Wednesday, December 31, 2014

Market Commentary (audio)

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Tuesday, December 30, 2014

2014 Review And Our View Going Forward...

I have to admit, in some ways 2014 was a bit of a humbling experience. Which is ultimately a good thing. For, as I've stressed here numerous times, humility is a key ingredient to long-term investment success. For without it one might get the idea that he/she can know enough to throw everything at a couple select stocks or a given sector or two, can know precisely which countries' economies will deliver in the days ahead, and can even time the ups and downs of the world's stock markets. That my friends is akin to driving a hundred miles an hour down an icy mountain road on slick tires and a few martinis.

Such bravado among experts can lead to disaster as well: as evidenced by this years' pace in which hedge funds (run by supposed masters of markets employing the most sophisticated strategies) have failed---a pace not seen since the 2009 meltdown, when 1,023 closed up shop. No need to investigate the whys, the markets tell the story. Which would be really big commitments to any or all of the following: Going long (owning) the energy sector, other commodities, non-US developed markets and non-US emerging markets---and going short (selling) the U.S. market (save for energy), particularly interest rate sensitive utilities and the asset class that simply had to give way to higher interest rates (that never came), bonds.

In last year's year-end letter I offered up my view of where I humbly saw the best opportunities in equities going forward and to what extent we would attempt to exploit them in our clients' portfolios. And while on a sector basis three out of our six 10%+ recommended weightings posted nice double-digit gains, we missed the boat on the two best performers (health care and utilities). And our non-U.S. allocation---which we bumped up at the beginning of the year---got creamed. Here are the 10%+ sector targets we set at the beginning of the year and the year-to-date (12/30/14) results (according to Standard and Poor's) for each respective S&P sector index:

Technology target: 15-20%,  YTD return: +19.6%

Financials target: 15-20%,  YTD return: +14.5%

Materials target: 10-15%,  YTD return:  + 5.7%

Industrials target: 10%,  YTD return:  + 8.6%

Energy target: 10%,  YTD return:  - 9.3%

Staples target: 10%,  YTD return:  +14.2%

Given that the S&P 500 Index is up 12.55%, the above---save for materials and especially energy---doesn't look too shabby. Well, if we had every client's portfolio allocated 100% to U.S. stocks---while it wouldn't have been a repeat of 2013 (a very good year)--- results would've been on par with the S&P 500. However, alas, 100% to U.S. stocks wasn't our positioning in 2014, as it has never been. We did the usual: diversified globally across many sectors and tipped the weightings at the margin to the sectors and regions we believed presented the best long-term opportunities. The hit to energy along with the hit to our non-U.S. exposure, which we bumped up in many portfolios last year, did a number on the bottom line relative (to the U.S.) results. Here are the non-U.S. targets and results of the related S&P indexes:               

Non-U.S. Developed Markets target: 25%,  YTD return:  -6.31% (S&P Developed World ex-US)

Non-U.S. Emerging Markets target: 7.5%, YTD return:  -2.34% (S&P Emerging)

So, when we take a hit on 35-45% of our stock exposure (U.S. energy plus the two non-US categories) in a calendar year, we're going to be hard-pressed to capture the entire gain of the major U.S. averages (in that calendar year)---always accounting, that is, for our overall exposure to equities (i.e. the index return is multiplied by a portfolio's actual equity target % to determine the relative results). That said, a critical key going forward will be to not react as if we are hard-pressed to, say, blow away the S&P 500 in the coming year. That emotion, I assure you, is what's led to the populating of the hedge fund graveyard these past few years.

In fact, even thinking in terms of "the coming year"---or in one-year increments at all---is an ill-advised way of approaching the business of investing. Whenever someone says to me "Marty, I have a chunk of money that I won't need for a year that I'd like you to invest for me." Without exception, I decline. Same goes for two-year, and even three or four-year commitments. The markets are far too unpredictable to devote to them what I view as short-term monies. When we get to five plus years, we can talk.

In that vein, when I, for example, make a case for non-U.S. equities, while I may be thinking that next year will see share prices outpace the domestic market, I'm actually thinking---in terms of holding periods---well beyond the next twelve months. In essence, all we can do is recognize value when we see it---the market will determine the time frame in which it will reward our insights, if at all. And, alas, it loves to test our patience. Bottom line: If we're married to an objective of beating some benchmark on a yearly basis, we might find ourselves abandoning a fundamentally sound approach mid-stream and missing the outsized gains that tend to find their way to the underpriced regions of the world. Same goes for sectors.

So here's what I'm thinking going forward:

Starting with fixed income...

Being wrong is okay when it means being early:

On December 5th, 1996 Alan Greenspan warned the world of irrational exuberance taking hold of the stock market, particularly the tech sector. As it turned out he was onto something, he was just three years early. Heeding his warning would have initially been painful as the NASDAQ Composite index shot higher the following three years. However, one would have avoided the mother of all bear markets as the tech-heavy index plunged nearly 80% between March of 2,000 and March of 2003. I recall toward the tale-end of the '90s receiving some pushback from clients as we rotated away from tech. I wasn't predicting the collapse, I was just paring back what had become an over allocation (as tech stocks ran up) and reducing exposure to a sector that by historical norms possessed valuations that looked very stretched.

From 2004 through 2006 we reduced or, in many cases, entirely eliminated our clients' exposure to real estate mutual funds. While my sense was that the sector had gotten ahead of itself, it took until the spring of 2007 for that opinion to begin to make sense from a share price perspective. And, believe me, it was tough watching those shares move higher in the wake of those sales. But my was I glad we sold---$15,000 in the Franklin Real Estate Fund in early February 2007 would've been worth roughly $3,500 on March 6, 2009. While that period was no fun and games for the rest of the market (although 2007 wasn't bad), virtually nothing got hit like real estate.

Probably the simplest to understand relationship in investing is the negative correlation between bond prices and interest rates. And going into 2014, after a prolonged period of record low interest rates---and a rough 2013 for bond investors---the consensus was that it would be an outright ugly year for the bond market as, surely, interest rates had to begin rising. I shoulda---given all my preaching of the dangers of following the crowd---known better. As it turned out rates trended lower from beginning to end and bonds did just fine (reminiscent of our early exodus from real estate in the mid 00s). But the thing is, given that at our shop our portfolios' fixed income component is there for safety, and considering that "simplest to understand relationship" between bonds and interest rates---consensus following or not---I couldn't bring myself to meaningfully buy bonds amid history's lowest interest rates.

Going into 2015 there's a case to be made that, amid incredibly low interest rates among other developed nations, the U.S. treasury will remain the sovereign debt issuer of choice. And, therefore, despite the seeming inevitability of a Fed funds rate hike, there'll be no grand exodus from the U.S. bond market. There are other cases being bandied about (ex: the likes of Bill Gross and Paul Krugman believe disinflation, a very strong dollar and low oil prices will keep the Fed on hold and interest rates very very low for longer than the market may now be discounting), but that in my view is the most credible.

So then, should we maybe dip our toe back in and take a position or two? Maybe invest in the Janus bond fund managed by Gross? I say absolutely not! That would, or might, be akin to Greenspan retracting his irrational exuberance statement just before the great tech collapse. You see, it's paid to this point to follow the Fed into the long-end of the yield curve (that would be quantitative easing), but that's over with. Now the Fed has to figure out how to ultimately unload some of that $4 trillion monster of a balance sheet (whether by outright selling or by simply not reinvesting the proceeds from maturing bonds). And, trust me, you don't want to be a buyer in that environment, regardless of how bonds shake out in 2015.

Last year's winning sectors that we missed:


As investors tend to buy utility stocks for the yield, and as utilities are considered a defensive sector (good to own when the economy's weak), given the interest rate environment, the prospects for economic growth heading into 2014, and what I viewed as stretched valuations, the one sector I had virtually no interest in at the beginning of the year was utilities. And go figure, the S&P Utilities Sector Index is up 26.6% year to date. Humbling! Irrational exuberance among utility stock investors? I think so. We're heading into 2015 with yet lower interest rates, a better looking economy and, in my view, really stretched valuations.

Health Care:

Surely the Affordable Care Act is a game changer for the health care sector. If everyone has coverage, providers are getting paid. That must mean better revenues and, consequently, higher stock prices. While we didn't entirely abandon the sector, we kept our average weighting in most portfolios in the 6 to 10 percent range. Despite the improved prospects for reimbursement, the defensive nature of investing in health care (I like hc when the economy's struggling. I.e. while you won't buy a new house or a car when you fear for your job, you'll still seek attention when your belly aches) and their stretched valuations heading into 2014 left me uninterested in increasing our exposure. And go figure, the S&P Health Care Index is up 24.5% year to date. Yeah, humbling... Irrational exuberance among health care stock investors? Not sure... There are some interesting companies, particularly in biotech, that probably deserve a look. That said, I'm going to recommend a continued modest allocation given present valuation levels.

The rest:


Reasonable valuations, expectations of an improving economy, and the potential for capex spending (businesses investing in expansion) inspired our 15-20% target weighting to technology stocks. As stated above, the S&P Information Technology Index is up 19.6% year to date. As we enter 2015, valuations remain in my view okay, the economy seems to be gaining a little momentum, and the prospects for capex are stronger than they were a year ago. Thus, I'm recommending the same target going forward.


