Mullins January 2015

JANUARY 2015
Michael Mullins, President
1642 S. Trenton Street
Denver, CO 80231
303.337.2418/office
303.514.8211/mobile
www.mullins-inv-mgmt.com
mm@mullins-inv-mgnt.com
www.mullins-inv-mgmt.com
Paul Ferry, Director of Fixed Income
Christopher Ferry, Invest Advisor Rep
5100 Edina Industrial Blvd, Suite 225
Edina, MN 55439
612.327.0768 mobile/Paul
952.200.0933 mobile/Chris
pf@mullins-inv-mgmt.com
cf@mullins-inv-mgnt.com
Market Update
(all values as of 12.31.2014)
Stock Indices:

Dow Jones 17,823
S&P 500 2,058
Nasdaq 4,736

Bond Sector Yields:

2 Yr Treasury 0.67%
10 Yr Treasury 2.17%
10 Yr Municipal 2.11%
High Yield 6.61%

YTD Market Returns:

Dow Jones 7.52%
S&P 500 11.39%
Nasdaq 13.40%
MSCI-EAFE -7.35%
MSCI-Europe -8.59%
MSCI-Pacific -5.19%
MSCI-Emg Mkt -4.80%
US Agg Bond 5.88%
US Corp Bond 7.39%
US Gov’t Bond 5.92%

Commodity Prices:

Gold 1,184
Silver 15.61
Oil (WTI) 54.12

Currencies:

Dollar / Euro 1.21
Dollar / Pound 1.55
Yen / Dollar 119.93
Dollar / Canadian .86
The steep drop in oil prices led to risk
aversion among the international mar-
kets as volatility increased and assets
sought the stability and transparency
of U.S. markets. Considered to have the
healthiest economy and financial mar-
kets currently, the U.S. is also reaping the
benefits of lower oil and gasoline prices.
Russia is experiencing a run on assets, as
mass capital and assets are leaving the
country in search of security and preser-
vation of wealth. The massive devaluation
of the Russian currency, the ruble, has
prompted Russian citizens to panic buying
of cars, washing machines, and computers
hoping to maintain the value of their mon-
ey in items rather than Russian rubles. Net
capital outflows out of Russia are estimat-
ed to have surpassed $134 billion in 2014,
more than double of what left the country
in 2013. A looming recession is also hin-
dering any economic progress in Russia,
as the ruble’s downward valuation is now
affecting employment and businesses.
The U.S. economy grew at the fastest
pace in more than a decade, as Gross
Domestic Product (GDP) expanded
at a 5% annualized rate for the third
quarter of 2014. GDP data is compiled
by the U.S. Commerce Department
and released on a quarterly basis. It
is one of the most critical data com-
ponents used by economists in de-
termining the health of the economy.
The number of Americans filing for unem-
ployment continues to fall, as more em-
ployers are hiring at the strongest pace
since 1999. The Federal Reserve sees the
strengthening labor market as the cat-
alyst for inflation, led by higher wages.
U.S. manufacturing output in the Untied
States recorded its largest increase in nine
months, led by automobile and machinery
production. Utilization rates, a measure of
how efficiently companies are using their
resources, surpassed a key threshold of
80 in December. Manufacturing account-
ed for about 12 percent of the nation’s
economic growth in 2014, half of the
25 percent it represented in the 1960s.
Some economists and analysts see this
as a growth opportunity as manufactur-
ing returns to levels not seen in decades.
The Fed’s most recent Beige Book Report
Current Environment - Macro Overview

