OUR MISSION Smith Shellnut Wilson is a registered investment advisor* specializing in managing investment portfolios for banks, individuals, corporations, foundations and public entities. Smith Shellnut Wilson offers its clients a combination of skilled investment management and unremitting client service. Smith Shellnut Wilson is dedicated to the premise that client relationships and performance, not transactions, are the ultimate goals. I. 3nd Quarter 2014 ECONOMIC AND MARKET COMMENTARY Kolby Sneathern SSW Research Department Office: (601) 605 1776 Website: www.ssw1776.com Contact: kolbys@ssw1776.com THIRD QUARTER EQUITY MARKET RECAP U.S. equity investors endured a bumpy summer, with a steep decline in the market in early August sandwiched between a rocky July and solid September. Rising concern over geopolitical risks impacted market sentiment, triggering some abrupt, albeit minor corrections. A key element elevating geopolitical risk is the evolution of ISIL and its activities in Syria, Iraq and the broader region known as the Levant. In addition to ISIL, there is continuing turmoil in Nigeria, a spreading Ebola epidemic, and, further, problems involving Russia and Ukraine and the responses of the U.S. and European Union to that crisis. These successive geopolitical risk shocks started intensifying in July and continued throughout the quarter. COMPARATIVE RETURNS as of 9/30/2014 % Change 4 3 22.00 2 20.00 1 18.00 Dow Jones Sep 14 Aug 14 Jul 14 Jun 14 May 14 Apr 14 Mar 14 4 Jan 14 3 10.00 Feb 14 2 12.00 Dec 13 14.00 Sep 03 Mar 04 Sep 04 Mar 05 Sep 05 Mar 06 Sep 06 Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 1 Nov 13 0 16.00 Oct 13 24.00 S&P 500 P/E RATIO as of 9/30/2014 Sep 13 P/E S&P 500 After falling nearly 4% in early August, its largest decline since January, the S&P 500 rallied to new all time highs, closing above 2,000 for the first time in late August. The S&P posted a 1.13% return in the third quarter, making it the seventh consecutive quarter with a positive return. Looking forward, equity markets face other uncertainties in addition to geopolitical unrest. While the Fed begins their slow and steady journey to normalizing monetary policy, predictions that rates could start to rise in the first quarter of 2015 have generally been moved out into the middle of 2015. The Fed also hinted that, barring any surprises, its quantitative easing asset purchases will end in October. The end of its balance sheet expansion is clearly in sight. Despite the uncertainties, markets have continued their post crisis bull market trajectory. The Russell 2000 and NASDAQ are up sharply since March 2009. However, financial markets must now begin to navigate uncharted territory as the Fed ends quantitative easing and begins raising rates from practically zero, back to more normal levels. *Registration of an Investment Advisor does not imply any certain level of skill or training. Smith Shellnut Wilson, LLC Investment Counsel and Management SEC Registered Investment Advisor*...150 Fountains Blvd., Suite A Madison, MS 39110 Telephone 601 605 1776 Fax 601 605 1710
II. THIRD QUARTER BOND MARKET RECAP Uncertainty as to when the Fed will begin to raise rates kept bond investors on their toes throughout the quarter, with many market participants supporting the theory that rates will rise sooner than expected due to improving economic data. In July and the first half of August, yields on U.S. Treasuries steadily declined as signs of tepid U.S. economic growth and the biggest yield premiums over European debt in more than a decade bolstered demand for U.S. debt. Treasury yields continued their downward trend through August as demand for safety increased on growing concerns that tensions were escalating between Russia and western nations over Ukraine. U.S. 10 year Treasury Yield 6/30/2014 9/30/2014 industrialized world. American factories have just capped their strongest quarter in three years, as manufacturing aided the U.S. economy in withstanding slowing global economies. Source of graph: www.tradingeconomics.com Resilient motor vehicle sales, spurred by more employment opportunities and a pickup in corporate equipment purchases are at the crux of the strongest rate of production in four years. While Europe is stagnating and China is cooling, domestic demand is likely to allow U.S. manufacturing to sustain its expansion. Source of graph: Bloomberg September proved to be a different story for government debt, as Treasury yields rose sharply amid speculation the Fed will delete reference to rates staying low for a considerable time, and cementing the increase in interest rates expected next year. Investors continue to be concerned over inflation risk and the impact of the appreciation of the U.S. dollar, while the Fed signaled in late September it will raise short term interest rates next year even though inflation remains below the central bank s target. III. 2.34% ECONOMIC SNAPSHOT 2.52% As we enter the final quarter