Cheap valuations and the prospects for an improving economy inspired our 15-20% target to the financial sector. The S&P Financial Sector Index is up 14.5% year to date. If in 2015 interest rates rise in an orderly fashion in response to an improving economy, lenders can realize the best of both worlds: better margins and growing loan demand. Financials are heading into next year sporting the lowest forward price to earnings (p/e) ratios among the major sectors. We're, therefore, maintaining that 15-20% target going forward.


Reasonable valuations, the mid-late cycle nature of the sector and the prospects for an improving global economy inspired our 10% target weighting to the materials sector. As it turned out materials stocks didn't produced the relative results the above logic might have suggested. The S&P Materials Sector Index is up 5.7% year to date. While the U.S. economy is gaining traction, and I don't see huge risks of deep recessions in many foreign markets, we're going to stick with our 10% target weighting going forward.


You want to own industrial stocks when you expect the economy to improve---as long as they present reasonable valuations. And going into 2014, both factors prevailed. The S&P Industrial Sector Index is up 8.6% year to date. In fact both factors remain going into 2015. We're bumping our target allocation up a bit, to 12%, for the time being. Expect industrials (particularly the transportation component) to outperform going forward should energy prices remain low.


Ugh! Despite increasing North American production, I was quite bullish on the energy sector going into 2014. So much so that in the portfolios of willing clients we went a little beyond our 10% target. Half way through the year I was feeling pretty smart, given the impressive 15% gain to that point. I've devoted a few recent commentaries to the whys of the energy sector collapse, so I won't delve here. Suffice it to say that energy stocks have gotten absolutely creamed the second half of the year. The question going forward is, do we jump all over them at these depressed prices? Perhaps we should, but let's not for now. Instead we'll simply rebalance (buy) back to that 10% target and expect that the forces of supply and demand will make sense of oil prices as we go forward. But, hey, let's not complain if energy prices stay low. As I've stated emphatically the past few weeks, for the U.S. and Europe in particular, this is one heck of an economic stimulus!

Consumer Staples:

I was a little reluctant targeting staples at 10% at the beginning of the year. Valuations were not compelling and they're the place we go when the economy isn't, well, going. Nonetheless, in the interest of maintaining balance and playing a little defense we kept the weighting healthy in most portfolios. And good thing, because the S&P Consumer Staples Index is up 14.2% year to date. That 10% target is where we'll stay for now.

Consumer Discretionary:

Mostly due to stretched valuations (after a phenomenal 2013), I was not---despite my optimism over the economy---at all bullish on consumer discretionary stocks (up 8.4% year-to-date) going into this year. Therefore, our portfolios have, on average, maintained a little less than 10% exposure. Well, I've just recently begun adding them again where I see an underweighting. While, in the aggregate, the stocks that make up the S&P Consumer Discretionary Index are trading at a not cheap 16.9 p/e, their 11.86 projected earnings growth rate makes the p/e to earnings growth (PEG) ratio---a popular valuation metric---reasonable. Factor in growing consumer optimism, an improving jobs/wage picture and lower energy prices, and one should feel okay about the this space going forward. I'm recommending a solid 10% weighting for now.

Other areas of interest:


Woe are those who bet that money printing galore had to lead to great gains in commodities prices. Even a modest allocation to a commodities fund this year dealt pain to one's overall results (DBC, the commodities futures ETF, has tanked 26.6% [according to Morningstar]). And bearishness reigns going forward. An already really strong dollar, the prospects for even further gains (in the dollar) considering potentially higher U.S. interest rates, foreign currency printing throughout much of the rest of the world, and the expectations that China's economy, for example, will not regain its momentum anytime soon have the "experts" painting yet more bleakness for commodities investors.

Now that, my friends, is a contrarian's dream. When the trade is overwhelmingly tilted in one direction you generally want to buck the tide. Plus, I have to believe that much of what's expected next year is already priced into the dollar. And, if so, what happens if China gets off to a better than the anticipated 7% annual pace early in the year? And what if when the ECB ramps up QE (Euro printing) foreign investors plunge into the Euro Zone equity markets (and, therefore, the Euro) and effectively offset the expected fall of the Euro? And what if we do see inflation pick up as oil finds a bottom and the now optimistic consumer gets busy consuming? Trust me, any or all of these possibilities could see investors flocking to commodities, those ever-popular---and now cheap---hedges to a falling dollar.

So do we, say, dump something and load up on commodities? Well, not if you don't have nerves of steel and an iron stomach. Commodities are the definition of volatile. And besides, if you're our client, you are indeed exposed; through your energy sector and materials sector allocations. And a few of you steely-nerved and iron-stomached individuals do hold a more direct commodities position or two. I'm simply suggesting that we shouldn't be too surprised if the consensus on commodities gets surprised at some point in the not too distant future...


Many times over the years I've dubbed, or (as I'm sure I heard this from someone else) redubbed, "it's different this time" as investing's most dangerous four-word phrase. Well, actually, it is different this time. That is, housing has definitely not led the way during this recovery, as it has---in terms of the rate of growth---during past recoveries. Which shouldn't come as a surprise given that it was the housing bubble that burst all over the global economy in 2008. But it's almost 2015, which means the first round of folks who had to go the distance and declare bankruptcy are reaching the point that brings them credibly back into the housing market. The employment indicators, as I've been reporting for months---as well as the jobs numbers themselves---are finally picking up measurably, wages are beginning to creep higher, consumer sentiment is hugely positive and the NAHB Housing Market Index has been dancing between 50 and 60 (57 recently) since July---above 50 means there are more optimists among home builders than there are pessimists.

Now we can get really deep into the weeds and talk about demographics and household formations, both of which speak positively going forward, but suffice it to say that it makes sense that, again, given the nature of the last recession, a pickup in the economy might very well unleash a good deal of pent up demand onto the housing market. Plus---and this is a huge plus---the housing-related companies that comprise the S&P Homebuilders Index are, in the aggregate, trading at 14.5 next year's estimated earnings against an earnings growth rate of 13.6%: That's a PEG ratio of nearly 1, which makes it very cheap relative to other U.S. sectors. Oh, and the index is up a paltry 2.1% year-to-date (i.e. no worries about buying into a runaway sector).

So do we add a little homebuilders exposure? Yes, I think we do. But, like everything else, in moderation, and with a long-term, volatility-tolerant, perspective.

I know, this letter's getting long, and thanks for hanging in there. Of all the stuff contained herein, the following, in my view, is the most compelling:

Emerging Markets:

Japan has a problem that Prime Minister Abe can't fix by printing money. Japan needs to print babies, or open its borders (while there's been some proposals in the works, Japan's leadership continues to ignorantly, or, more truthfully, politically, resist reforming its disastrous immigration policy). You see, its population is shrinking. And while I suspect you'll find economies throughout history that fared poorly (which was the stuff of bad governments) as their populations grew, you'll not find any history of economies that thrived while their populations shrank (think this through before siding with those who'd kick out the "illegals" and fence the borders [reach out to me if you're open-minded and need some convincing]).

You've been warned for years about the graying of America. But you've heard nothing about the graying of India, Brazil, Mexico, Indonesia and South Africa (I could name many more). China is almost on a par with us in terms of median age. When you read the 2024 version of this letter, I suspect, with great confidence, that the best economies of the prior decade will have been those we call emerging. Why? Because the emerging markets are where everybody---well, 85% of world's population---lives. And that's where populations are growing. And that's where Apple will sell the most iPhones, Domino's the most pizza, GM the most cars and pfizer the most meds in the years to come. And that's where folks will overcome their present limits and---make no mistake---that's where many of tomorrow's great companies will be born.

As I've been reporting, emerging markets, as a group (or an index), have not been the most profitable investment destinations the past couple of years (consequently, valuations for many of these countries' markets are amazingly cheap relative to the developed world). Currency flux, capital flows and flight, fiscal and monetary policy mistakes and the coming and going of capital controls (not to mention the occasional military conflict) can make investing in emerging markets a breathtaking affair. There will absolutely be years, like 2014, when a 7.5% allocation, or more if you love roller coasters, will weigh down your portfolio's overall results. But then there were those years like 2006, 2007 and 2009 when VWO (Vanguard's emerging mkt ETF) returned (according to Morningstar) 29.5%, 39.1% and 76.3% respectively (vs. 15.8%, 5.49% and 26.5% respectively for the S&P 500).

If you're wondering why the seemingly most obvious of our investment destinations occupies the smallest equity allocation within our typical client's portfolio, it's the volatility. Most folks don't much enjoy investment roller coasters (except, that is, during the incline).

I'll stick with the 7.5% recommended target. We can talk individually if you'd like to consider going higher, or lower.

Non-U.S. Developed Markets:

As previously stated, international equities have not contributed to our porfolios' bottom lines of late nearly to the extent the U.S. exposure has. And for good reason---the U.S. economy has been the one bright spot, lately, among the world's developed nations. But, you know, political and central bank meddling notwithstanding, economies (even Japan's, ultimately) are cyclical. And I strongly suspect that when you read the 2024 version of this letter, I will be offering up some narrative about how the economies of the Euro Zone had expanded, contracted and expanded again over the course of the prior decade. And with an attractive aggregate p/e, a decent anticipated earnings growth rate, and more monetary accommodation ahead---not to mention profit margins that, unlike the U.S., are nowhere near their all time highs---I'm thinking the Euro Zone makes for a legitimate investment destination going forward. Hence my recent recommendation to bump up (a little) that exposure.