JANUARY 2015 www.mullins-inv-mgmt.com
TheS&P500IndexClosedAtRecordLevels53TimesIn2014
U.S. markets were among the best performing
equity markets internationally, and the top per-
forming among developed markets. The S&P 500
index closed at record levels 53 times in 2014,
while the Dow Jones Average reached a new high
38 times throughout the year. A visual extraction
of these highs would appear as a gradually in-
creasing slope, with some pullbacks along the way.
Some analysts are expecting positive earn-
ings revisions for U.S. companies that will ben-
efit from lower oil prices. The steep and dra-
matic drop in oil has also decreased operating
costs for many companies where oil is a sig-
nificant component to their bottom-line. Air-
lines, transportation, hospitality and food are
among the industries that have traditionally
benefited when oil and gasoline prices drop.
With 2014 results included, the S&P 500 Index
has had the best three year returns including div-
idends, since the late 1990s. Given the market
symmetry in 2014, some market analysts expect
to see similar patterns repeated as economic con-
ditions and company earnings slowly improve.
Sources: Bloomberg, Reuters
Equity Overview - Domestic Equity Markets
sees U.S. economic expansion as broad based,
measuring labor and economic improvements in all
12 districts of the Federal Reserve System. The Fed-
eral Reserve sees a benefit in consumer demand
and business demand strengthening together.
The output of utilities and automobiles grew
to levels not seen in decades as cheap ener-
gy and low utility costs encourage foreign man-
ufacturers to enter the U.S. markets and take
advantage of affordable American labor. Euro-
pean auto makers with operations in the U.S.
are benefiting as well from a weakened euro.
Several large European car makers that man-
ufacture cars in the U.S. export them interna-
tionally, directly from ports in the U.S., yet sell
autos in more affordable euros worldwide.
The U.S. government and corporate bond markets
outperformed the majority of the world’s stock
markets in 2014, validating a continued flight to
stability throughout the year. The decoupling of
U.S. growth from other developed economies,
also known as divergence, was the scenario go-
ing into 2015 where the U.S. is in better econom-
ic and financial shape than most other countries.
Deflation worries in Europe and slowing economic
conditions continued into 2015, prompted a revisit
to the Euro Crisis as Greece struggled with political
issues and the possibility of an exit from the euro.
The International Energy Association (IEA) is fore-
casting weaker oil consumption in 2015, lead-
ing to increasing worldwide inventories and
continued low prices. When oil hit a high of
$107 a barrel in June 2014, not many thought
that it would have fallen by half by year end.
Sources: Commerce Dept., FED Beige Book
Fixed Income Overview - Bond Markets
Even as the U.S. economy grew in 2014
and the Federal Reserve terminated its
stimulus program, Q.E., U.S. govern-
ment bonds had their best year since 2011.
The consensus at the beginning of 2014 was
that rates were surely heading higher with the
end of Q.E. in sight and inflationary pressures
heating up. The 10-year Treasury bond start-
ed the year at 3% and ended 2014 at 2.17%.
The U.S. 30-year Treasury bond dropped to its
lowest yields in two years, closing 2014 at 2.75%.
Numerous analysts at the beginning of the year
were expecting an increase from its then cur-
rent yield of 3.92%, a dramatic miscalculation.

TheRussianRubleTumbled44PercentAgainstTheU.S.DollarIn2014
Geopolitical events worldwide, slowing econo-
mies in Japan and Europe, and the lure for sta-
bility all helped propel the U.S. dollar to its single
best year since 1989. The dollar advanced against
all of its 31 major counterparts for 2014. Defla-
tion concerns in Europe and Japan drove down
the euro and yen, and tumbling oil prices sent the
Russian ruble down 44 percent against the dollar.
A challenge at home when the dollar rises is the
dynamic of U.S. exports becoming more expen-
sive worldwide. As the dollar increases in value
versus other currencies, U.S. exported goods be-
come less affordable in the international markets.
Conversely, the strengthening dol-
lar has also made it more affordable
for imported goods, which become
less expensive as the dollar elevates.
The single most significant bene-
fit to Americans from a rising dollar
has been the dramatic drop in oil
prices, which the U.S. still imports
about a third of the oil consumed.
Sources: U.S. Commerce Dept.,
Eurostat
The Dollar’s Supremacy – Currency Market Dynamics
A flight to quality continued to reduce U.S. Trea-
sury yields, yet with its 2.17% yield at year end,
the 10-year U.S. Treasury is the highest yielding
10-year government bond among the Group of
Seven countries. By contrast, Germany’s 10-year
government bond yield fell to nearly .50 percent
due to deflationary concerns in the euro zone.
A flattening yield curve of U.S. Treasuries has
created a divergence between short term and
long term bonds, where short term rates in-
creased and long term rates decreased. A flatten-
ing yield curve signifies an increase in Fed rates
while long rates are dictated by the markets,
which now sees lower inflation expectations.
A decrease in long term rates (which are mar-
ket dictated) tells us that the market doesn’t ex-
pect interest rates to rise that much from where
we are now, while an increase in short term
rates (which are dictated by the Fed) tells us that
the Fed is preparing for inflationary pressures.
As oil prices tumbled towards the end of 2014,
high yield corporate bond prices were affect-
ed by oil’s decent. The reason is that a large por-
tion of outstanding high yield bonds are in the
energy sector, specifically shale related com-
panies throughout the country. It was the high
yield bond market that afforded many start up
shale drillers in the late 2000s to establish and
build out their infrastructure. The drop in oil
prices has reduced operating margins for some
of the companies thus adding pressure to their
underlying debt. Some analysts expect mar-
gins for many of these companies to improve
even with continued low oil prices due to new
technology allowing for reduced expenses.
Sources: U.S. Treasury, Bloomberg

