Economic numbers

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Since Zenith examines economic data beyond the headline, we would like to share our thoughts on the recent mix of data specifically to aid portfolio managers and investment committees. By taking a close look at the internal composition of the Leading Economic Indicators, your investment team can apply a more realistic expectation on future economic growth as it relates to your asset allocation decisions.

These numbers are reasonable at best.

1. Unemployment claims near a 4-month high-negative

2. Existing home sales down 2.6% in March-negative

3. Philadelphia Fed Manufacturing-Still growing at 8.5 but down from 12.5 prior and less than estimates. Encouraging that there is positive growth although new orders are down. Mildly positive

4. LEI-Leading economic indicators from the conference board up .3 in March. While encouraging as a leading indicator, the leader in the 10 indicator index was Interest Rate Spread. In fact of the 7 of 10 that were up, three were financial indicators. Credit index, stock prices and the interest rate spread. Since these can be very volatile and manipulated by monetary policy, I would not give this reading AS positive a read as the press release. Mildly positive

Overall, a reasonable day but one with plenty of forward looking question marks. While risk assets should not be abandoned, Zenith recommends a tilt toward the safer end of the risk spectrum.

Tom Koehler, CFA

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Commodities

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Zenith Portfolio Strategies assesses macro economic indicators and how they affect various asset classes. For any portfolio manager or investment committee that is vetting the commodity complex for continued or potential inclusion into your asset mix, it is important to be confident in the return drivers. With inflation at the forefront of investment concerns, it is important to look and examine any commodity exposure and its true responsiveness to inflation.

Commodities as inflation protection. Deutsche Bank DBC and Pimco PCRIX have returned approximately neg 9.56% and -13.70% over the last year while CPI measured inflation has been ticking positive for the year. I know these are touted as inflation hedges but that return is no hedge at all. Take a look under the hood and determine if they truly are giving you the inflation protection they claim.

Zenith does not see a tight correlation between CPI and steady performance from either of these products. We would look elsewhere and as we find a reasonable substitute, we will post.

Tom Koehler, CFA

Financial terminology

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Contango and Backwardation are very important to understand for any portfolio manager or investment team that is invested in the commodity complex or is contemplating a placement. The implications of the construction methodology are huge as your firm will not likely be buying currently produced commodities but rather the price of a contract of oil and corn in the future.

Contango and Backwardation describe the cuurent state of a futures curve typically found in broad based commodity indexes. Most will not have spot(todays price) represented but rather will hold various futures contracts.

Contango-The futures contract price is more expensive than the current price.
Backwardation-The futures contract price is less expensive than the current price.

This is important as studies have demonstrated that over time buying indexes in contango leads to subpar performance. Since most ETFs and funds that hold long only commodity indexes are subject to varying degrees to this risk,  Zenith recommends a thorough examination of your current or prospective holdings in this area.

Unless the index product has enough flexibility to mostly mitigate the adverse effects of contango, we would not allocate risk capital there.
Tom Koehler, CFA