Per the above, Japan does not impress me. But that doesn't mean there aren't investment opportunities to be had in the great shrinking nation. The companies comprising the MSCI Japan Index are, in the aggregate, trading at 13.7 times next year's earnings. Throw in an earnings growth rate of 11.92 and you get a 1.15 PEG ratio---that's attractive. And factor in a central bank policy that'll remain the definition of easy for the foreseeable future, and you might do okay owning Japanese stocks going forward. While perhaps I should, I'm not recommending a Japanese-specific allocation at this time. But I'm feeling okay about that 21% exposure in EFA (the developed mkts etf we use widely) and the 9 to 11% Japan position in the international mutual funds some of our accounts hold.

The above logic aside, the simple fact that U.S. equities encompass merely 34% of the world stock market---or, frankly, that two-thirds of the world's growth opportunities lie outside the U.S.---virtually demands that we avail our portfolios to some of what the outside world has to offer.

I'll close here with a repeat of some common sense and two timeless bottom lines from last year's letter, a personal message, and a video that beautifully emphasizes why we should always maintain a global perspective:
Now, as scientific as you might imagine our selection process to be, there’s no assurance that the above allocation will deliver improved results at the margin (which is what we’re after). I can easily articulate a scenario for every one of the above sector picks that would logically counter whatever I believe justifies its 10+% weighting. And that’s essential to the process: For me to take, for example, a given client’s exposure to materials stocks from, say, 4% to 10%, there has to be investors (holders of materials stocks) out there who think that’s a bad idea—who are looking to unload their positions onto fools like me. Without opposing views (buyers and sellers) there’d be no market. You can, therefore, see why diversification is so important.

Beyond asset class and sector selection, there’s the real important stuff—the stuff that goes on between the ears: Like maintaining a proper perspective on volatility and asset allocation. Like understanding the opportunities that lie beyond our borders. Like understanding the cyclical nature of the economy and the influence of monetary policy on the cycle and on the pricing of fixed-income securities. Like never making emotionally-based investment decisions. And like understanding that, politics notwithstanding, our future is as bright today as it’s ever been.

The Bottom Line – investment-wise

The unpredictability of markets, while unnerving to some, forever offers opportunity for the disciplined investor. In fact, long-term investment success is indeed all about discipline. Investment mistakes are typically emotionally-driven. Fear can drive an investor out of equities long before his/her financial plan would have called for. Typically, and ironically, the times of extreme panic have tended to be extreme buying opportunities. Conversely, greed can inspire an investor to overweight—relative to his/her time horizon and tolerance for risk—a given sector, or equities in general. Typically, and ironically, times of investor euphoria (think tech in the late 90s and real estate in the mid 00s) have tended to be ideal times to rebalance out of equities.

Maintaining an asset allocation/rebalancing strategy keeps one from succumbing to the herd mentality. And, as we’ve discovered, following the herd is generally not your recipe for long-term success—think tech in the late 90s (irrational exuberance), the subsequent market bottom in March 2003 (extreme panic), and real estate in the mid 00s (irrational exuberance), and the subsequent market bottom of March 2009 (extreme panic). I suspect the holders of long-dated bonds have yet to learn that painful lesson.

The Bottom Line – economically, and societally, speaking

While there’s plenty in terms of geo-political risk to concern ourselves with at present, the future holds as much promise today as it has at any time in history. Yes, mistakes, particularly mistakes of policy, will be made. And yes, such mistakes will deliver hurdles and setbacks in the years to come. And yet future generations will witness the advancement of the human condition in ways we can’t even begin to imagine. The ultimate pace of that advancement will be determined by the extent to which we possess the freedom to pursue our individual objectives, and the freedom to conduct business in the global marketplace going forward.

Near-term, I remain cautious. Long-term—bumpy roads notwithstanding—I remain wildly optimistic. That (long-term wild optimism) said, your portfolio must, at all times, reflect your time horizon and your temperament.

Thank you so much for taking the time to take all this in. And I must say what my staff and I say all the time around the office: We have been truly blessed with a most wonderful group of clients! Thank you for allowing us to lighten the burden of investing your long-term assets from your shoulders!

Your financial peace of mind is of the utmost importance to us. So please, never hesitate to call on us---no need to ever wait for our scheduled review meeting---if the uncertainties of the financial world happen to distract you from the things you love to do...


Sunday, December 28, 2014

K-12 with hearing loss face limitations, learners, says research that is new

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Saturday, December 27, 2014

Weekly Audio Update

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Friday, December 26, 2014

Looks Like the Market Got It Right in 2013, And Your Weekly Update

This week's commentary is fittingly short, given the shortened workweek:

So it looks like the U.S. stock market got it right in 2013 . As I've stated numerously throughout this year, a better U.S. economy in 2014 was necessary to validate 2013's impressive gains. And, yes, the U.S. is indeed on firmer footing as we close out 2014. And as I'll report in next week's year-end letter, the market seems to have digested the 2013 feast quite nicely. 

2015 will be interesting indeed. While one would have to stretch to come up with a legitimate case for a bear market-causing recession next year, we shouldn't be surprised if we find the U.S. market suffering a little heartburn when the Fed begins its long-awaited tightening, or, as the Fed prefers, "normalizing" cycle--- I've made the case that the profit cycle is a bit more mature today than it was during past fed-tightening cycles. That doesn't mean that profits can't continue to accelerate going forward as strength in the economy builds on itself, it just means that we can expect a bit more volatility than we've grown accustomed to over the past few years.

Of course corrections, bear markets, extended bull markets or what have you notwithstanding, there's always value to be found in the market. I've been sharing my thoughts on the prospects for non-US stocks going forward, but I'm also seeing some interesting developments (positive and negative) among certain sectors here in the U.S. as well. I'll offer up the details in my year-end letter.

All of us here at PWA wish you and yours a wonderfully Happy New Year!

Here are the highlights from last week's U.S. economic journal:

DECEMBER 22, 2014

THE CHICAGO FED NATIONAL ACTIVITY INDEX FOR NOVEMBER advanced impressively. Here's from the press release:
Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to +0.73 in November from +0.31 in October. Two of the four broad categories of indicators that make up the index increased from October, and only one of the four categories made a negative contribution to the index in November.

The index’s three-month moving average, CFNAI-MA3, rose to +0.48 in November from +0.09 in October, reaching its highest level since May 2010. November’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests modest inflationary pressure from economic activity over the coming year.

EXISTING HOME SALES came in below the consensus estimate, 4.93 million vs 5.20 million est, and the October number, 5.26 million. This ends five straight months of 5 million plus. Interesting, given the improving jobs numbers and consumer sentiment--not to mention November's decent weather. The good news is that inventory is holding steady at 5.1 months of sales... I expect we'll see better numbers going forward...

DECEMBER 23, 2014

THE ICSC RETAIL REPORT came in at a very strong 3.4% increase over the previous week. And a 3.1% year over year rate... Much better than last week's year over year change of 1.1%. This year's retail season is indeed showing strong growth and speaks to the health/optimism of the consumer...

THE JOHNSON REDBOOK RETAIL REPORT surged to 5.3% year over year growth... Up from last week's positive report of 4.3% growth. Ditto my last comment under the ICSC commentary...

DURABLE GOODS ORDERS dropped .7% in November after increasing .3% in October. This is a big disappointment, as the consensus estimate was for a 3.1% rise. This is consistent with the softening we're seeing in recent manufacturing surveys. Beyond transportation, which fell 1.2% (largely due to a decline in defense aircraft orders), the results were mixed buy mostly down---machinery being the only major industry with a gain.

THE FINAL Q3 GDP NUMBER came in at a very impressive 5.0%. The highest reading since Q3 2003. Consumption surged, adding 2.21% to the total. Despite non-impressive housing results, fixed investment bounced back in the third quarter.  Bespoke makes an interesting point in their afternoon commentary:
From 1947 to 2000, private residential fixed investment averaged (through all economic cycles) 4.8% of GDP. It  now stands at 3.2%, well off its 2.4% low but still only back to the previous worst all-time reading set in the third quarter of 1982. Getting back to average would mean an extra point of GDP growth at the least. While housing activity continues to disappoint (New Home Sales for November came in at 438,000 versus 460,000 expected and 458,000 previous today), it remains the biggest possible upside risk to growth in the coming year.

CORPORATE PROFITS IN Q3 came in at $1.895 trillion. That's a 5.1% year over year change... Grew at 3.8% year over year in Q2...

THE FHFA HOUSE PRICE INDEX showed unexpected strength in October, .6% vs .2% est. 4.5% year over year, after a 4.4% gain in September...

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX held steady at a very high 93.6. The expectations component came in very strong and inflation expectations are low... This is a beautiful recipe for growth in retail...

PERSONAL INCOME AND OUTLAYS support the consistent high readings in consumer confidence. Of note is PCE (personal consumption expenditures) inflation coming in at 1.2%, from 1.4% prior... The core, which excludes food and energy, came in at 1.4%, from 1.5% prior. PCE is the inflation measure most watched by the Fed. Clearly, inflation is not yet the excuse to raise interest rates... Here's Econoday's commentary:
The consumer sector continues to improve with gains in income and spending but inflation remains weak. Personal income advanced 0.4 percent in November after growing 0.3 percent in October. The wages & salaries component increased 0.5 percent, following a gain of 0.3 percent the month before.

Personal spending grew 0.6 percent, following 0.3 percent in October.

Strength was in durables which jumped 1.6 percent, following a rise of 0.3 percent in October. Nondurables were unchanged in November after decreasing 0.3 percent the prior month. Services improved 0.6 percent after rising 0.4 percent in October.