LithuaniaBecameThe19thMemberNationToAdoptTheEuro
In order to stem the ruble’s dramatic devalua-
tion, Russia’s central bank raised its key rate
from 10.5 percent to 17 percent on December
15th. It was Russia’s sixth time in 2014 that it
had raised its key rate aimed at limiting addi-
tional currency losses and keeping inflation
contained. The ruble’s tumble has lifted in-
flation in Russia to its highest levels in more
than five years, with consumer prices rising
over 11% alone in the month of December.
Some believe
that Russia’s dire
circumstances
may lead to geo-
political tensions
as Putin shifts the
blame to sanc-
tions imposed by
the U.S. and its
Western allies.
A revisit of Rus-
sia’s debt default
in 1998 became
a focal point
again as inter-
national curren-
cy traders sug-
gested that such a threat
may again be probable.
Standard & Poor’s, a credit agency, said that it
is considering reducing Russia’s debt rating to
junk for the first time in over 10 years. Moody’s,
another credit agency, has placed 16 Russian
banks on review for a possible downgrade as
well. Such implications don’t bode well for Rus-
sia’s financial markets and the ruble, which will
likely continue to struggle for quite some time.
Belarus imposed capital controls, a process
where a nation’s government can regulate flows
from capital markets in order to stem a run on
assets. The central bank said that it was react-
ing to the situation in neighboring countries,
primarily in Russia. Belarus is the first ex-So-
viet republic to fence off its economy as Rus-
sia’s financial crisis ripples through the region.
Many are concerned that other former Soviet
satellite countries may replicate Belarus. Such
actions create a difficult environment for citi-
zens of a country where capital controls have
been imposed. Imported goods become much
more expensive and difficult to get and revenue
from exports shrink.
The Greek debt crisis
re-emerged in Decem-
ber as some politi-
cal leaders in Greece
questioned the aus-
terity measures put
in place last year to
avoid a probable debt
default. Concerns sur-
rounding the exit of
Greece from the euro
has once again become
a topic of conversation
for banks and finance
entities in Europe.
Lithuania became the 19th
member country to adopt
the euro as its official currency on January 1st.
Citizens swapped Lithuanian litas for euros with
cheer in hopes of building an economic shield
against the Russian ruble’s fall and its affect
throughout former Soviet block countries. This
was Lithuania’s second attempt to join since
it was turned down in 2006. The Baltic coun-
try of 3 million people is wedged between Po-
land and Latvia and is a former Soviet Republic.
Sources: Eurostat, S&P
Deflation In Europe & A New Member To The Euro - International Markets
FlagMap Of Lithuania

