Reflections on the World of Investments, Finance, and Wealth Management.

Henry Fund Economic Outlook – March 2015

The following release was prepared by Alec Davis and Bernardo Daza on behalf of the 2015 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.

Henry Fund Research

The Henry Fund Research Team’s March outlook for the US economy remains positive, with a projected 6 month growth of 3.1% compared to a 2.2% growth for Q4 2014. We expect GDP expansion to remain stable over the 2 year forecast period at an average of 3.0% by Q2 2016. Recent growth has been slowed by a sluggish global economy and currency devaluations in Europe and Asia which has put strains on US multinational corporations.

The CPI inflation currently stands at -0.1% over the trailing 12-month period as the recent plunge in the price of oil works its way through the economy. We expect this number to move positive to 1.1% for the 6 month outlook and 1.8% for the 2 year windows, still below the Fed’s target rate of 2.0%.

Our outlook for US unemployment is stable, as we expect the current 5.5% rate to remain over the next 6 months while continuing to move downward to 5.35% over the 2 year forecast period. Despite loses in the energy sector, we expect the strong US economy and GDP growth to make up for this in the other sectors such as technology and consumer discretionary.

The recent strong gains in unemployment have accelerated sentiments that the Fed will begin its shift in monetary policy towards raising rates in the latter half of 2015. We project the yield on the 1-yr T-Bill will move to 0.32% by Q3 2015 and the 10-yr yield at 2.42%. Any increase in the Fed Funds rate will be gradual, signaling a move towards a higher rate environment but with consideration that US inflation remains low. Our outlook for 2017 interest rates are 0.90% and 3.36% yields for the 1-yr and 10-yr notes respectively.

The price of oil remains suppressed following its fall in Q4 2014, and continues to have a major impact on the global economy. Our 6 month outlook at $51/barrel is in line with current trading levels as OPEC and other major oil producing nations have yet to signal any significant cutback in production. At these prices we believe ultimately production will be unsustainable for higher cost producers such as the American shale oil industry and that prices will eventually rebound slightly to $71/barrel by 2017. Global energy stability could be threatened by the fact that several major oil producing nations such as Russia and Venezuela have federal budgets based on oil priced at $100/barrel, and continued trading below these levels would continue to destabilize their economies.

In the US falling oil prices have helped pushed consumer confidence up as consumers are able to put savings on energy and gas towards other household purchases. Lower energy prices should continue to provide tailwinds for the US economy as these pricing effects work their way through the various sectors. Due to low oil prices, low unemployment, and forecasted strong GDP growth, our outlook for consumer confidence is positive for both the 6 month and 2 year time frame.

US consumers will also benefit from the strongest US dollar in over 5 years as major economies such as the EU and Japan have implemented economic stimulus measures that have devalued their currencies. Our outlook for the 6 month Euro exchange rate at $1.07 is close to current trading levels, and we expect this to rebound slightly to $1.14 by 2017. We expect the dollar to the yen exchange rate to behave similarly.

The US equities market continues its strong bull run, and we expect this trend to continue although at a reduced rate for 2015. Despite high valuations, the strength of the US economy and dollar relative to the rest of the world has continued to drive capital to US markets, which combined with low interest rate environments means record valuations should continue. We expect a 2.8% growth for the S&P 500 over the next 6 months and a 6.7% growth rate for the 2 year outlook.

CFA Exam: Ethics Study Sessions

Cathy Zaharis, CFA, Director of the Finance Career Academy in the full-time MBA program, will host weekly study sessions for the CFA exam ethics module. All students are welcome to attend any or all of the sessions. Feel free to bring your lunch.

  • Location: 435 Pomerantz Center
  • Time: 12:30-1:20 p.m.
  • Dates:
    • Tuesday, March 24
    • Tuesday, March 31
    • Wednesday, April 8
    • Wednesday, April 15
    • Tuesday, April 28
    • Tuesday, May 5

Celebration of Women’s History Month

Tippie is celebrating Women’s History Month throughout March, highlighting alumni, faculty, students and leaders of the TCOB. The profile for one of the highlighted alumni, Shalini Campbell (BBA ’04) caught my eye, as she shared one of her favorite memories of Tippie.

Quote from Shalini Campbell

Current members of the Applied Equity Valuation (Krause Fund) course can take some comfort in knowing that they are not alone and that the more things change the more they stay the same. :)

Henry Fund Economic Outlook – February 2015

The following release was prepared by Kapil Dhingra and Michael Kelleher on behalf of the 2015 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.

Henry Fund Research

The Henry Fund research team expects the U.S. economy to stabilize following the 5% growth in 3Q2014 and project a six-month growth rate of 3.4%. Over the next two years, we anticipate the U.S. economy will benefit from lower oil prices and a strong dollar. While we forecast prolonged growth and an overall increase in corporate earnings, gains will be muted by a lagging global economy. We project real GDP growth of 3.2% by 2017.

