Page 1

August, 2016

R

REITS: AN UPDATE ON THEIR CURRENT STATUS – MOSTLY POSITIVE

By Scott Opsal, Director of Research, The Leuthold Group, LLC REIT Power: eal Estate Investment Trusts (REITs) are in the midst of a spectacular multi-year run and are widely favored by investors looking for yield in the equity markets. Real Estate Secures Its Own GICS Sector: Historically, included in the Financial sector, REITs have often been bypassed or been overlooked by portfolio managers who are filling target allocations with the customary sector constituents such as banks, brokerage firms and insurance companies. Now, Real Estate is about to become the newest Global Industry Classification Standard (GICS)

IF TIPS YIELDS GO NEGATIVE, GOLD RALLY LIKELY CONTINUES

By Eric Bush, CFA in Markets, GaveKal Capital, LLC 10-year Treasury Inflation Protected Securities (TIPS) yield briefly went negative the week of July 3, 2016 and the current yield is just 3 basis points (bps). TIPS yields have fallen around 75 basis points since the beginning of the year. This decline in yield has been accompanied by a rally in gold from $1,060.00 to $1,342.00. One of the more persistent relationships in the market place since 2003 has been this negative correlation between TIPS yields and gold prices. If history is any guide, TIPS yields will probably be negative if gold rallies above $1,400.00. See “Government Bonds 10-Year TIPS Yield & Gold Since 2003” chart and “Government Bonds 10-Year TIPS Yield & Gold” chart on page 4.

IN AN INVESTMENT PICKLE?

REITs, continued on page 8

INVESTORS CHASING DIVIDEND STOCKS TO GET YIELD

By Blaine Rollins, CFA, 361 Capital, LLC The hunt for yield and safety stocks continues to captivate investors. Of the nearly 2,700 U.S. equity mutual funds and Exchange-Traded Funds (ETFs), investors have poured money into less than 20.0%—those with the highest yields. The rest have seen outflows.

Source: This article was excerpted from “If TIPS Yields Go Negative, Gold Rally Likely Continues”, by Eric Bush, CFA in Markets, GaveKal Capital, LLC, (GaveKal Capital Blog, July 14, 2016), http:// blog.gavekalcapital.com COPYRIGHT 2016 GAVEKAL CAPITAL, LLC REPRINTED WITH PERMISSION OF GAVEKAL CAPITAL, LLC

TIPs, continued on page 4

SECOND QUARTER EARNINGS: MORE OF THE SAME

By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.

However, the highest-dividend-paying stocks are trading at valuations that are about 85.0% higher than their historical average. Investors seem willing to pay a hefty premium for companies offering high current yields, over firms that can grow dividends over time.

Earnings and revenue growth has been non-existent in recent quarters and the second quarter of 2016 is no different on that count. Growth is on track to be in negative territory for the 5th calendar quarter in a row.

High-dividend payers are popular because they are generally seen as stocks that act like bonds. Yet with so many investors and investment flows heading in the same direction, the perception of safety may be an illusion.

The Energy sector has been, and continues to be, a big drag on the overall growth picture. However, energy alone can’t be blamed for all the growth challenges. Momentum from the other major sectors is lacking as well.

Source: This article was excerpted from “They Walk The Line…”, by Blaine Rollins, CFA, 361 Capital, LLC, (Weekly Research Brief, August 8, 2016), www.361capital.com COPYRIGHT 2016 361 CAPITAL, LLC REPRINTED WITH PERMISSION OF 361 CAPITAL, LLC PULSE

Second Quarter, continued on page 17

THE GLOBAL INVESTMENT PULSE, August 2016

1


ABOUT LEGEND FINANCIAL ADVISORS, INC.® Legend Financial Advisors, Inc.® (Legend) is a Non-Commission, Fee-Only Fiduciary Securities and Exchange registered investment advisory firm with its headquarters located in Pittsburgh, Pennsylvania. Legend provides a multitude of services, including Wealth Advisory Services, which incorporate Financial Planning and Investment Management strategies to affluent and wealthy individuals as well as business entities, medical practices and non-profit organizations. Legend analyzes each client’s financial strengths and weaknesses, then recommend creative solutions for improvement. Additionally, Legend works closely with our client’s other professional advisors to achieve optimal results.

Editor Louis P. Stanasolovich, CFP® CCO, CEO and President Legend Financial Advisors, Inc.® 5700 Corporate Drive, Suite 350 Pittsburgh, PA 15237-2829 legend@legend-financial.com Newsletter Production Manager Lori L. Albert legend@legend-financial.com

WHY LEGEND IS DIFFERENT? 1. Legend is compensated exclusively by client fees, known as a Non-Commission, FeeOnly, Fiduciary advisory firm. Unlike Legend, fee-based advisors and brokerage firms have numerous conflicts of interest due to the fact that they receive commissions. 2. Members of Legend’s Financial Advisory Team have been selected by National Publications such as Worth, Medical Economics and Barron’s more than 60 times as “The Best Financial Advisors In America”. 3. Unlike most advisory firms and all brokerage houses, Legend and its advisors have chosen to be governed by the Fiduciary Standard of Law. Fiduciaries are required to work in their clients’ best interests. 4. Legend designs dynamic, creative and personalized financial planning and investment solutions for its clients. 5. Legend emphasizes low-cost investments where possible that are allocated and traded in a tax-efficient manner.

