Sunday, August 31, 2014

The Buying-of-the-Dips Saga - AND - An Economic Update

August turned out to be a very nice month if you're long (own) the stock market. Yes, July's little swoon turned out to be yet another chapter in this buying-of-the-dips saga. That's virtually all we've seen since the fall of 2011---an amazingly long time without a 10+% correction.

So what gives? Of course nobody knows for sure, but here's what I'm thinking:

First and foremost, this has indeed been the most disrespected bull market of my career. While the indices hit all-time highs, among other things, folks carp about the Fed and how it's the reason for the season. Which means when the Fed turns the printing press cold, this market will melt down all over those fools who've been riding it higher. If you're a regular reader you know I'm not at all sympathetic to that thinking. Not that I don't think the market's in for some pain when the Fed finally lifts the interest rate pedal off the floor, but I adamantly do not fully credit the Fed with the bull market. So why do I label all this bull market-doubt "first and foremost"? Because an environment of disbelief does not lend itself to the telltale euphoria that typically precedes the demise of a bull market.

Secondly, low inflation amid an expanding economy---which is what we're now experiencing (in the U.S.)---is goldilocks for the stock market.

Thirdly, and sadly, the individual investor is always the last to the party. And, still suffering the psychological effects of 2008, he/she has been reluctant to entrust the stock market with his/her retirement savings. If history repeats, he/she'll ultimately capitulate and rush in, signaling (possibly) the last leg (which could be a short or long leg) of this bull market.

And, fourthly, while I don't credit the Fed with the productivity gains made by corporate America these past few years, I acknowledge the fact that it has contributed to an interest rate environment that virtually eliminates the stock market's competition. That is, for the attention of those who are uninterested in earning money market rates (essentially zero) on their entire portfolio, or earning 2.3% on a ten year bond that'll get creamed when interest rates rise, but are yet willing to expose a portion of their long-term portfolios to the volatility inherent in the stock market.

Of course there's more---geopolitical uncertainty keeping a lid on optimism for one---but we'll rest on those four for now.

Please keep in mind that, in the above, I only attempt to describe a few factors that might explain why we are where we are. You should not view it as any assurance that present trends will remain ad infinitum, or for the next few weeks, months or years. The world is a dynamic place, and, as I've explained here ad nauseam, the factors that move markets are uncountable. My comfort as a long-term investor comes from.... well, being a long-term investor, and from my belief that the goods and services you and I (and our children's children) will be enjoying years hence will make today's miracles seem stone-agely by comparison.

The following are the highlights from my economic journal for the last half of last week. As you'll see, things in the U.S are, on balance, looking up:


AUGUST 27, 2014

The Congressional Budget Office (CBO) released its latest update of economic projections. The first two paragraphs sum up its findings:
The federal budget deficit has fallen sharply during the past few years, and it is on a path to decline further this year and next year. However, later in the coming decade, if current laws governing federal taxes and spending generally remained unchanged, revenues would grow only slightly faster than the economy and spending would increase more rapidly, according to the Congressional Budget Office's (CBO's) projections. Consequently, relative to the size of the economy, deficits would grow and federal debt would climb.

CBO's budget projections are built upon its economic forecast, which anticipates that the economy will grow slowly this year, on balance, and then at a faster but still moderate pace over the next few years. The gap between the nation's output and its potential (maximum sustainable) output will narrow to its historical average by the end of 2017, CBO expects, largely eliminating the underutilization of labor that currently exists. As the economy strengthens over the next few years, inflation is expected to remain below the Federal Reserve's goal, and interest rates on Treasury securities, which have been exceptionally low since the recession, are projected to rise considerably.

NEW PURCHASE MORTGAGE APPS PICKED UP A LITTLE, rising 3.0%, but still flat (down 11% year over year).

AUGUST 28, 2014

The revised GDP number for Q2 came in at 4.2%, better than the preliminary estimate. Here's Econoday's summary:
The second estimate for second quarter GDP growth came in a little stronger than expected, rising 4.2 percent annualized versus a 4.0 percent forecast and coming off a 2.1 percent weather related drop in the first quarter. With this second estimate for the second quarter, the general picture of economic growth remains the same; the increase in nonresidential fixed investment was larger than previously estimated, while the increase in private inventory investment was smaller than previously estimated.

WEEKLY JOBLESS CLAIMS CAME IN JUST A BIT LOWER THAN LAST WEEK'S, showing strength in the jobs market. The present pace of economic growth is job-supportive for sure.

CORPORATE PROFITS are growing nicely. Here's Econoday's summary:
Corporate profits in the second quarter came in at $1.840 trillion, following $1.735 trillion for the first quarter. These numbers include annual revisions. Profits in the second quarter gained an annualized 26.5 percent after an 11.0 percent drop in the first quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits on a year-on-year basis were up 4.5 percent, compared to 2.4 percent the prior quarter.

While the various housing indicators are coming in somewhat mixed, on balance, things are clearly looking up. As today's PENDING HOME SALES---3.3% increase, bringing the index to 105.9 (way above expectations)---number suggests.

AUGUST 29, 2014

PERSONAL INCOME GROWTH surprisingly decelerated in July, after two strong months. Personal income, up .5% in both May and June, came in at up .2% in July. The consensus estimate for July was up .3%. Wage and salary growth decelerated as well: up .2% in July after .4% increases in May and June.

Personal spending actually declined .1% in July after a .4% increase in June. The consensus estimate for July was up .3%. I'm surprised as well---given the strength we're seeing in the employment components of virtually every employer survey I've reviewed over the past several weeks.

The PCE (personal consumption expenditures) core inflation measure came in at 1.5%, same as June. PCE is the Fed's preferred metric, and remains below its 2% target.

While---based on what I'm seeing in the surveys, plus recent reads on consumer confidence---I suspect we'll see these stats improve in coming months, July's income and spending numbers, and PCE inflation, should calm the nerves of itchy trigger-fingered traders who remain focused on the Fed.

THE CHICAGO PURCHASING MANAGERS INDEX jumped big time, to 64.3, in August. This is after posting 52.6 (above 50 denotes an expanding economy) in July. Here's Econoday's summary:
The Chicago PMI moved from slight monthly expansion, 52.6 in July, to extreme monthly expansion for August, to 64.3. The August reading is the highest since a 65.5 spike in May.

Details of the report are released to paid subscribers only but a run down is published with production leading August's gain while the monthly gain in new orders is described as strong. The gain in backlog orders is also described as strong while supplier deliveries lengthened. Inventory accumulation was especially pronounced while prices paid edged up only slightly. Employment growth slowed.

Confirming Tuesday's Conference Board's Consumer Confidence Index (big positive move), the UNIVERSITY OF MICHIGAN'S CONSUMER SENTIMENT INDEX showed growing optimism---in current condition terms that is---coming in at 82.5. The current conditions component came in at 99.8 vs 97.4 in July.

However, future expectations are lagging a bit. That component came in at 71.3, which was better than the 66.2 mid-month look, but down a bit from the 71.8 reading in July. Econoday says:
The softness in expectations hints at a lack of confidence in the long term outlooks for jobs and income. Yet the gain for current conditions is a definite positive for the short-term outlook.

Again, I look for these numbers to improve going forward based on what I'm seeing in the leading indicators...



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