Sunday, October 26, 2014

Market/Economic Update

I started last weekend's letter by defining "volatile" as the previous week's market action and mixed economic signals. The ensuing week told a vastly different story---with the stock market breaking strongly to the upside, and the slew of economic indicators painting a generally positive picture for the U.S. economy.

Could the recent pullback in the major averages be yet another head-fake in a bull market that appears to be sustained by positive earnings, rosy outlooks, low inflation, low interest rates, an accommodative Fed and liquid corporate balance sheets? And could it be that the U.S. economy has finally lifted off the runway?

Yeah, those are legitimate could-bes. But before we throw all caution to the wind and mortgage the almond farm to buy Apple, let's not forget that the stock market, while a great wealth-builder for the patient long-termer, loves to break the hearts of those so naive as to believe that they can consistently interpret, and successfully trade, the economic tea leaves.

That said, as you've seen in the last several updates---the following being no exception---the U.S. employment picture is looking better by the day. Combine that with the recent plunge in energy prices and you have the recipe for an upside surprise come the Christmas retail season. Provided, that is, that the recent sell-off in stocks hasn't done a number on the consumer's psyche---recent sentiment surveys suggest it hasn't.

So then, am I a raging near-term bull? Can I entirely slough off the Euro Zone, Russia, the strong dollar, Ebola, etc.? Actually, I can, but I won't. Anymore than if I were a brooding bear and began this letter by citing the ugly economic signals coming from the Euro Zone, the dangers of a strong dollar, the threat of Ebola, etc. would I entirely slough off the positives I chose instead to reference. And, honestly, whatever the near-term has in store means literally zilch with regard to the long-term success of our clients' portfolios. Why? For the simple reason that the distance between now and year-end 2014 is, to state the obvious, extremely short. Anyone who needs the money they have in stocks between now and year-end has no business being in stocks, regardless of how rosy the picture.

Why, therefore---with such a long-term view---do I bother you with weekly market and economic updates? Well, it's simply because that unless you remain completely out of touch with the mainstream media---in which case you're blessed---you're bombarded with short-term all-over-the-map perspectives on the economy and the financial markets. So I figure you might as well get mine as well. Along with a steady dose of why it's so important to diversify and maintain your long-term perspective/discipline...

Here are the highlights from last week's (U.S.) economic journal, edited for your reading (WOW, MOM, QOQ and YOY mean week-over-week, month-over-month, quarter-over-quarter and year-over-year respectively):

OCTOBER 20, 2014

OCTOBER 21, 2014
ICSC WEEKLY RETAIL SALES came in soft once again last week. Down .3%, and only up 2.1% YoY. This is lower than the typical 4+% rate we tend to see during economic expansions. That said, the report cites strength in electronic and apparel stores. I remain optimistic for the Christmas season based on the improving jobs picture, lower energy prices and a fairly confident consumer.

THE JOHNSON REDBOOK RETAIL SALES showed a healthier retail sector than did the ICSC report. Up .1% MoM (nothing to get too excited about), and up 4.1% YoY---which is within the typical expansion-phase range...

EXISTING HOME SALES improved 2.4% MoM... Yet remain flat YoY: -1.7%...

EXISTING HOME PRICES were down 4% MoM, and up 5.6% YoY... From Econoday's report:

The housing market has been flat but today's report offers a hint of good news, especially given this month's sharp decline in mortgage rates and the steady improvement underway in the labor market. Financial markets are showing little initial reaction to today's report.

API WEEKLY CRUDE STOCK showed a 1.2 million barrel build. Despite higher inventory, oil seems to have found a bottom the past couple of days...

API WEEKLY DITILLATES STOCKS were down .82 million barrels.

API WEEKLY GAS STOCKS were down .532 million barrels...  Oil, etc., inventories are important to track, as they will impact pricing. I.e., higher inventories ultimately translate to lower prices, and vice versa

THE BALTIC DRY INDEX has bounced to 1009... This is a positive read for the global economy, particularly China. In that the index tracks the price of shipping raw materials by sea. The higher the demand for raw industrial materials, the higher the price of shipping and, thus, the higher the index....