Legend Financial Advisors, Inc.® 5700 Corporate Drive, Suite 350 Pittsburgh, PA 15237-2829 EmergingWealth Investment Management, Inc. 5700 Corporate Drive, Suite 360 Pittsburgh, PA 15237-2829 Postmaster: Send all address changes to: Legend Financial Advisors, Inc.® 5700 Corporate Drive, Suite 350 Pittsburgh, PA 15237-2829 Copyright 2016 by Legend Financial Advisors, Inc.® And EmergingWealth Investment Management, Inc. reproduction, photocopying or incorporation into any information-retrieval system for external or internal use is prohibited unless permission in each case for a specific article. the subscription fee entitles the subscriber to one original copy only. Unauthorized copying is considered theft.

ABOUT EMERGINGWEALTH INVESTMENT MANAGEMENT, INC. EmergingWealth Investment Management, Inc. (EmergingWealth), is the sister firm of Legend Financial Advisors, Inc.® (Legend) and is a Non-Commission, FeeOnly Securities and Exchange Commission (SEC) registered investment advisory firm. EmergingWealth provides Investment Management services to individuals as well as business entities, medical practices and nonprofit organizations whose wealth is emerging. All investment portfolios are sub-advised by Legend. Both Legend and EmergingWealth share a common advisory team, Investment Committee and Fee Schedule.

LOUIS P. STANASOLOVICH, CFP®, EDITOR Louis P. Stanasolovich, CFP® is founder, CCO, CEO and President of Legend Financial Advisors, Inc.® (Legend) and EmergingWealth Investment Management, Inc. Lou is one of only four advisors nationwide to be selected 12 consecutive times by Worth magazine as one of “The Top 100 Wealth Advisors” in the country. Lou has also been selected 12 times by Medical Economics magazine as one of “The 150 Best Financial Advisors for Doctors in America”, twice as one of “The 100 Great Financial Planners in America” by Mutual Funds magazine, five times by Dental Practice Report as one of “The Best Financial Advisors for Dentists In America” and once by Barron’s as one of “The Top 100 Independent Financial Advisors”. Lou was selected by Financial Planning magazine as part of their inaugural Influencer Awards for the Wealth Creator award recognizing the advisor who has made the most significant contributions to best practices for portfolio management. He has been named to Investment Advisor magazine’s “IA 25” list three times, ranking the 25 most influential people in and around the financial advisory profession as well as being named by Financial Planning magazine as one of the country’s “Movers & Shakers” recognizing the top individuals who have done the most to advance the financial advisory profession. 2

THE GLOBAL INVESTMENT PULSE, August 2016


THE RISKS AND REWARDS OF HIGH YIELD (JUNK) BONDS

By James J. Holtzman, CFP®, CPA, Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc. the better. Of course recessions will force a number of these companies into bankruptcies.

For those investors willing to accept a degree of risk, returns on high yield bonds, a.k.a. junk bonds, can be very attractive. These debt securities are essentially unsecured bonds that carry more risks than investment grade AAA, AA, A or even BBB bonds. These bonds are rated no higher than the BB by Standard and Poor’s or Baa by Moody’s. Unrated bonds may also be included. In the past, junk bonds were issued primarily by financially troubled corporations that were having difficulty raising capital elsewhere. Today, however, smart start-up companies, many in the high tech industry and many energy - related companies make up the greatest number of new bond issuers. These firms often have extended lines of credit with financial institutions. Some prefer not to dilute ownership of earnings by issuing new stock. In the case of energy, how sound these companies are depends upon how high the price of energy is; the higher

Historical figures show that junk bonds are approximately 20 times more likely to default than high-grade bonds. In return for the higher risk, junk bonds usually pay 4.0% to 6.0% more per year than the investment grade bonds. Still, the annual rate of default is usually less than 2.0% of the outstanding value of the aggregate junk bonds market valuation and, because defaulted bonds normally retain a portion of their value, the annual net loss in the junk bond market amounts to as little as 1.0% of the total outstanding value of junk bonds. Whether to include junk bonds in an investment portfolio depends largely on the investor’s tolerance for risk. These bonds have demonstrated a relatively good track record over the past 25 years, but the risk is real. Past performance cannot be viewed as an accurate predictor of future performance. Should

the investment industry experience a severe downturn, for example, defaults and substantial losses could be expected in the junk bond market. Due to high-risk factors, investors should avoid allocating substantial portions of their portfolio to junk bonds, whether purchased directly or indirectly. Many advisors also warn against longterm investments in junk bonds since the longer the term of the bond, the higher the degree of volatility. The value of a 20-year bond, for example, may fluctuate four times as much as a four-year issue. Higher interest rate payments from junk bonds may somewhat mitigate losses. Further, in an extended economic recession such as the last recession in 2007 to 2009, defaults could drive longterm junk bonds’ values down sharply. COPYRIGHT 2016 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.® PULSE

JAPANESE NEGATIVE INTEREST RATES HAVE NEGATIVE IMPACTS

By Diane M. Pearson, CFP®, PPCTM, CDFATM, Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.