PCE inflation continues to be weak-largely due to lower energy costs. Headline inflation posted at a minus 0.2 percent on a monthly basis, following no change in October. Core PCE inflation was flat in November, following a 0.2 percent rise in October.

On a year-ago basis, headline PCE inflation eased to 1.2 percent in November from 1.4 percent the prior month. Year-ago core inflation came in at 1.4 percent in November compared to 1.5 percent in October. Both series remain below the Fed goal of 2 percent year-ago inflation.

Overall, the consumer sector is slowly improving even though inflation is below the Fed's goal. In fact, lower gasoline prices are improving discretionary income and boosting spending elsewhere.

EXISTING HOME SALES came in below estimates at 438k... 460k was the consensus... Overall the November housing readings have been surprisingly disappointing. It'll be interesting to see, against a healthier and happier consumer and relatively positive homebuilder sentiment, how this indicators shapes up next year...

THE RICHMOND FED MANUFACTURING INDEX ---on the surface---picked up this month to 7 from 4 in November. While new orders and shipments were just okay and order backlogs contracted, a solid gain in the employment component speaks to confidence among the regions manufacturers...

DECEMBER 24, 2014

MBA MORTGAGE PURCHASE APPS showed a little growth last week, up 1%... REFINANCES were up 1% as well. I expect to see this data improve gradually going into next year...

WEEKLY JOBLESS CLAIMS fell further to 280,000 last week. The 4-week average is down to 290,250... These are very healthy numbers... Continuing claims, however, rose 25,000 to 2.403 million. The unemployment rate for insured workers is unchanged at a recovery low of 1.8%... All in all, the labor market continues to improve measurably...

THE BLOOMBERG WEEKLY CONSUMER COMFORT INDEX climbed yet again to a 7 year high. The sentiment indicators across the board have been stellar of late. This points firmly to a better US economy heading into next year (the Fed will, I suspect, be inching rates up by midyear)... Here's from the press release:
 (Bloomberg) -- Six years into the U.S. economic expansion, the recession in American consumer confidence is finally over.

The Bloomberg Consumer Comfort Index increased to 43.1 in the period ended Dec. 21, its highest level since October 2007, two months before the worst economic slump in the post-World War II era began, according to a report today. The same week, the fewest people since early November lined up at state employment agencies to apply for jobless benefits, other figures showed.

The confidence index blew past its long-term average as a strengthening job market, hints of impending wage gains and the cheapest gasoline in five years help Americans shake off any lingering recessionary blues. The gauge’s eight-point jump over the past three months has been led by improving attitudes toward the economy and buying climate, signaling a retail sales surge will probably extend beyond the holidays.

“It looks like consumers are in high gear heading into next year,” said Sean Incremona, senior economist at 4Cast Inc. in New York. “Better labor market conditions, better support for personal income, gas prices -- we’re really seeing good momentum.”

OIL INVENTORIES surged last week by 7.3 million barrels (and oil prices tanked on the news). Refineries are operating at a strong 93.5% of capacity. GASOLINE inventories grew by 4.1m barrels. DISTILLATES inventory was up 2.3m barrels.

NAT GAS INVENTORIES fell 49 billion cf last week...

Sunday, December 21, 2014

Weekly Audio Update

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Friday, December 19, 2014

"Patient" replaces "Considerable Time", The Fed Rally, Less Scary Credit Spreads, and Your Weekly Update

Over the course of the first twelve trading days in December you received eight Dow triple-digit-down audio commentaries from yours truly. That's a lot! And while plunging oil prices caught the blame, I was making the case that it was more about fear that the fed might soon raise the fed funds rate due to an accelerating U.S. economy. In retrospect, while indeed the market rallied hard after the Fed replaced "considerable time" (with regard to when it will begin normalizing [tightening] monetary policy), with "patient" (as I suggested it might), the previous days' stock prices had in fact moved in lockstep with movements in the price of oil. So perhaps it was, at least to some extent, about oil---or about the impact the energy sector is having on high yield credit spreads, or about how plunging oil, among other things, could result in a Russian default (although Russia has built up quite a balance in foreign reserves since the last time it defaulted on its debt).

Here's an update of the chart I featured in my last commentary comparing the high yield credit spread (purple line) to the S&P 500 (white line). Notice the sharp reversal: click to enlarge

HY spread, spx Dec 18

Last week's commentary explains the logic...

Credit spreads notwithstanding, clearly, traders are now cueing big time on the Fed---a two-day, 700 point, rally in the Dow proves it. Now that doesn't mean that the present market level doesn't make sense---the fundamentals are by no means terrible---but it does speak to what we might expect when the Fed finally begins "normalizing" policy (had they signaled that they stand ready to raise rates soon, we surely would've seen the reverse). The Fed sees its task going forward as preparing the market for the inevitable. Wednesday's replacing of "considerable time" with "patient" was a baby step in that direction.

In the meantime, as you'll notice in this week's economic highlights, the U.S. economy is---on balance---moving right along. Which may bode well for the U.S. stock market for the time being (but no promises).

As for other countries' economies, and markets, several have a bit of catching up to do. Which, along with the plunge in the energy sector, explains the overall lackluster (when compared to select U.S. indices) 2014 results for globally balanced portfolios. The question now would be, with the U.S. economy picking up the pace, and much of the rest of the world struggling to gain traction, does one sacrifice some balance and rotate out of international equities and into what's been working? Well, if you've been reading/listening lately you know my answer. Which is a resounding no. While I make no promises, given stats that I've previously presented, it makes sense to me that over time there's a fair chance we'll see a convergence of results between the performance of the U.S. and other markets.

Here's a graph (normalized to 100) showing the price movement of the S&P 500 (white line), the MSCI Europe, Australia and Far East Index (yellow line) and the MSCI Emerging Markets Index (green line) from the peak prior to the 2008 bear market to present (notice the divergence from Q1 2011 forward). While the S&P has regained its prior peak level plus 40%, the rest of the world, again, has some catching up to do. click to enlarge

spx, eur, em from prior peak

If, as I expect, we ultimately see a reversion to the norm, the question is, will it be the result of the U.S. market declining faster than other markets, other markets rising faster than the U.S. or a meeting in the middle? In two of those scenarios foreign markets rise. Time will tell...

Here are the U.S. highlights from last week's economic journal:

DECEMBER 15, 2014

THE EMPIRE STATE MANUFACTURING INDEX surprisingly contracted this month. In fact it's the first negative reading since January of 2013. New orders, unfilled orders and shipments all showed declines. One bright spot was the employment component, which has been the consistent case among most of the anecdotal reports. It'll be interesting to see how other regions stack up going forward.

Contrary to the NY regional read on manufacturing, the U.S. INDUSTRIAL PRODUCTION number, +1.3%, came in noticeably above the consensus estimate, +.7%. Capacity utilization is back to its long-term average of 80%. As the Fed's opening paragraph in the release suggests, this was a strong report:
Industrial production increased 1.3 percent in November after edging up in October; output is now reported to have risen at a faster pace over the period from June through October than previously published. In November, manufacturing output increased 1.1 percent, with widespread gains among industries. The rise in factory output was well above its average monthly pace of 0.3 percent over the previous five months and was its largest gain since February. In November, the output of utilities jumped 5.1 percent, as weather that was colder than usual for the month boosted demand for heating. The index for mining decreased 0.1 percent. At 106.7 percent of its 2007 average, total industrial production in November was 5.2 percent above its year-earlier level. Capacity utilization for the industrial sector increased 0.8 percentage point in November to 80.1 percent, a rate equal to its long-run (1972–2013) average.

THE NAHB HOUSING MARKET INDEX, while the number was below consensus (57 vs 59), shows builder confidence remaining strong. This is the 6th straight reading above 50 (expansion range). Expectations for future sales, as well as current sales, was very high...

DECEMBER 16, 2014

THE ICSC RETAIL REPORT showed a week over week spike of 3%, however, year over year it fell to a 1.1% pace. This speaks to the shopper's timing this year vs last, and supports the notion that the next few days will be pretty robust...

THE JOHNSON REDBOOK RETAIL REPORT showed sales improving to a 4.2% year over year pace. That's a typical pace during economic expansions...

HOUSING STARTS came in at 1.028 million, below the consensus by .01 million and off the revised prior month rate of 1.045 million.  Permits also declined, coming in at 1.035 million versus 1.080 million the prior month. November's decline followed a positive October. On net, activity has been trending just slightly positive of late...

MARKIT'S FLASH MANUFACTURING PMI INDEX came in above 50 (which denotes expansion) but, at 53.7, it was less than the consensus estimate and less than last month's 54.7. This represents the slowest growth in 11 months. Cost inflation, reflecting oil, is at a 19 month low. While November was a very good month in the sector, December's early indications are showing a slowing of the pace...

DECEMBER 17, 2014

MBA PURCHASE APPLICATIONS dropped a big 7% last week, despite falling mortgage rates... While consumer confidence is riding high, it's clearly not showing yet in the housing related results...

CPI came in lower than expected in November... The month over month change was -.3%. Year over year CPI is running at 1.7%, ex food and energy... With food and energy, it's running at 1.3%... This would be ammunition for the Fed to continue it's easy policy stance.

THE CURRENT ACCOUNT DEFICIT came in at -100.3 billion in Q3... While some economists place importance on the trade deficit... I don't... The fact that last quarter's number surprised to the upside speaks to the relative strength of the U.S. consumer, and the dollar itself...

