With temperatures unfamiliarly hitting 100 degrees here in Northern California to end the quarter, it’s safe to say that the weather is a bit hotter than the past few week’s market performance. That being said, this year’s performance is nothing to sneeze at. The close of this quarter marks the S&P’s strongest first half in more than 10 years reaching record highs in May.
For the quarter, the S&P 500 gained 2.4 percent and the Dow slightly behind gaining 2.3 percent. The NASDAQ came out strongest with a 4.2-percent jump up for the quarter. Corporations brimming with cash have responded by paying higher dividends and we thank them for this. However, there are some headwinds to face. Consumers still remain under pressure to make any major purchases, employment, though improving, still is nowhere near where it should be, and higher mortgage rates will either create more “fast” buyers or slow down the housing recovery. Internationally, China could be on the precipice of a big credit squeeze as years of relying on a massive debt to finance massive projects (think of huge empty shopping malls and empty highways) and this most likely will push global growth down considerably. Remember, China is the world’s second largest economy behind the U.S.
What seems to be catching a lot of press is Mr. Bernanke’s statement saying that if the economy continues to strengthen, the central bank would start reducing its monthly bond purchases later this year. Overall, this is a good thing, as it shows signs of stabilization and eventually the economy should be strong enough to not rely on these “band-aid” measures. Mr. Bernanke said unemployment would have to be at about 7% when the Fed brought the bond-buying program to a close. The jobless rate stood at 7.6% in May.
The bond market is starting to show signs of a downturn as the Barclays U.S. Aggregate Bond Index suffered its worst quarterly setback in nine years. With Treasury prices falling and bond yields rising, the era of steady rising bond prices may be nearing an end. As bond yields rise, this can eventually pose a problem for stocks as it may provide a more attractive option. Bonds remain a very important part of an investment portfolio because they can provide capital preservation, income and diversification but we must always be prepared by creating a diversified bond ladder and not attempting to time the markets or interest rate movements. As Yogi Berra once said, “It’s tough to make predictions, especially about the future.”Overall, investors should be pretty pleased with the first half of 2013. Volatility will still reign over the 2nd half of this year as these big macro issues are confronted. By keeping a steady pace and staying diversified across sectors and asset classes, the volatility will be much easier to face.
Ecolab and Dirty Water
The discovery of shale gas in the undergrounds of the US has led to a natural gas boom. In order to get to this natural gas, big energy companies have started fracking. The process of fracking is one that would make most people cringe.
(Take a look at this infographic of the process.)
In years past, it took just 1 barrel of water to get 10 barrels of oil, but generating a similar amount of shale-gas energy requires five times that amount due to fracking. As millions of gallons of H20 are forced into the ground in order to lift the natural gas out, contamination becomes inevitable. A large portion of the water remains underground, but the remaining water becomes heavily toxic with methane concentrations almost 20 times higher than normal water.
Though definitely not the end-all answer, one company that is addressing the issue of water treatment is Ecolab (ECL). This Minnesota-based company provides cleaning and sanitizing products and programs, equipment maintenance and repair services primarily to customers in the foodservice, food and beverage processing, hospitality, and healthcare industries. Ecolab’s recent purchase of Nalco makes them the leader in the treatment of fracking water. This same company helped clean up the BP Gulf of Mexico oil spill in 2010.
Chipotle Mexican Grill and Local Petaluma Cheese
Chipotle (CMG), a chain of over 1200 restaurants in the US, is revolutionizing the fast food industry by sourcing from organic farms. It serves 100% free-range chicken and pork, about 60% beef, rBGH-free dairy products, and organic produce and beans. Their goal is to offer a completely sustainable menu as soon as they can build the supply chain to meet their demand.
Though quickly becoming a large chain, Chipotle has teamed with local farmers to bring in product. Local cheesemaker, Petaluma Creamery, produces up to 150,000 pounds of cheese for all Chipotle restaurants throughout the Pacific region. The partnership between Petaluma Creamery and Chipotle Mexican Grill has produced jobs for the region. “Chipotle was looking for food with integrity, produced by people who are passionate about what they do,” stated Larry Peter, owner of Petaluma Creamery, a local landmark on Western Avenue since it was established in 1913 as a co-op with 33 farmers producing bulk cheese.
Kudos to Dunkin Donuts and As You Sow
Due to shareholder pressure from non-profit As You Sow, Dunkin Donuts (DNKN) will be phasing out foam cups in the next 2-3 years and will be testing a new eco-friendly cup with recycled content. As You Sow has been pressuring Dunkin (PDF) in the last 2 years to implement recycling of its beverage packaging and due to shareholder activism pressure, it seems as if it is paying off.
Dunkin Brands Group is an East Coast mainstay serving sugary fried donuts and cream-laden coffee. It has plans to expand on the West Coast opening an additional 360 stores this year. Though not the healthiest of foods, Dunkin’s attempt to stop the use of foam cups should be seen as a step in the right direction.
Urban Outfitter CEO’s Wife Vote to Board an Insult
When it comes to corporate governance, Urban Outfitters (URBN) just is flat out clueless. In 2011, a shareholder proposal at this clothing chain requested a report on board diversity. It received 22% in favor of. In 2012, another proposal asked them to commit to a policy bringing in women and minority candidates to the board. This proposal received 38% in favor of. Because of the high vote, Urban Outfitters decided to bring in a female board member. But the problem here is this board member is Margaret Hayne, the wife of CEO Richard Hayne (a scene from Arrested Development and the clueless Bluth family keeps entering my mind). Apparently, son of the family, David Hayne is an executive of the company as well. Board diversity is an issue that many shareholders are searching for and in Urban Outfitter’s case, is not being addressed in the right manner.
For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.
Sustainvest Soon to Voice Concern
At Sustainvest, we are committed to pushing companies to improve their sustainability initiatives. As owners of these publicly traded companies, we have a right to voice concern. Shareholder activism is the process of dialogue with corporations to generate investor pressure on corporate executives. This process educates the public on environmental, social and corporate governance issues. This can be used as an effective tool to encourage corporations to change their policies. We will be filing several shareholder resolutions this year so stay tuned.
[Read the full Sustainvest Q2 newsletter here (PDF).]
Dale Wannen, a Kapitall contributor, is President of Sustainvest Asset Management, an investment advisory firm focused on integrating environmental, social and governance (ESG) principles into investment portfolios. He frequently writes and speaks on the topic of sustainable and responsible investing and believes that triple bottom line investing is something that all investors should be approaching. To learn more, Dale can be reached at [email protected].
Sustainvest Asset Management, LLC is a registered investment advisor based in Petaluma, CA which focuses on sustainable and responsible (SRI) investing. As an independent practice, we are able to give clients an objective view without any conflict of interests. This independence allows us to make decisions in the best interest of our clients. Sustainvest Asset Management does not sell financial products and is free to explore the best solutions for our client’s needs.
Disclosure: The information contained in this letter has been prepared from sources we believe to be reliable, but we make no guarantee as to its accuracy. No information herein is intended as an offer or solicitation of an offer to sell or buy or as a sponsorship of any company or entity. Opinions expressed herein are subject to change without notice. The writings of authors do not necessarily represent the views of Sustainvest Asset Management LLC. There are certain risks involved with investing.
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