Thought of the Week

1. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser. All charts courtesy of Yahoo! Finance.
Thought for the Week (275):
A Tale of Two Cities
Synopsis
 Consumer spending drives 70% of our economy, yet it’s shaping up to be a “Tale of Two Cities.”
 High-income earners are experiencing several tailwinds as home values and equity portfolios continue to rise, while low-income earners still face material headwinds.
 Given high earners’ disproportionate spending level, we believe that consumer spending will be a net positive for our economy over the coming years.
A Bifurcated Consumer
Consumers are currently living a “Tale of Two Cities” where the high earners and the low earners are being impacted quite differently from the current economic climate. The confidence level of both matters to our economic well being, and understanding where each stands can offer insight in where to invest for the future.
For example, during times of economic growth when consumer confidence is high, we look for investment opportunities in highly discretionary categories such as travel, jewelry, and home improvement.
On the other hand, during times of economic contraction when consumer confidence is low, we look for investment opportunities in less discretionary categories such as staples, discount shops, and quick service restaurants.
As a result, let’s walk through a basic analysis of the current consumer environment and then derive an investment conclusion based upon this analysis. We will begin our analysis by comparing the “headwinds” to the “tailwinds” for both consumer groups.
Consumer Headwinds
We see a number of “headwinds”, or restrictive forces on spending, that both consumer groups must face going forward including:
 Unemployment Rate: The unemployment rate is currently 7.2%, and this figure does not even include those consumers who have given up trying to find a new job.
 Payroll Taxes: These taxes were increased across the board in 2013, and every worker will see a smaller paycheck this year. While the amount was relatively immaterial for a consumer with a larger income stream, those with smaller paychecks will eventually feel the impact.
 Student Debt: These debts are growing at astronomically high rates, and those who have recently graduated will be handcuffed to these large monthly payments for several years.
 Cost of living: Our government may downplay inflation but comparing grocery bills today vs. five years ago tells a different story. As inflation rises and replacement cycles for goods, such as a new car, must be met, consumers will be forced to make difficult financial tradeoffs.

2. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser. All charts courtesy of Yahoo! Finance.
 Healthcare Costs: Although we cannot be certain about the overall impact that Obamacare will have on our economy, we can be relatively certain that our healthcare costs will increase materially over the next 3 - 5 years.
Although each of these headwinds will reduce the discretionary income of all consumers, the low earners will feel a greater impact as these headwinds represent a greater percentage of their overall monthly earnings.
The net result is that stocks tied to low earners’ basic needs should outperform the stocks tied to low earners’ discretionary spending because a larger percentage of their income will be directed to their core needs going forward.
Tailwinds
We also see several “tailwinds”, or forces that promote stronger spending, including:
 Unemployment Rate: Despite the overall rate being high, the unemployment rate for those consumers with a Bachelor’s degree or better is approximately 3.7%. Those with desirable skills are in demand and businesses can’t find enough qualified talent.
 Wage Growth: The average household in the top 20% of earners posted a 6.4% gain in income from 2009 – 2012. Middle-income households made a 3.3% gain in that span and the lowest- income households earned 0.5% less in 2012 than in 2009 (a tailwind for upper and middle income and a headwind for the rest).
 Balance Sheets: Investment portfolios and home equity values have recovered from the lows of 2008. High earners are feeling the tailwinds of these gains whereas low earners typically do not own real estate and/or diversified investment portfolios.
 Gasoline Prices: Prices at the pump have been coming down, however, this tends to be highly cyclical. As less money is spent at the pump, more is available for discretionary spending.
Whereas the headwinds affected low earners more than the high earners, these tailwinds tend to favor high earners more than low earners. As a result, we expect to see stronger consumer confidence for high earners versus low earners. Stronger confidence typically translates to more discretionary spending.
The net result here is that stocks tied to high earners’ discretionary spending should outperform the stocks tied to more basic needs of all consumers.
NOTE: We own Tiffany (TIF) in the DIAS Focused Growth portfolio and a key driver for our investment thesis for their outlook is our preference for stocks tied to high earners’ discretionary spending.
Implications for Investors
We remain quite bullish on equities over the long-term and one of the key components to our thesis is robust consumer spending. Stocks are highly correlated to gross domestic product (GDP), which is a measure of economic growth, and rising GDP typically results in a rising equity market.
Consumer spending represents approximately 70% of our GDP so the health and confidence of consumers is vital to economic growth. Given the current bifurcated consumer, where the high earners appear more confident than the low earners, we must further our analysis by determining the net impact of both groups’ current economic situation.

3. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser. All charts courtesy of Yahoo! Finance.
Although high earners represent a very small percentage of overall consumers, they contribute the most to overall consumer spending on an absolute basis. Therefore, watching high earner confidence and spending levels is a strong indicator to the direction of overall consumer spending.
Simply put, as long as high earners continue to remain confident, we will also remain bullish on the positive momentum of overall consumer spending.
The bottom line is that the analysis provided above is one of many components to our bullish view on equities, and over the coming weeks we will dive into the other key factors in order to shed light into why we expect to see a slow and steady rise in equities over the next 5 – 7 years.