Bloomberg recently reported that instead of encouraging spending, the Japanese people are stashing their cash in safes, with sales of house safes increasing 250.0% over the last year. What’s even more troublesome, is many elderly Japanese people are purposely committing crimes to end up in prison—a place with free food and health care, since negative interest rates are eating up their savings. Source: Parts of this article was excerpted from “Is This The Airlines Liftoff Investors Have Been Waiting For?”, by Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors, (Advisor Alert, July 15, 2016), www. usfunds.com COPYRIGHT 2016 U.S. GLOBAL INVESTORS REPRINTED WITH PERMISSION OF U.S. GLOBAL INVESTORS

THE GLOBAL INVESTMENT PULSE, August 2016

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TIPs, continued from page 1

GOVERNMENT BONDS

10-YEAR TIPS YIELD & GOLD SINCE 2003

Correlation: -0.87

2,000 1,800 1,600 1,400

Gold

1,200 1,000

7/13/2016

800 600

400 200

-1.0

-0.5

0

1.0

0.5

1.5

2.0

2.5

3.0

10-Year TIPS Yield

As of: July 14, 2016 COPYRIGHT 2016 GAVEKAL CAPITAL

Source: GaveKal Capital, GaveKal Capital Blog, July 14, 2016, http://blog.gavekalcapital.com REPRINTED WITH PERMISSION FROM GAVEKAL CAPITAL

GOVERNMENT BONDS

10-YEAR TIPS YIELD & GOLD

Correlation: -0.89

-1.0

1,900 1,800 1,700

-0.5

1,600 1,500

0.0 0.03 1342.75

0.5

1,400 1,300 1,200

1.0

1.5

1,100

10/12

1/13

4/13

7/13

10/13 1/14

4/14

7/14

10/14 1/15

4/15

7/15

10/15 1/16

4/16

7/16

1,000

Gold, London PM Fixing ($/ozt) – Close (Right) U.S. Treasury Constant Maturity – 10 Year – Yield (Left)

As of: July 14, 2016 COPYRIGHT 2016 GAVEKAL CAPITAL

Source: GaveKal Capital, GaveKal Capital Blog, July 14, 2016, http://blog.gavekalcapital.com REPRINTED WITH PERMISSION FROM GAVEKAL CAPITAL

PULSE 4

THE GLOBAL INVESTMENT PULSE, August 2016


Gold, continued from page 17

GOLD CORRECTS ON RISE OF 10-YEAR TREASURY YIELD MAY 1, 2016 TO JULY 26, 2016

As of: July 26, 2016

Source: Bloomberg Investment Services COPYRIGHT 2016 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

GOLD’S AVERAGE MONTHLY GAINS AND LOSSES, 1975 TO 2013

As of: July 26, 2016

Source: Bloomberg Investment Services COPYRIGHT 2016 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

PULSE THE GLOBAL INVESTMENT PULSE, August 2016

5


LOW VOLATILITY DIVERGENCE, WILL THE THIRD TIME BE A PROBLEM? By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC

Last month we discussed the re-emergence of a market leadership pattern that preceded the steep market declines of August 2015 and early 2016. That divergence between the S&P 500 Low Volatility and High Beta Indexes has become more fully fleshed out over the past few months, with panic buying evident among Low Volatility stocks. The three-month performance spread is now even more extreme than it had been on the eve of both the August and December stock market air pockets (“S&P 500 Low Volatility Index”). This is worrisome, but it should be emphasized that similar divergences did not develop during the multiple bear market rallies within both the 2000-2002 and 2007-2009 cyclical bear markets. In other words, fear that this divergent pattern could prove to be a rally killer is based on a small and very recent sample set. See “S&P 500 Low Volatility Index” to the right. On a sectoral basis, the High Beta Index has been burdened by its substantial exposure to the Energy and Financial sectors. The Low Volatility Index, on the other hand, could not have been positioned any better, with heavy bets on Staples, Telecom Services, Utilities and anything else exhibiting stability and yield. But these qualities come at a price. The Low Volatility decile within the Leuthold 3000 Universe now commands a median trailing Price-To-Earnings (P/E) of 24.5x—five points higher than the peak reached during the 2002-2007 bull market. Low Volatility strategies were early leaders of the stampede toward passive indexing, but their current popularity suggests they are set up to disappoint. See “Leuthold 3000 Low Volatility Index” on the top of page 7. While Low Volatility stocks have reached record valuations on an absolute basis, they haven’t quite eclipsed their old relative high in relation to the High Beta universe. Today’s Low Volatility/ High Beta Relative P/E Ratio stands at 1.70x, still 15.0-20.0% below the relative highs reached during the worst months of the financial crisis. Note that the previous major spikes (and even the minor spikes) in this ratio occurred near the lows of either severe corrections (2011 and 2012) or full-blown bear markets (1990, 1998, 2002, 200809). In other words, Low Volatility tends to enjoy a premium when investors are scared. But today’s premium occurs with the Dow Jones Industrial Average (DJIA) and S&P 500 a chip shot from new highs and with the domestic economy near full employment. See “Leuthold 3000 Low VolatilityHigh Beta Relative PE Ratio” on the bottom of page 7. Some clients contend the obsession with Low Volatility equities is a sign of underlying investor pessimism, a (contrarily) good thing. We’re not so certain. If the Low Volatility investors are bearish, then they are—at a minimum—fully invested bears. And remember, that particular breed of bear

S&P 500 Low Volatility Index (right scale)

S&P 500 High Beta Index (left scale)

As of: July 8, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, July 8, 2016, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

was plentiful at the market top of March 2000, but their underlying “pessimism” did little to cushion against the ensuing 50.0% market drop. We think the push into Low Volatility stocks more probably reflects pure performance-chasing rather than investor pessimism. Pessimistic investors demand high future returns, not the record low ones implied by today’s Low Volatility valuation metrics.

from “Stock Market Observations: Bull Market Top Timeline Little Changed”, by Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC, (Perception Express, July 8, 2016), http://leuth. us/stock-market COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

Source: This article was excerpted Low Volatility, continued on page 7

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Low Volatility, continued from page 6