The CPI inflation in December decreased 0.4% from November driven mainly by a swift decrease in oil prices and flat wage inflation. We expect inflation to stagnant with a positive bias over the next two quarters, but return to a targeted 2.0% over a two-year period.

With an overall stable economy and favorable economic outlook, we see improvements in the unemployment rate to continue, reaching 5.4% over the next six months before stabilizing at 5.3% over the next two years. Job losses and layoffs related to the energy sector should be offset by expanding opportunities and growth in the information technology, consumer discretionary, materials, and telecommunications sectors.

In line with the Federal Reserve’s announcement of maintaining accommodative monetary policy and the recent drop in their inflation target, we expect a delay in any potential increase in the Fed funds rate until at least the second half of 2015. We believe the Fed Funds rate will approach 0.75 by the end of 2016. Global market forces, low inflation, and continued flight-to-quality will hold interest rates down. The 1-year Treasury-Bill yield is expected to stay unchanged in the near term but increase up to 0.80% over the next two years. The 10-year Treasury yield will reach 2.6% by 2017.

Falling oil prices have dominated the headlines over the last year, with oil recently trading in the mid to upper $40s per barrel. Oil has fallen by over 50% in the last six months.  OPEC members have not reduced production as US shale output increased. Predicting future oil prices has proven extremely difficult; however, we believe oil prices have neared bottom.  We estimate prices to remain near current levels for the next six months, then rebound to the around $75 per barrel by 2017. Demand in mature markets will remain constant with increased demand in emerging markets. We believe current low revenue per barrel is unsustainable and anticipate small operators with high extraction costs may either cease production or be forced out of business. The decline in energy prices has led to annual savings of nearly $1,000 per U.S. household. While these gains should eventually spur consumers to boost spending, recent data suggests that so far households are using the energy windfall to pay down debt and strengthen personal balance sheets rather than increasing discretionary expenditures.

As the dollar also strengthens, we see consumer confidence remaining strong over the next six months and remaining positive into the near-term future as well.  Further, as the US economy continues to outperform global benchmarks, we see a continued strong dollar against the Euro.  We do expect the global economy to mirror US growth within the next two years giving the Euro a bit of a rebound against the US dollar at $1.19 by 2017.

Following three years of strong equity market gains, the S&P 500 index is trading near record highs. Given positive trends described in this report we foresee continued growth to equities, but at a more conservative pace. We are taking a conservative approach and predict low-single digit growth in the market over each of the next two years, while corporate earnings catch up with valuation levels.

Finance MBA Program Ranked #2 in World

The Financial Times has ranked the Tippie MBA Program #2 in the world for finance in its 2015 Global MBA Rankings. One of the interesting aspects to this ranking is that a portion of the formula is based on surveys of graduates from 2011. This cohort of students was the first to graduate from Tippie following the overhaul of our MBA curriculum and the creation of the Finance Career Academy.

Financial Times 2015 Global MBA Ranking for Finance

Financial Times 2015 Global MBA Ranking for Finance

A Scary Image for Hawkeye Basketball Fans

As the #25 Iowa men’s basketball team heads into their tough road test this evening at #6 Wisconsin, I am reminded of a photo (see below) that was sent to me last season as part of a University of Iowa season ticket promotional package. I assume that members of the athletic department must have been aware of my mad skills as the starting point guard for North Central High School back in the late 1980s. Our team was legendary. In fact, during my junior and senior years, we posted back-to-back 2-17 seasons with a team shooting percentage that often topped 30% on a good night as we battled for the cellar of the Corn Bowl Conference. My career high school basketball record (freshman, JV, and varsity) was a combined 8-56. Needless to say, my basketball career provided a lot of character building opportunities. Hawkeye fans should rejoice that they will not be seeing the following jersey on the court anytime soon.

Basketball Jersey

Leaving London

Our London study abroad program wrapped up the final class session this morning. We have enjoyed the last couple of weeks, and our students have been great to work with. It is always a little sad to leave London, but I have been fortunate to teach in the study abroad program four times. London is such an amazing city. I am looking forward to returning home to Iowa City after nearly 3 weeks in the U.K., but I am less excited about the cold winter weather that we have managed to avoid. Today in London, the temperature reached 55 degrees.