of 2014, the U.S. economy, while weak by historical U.S. standards, maintains a relatively strong position among its weaker peers in the September s employment report released a plethora of positive trends, including an unemployment rate under 6% for the first time since September of 2008. The employment report also revealed a stronger gap between full time over part time work. According to Capital Economics, the 671,000 rise in September meant that in the past two months full time employment has increased by 798,000. In contrast, part time employment fell by 384,000 in September, indicating some part time workers have found full time work. Carrying this momentum throughout the remainder of 2014, we look for the U.S economy to advance at a steady pace, with most major components of GDP making a positive contribution. The source for the information for this commentary is Bloomberg News unless otherwise noted. 2 P age
IV. INSIDE OUT Insider Buying Dries Up Defying $275 Billion of Buybacks By Lu Wang American companies have seldom spent more money than they are now buying back shares. The same can t be said for their executives. With sales growth running at an average 2.6 percent a quarter in the past two years and cash balances exceeding $1 trillion, chief executive officers are turning to stock buybacks to bolster per share profit. More than one fifth of S&P 500 companies cut their share count by at least 4 percent in the first half. Executives Preference A total of 7,181 insiders bought their own stock this year through Sept. 12 and 23,323 sold shares, according to data compiled by Bloomberg and Washington Service. The ratio of buys to sells is near the lowest since 2000. At the same time, corporate repurchases reached $275 billion in the first half of the year, the second busiest since S&P and Dow Jones Indices began tracking the data in 1998. Share purchases by executives are becoming rarer after seven straight quarters of advances pushed valuations in the Standard & Poor s 500 Index to a four year high. While companies are pouring money into their own stock because they have nothing better to do with it, officers and directors aren t and that s a bearish signal for share prices. Buying Stock Insiders buying stock have dropped 8 percent from a year ago, poised for the fewest in more than a decade. Monsanto Co. and Cisco Systems Inc. are among companies whose executives have done less buying even as corporate repurchases increased. Gains in the S&P have pushed the benchmark index for U.S. equities to about 18.2 times annual earnings, the highest since March 2010. The gauge has closed at records more than 30 times in 2014 and posted annual returns of 24.4 percent since March 2009, compared with 26.3 percent in the last five years of the 1990s Internet bubble. Trailing Growth Economic growth has yet to catch up with the pace of the dot com bull market. Gross domestic product has expanded on average 2.1 percent a quarter since 2009. During the last 21 quarters of the 1990s rally, GDP growth averaged 4 percent. While we think an appropriate way to deploy excessive cash is through increasing dividends, many executives prefer cash buybacks because of the improvement to earnings per share that could be created, Kristina Hooper, a U.S. investment strategist at Allianz Global Investors in New York, said in a phone interview on Sept. 18. The firm oversees $511 billion. The lost interest among executives is likely concern about valuations, or at least a lack of seeing screaming buys as they have been, she said. Hugh Grant, Monsanto s chairman and CEO, sold 44,179 shares in the world s largest seed producer in January. That s his biggest disposal in the open market since 2004, excluding options related and automatic sales. In June, Monsanto announced a $10 billion stock buyback plan. Even after the selling, Grant still owns more than four times his stock ownership requirement. Stock Disposal Cisco in November announced $15 billion in buybacks and said last month that it plans to return a minimum 50 percent of its free cash flow to shareholders. At the same time, Chief Financial Officer Frank Calderoni got rid of 120,000 shares on Sept. 17, his first disposal since 2008 excluding options related and automatic sales. Stock Diversification Past insider transactions have proved prescient. Company officials turned pessimistic on their own stock in October 2010, with about seven insiders selling for every two that bought shares. The ratio exceeded three to one for five straight months, the longest stretch in a decade. The S&P 500 peaked in April 2011 and slumped 19 percent through October, the closest the market has come to ending the bull market. 3 P age
V. CHART BOOK Note: Bar chart data in brown are estimates from a Bloomberg composite of market participants 4 P age
Note: Bar chart data in brown are estimates from a Bloomberg composite of market participants 5 P age
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