Leuthold 3000 Low Volatility Index – Median Price-To-Earnings On Trailing 12-Month Earnings Per Share

As of: July 8, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

There’s a mania for stability

Source: The Leuthold Group, LLC, Perception Express, July 8, 2016, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Leuthold 3000 Low Volatility / High Beta Relative Price-To-Earnings Ratio

1.70

Median = 0.63

As of: July 8, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, July 8, 2016, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

PULSE THE GLOBAL INVESTMENT PULSE, August 2016

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REITs, continued from page 1

sector. Until now REITs have been classified as an industry group under the Financials sector, but S&P and MSCI determined that the investment characteristics of real estate warranted a distinct identity as the eleventh sector. REIT Investment Characteristics: REITs bring several distinctive attributes to a broad equity portfolio, the first three seen as desirable and the last as a byproduct of the industry’s very nature. Viewpoints on each trait as it stands today, as well as the expectations from the sector going forward, are indicated below. 1. Yield 2. Growth 3. Diversification 4. Cyclicality Yield: REITs have long been favored for their high dividends, particularly in today’s yield-starved environment. Given the intense focus on current income, this article compares REITs to three other equity yield opportunities: the S&P 500 index as a baseline, the S&P Utilities index, and the S&P Dividend Aristocrats Index (consistent dividend-paying stocks). All four sport yields greater than the tenyear Treasury, and many investors have turned to these equity assets as bond

substitutes to find income. In exchange for taking on price volatility, investors receive a higher yield and the chance for income growth over time. The Dividend Yield chart shows dividend yields over the past fifteen years. Utilities and REITs have always offered equity investors a higher current yield and the more recently launched Dividend Aristocrats offers a slight premium. As a generally safer business model, Utilities typically yield less than REITs but this relationship oddly flipped after the 2008/2009 severe recession. It is not generally believed this was caused by a shift in risk sentiment; it is more likely the result of a 40.0% drop in REIT dividends through the end of 2009. Investors hoped dividend cuts were temporary and would be restored after the recession, so they did not fully mark down real estate values to reflect the entire dividend shortfall. REIT yields have recently climbed back above Utilities, although both remain at historically low absolute levels. See “Dividend Yield” chart on the top of page 9. The Yield Spread versus S&P 500 chart captures the yield spread between the three income assets (Utilities, REITs and the Dividend Aristocrats Index) and the S&P 500. Utilities and S&P Dividend Aristocrats Index (SPDA) have tightened over the last several years as investors chase yield, but interestingly, the REIT spread has widened since late 2015. As discussed later, this could be due in part

to cyclical worries which caused investors to shift out of the REIT space. However recently, REIT dividend growth has picked up considerably. Since the end of the last recession, the largest REITs have been growing their dividends at double-digit rates (See REIT Dividend Growth chart below), and this aggressive growth rate in a flat stock market has enabled yields to climb relative to other income equities. See “Yield Spread versus S&P 500” chart on the bottom of page 9. Growth: Not only do income equities have a yield edge over bonds today, they also have the tremendous fundamental advantage of potential growth. While fixed income coupons are by definition “fixed,” dividend-paying equities offer the chance for attractive current income that grows. REITs, Utilities, and S&P Dividend Aristocrats Index (SPDA) all participate in economic growth, which adds significantly to overall return. The REIT Dividend Growth chart captures the median dividend growth rate of the twenty largest REITs coming out of their recessionary doldrums. REITs have eagerly recovered lost ground by growing dividends at nearly 10.0% over the last three years. In addition to dividend growth, the REIT Revenues Versus Nominal Gross Domestic Product (GDP) and Structures chart (in the Cyclicality section) demonstrates REITs’ ability to grow revenues. Except for recessions,

REIT DIVIDEND GROWTH Median of 20 Largest REITS Year-Over-Year 16.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

As of: August 5, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

8

THE GLOBAL INVESTMENT PULSE, August 2016

Source: The Leuthold Group, LLC, Perception Express, August 5, 2016, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

REITs, continued on page 9


REITs, continued from page 8

DIVIDEND YIELD 10

Percent Yield

8

6

4

2

S&P 500 Utilities

As of: August 5, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

Jun-16

Oct-15

Feb-16

Jun-15

Oct-14

Feb-15

Jun-14

Oct-13

Feb-14

Jun-13

Oct-12

Feb-13

Jun-12

Oct-11

Feb-12

Jun-11

Oct-10

S&P 500 REITs

Feb-11

Jun-10

Oct-09

Feb-10

Jun-09

Oct-08

Feb-09

Jun-08

Oct-07

Feb-08

Jun-07

Oct-06

Feb-07

Jun-06

Oct-05

S&P 500

Feb-06

Jun-05

Oct-04

Feb-05

Jun-04

Oct-03

Feb-04

Jun-03

Oct-02

Feb-03

Jun-02

Oct-01

Feb-02

0

S&P 500 Dividend Aristocrats

Source: The Leuthold Group, LLC, Perception Express, August 5, 2016, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

YIELD SPREAD VERSUS S&P 500 7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

S&P 500 Utilities As of: August 5, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