THE EIA PETROLEUM STATUS REPORT shows a draw of .8 million barrels last week. That's good news for those looking for oil's rout to bottom. Gasoline inventories however rose by 5.3 million barrels. That's good news for folks who drive cars. Distillate inventories rose .2 million barrels. Refineries are running at a high 93.5% of capacity... I look for an easing in refinery production going forward.

THE FOMC MEETING ANNOUNCEMENT indeed omitted "considerable period". However, the word "patient" appeared instead. Now let's see, if one feels one needs patience, then one believes that what one's waiting for may not materialize for a considerable period. Hmm... Today we saw the Fed take the ultimate baby step toward readying the markets for the inevitable tightening cycle to come... The stock market rallied hard on the Fed's soothing words...

DECEMBER 18, 2014

JOBLESS CLAIMS came in at a low 289k last week. The 4-week average is now 298,750. Continuing claims last week came in at 2.373 million, which is down a substantial 147k from the prior week. although that merely reverses the prior week's 148,000 surge... All in all, the employment picture has brightened measurably in the U.S....

MARKIT'S FLASH SERVICES PMI, like Tuesday's manufacturing survey, registered an expansionary number, 53.6. But, just like the Manufacturing PMI, the results show a slowing of the growth rate from the prior month's read. In fact, the index peaked in June and has slowed over the past 6 months.

BLOOMERG'S WEEKLY CONSUMER COMFORT INDEX continues, as do virtually all other recent sentiment surveys, to show a substantial pickup in consumer optimism over the economy going forward. Last week's 41.7 was the best reading in seven years.

THE PHILADELPHIA FED SURVEY continues to show strong growth in the Philly Fed region, but not quite as strong as Novembers big jump. Ex-November, the reading is the best since 3/11. Here's a slice of Econoday's commentary:
The Philly Fed's general conditions index slowed to 24.5 from 40.8 in November. Outside of November, the latest reading is the strongest since March 2011.

But details in the report do show across-the-board slowing including for new orders, at 15.7 vs November's 35.7, unfilled orders at 1.5 vs 7.1, employment at 7.2 vs 22.4, and shipments, at 16.1 vs November's 31.9. It was this 31.9 reading that first signaled what proved to be a great month for manufacturers based on Monday's November industrial production report where the manufacturing component surged 1.1 percent.

But November looks to be an impossible comparison for the manufacturing sector this month though the rate of growth is still very strong. Other details in today's report include steady and muted readings for prices and a steady reading for inventories. The 6-month outlook remains very strong though once again less strong than November, at 51.9 vs 57.7.

THE INDEX OF LEADING ECONOMIC INDICATORS shows very strong near-term rates of growth, .6% for November. This supports the notion that the U.S. economy has found its footing going into 2015...

NAT GAS INVENTORIES fell 64 bcf last week. That's two consecutive weeks of decline.

DECEMBER 19, 2014


THE KANSAS CITY FED MANUFACTURING INDEX gave a better read for December than did other regional surveys. Manufacturing activity in the Tenth District expanded moderately and future expectations remained at healthy levels.

Tuesday, December 16, 2014

Market Commentary (audio)

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Monday, December 15, 2014

Market Commentary (audio)

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Sunday, December 14, 2014

Weekly Audio Update

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Man What a Week!, Scary Credit Spreads, Oil, The Next Two Weeks Don't Matter, and Your Weekly Update

Man what a week we just had! China's Shanghai Composite Index fell 9.2%, Greek stocks took a 20% hit, the European index ETFs we're adding to some portfolios saw 4.9% and 5.2% declines, and the S&P 500 saw its number taken down a 3.5% notch. So what just happened? Well, there's one CNBC host who likes to say "it's simple, there were more sellers than buyers." Problem is, that's impossible. If there were more sellers than buyers---if to be a "seller" means you sold something---well, I couldn't have told you how "bad" last week was. For there would have been no price discovery. Truly, to put a number on an index we have to know what was paid for the shares of the stocks it tracks when the last trades were made. The fact that the markets went down last week means that the buyers were not willing to pay the beginning of the week prices for shares of stock. And make no mistake, those who bought near the close on Friday were thinking last week was a great week---in that they received a nice 4 to 20% discount on the stuff they bought. While the sellers in no way shared that "great week" feel.

As for the long-term holders of stocks, eh, no big deal. Stocks go up, stocks go down. Always have, always will...

As for the U.S. economy, well, if last weekend your crystal ball had foretold of what you'd see in the indicators during the coming week, you would have no way predicted a drubbing of the U.S. stock market. I.e., the Conference Board's Employment Trends Index increased for the 11th straight month, the NFIB Small Business Optimism Index jumped to its highest level since February '07, weekly jobless claims dipped back below the $300k mark, retail sales blew away expectations and the consumer optimism surveys showed multi-year highs.

Given that U.S. GDP is two-thirds consumer spending and that small businesses are the backbone of the U.S. economy, you'd think that all of the above would've been celebrated by the market.

Ah, but there's the rest of the world out there. And a lot of the rest of the world ain't looking so good in the eyes of short-term investors. That said, the vast majority of pundits are crediting plunging oil prices as the reason for virtually all of the recent volatility. That there's a bubble a popping, and we all know what happened the last time a bubble (the housing market) popped, right? Well, yeah, but the key distinction is that a house is something you own, while oil is something you consume. The plunging price of an asset on your balance sheet is a wholly different proposition, with dramatically different ramifications, than the plunging price of an expense item on your cash flow statement. Yes, plunging oil prices are a huge net positive for the economy.

Now---to understand where the naysayers are coming from---given that such a thing is presented as a "net" positive, there has to be a calculation where positives are netted against negatives. So then, what are the negatives? Well, I've already touched on the obvious. 

In case you forgot:
I’ve heard a number of pundits downplay the economic stimulus story of plunging oil prices. They cite the boom in states like North Dakota, and how the folks there will suffer if this keeps up: A good number of those jobs will go away and that’ll reverberate throughout the rest of the economy. Well, they’re right, and, well, they’re wrong. Yes, some folks could lose their jobs, but if “reverberate” means that a cut in U.S. oil production will effectively nullify the economic gains of lower oil prices, they’re wrong—on two fronts. One, the U.S. oil boom has been the result of newly adopted (i.e., it’s been around awhile, but it’s just now being used en masse) technology that doesn’t rely on human capital like the old technology did. Meaning, the productivity of today’s oil industry is way higher than yesterday’s. I.e., it takes substantially fewer man hours to fill a barrel of oil than it used to. Plus, the U.S. remains a net importer of oil. Meaning, the boon to the U.S. consumer and industrial user of oil overcompensates for the hit to the oil producing states.

But there's a not so obvious concern that, believe it or not, smells a little like the bursting of the housing bubble---and this one clearly has some folks questioning the net positive story. It has to do with the debt market (mortgage debt was the bubble that brought the global economy to its knees). As it stands, no small percentage of today's outstanding high yield debt (junk bonds) was issued by the energy sector. In fact, it has been one of the highest issuers of high yield bonds over the past few years. One indicator I track as a gauge of financial stress in the system---and, therefore, a potential pre-recession indicator---is the spread between the yield on junk bonds and the yield on the 10-year treasury note (the bond market has historically been a somewhat more sensitive economic indicator than has the equity market). And it's been spiking of late.

Here's a scary 30-year graph showing the high yield spread (purple line) and recessions (red lines): click to enlarge

HY spread and recessions 30yrs

Okay, "scary" may be a stretch given that spikes in the yield spread are not uncommon and don't always mean recession, but, clearly, they're something to pay close attention to.

In terms of stocks, the year to date graph below tells you why the market might be a little nervous these days (purple = yield spread, white = S&P 500):  click to enlarge

High yield spread and spx

So then, the calling into question the health of issuers of below investment-grade corporate debt---evidenced by investors demanding higher yields on said debt---could mean that the bond market sees dark clouds on the horizon. Which could, if not should, spook equity traders in a hurry. Today's question, however---given the growing strength of the U.S. economy, and the lack thereof in the energy sector---would be: is it the outlook for merely the energy sector that's pushing out the spread, or is there a macro threat looming? The given (growing economy/weakening energy sector) of today's question suggests that it's primarily the energy sector doing a number on the spread.

Therefore, no---particularly when we consider your traditional recession indicators (the treasury yield curve, the trend in the unemployment rate, the St. Louis Fed Financial Stress Index and the Recession Probability index, all of which I recently charted for you)---I'm not seeing much risk of a U.S. recession anytime soon. 

In fact, I'm struggling with the whole premise that the recent volatility is all about plunging oil prices and spiking credit spreads. I'm thinking, counter intuitively perhaps, that it's more about the strengthening U.S. economy. You see, stocks love low interest rates. And almost nothing (other than high inflation) kills low interest rates like a growing economy. Which means all eyes are on the Fed, and the Fed meets next week, and everyone expects the Fed to leave out those three market-placating words, "considerable time period" (between now and the first fed funds rate increase), from its post-meeting statement. Which means the zero interest rate party may be coming to an end in the not-too-distant future. Which, as I suggested two weeks ago, may spell a bit of trouble for the stock market---at least at the outset (or as we anticipate the outset).