OCTOBER 22, 2014
MBA PURCHASE APPLICATIONS continue to show weakness in the housing sector. Econoday's summary:

Mortgage rates are falling fast and are giving a sharp lift to refinancing applications but not applications for home purchases. The refinancing index jumped 23.0 percent in the October 17 week following an 11.0 percent jump in the prior week while the purchase index fell 5.0 percent for a second straight decline. Year-on-year, the purchase index is down 9.0 percent. Mortgage rates have fallen nearly 30 basis points over the past month and were down 10 full basis points in the latest week to an average 4.10 percent for conforming balances ($417,000 or less). The lack of movement for the purchase index underscores the lack of traffic and lack of demand in the housing sector.

THE CPI came in at a very tame .1% increase for September. And 1.7% YOY... The same number with and without food and energy (the .3% increase in food (3.0% YOY) is effectively offset by declines in energy prices)... Clearly, the inflation readings have to be music to the ears of Fed worriers. Here's the BLS summary:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.
Increases in shelter and food indexes outweighed declines in energy indexes to result in the seasonally adjusted all items increase. The food index rose 0.3 percent as five of the six major grocery store food group indexes increased. The energy index declined 0.7 percent as the indexes for gasoline, electricity, and fuel oil all fell.
The index for all items less food and energy increased 0.1 percent in September. Along with the shelter index, the index for medical care increased, and the indexes for alcoholic beverages and for personal care advanced slightly. Several indexes were unchanged, and the indexes for airline fares and for used cars and trucks declined in September.
The all items index increased 1.7 percent over the last 12 months, the same increase as for the 12 months ending August. The 12-month change in the index for all items less food and energy also remained at 1.7 percent. The 12-month change in the shelter index has been gradually increasing, and reached 3.0 percent for the first time since January 2008. The food index has also risen 3.0 percent over the span, while the energy index has declined 0.6 percent.

THE EIA OIL INVENTORIES REPORT showed a continued build of 7.1 million barrels. This was the reported, and logical, excuse for oil prices declining and energy stocks taking a huge hit (xle -1.9%) today. Econoday claims that maintenance at refineries is contributing measurably to the builds:

Maintenance season for refineries is pulling down refinery inputs of oil and contributing to large builds for oil inventories which rose 7.1 million barrels in the October 17 week to 377.7 million. Refineries operated at 86.7 percent of capacity, down from 88.1 percent in the prior week. And wholesale supplies are looking increasingly thin, pointing to the need for greater refinery output. Gasoline wholesales stocks are down 0.2 percent year-on-year while distillate stocks are down 0.6 percent. WTI oil is moving on the large headline build for oil, down more than 50 cents to under $82.

OCTOBER 23, 2014
WEEKLY JOBLESS CLAIMS continue to come in a multi-year lows. The 4-week moving average, at 281,000, is a number lower than we've seen in 14 years. Speaking very favorably about the jobs market and the U.S. economy going forward.

THE CHICAGO FED NATIONAL ACTIVITY INDEX came in strong at .47, from -.25 in August. 

THE FHFA HOUSE PRICE INDEX came back in August by .5%, following a gain of .2% in July. Expectations were for a .3% gain in August.

THE MARKIT FLASH MANUFACTURING PMI showed a slowing for October to 56.2 from September's 57.5. The mid-month flash for September was 57.9. Employment growth, however, held strong at a 2 1/2 year high. September turned out to be a strong month for manufacturing, making MoM comparisons difficult...

THE INDEX OF LEADING ECONOMIC INDICATORS jumped .8% in September. Here's Econoday:

The index of leading economic indicators rose an outsized 0.8 percent in September against an easy August comparison when the index was unchanged. Low interest rates were the major factor contributing to the strength which was very broad based with only one of the 10 components, consumer expectations, in the negative column. The improvement in the labor market was a very strong positive for the month as was the month's strength in manufacturing. Early indications on October's readings are mixed with interest rates moving even lower and the consumer sentiment and consumer comfort indexes both showing strength. On the flat side, however, are unemployment claims and early manufacturing readings.

NAT GAS INVENTORIES rose by 94bcf last week. 3.3 trillion cubic feet currently in storage...

THE KANSAS CITY FED MANUFACTURING INDEX grew modestly in October. Optimism for future activity shows high in the survey. Again, September was a tough act to follow...

OCTOBER 24, 2014
NEW HOME SALES came in at 467k, 1k above August after it was revised down by 38k. September's pace was the best since July 2008.

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