S&P 500 REITs

Jun-16

Feb-16

Oct-15

Jun-15

Feb-15

Oct-14

Jun-14

Feb-14

Oct-13

Jun-13

Feb-13

Oct-12

Jun-12

Feb-12

Oct-11

Jun-11

Feb-11

Oct-10

Jun-10

Feb-10

Oct-09

Jun-09

Feb-09

Oct-08

Jun-08

Feb-08

Oct-07

Jun-07

Feb-07

Oct-06

Jun-06

Feb-06

Oct-05

Jun-05

Feb-05

Oct-04

Jun-04

Feb-04

Oct-03

Jun-03

Feb-03

Oct-02

Jun-02

Oct-01

Feb-02

0.0%

S&P 500 Dividend Aristocrats

Source: The Leuthold Group, LLC, Perception Express, August 5, 2016, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

REITs, continued on page 10

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REITs, continued from page 9

REITs have grown revenues at strong single-digit rates. Defining return as yield plus growth, REITs offer an attractive combination today. Using simple round numbers, a 4.0% yield added to a 6.0%8.0% growth rate would give REITs a long-term fundamental expected return of 10.0%-12.0%; an intriguing potential return in this low-return market.

diversification to broad portfolios and that added intangible should be part of the portfolio manager’s consideration. See “REIT Correlation 12M versus Stocks” chart and “REIT Correlation 12M versus Bonds” chart on the top and bottom of page 11, respectively.

Diversification:

After pointing out the virtues of yield, growth, and diversification, there is a negative: cyclicality. Beyond the general business cycle, REITs are captive to building cycles, occupancy rates, and rent levels. Recent revenue growth has been close to the median of 9.4% but be aware that low and even negative readings are to be expected during an economic slowdown or a collapse in construction investment.

The third desirable aspect of REITs is portfolio diversification. Some see real estate as an alternative asset, others view it as an equity asset; in either case REITs are a distinct option that can provide diversification to a multiasset portfolio. The REIT Correlation 12M versus Stocks charts and the REIT Correlation 12M versus Bonds chart illustrate the rolling 12-month correlation of REITs to stocks (S&P 500) and bonds (Barclays Aggregate). The data shows a REIT/stock average correlation of 0.49 with a curious spike in early 2016. This follows an equally curious drop in correlation during 2015. It will be important to monitor this variable to see if it’s an illusion created by the 12-month rolling window, or whether the relationship between equities and REITs has actually tightened. The REIT/bond average correlation of 0.08 (This may be too low looking forward) but the most important feature of the REIT Correlation 12M (12 months) versus Bonds chart is the tremendous jump in REIT/bond correlation since 2012. REITs, Utilities, and S&P Dividend Aristocrats Index (SPDA) have become bond surrogates and will trade, in part, with movements in interest rates. One of the greatest concerns about owning REITs today is the potential for a meaningful correction should interest rates begin a sustained upturn. Nevertheless, REITs do bring

Cyclicality:

Each of the bond substitutes carries a risk of loss in an equity bear market, but REITs are the most cyclical of the three yield providers. The REIT Revenues versus Nominal Gross Domestic Product (GDP) and Structures chart highlights the dependence of REIT revenue growth on the overall business cycle and even more so on the investment cycle in building structures. See “REIT Revenues versus Nominal Gross Domestic Product (GDP) and Structures” on the top of page 12 REITs can be broken down into eight subgroups: Diversified, Industrial, Hotels & Resorts, Office, Health Care, Residential, Retail, and Specialized. Each group holds a particular type of property (i.e. malls, apartments, office buildings, warehouses) and each will be driven by its own group dynamics. The supply and demand fundamentals in one area may be very different than those in another, and investors should focus closely on whether certain types of property make more sense based on economic conditions and the market environment. The sector will

also contain various management and development companies, but the core of the real estate space is made up of property-owning entities. Closing Thoughts: REIT performance and popularity are at high levels today and investors are voting with their dollars. Vanguard’s ExchangeTraded Fund (ETF) (VNQ) is by far the largest REIT ETF and it has experienced astonishing fund flows since the recession (See VNQ REIT ETF chart). A $2 billion asset base in 2008 has ballooned to $34 billion in 2016. More remarkably, monthly inflows have averaged 7.0% of assets during this time. If money flow is any indication of investor sentiment, this fund tells a powerful story of why REIT visibility is on the rise. See “Vanguard (VNQ) REIT ETF” chart on the bottom of page 12. REIT valuations are high, as are those of most yield plays. The greatest concern about owning REITs is the risk of rising interest rates, which would weigh heavily on real estate, dividend-focused funds and Utilities. A second concern is the potential for a broad economic slowdown, which would impact construction and rental income. For now, the current income is attractive, and technicals and fund flows are strong. Source: This article was excerpted from “REITs: “We Are #11” – A Fresh Look At The Newest GICS Sector”, by Scott Opsal, Director of Research, The Leuthold Group, LLC, (Perception Express, August 5, 2016), http://leuth.us/special-interest COPYRIGHT 2016 The Leuthold Group, LLC REPRINTED WITH PERMISSION OF The Leuthold Group, LLC REITs, continued on page 11

BOND YIELDS

By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc. U.S. bond yields are testing multi-decade lows as a consequence of global deflationary forces and unorthodox monetary policy abroad. This theoretically is a welcome assist to the U.S. housing market, as these factors have pushed down the U.S. 30-year mortgage rate, providing an incentive for consumers to re-enter the housing market. With the ratio of new home sales expectations versus new home inventories rising, homebuilders could outperform. Source: Parts of this article was excerpted from “Is This The Airlines Liftoff Investors Have Been Waiting For?”, by Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors, (Advisor Alert, July 15, 2016), www.usfunds.com COPYRIGHT 2016 U.S. GLOBAL INVESTORS REPRINTED WITH PERMISSION OF U.S. GLOBAL INVESTORS PULSE 10