All that said, I wouldn't be the least bit surprised to see the market catch a nice bid sometime between now and year's end. Not because I want it to---and am therefore grasping at positive signs---(pragmatically speaking, I'm [other than as a source of material] uninterested [and so should be you] in short-term market direction) but because lots of folks trade seasonality (the last couple weeks of the year are often positive for stock prices) and lots of professionals, particularly hedge fund managers, got creamed this year and need desperately to catch up. Plus, we have a Fed that is being stared down by a skittish stock market, remarkably low inflation, plunging oil prices and a dollar that's been dwarfing other currencies like there's no tomorrow. I.e., while I don't expect that "considerable time period" will find its way into next week's statement, I do expect the Fed to nonetheless find the words that'll calm the market's nerves.

We'll see... And it (whether or market rallies the next two weeks) truly doesn't matter if you're a long-term investor...

The rest in a nutshell:

As for non-US markets: The volatility we've seen of late has been about legitimate concerns over economic weakness. Therefore, when it comes to China, Japan and the Euro Zone, central bank tightening is not something they need to worry about anytime soon. In fact, there's every reason to believe that we'll see precisely the opposite (aggressive loosening) going into next year. Which, at present valuation levels and recent underperformance (relative to the U.S.), makes some of those markets look very interesting going forward.

As for the price of oil: Given the magnitude of the recent plunge, one has to ask, at this juncture, if it isn't as much about the technicals (selling momentum exacerbated by the breaching of support levels drawn on graphs) as it is about supply and demand? Yesterday morning CNBC's Joe Kernan pondered how the experts who make their living following the oil market can know that there's a glut at $58 a barrel, when they didn't know it when it was recently at $90 (click here for the three-minute interview). Make no mistake, OPEC production notwithstanding, the present glut (at whatever extent it exists) will evaporate if the price continues its present trend.

I could go on all day (virtually every indicator below deserves its own essay), but I wouldn't expect---if you're even still with me---you to. So I'll leave you here with the highlights from last week's (U.S.) economic journal:                       

Thanks for reading!

DECEMBER 8, 2014

THE CONFERENCE BOARD'S EMPLOYMENT TRENDS INDEX increased in November. Here's from the press release:
NEW YORK, December 8, 2014…The Conference Board Employment Trends Index™ (ETI) increased in November. The index now stands at 123.24, up from 122.8 (a downward revision) in October. This represents a 6.1 percent gain in the ETI compared to a year ago.

“The Employment Trends Index increased for the 11th straight month in November, and recent solid improvements suggest that strong job growth is likely to continue into early next year,” said Gad Levanon, Managing Director of Macroeconomic and Labor Market Research at The Conference Board. “We will probably reach the natural rate of unemployment, 5.5 percent, within a few months, and these tighter labor market conditions should lead to acceleration in wage growth.”

DECEMBER 9, 2014

THE NFIB SMALL BUSINESS OPTIMISM INDEX jumped on expectations for an improving economy. The opening paragraph, featured below, says the expectations for an improving economy and increased sales volume explains the very good reading. However, it tells us that certain "hard" index components didn't improve. Of course if small businesses are correct in their optimism, we should expect the other components to improve in the coming months:
The Small Business Optimism Index gained 2.0 points, taking the Index to its highest level since February 2007. The average of the Index from 1974Q4 to 2014 to date is 98, which includes all the Great Recession readings. What didn’t improve were the four “hard” Index components: job creation plans, plans for capital outlays, job openings and inventory investment plans, together adding a negative 1 percentage point to the Index. The entire gain in the Index was accounted for by two components: Expectations for Business Conditions in Six Months and Expectations for Real Sales Volumes, adding a combined 21 percentage points to net favorable responses, perhaps a response to the November election results.

THE ICSC RETAIL REPORT had same store sales falling last week by 1.5%. Year on year, the sector picked up .1% to 2.9%.

THE JOHNSON REDBOOK RETAIL REPORT showed the rate of growth decelerating on a year over year basis to 3.9%, vs 4.8% the prior week. The report says this is typical for the first week of December... i.e., it follows the late November rush. The report says retailers are optimistic for the balance of this season...

THE JOB OPENINGS AND LABOR TURNOVER (JOLTS) REPORT showed that there were 4.8 million job openings at the end of October. Up slightly from September's 4.6 million. The all-important quits rate was little changed at 1.9%, which has been growing of late, and is a sign of strength in the labor market. I.e., folks don't quit their jobs unless their prospects are better elsewhere. The pre-recession level was 2.1%... the recession's worst level was 1.3%...

THE WHOLESALE TRADE REPORT showed inventories steady in October, up .4%, vs .2% increase in sales. Leaving the inventory to sales ratio at an historically healthy 1.19%... The draws in inventory came from computer equipment, farm products, chemicals and furniture... Low inventories in a strengthening economy are an optimistic sign for production going forward.

DECEMBER 10, 2014

MBA PURCHASE APPLICATIONS were uninspiring. Here's Econoday's summary:
In a nearly identical reversal of the prior week's readings, the Mortgage Bankers' composite index rose 7.3 percent in the December 5 week, vs a 7.3 percent decline in the November 28 week, while the refinance component rose 13.0 percent following the prior week's 13.0 percent decline. The difference, and there's not much, is the purchase component which rose 1.0 percent in the latest week, down slightly from the prior week's 3.0 percent gain. But there is one more perfect match in the latest data and that's a 4.0 percent year-on-year decline for the purchase index which hasn't shown much life at all this year. Rates moved mostly higher in the week with the average 30-year mortgage for conforming loans ($417,000 or less) up 3 basis points to 4.11 percent.

THE EIA PETROLIUM STATUS REPORT had crude inventories growing by 1.5 million barrels last week, gasoline by 8.2 million barrels and distillates by 5.6 million barrels... Oil prices are tanking on the news.

DECEMBER 11, 2014

WEEKLY JOBLESS CLAIMS dipped down to 294k last week... The 4-week moving average remains barely  below the 300k mark at 299,250... this is up from early November by 15,000...

RETAIL SALES came in very strong, up .7% vs .4% estimate, despite falling gasoline prices. Car sales jumped 1.7%... ex-autos retail sales were up .5%. Gasoline sales (retail sales data are based on dollar volume) declined 1.3%... This is a good number for Q4 GDP...

IMPORT AND EXPORT PRICES both declined... month over month down 1.5% and 1.0% respectively. Year over year down 2.3% and 1.9% respectively. Of course oil is a factor, but not nearly the only. Ex-oil, import prices fell .3%.. Ex-food and fuels, -.5%... Clearly, the strong dollar explains much of the import price decline, however the exports side of the data doesn't support that notion. Falling oil prices are no doubt impacting the global price environment...

BLOOMBERG'S WEEKLY CONSUMER COMFORT INDEX speaks volumes to what I've been reporting for weeks. That the confluence of an improving jobs picture and lower gas prices are inspiring a feel-good spirit among consumers. From Bloomberg's release:
Dec. 11 (Bloomberg) -- American consumer confidence reached a seven-year high last week as job gains and plunging fuel costs propelled the economy and boosted spirits in the midst of the holiday-shopping season.

The Bloomberg Consumer Comfort Index increased to 41.3 in the period ended Dec. 7, its highest since December 2007, from 39.8 the week before. Measures on the economy and buying climate also climbed to the strongest levels in seven years.

The lowest gasoline prices since 2010 and the biggest job gains in more than a decade are giving consumers the means to boost spending.

BUSINESS INVENTORIES rose slightly in October, but, most importantly, show no notable change relative to sales. The inventory to sales ratio remains at a very comfortable 1.30...

NAT GAS INVENTORIES fell 51 bcf last week...

THE FED BALANCE SHEET rose $2.7 billion last week to a monster $4.489 trillion...

DECEMBER 12, 2014

THE PRODUCER PRICE INDEX dropped .2% month over month and 1.4% year over year. Ex-food and energy, the month on month change was zero, year on year up 1.7%... The inflation indicators, by themselves, do not support the case---at least from an inflation standpoint just yet---that the Fed is behind the curve... 

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX surged this month to 93.8 vs the 89.5 consensus estimate. This is the best read since January '07. Both current conditions and expectations components show a consumer who's feeling very good about his/her circumstances...

TODAY'S CBOE EQUITY PUT CALL RATIO sits at a very high 79, up substantially from .49 a month ago. Last time we saw these levels was October 14, which was the day before this year's best rally in stock prices occurred. For contrarians this is a classic sentiment indicator... i.e., the time to buy the market is when sentiment is decidedly negative. This contrarian read however is not supported by Wednesday's AAII INVESTOR SENTIMENT SURVEY, which showed a 2.3% weekly increase in bullishness to 45%, and 3.6% decrease in bearishness to 22.3%... However, from my last recorded number, on 12/5, this represents a 7% decline in bullishness and a 1.5% increase in bearishness. That 12/5 52% read was historically high: interesting how the market has sold off since then... Yet another contrarian signal was the drop in short interest (denotes an increase in bullish sentiment), as of 11/28, in every sector, save for energy...            

TODAY'S BALTIC DRY INDEX reading is 863. This is a sharp decline from 10/31 when it peaked at 1,428 (which represented a 40% spike from the end of September). In October I reported that spike as a bullish signal for commodity-producing economies and as a signal that commodity users, such as China, were looking up. The recent trend completely reverses that sentiment. It'll be interesting to see if the Bank of China steps up stimulus as many expect. This data point provides fuel for that fire...