The Accent Study Centre: Our Academic Home in London

The Accent Study Centre: Our Academic Home in London

Cottage Craven, Home of Fulham FC

This afternoon both London classes visited Cottage Craven and met with team representatives of the Fulham Football Club. Located along the banks of the River Thames in SW London, Cottage Craven stadium has been the home of Fulham FC (go Whites!) since 1896. We began with a tour of the 25,700-seat stadium, including the locker rooms and players lounge area. After the tour, we met with Stephen Pyke, Commercial and Fundraising Executive for the Fulham F.C. Foundation. Stephen gave an excellent presentation, explaining the business and challenges of managing a professional football club. He also engaged the students in brainstorming ideas for how a smaller club can boost revenues in a league where a few heavyweights dominate the landscape. In 2014, Fulham was relegated to the Sky Bet Championship League after 13 years in the English Premier League. It was fascinating to learn about just how different the revenues and TV contracts are between teams in the top tier and second tier of the English football system. Fulham has a long history of welcoming American players to the club, which is owned by Shahid Kahn, who also owns the NFL’s Jacksonville Jaguars. It was a great visit with wonderful hosts, and I think we converted a number of students into Fulham fans.

Tippie London Students on the Home Bench at Fulham FC (Jan. 8, 2014).

Tippie London Students on the Home Bench at Fulham FC (Jan. 8, 2014).

Company Visit Day

On Tuesday, London students in the Wealth Management course visited three different companies in the City. We began our morning with a visit to the European headquarters for Principal Global Investors. Our hosts scheduled a series of speakers, including an equity portfolio manager, a trader, a research analyst, and a member of the legal team. It was interesting to visit the London offices for a parent company based in Des Moines.

Our second company visit of the morning was at Source, an exchange traded fund (ETF) company with approximately $17 billion of assets under management. The visit was hosted by President, Chief Strategy Officer, and University of Iowa alum, Peter Thompson (MBA ’90). We were also able to speak with Executive Director, Sjef Pieters, and Source CEO, Ted Hood. They explained the strategic approach that Source takes to compete in the European ETF market as well as how the market has changed since the company launched in April 2009.

Tippie Wealth Management Students Visit Source (Jan. 6, 2014)

Tippie Wealth Management Students Visit Source (Jan. 6, 2014)

After lunch in the City of London, our final visit of the day was to Lloyd’s of London, one of the world’s largest and most reputable specialist insurance markets. Our group split into two groups and enjoyed a very interest tour from two excellent guides, both retired executives who once worked in the Lloyd’s building. They explained the origins and history of the 325 year-old insurance market that has evolved into present day Lloyd’s. It is impressive to see how the organization has maintained and upheld many of the traditions of its historical roots. While three company visits in one day were tiring, the students remarked that it was very interesting and educational.

Tippie Wealth Management Students at Lloyd's of London with Tour Guide, Peter (Jan. 6, 2014)

Tippie Wealth Management Students at Lloyd’s of London with Tour Guide, Peter (Jan. 6, 2014)

A Busy Start to 2015

Students in our London program have been very busy the first few days of 2015. After a day off for New Year’s, we met for class last Friday morning (Jan. 2nd). We gathered that evening at a nearby sports bar to watch the Hawkeyes take on Tennessee in the Taxslayer.com Bowl. The game kicked off at 8:20 p.m. London time. Even though Iowa did not play as well as we had hoped, it was still a lot of fun to gather to cheer on the team from across the pond.

On Saturday, Jan. 3rd, both classes took a day trip via coach to visit Stonehenge and Windsor Castle. It was a wet, rainy day, so perhaps not the best to be outside looking at 5000 year old stone monuments, but it was still interesting to visit. This was in fact my 3rd visit to Stonehenge, having previously led students to the site in 2012 and 2009 while teaching in the London program. I joked with the students that I can now cross off “Visit Stonehenge 3 Times” from my bucket list.

What's the Meaning of Stonehenge?

What’s the Meaning of Stonehenge?

After Stonehenge, our coaches headed off to Windsor for a tour of Windsor Castle. We had two excellent Blue Badge guides enlightening us along the way. Windsor Castle is the largest and oldest occupied castle in the world, and it is the Queen’s favorite home. Our group was able to tour the lavishly furnished State Apartments and St. George’s Chapel.

Sunday was a day off for the students. A number of the students joined my family in attending a football match. The Queen’s Park Rangers (QPR) of the English Premier League took on Sheffield United from English League One in a 3rd round match of the FA Cup tournament at QPR’s Loftus Road Stadium. The visitors would pull off a huge upset of the host side 0-3 before a crowd of almost 17,000 fans.

You are never too old for a picture with Spark, the QPR mascot.

You are never too old for a picture with Spark, the QPR mascot.

Death Valley

Todd Houge

Todd Houge is the Curt and Carol Lane Faculty Fellow in the Tippie College of Business. He teaches applied equity valuation, applied portfolio management, and wealth management courses to undergraduate and MBA students. Todd also supervises the department’s award-winning Henry Fund and Krause Fund programs, which provide a real-world, money-management opportunity for UI students.

Todd received a Ph.D. in Finance and an MBA from the University of Iowa. He also earned his Bachelor of Arts degree from Wartburg College and holds the Chartered Financial Analyst (CFA) designation from the CFA Institute.