THE GLOBAL INVESTMENT PULSE, August 2016


REITs, continued from page 10

REIT CORRELATION 12-MONTH VERSUS STOCKS

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0

0.0

-0.2

-0.2

1996

1998

2000

As of: August 5, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

2002

2004

2006

2008

2010

2012

2014

2016

Source: The Leuthold Group, LLC, Perception Express, August 5, 2016, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

REIT CORRELATION 12-MONTH VERSUS BONDS

0.5

0.5

0.0

0.0

-0.5

-0.5

1996

1998

2000

As of: August 5, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

2002

2004

2006

2008

2010

2012

2014

2016

Source: The Leuthold Group, LLC, Perception Express, August 5, 2016, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

REITs, continued on page 12

THE GLOBAL INVESTMENT PULSE, August 2016

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REITs, continued from page 11

REIT REVENUES VERSUS NOMINAL GROSS DOMESTIC PRODUCT (GDP) AND STRUCTURES One Year Growth Rate 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0%

Economic Data from bea.gov

-20.0% -25.0%

2001

2002

2003

2004

2005

REIT Revenue Growth As of: August 5, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

2006

2007

2008

Nominal GDP Growth

2009

2010

2011

Structures Growth

2012

2013

2014

2015

REIT Median 9.4%

Source: The Leuthold Group, LLC, Perception Express, August 5, 2016, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

VANGUARD (VNQ) REIT ETF 30.0%

$35,000

25.0%

$30,000

$25,000 15.0% $20,000 10.0% $15,000 5.0%

Total Assets ($ Million)

Asset Growth Per Month

20.0%

$10,000

0.0% -5.0%

$5,000

-10.0%

$0,000

Fund Flow As % Assets As of: August 5, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

Average 7.0% Per Month

Total Assets

Source: The Leuthold Group, LLC, Perception Express, August 5, 2016, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

PULSE 12

THE GLOBAL INVESTMENT PULSE, August 2016


“Do You Want A Second Opinion?” To see if your investment portfolio is built to navigate the pitfalls and opportunities ahead, call us today for a “Free Second Opinion” at (412) 635-9210.

www.legend-financial.com THE GLOBAL INVESTMENT PULSE, August 2016

13


SECULAR BEAR MARKET WATCH April 1, 2000 to July 31, 2016 (16 years and 4 months) Annual Compound Return

Total Return

Consumer Price Index (Inflation)*

2.11%

40.56%

90-Day Treasury Bills Index-Total Return

1.62%

29.94%

Barclays Aggregate Bond Index-Total Return

5.49%

139.45%

High Yield Corporate Bond Index – Total Return

9.22%

322.78%

S&P Leveraged Loan Index – Total Return

4.86%

117.30%

HFRX Global Hedge Fund Index

2.30%

44.89%

S&P 500 Index (U.S. Stock Market)

4.30%

98.81%

MSCI EAFE Index (Developed Foreign Equities)

2.86%

58.61%

MSCI Emerging Market Index (Equities)

6.24%

168.79%

Newedge CTA Index (Managed Futures)

5.44%

137.64%

Dow Jones–UBS Commodity Index-Total Return (USD)**

-0.95%

-14.46%

Dow Jones U.S. Real Estate Index-Total Return (USD)**

11.59%

499.80%

Gold Bullion

SECULAR BEAR MARKET WATCH (CONTINUED) 10.14%

384.55%

As of: July 31, 2016

Compound and Total Returns include reinvested dividends. MSCI Indexes do not include dividends prior to 2002. Newedge Index is equally-weighted. ** USD = U.S. Dollar Source: Bloomberg Investment Service

April 1, 2000 to July 31, 2016 (16 years and 4 months)

COPYRIGHT 2016 LEGEND FINANCIAL ADVISORS, INC. ® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ®

Note: During Secular Bear markets U.S. Stocks have historically returned a little more than inflation or a little less than inflation—plus or minus 1.50%—and generally last between 15 to 25 years. The last Secular Bear market (1966 to 1982) lasted 17 years and underperformed inflation by approximately one-half of one percent per year. The other Secular Bear markets since 1900 were 1901 to 1920 and 1929 to 1949. In both cases, the U.S. Stock market outperformed inflation by approximately 1.50% per year. All of the aforementioned performance numbers are pre-tax. The performance of the U.S. Stock market so far in the current period (April 1, 2000 to the present) certainly appears to indicate that we are in a Secular Bear market. Long-term returns (over the next 10 years) for the S&P 500 will probably be slightly worse than the last 16 years and 4 months. Current 10 year normalized P/Es (long-term valuations) indicate approximate annual compound returns of slightly less than 3.00% over the next 10 years. Of course during the next 10 years, returns during various periods will be significantly higher and lower than the expected return. For example, the more the stock market rises in the near term, the less returns after that period will be and vice versa. 14

THE GLOBAL INVESTMENT PULSE, August 2016


2016 PERFORMANCE YEAR-TO-DATE January 1, 2016 to July 31, 2016 (7 months) Year-to-Date Total Return Consumer Price Index (Inflation)

1.74%

90-Day Treasury Bills Index-Total Return

0.16%

Bloomberg Intermediate Term Corporate Bond Index

8.71%

Barclays Aggregate Bond Index-Total Return

5.98%

High Yield Corporate Bond Index – Total Return

12.45%

S&P Leveraged Loan Index – Total Return

5.97%

HFRX Global Hedge Fund Index

0.61%

S&P 500 Index (U.S. Stock Market)