Thursday, December 11, 2014

Market Commentary (audio)

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Tuesday, December 9, 2014

Market Commentary (audio)

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Monday, December 8, 2014

Market Commentary (audio)

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Sunday, December 7, 2014

The Oil Conundrum, A Majorly-Stimulated Economy, Emerging Markets, and Your Weekly Update

A good week for U.S. economic indicators was capped off Friday by an employment report that exceeded the highest published expectations---with the November number coming in at 321,000 jobs, and September and October revisions adding another 44,000. Last week I shared with you my view of what we might expect from the stock market when the Fed begins tightening up on monetary policy. The fact that Friday's jobs report (which also had wages increasing at a rate twice the consensus estimate) did not inspire a massive rally in U.S. stocks (the Dow gained only .33% Friday, the S&P 500 gained .17%) I think speaks to that logic. The fact that Eurozone markets did rally big time (the German DAX gained 2.36% Friday, the French CAC 40 gained 2.21%) on the U.S. jobs number I think  speaks largely to the fact that the ECB is on the other side of the monetary policy fence (they'll be easing). 

Now, you shouldn't take my implying that good news may not be great news for U.S. stocks in the near-term as a suggestion that good news isn't indeed good news. Because it is. In fact, we'll take all we can get as we head into the year when the Fed at last gets the Fed funds rate off of what they call the zero lower bound. For the stock market to withstand the next Fed tightening cycle, we'll have to see profits continue to expand while P/E (price to earnings ratio)s contract (per last week's chart). And for profits to continue to expand from these levels, we'll have to see the economy continue to gain momentum going into next year.

The oil conundrum:

Inquiries are flowing in. Here are two from clients that essentially sum up the split of opinion among market participants:
1. "Should we be buying more energy stocks now that they're so cheap?"

2. "Wondering how badly we're getting hammered by oil prices still tanking (and apparently likely to continue for some time)? And "Are you nervous about energy in 2015?"

Now that (diverging thoughts [i.e., buyers and sellers]) is what makes a market!

T. Boone Pickens (famous oil man/expert) says oil will be back to $100 per barrel in 12 to 18 months. Others say it's heading to $40. Again, that's what makes a market.

Me, I don't know where the price of oil is heading in the near-term. But I do know this, plunging oil prices first result in reduced, if not halted, investment in new capacity. Low prices that remain low will result in cuts to current production. Cuts to current production will alter the supply/demand equation, particularly when we're talking about a commodity that, in one form or another, every human on the planet consumers. And one that when its price majorly declines becomes a major economic stimulus. And folks living in a majorly-stimulated economy feel good. And folks who feel good like to drive places and fly places and buy stuff with parts made from petroleum products. Yep, you get it, the price ultimately comes bounding back.

I've heard a number of pundits downplay the economic stimulus story of plunging oil prices. They cite the boom in states like North Dakota, and how the folks there will suffer if this keeps up: A good number of those jobs will go away and that'll reverberate throughout the rest of the economy. Well, they're right, and, well, they're wrong. Yes, some folks could lose their jobs, but if "reverberate" means that a cut in U.S. oil production will effectively nullify the economic gains of lower oil prices, they're wrong---on two fronts. One, the U.S. oil boom has been the result of newly adopted (i.e., it's been around awhile, but it's just now being used en masse) technology that doesn't rely on human capital like the old technology did. Meaning, the productivity of today's oil industry is way higher than yesterday's. I.e., it takes substantially fewer man hours to fill a barrel of oil than it used to. Plus, the U.S. remains a net importer of oil. Meaning, the boon to the U.S. consumer and industrial user of oil overcompensates for the hit to the oil producing states.

So, I say we enjoy it while it lasts. Because, alas, it won't last forever. And, yes, we're still a ways away from the point where the alternatives take over. And the price of oil will traverse many cycles in the meantime.

As for my answers to those two client questions:

1. Yeah, I suspect if one's patient one'll do okay buying oil stocks here. But if you're at 10% already, I think you're good for now.

2. When 10-15% of your equity exposure drops 10% on the year (30% the past few months), that's 1 to 1.5%  (3 to 4.5% over the past few months) less than you would've earned on equities without the energy exposure. Which, in a year when a portfolio's international exposure is weighing on the overall results as well, is a noticeable hit. Am I "nervous about energy in 2015?" Nope. I'm comfortable with 10% exposure.

The International Scene:

As you've noticed  (here, here and here), the Eurozone has been on my radar of late. Other than a passing remark regarding the Bank of China's easing stance, I haven't said much about the emerging markets the past few weeks. Of course you clients know, given the emerging markets speech you suffer through at virtually every review meeting, that I remain a huge long-term bull. I mean, emerging markets (think China, India, South Korea, Indonesia, South Africa, Brazil, Mexico and the like) are where 85% of the world's humans live. They're where young materially (as in materialism)-thirsty workers reside. They're where populations are growing (critical to a growing economy). They're where infrastructure has huge catching up to do. In short, they're where the world's greatest opportunities lie. They're also where volatility is defined. Therefore, we can't go hog-wild into the emerging markets. We can, however, as we have in many portfolios (of willing clients) add incrementally over time. Here's what I wrote in last December's "Our View Going Forward":
We see unusual long-term opportunity in non-US economies, particularly emerging markets. During the first quarter of 2012 we recommended a modest move out of developed non-US markets to index funds that track the stocks of companies domiciled in China, Brazil, India, South Korea, Indonesia, Taiwan, Thailand, Malaysia and other emerging nations. The global economic concerns of the past few years have, we believe, offered up an opportunity to buy into those potentially robust economies at extremely attractive valuations. 85% of the world’s population lives in emerging markets and, clearly, western ideals have taken root in the psyche of the citizens and leaders of many of these nations. That said, change can be painful, and we caution investors not to over-indulge in direct emerging markets exposure.

(Note: The opportunity for growth I continue to see in emerging market equities was not nearly realized (in fact share prices declined) in 2013. Here’s a recent blog post where I explain how quantitative easing in the U.S. has led to extreme volatility in the emerging markets.) 

 We believe, geo-politics notwithstanding, that long-term opportunities exist in developed-world equities as well. Particularly in companies with substantial reach into the emerging markets. The relatively young, forward-looking, populations in many of the emerging economies (the average age of an Indian worker is 26)—with their need/thirst for infrastructure—presents opportunities for multinational companies in the U.S. and other developed nations. Think industrials, materials, technology, agriculture, energy and finance.

China stocks have been on a tear of late... As you'll notice in the below snippet from a Bloomberg News article, one Wall Street firm credits easing monetary policy from the Bank of China. Which (central bank easing), again, speaks to one reason why I find the Eurozone interesting going into next year. As for my thoughts regarding the long-term importance of maintaining emerging markets exposure in your portfolios, I'm more committed than ever. But my commitment is  more about the longer-term trends referenced above than it is central bank policy: 
That bull-market feeling is back in China.

The Shanghai Composite Index (SHCOMP)’s advance to a three-year high today extended its gain over the past month to 14 percent, trouncing all 92 of the world’s other benchmark equity indexes by at least six percentage points. Mainland investors are opening stockaccounts at the fastest pace in three years, trading in Shanghaisurged above 500 billion yuan ($81.3 billion) today for the first time and initial public offerings have returned an average 180 percent in 2014.

Central bank efforts to bolster China’s economic growth are reviving optimism in the $4.6 trillion stock market after the Shanghai Composite lost more value than any other major benchmark index worldwide in the past five years. While exchange-traded fund investors are paring holdings on concern the gains won’t last, Morgan Stanley (MS) says there’s potential for an “ultra-bull” rally where share prices double in 18 months.

“New account openings are a sign that there is fundamental investor participation,” said Jonathan Garner, the Hong Kong-based head ofAsia and emerging-market strategy at Morgan Stanley who predicted in June that monetary stimulus would drive a second-half rally in Chinese shares. “Moves on high volumes should always be taken seriously.”

Below are the highlights from last week's U.S. entries to my economic journal. As I suggested in the opening line above, last week was overall good on the economic indicator front. The "What Respondents Are Saying" sections from the Institute of Supply Management (ISM)s purchasing managers surveys (which I feature below), and the results of the consumer sentiment surveys, speak volumes about why the hard data is pointing to an acceleration in the U.S. economy:

(Oh, and lastly, if you're our client, and haven't yet listened to last Friday's audio titled "Important Message to Clients", please do. Your reply is requested with regard to two items therein.) 


 DECEMBER 1, 2014

MARKIT PMI MANUFACTURING INDEX shows slowing growth in the sector.. a 10 month low of 54.8 vs an estimate of 55 and 55.9 prior. New orders and output slowed... The employment component is still strong however... The manufacturing surveys of late have clearly flattened out... Still growing (above 50) but at a slower pace of late...

THE ISM MANUFACTURING INDEX did not at all concur with Markit's survey. The ISM came in at a very strong 58.7. Which is near recovery highs. New orders came in extremely strong at 66 with backlog orders up as well. Jobs growth remained strong, as did production growth. Slowing delivery times indicates strength as well. Input prices are dropping, reflecting declining oil prices. Here's what's the survey's respondents are saying (taken straight from the release):

"The Holiday Season continues to exceed expectations. Customers are generally optimistic for future sales growth." (Food, Beverage & Tobacco Products)

"Continued strong demand. Deliveries through the West Coast are delayed due to a number of factors." (Fabricated Metal Products)

"We have seen continued growth in transportation equipment. Slowdowns and threats of strike of West Coast longshoreman weigh heavily on U.S. operations." (Transportation Equipment)

"Business continues to be stronger than last year." (Furniture & Related Products)

"Improvement in defense spending and manufacturing." (Computer & Electronic Products)

"West Coast port longshoreman slowdown is affecting business with longer lead times." (Chemical Products)

"We continue to hire people. People are also leaving to take other jobs indicating the job market is starting to improve for manufacturing." (Electrical Equipment, Appliances & Components)

"Market has remained strong going into year-end." (Wood Products)

"Order intake has been substantial, resulting in a very healthy backlog. The packaging automation requirements in the food and beverage market are robust." (Machinery)

"Demand remains strong for new orders." (Miscellaneous Manufacturing)

THE GALLUP US CONSUMER SPENDING MEASURE showed consumers spending $95 per day in November, vs $89 in October. Also up year-on-year ($91 last November)... This is well above the recovery average...

