Ascendant Advisors, LLC

Ascendant Advisors, LLC

Ascendant Market Commentary

December, 2011

With so much focus over the past few months on global macro issues I thought it would be a good idea to point out some of the positive stories playing out at the “micro” level. While major macro-economic headwinds are present and likely will remain present, corporate earnings and relative valuations tell another more positive story. While the macro rift may well continue to drag down our markets, the hurdle seems to be set low enough that we may well be able to clear it quite easily.

Flight to Bonds
This year investors have been moving assets from equities to bonds on a large scale. While this may seem rational with the uncertain economic situation we are in, it seems investors are not accounting for any potential rise in interest rates. If they do increase at some point in the future bond market volatility could easily swing asset prices down as much as 40-50%. While the bonds eventually would return to par, the 15-30 years it would take to do so are years that the demographic investing in bonds does not have. This may very well be a time in which investors are fleeing the asset they should be flocking to.

Source: Investment Company Institute, Ascendant Advisors, LLC. As of November 16, 2011


Sector% Beating% Missing
Health Care 81.3% 10.4%
Utilities 77.1% 17.1%
Industrials 74.5% 10.9%
Industrials 74.5% 10.9%
Information Technology 70.4% 13.0%
Consumer Discretionary 66.7% 27.5%
Energy 66.7% 25.0%
Materials 65.5% 27.6%
Consumer Staples 63.0% 22.2%
Financials 62.3% 32.5%
Telecommunications Services 25.0% 50.0%
S&P 500 68.8% 21.4%

Source: Bloomberg, Ascendant Advisors, LLC. As of November 27, 2011 and only covering companies in the S&P 500 with 3rd quarter earnings on September 30, 2011


Despite all the negative investor sentiment and cash flows out of equities, corporations continue to achieve solid earnings results.  The majority of companies in most sectors have been beating consensus analyst estimates with Telecom being the only exception. It should be noted that several drivers of this are massive cutbacks, spending reductions and productivity increases from layoffs. Even still, companies have cleaned house and are making money hand over fist.

Source: Standard & Poor's Financial Services LLC, Ascendant Advisors, LLC


Of course being cheap is not reason enough to buy stocks, but consider the following:

  • Recent weekly unemployment insurance claims below 400,000; layoff announcements down; and job postings up (strong Job Openings and Labor Turnover Survey report).
  • Business and consumer optimism ticking back up after the summer swoon.
  • Inventories have been cut to the bone, taking growth from the third quarter, but are set to be additive in the fourth quarter, as they are now too low relative to sales growth.
  • Leading Economic Indicators (LEI) up sharply in latest report, with positive contributions from nine of the 10 sub-components.
  • Core inflation moving lower, which should boost "real" gross domestic product (GDP); gasoline prices near their lowest levels of the year.
  • Much better housing news: building permits, new home sales and recent National Association of Home Builders housing index all exceeded expectations.
  • Global central bank and Eurozone political leadership capitulations. Although decisive plans to stem the crisis are lacking, the European Central Bank (ECB) and other global central banks have moved into loosening mode, which should help boost growth.
  • Eurozone recession likely underway, but trade with Europe only accounts for 1.3% of US GDP.

As we at Ascendant have discussed and warned about often, the fiscal drama being played out in Washington will have its consequences. And one of the first victims will be bond investors as interest rates are forced higher, much higher, to attract buyers, particularly foreign buyers. When this happens, the return on bonds and bond funds will turn sharply negative.

The sad irony is this: to escape the risk of the stock market, millions have sought safety in bonds which sounds to me a little like jumping from the frying pan into the fire.

As 2011 draws to a close, I encourage you to take the opportunity to learn more about our Value-Momentum investment process and how our disciplined approach can help you navigate these difficult markets. If you are interested in having one of our professional staff contact you to schedule a meeting to review your portfolio please let me know.


Warm Regards,

James H. Lee, MBA
Ascendant Advisors, LLC