7.66%

MSCI EAFE Index (Developed Foreign Equities)

0.83%

MSCI Emerging Market Index (Equities)

11.95%

Newedge CTA Index (Managed Futures)

5.46%

Dow Jones–UBS Commodity Index-Total Return (USD)**

7.28%

Dow Jones U.S. Real Estate Index-Total Return (USD)**

16.52%

Gold Bullion

27.24%

As of: July 31, 2016 Compound and Total Returns include reinvested dividends. Newedge Index is equally-weighted. ** USD = U.S. Dollar Source: Bloomberg Investment Service

COPYRIGHT 2016 LEGEND FINANCIAL ADVISORS, INC. ® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ® THE GLOBAL INVESTMENT PULSE, August 2016

15


FOREIGN INVESTMENT OPTIONS

By James J. Holtzman, CFP®, CPA, Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc. Many investors use foreign equities in their portfolios. There are three major approaches into investing overseas: Foreign exchanges - Foreign stock can be purchased through U.S. brokerage firms. This approach provides investors with greater flexibility and control than other foreign investment methods. However, it requires the largest investment, at least $50,000.00, to create a diversified portfolio. American Depository Receipts (ADRs) - These vehicles were introduced to the financial markets in 1927. More than 1000 foreign issues are traded on U.S. stock exchanges today. Banks issue ADRs for shares or fractional shares in

overseas firms and retain the corporate stock certificates. Smaller investments are required than with foreign exchanges, but prices are more sensitive to changes in currency values. Mutual Funds/Exchange-Traded Funds (ETFs)/Exchange-Traded Notes (ETNs) - Choices include international funds that only hold foreign stocks, global funds containing both U.S. and overseas issues and single country funds that invest all assets into one nation’s stocks. Typically, investors can obtain a diversified, professionally managed portfolio for $250.00 to $2,500.00. ETFs and ETNs, which are typically based upon indexes, have no minimums.

Analyzing a fund’s track record and understanding management’s goals are important aspects to consider when investing both at home and abroad. Generally speaking, it is easier to make foreign investments through mutual funds. There is less paperwork and fewer difficulties with exchange rates than with the other approaches. COPYRIGHT 2016 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

PULSE

BREXIT HAS BEEN SCHEDULED

By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.

The Evening Standard reported that the British exit from the European Union (EU) will occur in December 2018 citing new Brexit Secretary, David Davis. “This means that some of the economic benefits of Brexit will materialize even before the probably formal departure from the EU around December, 2018,” Davis told the Conservative Home Website. Davis said that the United Kingdom could immediately begin making trade deals and that negotiations could take 12 to 24 months. Source: Parts of this article was excerpted from “Is This The Airlines Liftoff Investors Have Been Waiting For?”, by Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors, (Advisor Alert, July 15, 2016), www.usfunds.com COPYRIGHT 2016 U.S. GLOBAL INVESTORS REPRINTED WITH PERMISSION OF U.S. GLOBAL INVESTORS

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THE GLOBAL INVESTMENT PULSE, August 2016


GOLD IN A CORRECTION MODE

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors Right now, the yellow metal is in correction mode on a strengthening U.S. Dollar and rising two-year and 10-year Treasury yields, both of which share an inverse relationship with gold. See “Gold Corrects On Rise of 10-Year Treasury Yield” chart on the top of page 5. It’s also worth mentioning that the summer months have historically been among the weakest. By contrast, some of the highest gold returns of the year have occurred in September, when the Love

Trade heats up in India in anticipation of Diwali and the wedding season. See “Gold’s Average Monthly Gains and Losses, 1975-2013” chart on the bottom of page 5. Since 1970, there have been only four major gold bull markets, and the consensus among analysts right now is that we are in the early stages of a new one, with end-of-year forecasts in the $1,400.00 an ounce range.

Source: This article was excerpted from “Will The Gold Bull Market Resume After The Summer Correction?”, by Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors, (Advisor Alert, July 22, 2016), www.usfunds.com COPYRIGHT 2016 U.S. GLOBAL INVESTORS REPRINTED WITH PERMISSION OF U.S. GLOBAL INVESTORS Gold, continued on page 5

Second Quarter, continued from page 1

Estimates for the current period (2016 Q3) have started declining as well, in-line with the trend over the last few years. Earnings growth for the index is now expected to be in negative territory in the third quarter as well. There is hope for 2016’s fourth quarter though. Obviously, at least for the fourth quarter, there is modest improvement in the overall growth picture. The ‘improvement’ is more in the nature of ‘less negativity’ relative to the last few quarters, both with respect to earnings and revenue declines in the second quarter as well as profit estimate cuts for the third quarter. The bottom line is, so far as of Monday, August 8th, 436 S&P 500 companies, or 87.2% of the index’s membership have

reported earnings for the second quarter. Total earnings for these companies are down -3.9% on -0.8% lower revenues, with 70.9% beating earnings estimates and 52.8% coming out with positive revenue surprises. Source: Some information in this article was excerpted from “Q2 Earnings Scorecard”, by Sheraz Mian, Director of Research for Zacks, (Zacks Confidential Commentary, August 10, 2016), www. zacks.com COPYRIGHT 2016 ZACKS.COM REPRINTED WITH PERMISSION OF ZACKS.COM

PULSE

PENSION CRISIS

By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.