DECEMBER 2, 2014

AUTO SALES spiked above the highest estimates... 17.2 million, vs 16.5 million prior... North America-made cars were especially strong at 14.0 million... This is the second straight gain and speaks volumes about consumer optimism of late...

THE ICSC RETAIL REPORT came in surprisingly down 1.8% last week. The year on year rate, however, rose 1.1% to 2.8%... The report was  upbeat in saying that consumers are behind in their Xmas shopping, pointing to a potentially big December pickup.

THE JOHNSON REDBOOK RETAIL REPORT showed strength last week, growing to 4.8% (above 3.5% is typical during economic expansions) year on year, vs 4.2% the prior week...

THE GALLUP US ECONOMIC CONFIDENCE INDEX FOR NOVEMBER rose to -8 in November vs -14 prior. That's the highest monthly reading in the past 18 months. The post recession high was -7 in May 2013... This is the 4th consecutive increase after a year of flat readings... The following is from Econoday's summary:
Though the index remains in negative territory, November is the closest it has come to breaking into positive territory in quite some time. The current reading is the second-highest monthly reading since Gallup began tracking the index daily in January 2008. November saw higher weekly scores than at any point in the past year and a half, with a weekly high of minus 6 for the week ending November 16. The month ended with a score of minus 8 for the week ending November 30. Meanwhile, 43 percent of Americans said the economy is "getting better," while 52 percent said it is "getting worse." This resulted in an economic outlook score of minus 9 -- the best outlook score since July 2013.

Confidence among lower- and middle-income Americans climbed three points from October, to a current score of minus 11, and among higher-income Americans, it rose four points to plus 6. Upper-income Americans, those who make $90,000 a year or more, also had positive index scores of plus 5 in May and June of 2013.

November's economic confidence reading brings more promising news for those watching the index's movement. The consecutive monthly increases in economic confidence come as gas prices continue to drop and are slated to fall below $2 a gallon in some parts of the country. Additionally, the Dow rose 2.5 percent in November.

CONSTRUCTION SPENDING rebounded big time in October.. 1.1% month over month, vs -.4% prior... The noted positive components were public outlays and private residential.

DECEMBER 3, 2014

MBA WEEKLY MORTGAGE INDEX showed growth in new purchase apps +3%, but continued weakness in refinances. Econoday sums it up nicely:
The purchase index snapped back in the holiday shortened November 28 week, rising 3.0 percent after falling 10.0 percent in the prior week. The gain helped the year-on-year reading which improved to minus 4.0 percent from minus 10.0 percent. The refinance index, however, continues its long run in negative trend, down a steep 13.0 percent for a sixth straight decline. Rates were mostly lower in the week with the average 30-year mortgage for conforming loans ($417,000 or less) down 7 basis points in the week to 4.08 percent.

THE ADP EMPLOYMENT REPORT showed 208k new jobs in November. Off the 225k estimate but respectable nonetheless...

US PRODUCTIVITY rose 2.3% in Q3 vs 2.0% prior... the consensus estimate was for a 2.4% gain... The report speaks positively about corporate profits and modestly about consumer income. I do expect to see wage inflation as next year unfolds against an expectation of a tightening labor market...

MARKIT'S SERVICES PMI INDEX came in slower for the 5th straight month, at 56.2 vs 57.1... although it remains solidly in expansion territory (above 50). The employment component remains strong. Here's Econoday's summary:
Markit's sample of US service providers reports a 5th straight month of slowing growth from June's recovery peak, at a composite index of 56.2 vs 56.3 at mid-month and a final 57.1 in October. Readings on new business and output have now moderated for 7 straight months. A positive is a 5-month high in hiring and a 5-month high in the business outlook. Of note is continued moderation in inflation pressures with the increase in input costs the lowest since April last year and the increase in prices charged the lowest since July this year.

Despite slowing in the report, levels are still very healthy and sustainable. Coming up at 10:00 a.m. ET this morning is the non-manufacturing report from the ISM which, aside from services, also covers the construction and mining sectors.

THE ISM NON-MANUF (SERVICES) PMI, unlike Markit's, shows a growing trend in the services sector. At 59.3, it came within a hair of the recovery high of 59.6... You have to go back 9 years to find another reading (other than August's 59.6) this high. While the majority of the components read strong, the employment component softened a bit. While it still shows employment growth, the pace contracted in November. That's an unusual reading these days, but given the strength of the other components I'd expect to see the jobs component remain strong going forward. Other areas of note are the commentaries regarding strain on capacity (can lead to capex and/or inflation), and the increase in the prices index... Here's what's the survey's respondents are saying (taken straight from the release):

"Business is good with new technology and products." (Information)

"General uptick in demand/spending." (Finance & Insurance)

"We are experiencing downward pricing pressures on the price of natural gas as a result of the lower energy prices being driven by OPEC’s lower oil prices." (Mining)

"Food cost continues to be a challenge due to cost of goods increases. Beef, produce and turkey markets remain high. Chicken, pork and eggs, although year-over-year are higher; prices have fallen from one month ago." (Accommodation & Food Services)

"Business is strong. Many new accounts want to be implemented before year-end so cost reductions can be included." (Professional, Scientific & Technical Services)

"We are looking forward to a strong holiday season." (Retail Trade)

"We are still seeing continued momentum month-over-month with the strongest area being government accounts." (Wholesale Trade)

CRUDE OIL INVENTORIES declined 3.7 million barrels last week due to a rise in refinery demand. Running at 93.4% of capacity last week, refineries have added to product inventories: gasoline inventories up 2.1 million barrels and distillates up 3 million.

DECEMBER 4, 2014

CHAIN STORE SALES rose 4.9% over the past year... a healthy pace...

CHALLENGER JOBS CUTS totaled 35, 940 in November, down from 51,183 in October and 45, 314 last November. Makes sense given what we're seeing in the jobs-related data.

THE BLOOMBERG CONSUMER COMFORT INDEX continues to show sentiment near a 7 year high. The following from Bloomberg's release speaks to my optimism for retail this shopping season:
Dec. 4 (Bloomberg) -- Consumer sentiment last week held close to an almost seven-year high as falling gasoline prices kept Americans upbeat about the buying climate.

The Bloomberg Consumer Comfort Index eased to 39.8 in the period ended Nov. 30 from 40.7, which was the highest since December 2007. A gauge of attitudes about whether it’s a good time to spend stayed at the best reading since November 2007.

From Bloomberg:

Households making their holiday gift purchases have become more optimistic as they pay the lowest prices for gas since 2010 and employment opportunities expand. Faster growth in wages and further improvement in the job market that reduces the number of long-term unemployed would help set the stage for bigger consumer spending gains into next year.

Confidence had the “strongest start to a holiday shopping season since 2007,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement. This “should brighten the season for retailers.”

WEEKLY JOBLESS CLAIMS dipped back below 300k last week, to 297k....

NAT GAS INVENTORIES declined by 22 bcf last week...

M2 MONEY SUPPLY grew by $3.5 billion last week... after rising $12.1 billion the week before...

DECEMBER 5, 2014

THE BLS NONFARM PAYROLLS REPORT came in way above the consensus estimate, at 321k vs the 225k forecast. This essentially confirms, and some, the signals I've been reporting on for weeks. Plus, the month on month hourly earnings increase came in at a surprisingly strong .4% (estimate was .2%). This speaks volumes about the present momentum of the U.S. economy... This report, the wage number in particular, no doubt has the Fed's attention. It's virtually a given, barring a surprise pullback in the U.S. economy, that the Fed will begin the tightening process during the course of next year. However, given their obvious concerns over roiling the financial markets while raising interest rates, etc., and the present lack of inflationary pressures (the wage number notwithstanding), I expect they'll start the process in as gingerly a fashion as possible.

The U.S. imported $43.4 billion worth of goods and services than it exported last month. This is billed as a negative, given that the consensus estimate was for a $41 billion gap, by those who are paid to comment on such things. Personally, I view the negativity as utter hogwash. THE TRADE DEFICIT speaks to the relative health of the U.S. consumer, our freedom to shop the world for the things we desire, and the rest of the world's desire to acquire U.S. goods, services and assets... The deficit relates to goods and services, the remainder flows back as foreign direct investment in U.S. assets.... A very good thing by the way...

On the surface OCTOBER FACTORY ORDERS surprised on the downside. Under the surface, however, the bulk of the weakness came from nondurables, which is essentially the result of lower oil prices. Durable goods rose .3%, versus a drop of .7% in September...

CONSUMER CREDIT rose $13.2 billion in October. However, the gain was not in the area that would be meaningful to retailers (revolving credit). It was concentrated in non-revolving credit. Which would be auto loans and the government's acquisition of student loans from private lenders. If November's wage growth becomes the new trend, we'll likely see a pickup in revolving credit going forward...