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Despite the hoopla surrounding Brexit, the S&P 500 kept calm and carried on returning +2.46% for the 2Q.  Adding to the 1st Q’s +1.35%, the index is now up +3.84% for the 1st half of 2016.

The real story was the rally in interest rate sensitive securities.  Because the markets feared Brexit would induce a trade slowdown, there was a global flight for safety into bonds (particularly US treasuries).  Adding to the momentum, central bankers pledged again to be at the ready with excess liquidity.  All this prompted a powerful rally; the US 10 year Treasury declined in yield from +1.78% on March 31 to +1.49% on June 30th.  The electric utility sector benefitted and posted a gain of +21.2%.  Bonds, Real Estate Investment Trusts (REITs), preferreds, and higher yielding stocks all posted gains.  Energy stocks mirrored the 2Q rally in oil prices; the energy sector was up +14.3%.  Hardest hit were the banks.  Since they prefer higher rates (they immediately charge more on loans while dragging their feet on paying passbook savings), the financial sector declined -4.1%.

US corporate revenues were weak due to the strong dollar.  Share repurchases did as much to sustain stock prices as earnings which are still punk.  The sole bright spot is the energy sector which might add to rather detract from overall S&P earnings for the first time in 18 months.

Performance wise, several of our recently purchased biotech holdings shone.  Rebounding from an earlier price sell-off and continuing progress on their drug development programs, BioSpecifics, Momenta, and Portola were all up in the mid-teens.  Many of our income funds rallied because of their bond, REIT, and preferred holdings.

The only stinker in the Q was SAExploration (SAEX).  The company is an elite seismic testing firm contracted by the large oil companies in their search for additional reserves.  The company is re-structuring its balance sheet and engineering a reverse stock split because it has not been paid by its largest customer.  Why not?  The State of Alaska has delayed paying that customer its “energy tax credit” which means the customer has not paid SAEX.  This has constrained SAEX’s cash flows.  However, the tax credits will eventually come through, and the balance sheet re-structuring will occur.  We, along with management (which owns 44%), will continue to hold the stock.

Gold Leaf is an independent Registered Investment Advisor that buys stocks/bonds in cash positive companies with sustainable competitive advantages.  As an independent firm, Gold Leaf provides objective investment management.  Our goal is to protect client assets on the downside while participating in most of the market’s upside.

July 1, 2016                                                                                      Paul F. Rodgers, CFA

Gold Leaf does not provide legal, accounting, or tax advice.  Please consult your personal                   lawyer or accountant.  See for previous blogs.

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