dollar, which further slowed an already slow economy.  Nevertheless, the American economy is “snapping back” (just as it did in 2014) with estimates for Q2 growth of approximately 3% and good growth for the remainder of the year.  Light vehicle sales and housing starts, in particular, suggest that the consumer is in good shape and the American consumer is approximately 70% of the U.S. economy.

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Indeed, consumer sentiment is strong.

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Further, the labor market is improving on a number of fronts.

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Lastly, average hourly earnings are rising.

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Recently, Chair Yellen and her colleagues met in Washington D.C. and post their meeting, Chair Yellen reiterated what she has said countless times before – i.e. an increase in interest rates is coming, its arrival will be entirely “data dependent”, but the slope of the series of interest rate increases will be shallow. In fact, Chair Yellen admonished pundits not to be so concerned about whether interest rate “liftoff” will occur in September 2015 or December 2015 or even February 2016 – but rather they should focus on how quickly rates go up and she is telling the world that they will not go up rapidly.


We believe a bottom has been put in – barring any unforeseen cataclysmic economic event in the world.  A low price has cured a low price.  The market has corrected and surprising to us, more quickly than we had anticipated.  Drilling rig usage is off some 50%. Well production decline curves have “kicked in” and production is “rolling over”.  As a result, oil prices have “bounced off” a mid-$40/barrel and are around $60/barrel.


What can we say?  What can anyone say?  This is a very big drama being played out on the world’s stage.  We think Greece will default.  We think that there will be some initial concern expressed in the markets regarding “unknown collateral damage” to the Eurozone and the Euro.  Relatively soon thereafter, when investors see that the world is not about to end, the markets will again move ahead. Economically, Greece is unimportant in the world.  In most markets around the world, Greece is unimportant.  When Greece defaults, the ones who will suffer the most for some time to come will be the Greeks – and they will suffer more than they have so far.


The perceived market wisdom is that emerging markets are risky and volatile – thus the first among assets to be sold when investor risk aversion rises.  We have seen this phenomena many times over the years with the most recent episode as a result of worries over Greece and interest rates.  In June, investor exposure to emerging markets stood at a 15 month low after a big drop in May.  To us, this looks like yesteryear thinking.  Since the “financial meltdown,” the belated realization has been of under-priced “developed market” risk.  Hundreds of billions of dollars of supposedly low risk or risk free U.S. mortgage bonds or Eurozone government debt were anything but low risk.  Instead of always looking at “emerging” markets as a “glass half empty” proposition, we think investors ought to consider that according to the IMF (International Monetary Fund) “emerging” economies will account for more than 70% of global growth in 2015 and for more than half of world GDP (Gross Domestic Product).  A puzzlement in our minds is the tepid growth in the “developed” economies despite all the monetary stimulus thrown at them.  Too often proclaimed economic “hard landings” by pundits have not materialized in emerging countries because of clean government  balance sheets, flexible exchange rate regimes and high reserves.  To us, developed market assets look rich in comparison to “emerging” market assets.


The U.S. economy is gathering momentum.  Q1 is long over. Q2 economic performance is better than Q1 and the second half of 2015 will be better than the first half – barring any extraordinary exogenous event.   The American consumer is feeling good and should be spending with more “abandon” in the upcoming months – which is good for business.  The Fed will raise interest rates, but the increase will be small (25 Basis Points per raise) and the rate of increase will be shallow.  So bonds should not challenge the attractiveness of stocks for quite some time.  Oil prices have seen their lows, but will probably not see $100/barrel for some time.  This continues to be good news for energy consumers (most of the world) and at least better news for energy producers, as the price of oil and natural gas are not at their earlier “bottoms”.  Greece will create some near term “angst” in markets as investors “worry”.  The U.S. markets could be an initial beneficiary of a rise in worry as investors flee to “quality” and from “risk”.  Nevertheless, the worry should pass relatively quickly and markets should again move forward.  Equity markets, relative to bond markets, around the world are fairly to inexpensively priced.  Corporate earnings, cash flows and dividends look as though they will rise as the world economies (ex. Greece) improve.  Lastly, stock buybacks and an energetic merger/acquisition environment will further support stock prices.  We remain positive on equity markets around the globe and we are not enthusiastic about bond markets.



  • Housing should expand & support the economy. –  Yes
  • Employment will improve throughout the year. –  Yes
  • Companies will raise dividends & buyback stock.  – Yes
  • The Fed will keep interest rates lower for longer & raise them slowly & not sharply later in 2015. – Yes
  • The US, India, Japan, Brazil & Indonesia will accelerate their economic growth. China will not. Europe will try but not succeed. – Yes, in the U.S., India, Indonesia and Europe. Japan is trying.  Brazil is slowing, as is China.
  • Politics in the Eurozone will spark some “fireworks” which will add volatility to markets. – Yes
  • The dollar will be strong. – Yes
  • The Euro & Yen will be weak vs the dollar. – Yes
  • A political solution to the Ukraine issue will be found. Still hope for – but not seeing anything encouraging.
  • The price of oil will start its rally in late 2015. –  Already started.


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The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC.  These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.

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