The average Defined Benefit Pension Plan (DBPP) in the public sector (i.e., government) uses a discount rate of 7.7% (The assumed future rate of return). The discount rate is used to calculate the present value of pension liabilities and has historically been benchmarked to high-quality corporate bond yields. A higher discount rate drives a lower present value amount of liabilities and would result in lower pension plan contributions by an employer (Source: Illinois State Board of Investment). COPYRIGHT 2016 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

THE GLOBAL INVESTMENT PULSE, August 2016

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SMALL CAP TO LARGE CAP HISTORICAL PRICE TO EARNINGS (P/E) RATIO Small Caps Discount Versus Large Stocks Decreases To 2.0%

120

120

110

110

100

100

90

90

80

80

70

70

60

60 1983

1986

1989

As of: August 5, 2016

1992

1995

1998

2001

2004

2007

2010

2013

2016

Source: The Leuthold Group, LLC, Perception Express, August 5, 2016, http://leuth.us/market-internals REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

HISTORICAL VALUATIONS, GROWTH VERSUS VALUE U.S. LARGE, MID AND SMALL CAP STOCKS All growth stock and value stock style categories, except small growth and mid-growth, appear expensive when compared to the Historical Averages (1982 to date) and the Percent Above/Below Historical Average Valuation sections in the chart below. Large, Medium, and Small Growth Stock categories again appear cheaper relative to the Value categories than the historical averages as evidenced by the Today’s Growth To Value Ratio versus the Historical Average Growth To Value Ratio. Median Price-ToEarnings (P/E)

Historical Averages 1982 to Date

Growth Stocks

Value Stocks

Growth Stocks

Value Stocks

Large-Cap

22.7x

12.5x

19.8x

Mid-Cap

24.5x

13.4x

Small-Cap

29.6x

14.0x

* Growth To Value

Today’s

Historical Average

2000 Extreme

Growth Stocks

Value Stocks

G/V* Ratio

G/V* Ratio

G/V* Ratio

10.8x

14.0%

16.0%

1.82

1.96

5.80

23.3x

11.9x

5.0%

12.0%

1.83

2.07

9.30

27.3x

12.0x

8.0%

17.0%

2.11

2.43

12.50

In Small Caps, Growth remains relatively cheap versus Value.

As of: August 5, 2016 COPYRIGHT 2016 THE LEUTHOLD GROUP, LLC

18

Percent Above/Below Historical Average Valuation

THE GLOBAL INVESTMENT PULSE, August 2016

Source: The Leuthold Group, LLC, Perception Express, August 5, 2016, http://leuth.us/market-internals REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC


LEGEND FINANCIAL ADVISORS, INC.® & EMERGINGWEALTH INVESTMENT MANAGEMENT, INC.’S INVESTMENT MANAGEMENT SERVICES Legend Financial Advisors, Inc.® (Legend) and EmergingWealth Investment Management, Inc. (EmergingWealth) offer Personalized Investment Management Services to individuals and institutions. Investment portfolios are developed to match the client’s return and risk requirements, which are determined by the clients’ completion of a Risk Comfort Zone Questionnaire, with the guidance of a Legend Wealth Advisor or EmergingWealth Advisor, respectively. Each type of investment portfolio is managed to achieve the short, intermediate and long-term investment objectives of the client, as may be applicable.

INVESTMENT PROCESS Investment Portfolios: Unlike most financial advisory firms that offer one style of investment or portfolio type, we offer a wide array of investment portfolios that usually fit with the large majority of client needs. If necessary, we will create customized solutions as well. For the types of investment portfolios, please see our Investment Portfolios, Potential Return and Risk Spectrum Chart on the next page. For a detailed description of our portfolios, please contact Louis P. Stanasolovich, CFP®, founder, CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at legend@legend-financial.com. Investment Research: Our Investment Committee performs extensive research to identify opportunities, mitigate risks and structure investment portfolios. Emphasis is placed on developing portfolios that maximize the potential return relative to the amount of risk taken. In-depth due diligence including face-to-face interviews in many instances with portfolio managers for open-end mutual funds is performed on each investment we select for a portfolio. Factors (both from a qualitative and quantitative standpoint) that we conduct a thorough analysis of each investment include, but is not limited to, liquidity (including the primary investment and/or the underlying investments, if utilizing pass through vehicles such as openend mutual funds or exchange-traded products), income taxation, all related costs, return potential, drawdown potential (historical declines from peak-to-trough), volatility and management issues (Anything having to do with the management team of a stock, open-end mutual fund or an exchange-traded product.). All portfolios for EmergingWealth are subadvised by Legend. Client Education: Education is very important to us. We are dedicated to educating each client about the different investment portfolio types and how they relate to market volatility, time horizons, and investment returns. It is our goal to ensure that the client understands and agrees with our investment philosophy. Furthermore, we assist each client in selecting a risk tolerance level with which they are comfortable. Ultimately, an investment portfolio is designed to meet the client’s objectives.

PERFORMANCE REPORTING Many investment firms only offer monthly brokerage statements, which provide minimal information; typically only account and investment balances. We, on the other hand, provide detailed quarterly reports that outline performance, income and management fees (among other items) in a simple, easy-to-read report. In addition, each performance report is sent with an extensive index page that illustrates the investment environment during the reporting period.

FEES To find out more about the fees for either Legend or EmergingWealth’s Investment Management services, please contact Louis P. Stanasolovich, CFP®, founder, CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at legend@legend-financial.com. THE GLOBAL INVESTMENT PULSE, August 2016

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THE GLOBAL INVESTMENT PULSE, August 2016 © 2014 Legend Financial Advisors, Inc. ® All Rights Reserved

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