U.S.CompaniesCreatedRoughly2MillionNewJobsInThe1stNineMonthsOf2014
Job Trends in 2015 - Labor Market Review
In the first nine months of 2014, U.S. com-
panies created roughly 2,000,000 new jobs.
However companies had a difficult time fill-
ing their posted positions with qualified can-
didates. One in three open positions now re-
mains unfilled for longer than three months.
The demand for qualified workers is starting
to create a longer period for open positions,
where companies seek specific skills. There
are several industries where positions remain
open for longer than average periods of time.
Accommodation and food service jobs re-
main open and unfilled the longest of any
industry. Some believe that the low pay-
ing positions of the industry are driving qual-
ified workers to higher paying industries.
Mining and logging jobs tend to be physi-
cally demanding and requiring some tech-
nical experience. As the shale exploration in
North Dakota and Texas have continued, so
has the demand for knowledgeable candi-
dates. As the economy slowly improves, the
demand for paper and wood building materi-
als increases, thus requiring more logging labor.
Transportation, warehousing and utilities all
prosper from a recovering economy. As the de-
mand for shipping and storing products increas-
es, more energy is consumed driving up utility
usage. The wholesale and retail sectors also do
much better as the economy and job market
improves, allowing consumers to spend more.
Sources: Centre for Economic & Business Re-
search, Labor Dept.
A measure of an economy’s efficient use of its
capital assets and labor force is the capacity uti-
lization rate. This figure is released by the Fed-
eral Reserve each month and is closely watched
for indications of a
tight supply of re-
sources, which can
lead to higher labor
and capital costs.
As supply con-
straints develop,
inflationary pres-
sures can appear
due to higher
wages and operat-
ing expenses. Essentially, if market demand
grows, capacity utilization will rise, if demand
weakens, capacity utilization will slacken.
The financial markets can be directly influenced
by capacity utilization rates, where increasing
rates create inflationary pressures thus push-
ing bond yields higher. An increase in capacity
utilization rates may also translate into more
efficiently run companies, thus increasing eq-
uity valuations.
The most recent
capacity utilization
rates released by
the Federal Reserve
show the rate sur-
passing 80% for the
first time since 2007.
It is believed that
when the utilization
raterisessomewherebetween82%and85%,com-
panies are operating efficiently and productively
allowingthemtoraisepricesandincreasemargins
and eventually leading to overall price inflation.
Source: Federal Reserve
What The Capacity Utilization Rate Tells Us - Domestic Economy

JUNE 2013
*Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period. Index data sources; MSCI, DJ-UBSCI,
WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offer
or solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriate
and/or suitable for all investors. This material is meant solely for informational purposes, and is not intended to suffice as any type of accounting, legal,
tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.
www.mullins-inv-mgmt.comJANUARY 2015
SmallElectronicDevicesConsumeMoreEnergyThanMostPeopleThink
Contrary to what we hear about conserva-
tive practices with energy consumption,
energy use in American homes has actu-
ally increased over the past 30 years. Data
compiled by the U.S. Energy Department
identified various reasons as to why we’re
using more energy, primarily electricity.
The use of more
energy has been
originating from
homes all over the
country, driving up
usage and even
straining grid ca-
pacities at certain
times of the year.
The culprit to el-
evated electrici-
ty consumption
is the plethora of
smaller electron-
ic devices that
have encroached
upon American
homes over the
past few years.
As technologi-
cal advancements have created more elec-
tronic devices, and at affordable prices, the
increased use of plug in outlets and power
strips has also increased. The Energy Depart-
ment estimates that energy used in house-
holds for appliances and electronic devices
accounted for about 21% of total household
consumption throughout the 1980s. It now
estimates that over 35% of total consump-
tion is appliance and electronic device driven.
Over the years a multitude of regulations and
laws have been enacted to curtail the use of
electricity by larger and widely used applianc-
es such as refrigerators and washing machines.
The challenge has been the ongoing prolifer-
ation of smaller electronic devices and the dif-
ficulty to identify
and regulate them.
Bigger homes have
become more of the
norm since the late
90s, where homes
built in the 1970s and
1980s were typically
less than 1800 sq ft.
In the 1990s the av-
erage size of a new
home increased to
2200 sq ft and rose
to 2400 sq ft in the
2000s. Even though
homes built in the
90s and 2000s con-
tain more energy
efficient technolo-
gy, the larger area
and higher ceilings
consume more energy to heat and cool, out-
weighing some of the technology benefits.
The Energy Information Agency (EIA),
which also reports on energy usage, proj-
ects that current home energy consumption
will remain the same for another 30 years.
Sources: U.S. Energy Dept., U.S. Census Bureau
Why We’re Using More Energy - Home Energy Review

Mullins January 2015

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