Sunday, November 23, 2014

Weekly Update...

As you may have noticed, you’re receiving far fewer emails from me these days. I assure you it’s not, as one client quipped, because I’m spending all of my time on the golf course. I honestly can’t remember the last time I played golf. Well, honestly, I can. It’s just that it was so horrifying that I’ve been trying to block it out of my mind ever since. The fact is—at least for the time being—I’ve decided to dispense with the commentary on global politics, except when I feel it holds near-term pertinence to your portfolio, and steer your attention solely to markets and economics. And I’m hoping that less frequency will inspire you to travel with me (read my commentaries) into the end of this year and beyond—as I offer my insights into the data that will dictate our portfolio recommendations going forward.

On those occasions when I fall off the wagon (it'll happen) and rant on about some senator proposing a taxpayer-funded goodie---disguised as something other than sheer thievery--- for a crony, I'll give you fair warning in the teaser. Otherwise, you're safe clicking the "click here to continue" link.

Your weekly update:

We began last week with news that Japan has fallen, by textbook definition (two consecutive quarters of negative GDP), into recession. After contracting by 7.2% in Q2, the world's third largest economy defied economists' estimates (the consensus had it growing at an annualized 2.1%) and delivered a negative 1.6%. U.S. stock index futures sold off on the news. But upon realizing that Japan has been no big contributor to global economic growth of late, traders bid the major averages a few basis points higher by the close on Monday. By the week's end, the Dow was up .99%, the S&P 500 1.16% and the Nasdaq .52%. As for Japan's market, by the end of the week---bolstered by Prime Minister Shinzo Abe's announcement that a pending sales tax hike will be delayed by 18 months---it had recouped almost all of Monday's 3% drubbing, ending the week down .76%.

As for the U.S. economy, as you'll see below, last week's data supports my view that, while still a considerable ways from robust, it is on as firm a footing as we've seen during this recovery. In my last update I suggested that growing optimism for the U.S. economy would ultimately equate to a pickup in capex spending (an essential ingredient in a healthy expansion). The latest Empire State Manufacturing Survey (see below) supported that view, which, by the way, would be bullish for the tech and industrial sectors.

Weekly retail sales continue to come in relatively soft. However, as I've been suggesting the past few weeks, I'll be surprised if the presently high consumer sentiment readings, lower gas prices and improving jobs picture don't equate to a robust holiday shopping season.

Beyond the above, manufacturing's mixed (but good on balance), housing seems to be improving a bit, inflation's tame, the Fed's dovish, and foreigners are buying U.S. securities like they're going out of style. Oh, and Q3 earnings have come in quite good: With 487 of the S&P 500 companies thus far reporting, 79% beat analyst's estimates on 9.1% year-on-year growth. The top line was pretty good in terms of surprises, with 60% beating estimates. Growth was okay at 4% year-on-year.

The international scene:

While the Fed is done for now with QE (printing dollars and buying treasuries and mortgage backed securities), the Bank of Japan, the ECB and The Peoples Bank of China (just lowered its benchmark interest rate for the first time in two years) are doing their darnedest to devalue their respective currencies (bolster their exports).  Stocks across the globe popped (Europe's especially) higher on Friday on news that China was cutting interest rates and that Draghi was willing to buy all manner of bonds to create a little inflation in Europe.

Among developed markets, the Eurozone currently has my attention the most. Back in January 2013, I was telling clients that, while I was making no market prediction, I was comfortable with the U.S. stock market from a valuation perspective. And, as you'll recall, 2013 was a phenomenally good year for your portfolio. But, again, I was not making that prediction, I just happened to be comfortable with U.S. stocks at the time. (Here's an article I dug up from back then where I touched on that sentiment). And while---with the U.S. economy at last showing possibly sustainable signs of life---I probably should be equally sanguine on our market today, I'm actually feeling a little more comfortable (from a forward rate of return standpoint [not necessarily from a relative risk standpoint]) with European equities at the moment (as strange as that may seem amid the present state of the European economy). You see, valuations among Europe's markets---based on next year's estimated earnings---reflect a noticeable discount to the U.S. market. And while the U.S. Central Bank is on the cusp of (albeit slightly) tightening monetary policy, the ECB is moving firmly in the opposite direction. Now, as you may know, my economic rearing makes me no believer in the notion that nations can print away their long-term problems. As a watcher of markets, however, I know that traders are indeed believers. And, frankly, QE or not, I'm guessing that Europe's teeter totter economies will, on balance, settle into a better growth trajectory as next year unfolds.

Not to say that by upping our exposure to European stocks we'll realize out-sized returns in 2015, or that, in the event of a bear market, owning attractively-valued foreign securities will lessen the pain (could exacerbate it), it makes sense to me to own Europe at these levels. I am, of course, assuming that "we" remain long-term investors (patient, that is) and are very comfortable with volatility.

Here are last week's (U.S.) highlights from my economic journal:

NOVEMBER 17, 2014

THE EMPIRE STATE MANUFACTURING SURVEY showed New York's manufacturing sector gaining in the general index, new orders, shipments and employment. A good showing, all in all... However, the 10.16 came in below the 11.1 estimate... While the current conditions component came in below the estimates, expectations improved to the highest level in two years. Also, and big in my estimation, plans for capex and technology spending increased nicely - also to a two-year high.

INDUSTRIAL PRODUCTION declined .1% in October, vs a .2% estimate. Mining and utilities, -.9% and -.7% respectively, brought down the overall results... Manufacturing gained .3%, nondurables up .3%, durables up .1%. Among durables machinery posted the largest gain, 1.3%...

CAPACITY UTILIZATION RATE dropped to 78.9% in October... Not a good sign, however signals that inflation does not pose a near-term economic threat --- and substantiates some Fed members' concerns over too-low inflation.


NOVEMBER 18, 2014

THE ICSC RETAIL SALES REPORT rose a modest .2% over the previous week. Up 2.2% year-over-year. Anything but robust, but I remain optimistic going into the Xmas season.

THE JOHNSON REDBOOK RETAIL SALES REPORT improved slightly on a year-over-year basis, up 3.9%, vs 3.8% last week.

THE PRODUCER PRICE INDEX FOR OCTOBER showed a higher level of inflation at the producer level than analysts expected, .2% vs -.1%... Year-over-year, excluding food and energy, PPI final demand was up 1.7%. I.e., inflation, at the producer level, remains relatively benign at this point.

THE NAHB HOUSING MARKET INDEX came in stronger than expected, 58 vs 55. While the housing market remains somewhat uninspiring, a few recent indicators are hinting at an improving trend. This one in particular... From Econoday's summary:

Improvement in the jobs market together with low mortgage rates are raising sentiment among the nation's homebuilders whose housing market index is up 4 points this month to 58 which, outside of September's 59, is the best reading of the year and of the recovery. Gains appear through the three components led by a 5 point gain in current sales to 62 which points to strength for November new home sales. Future sales are up 2 points to 66 with the traffic component, which continues to lag, up 4 points to 45. Regional data show wide gains led this month by the Northeast which is now in positive ground at 51 (readings over 50 indicate month-to-month growth).

E-COMMERCE SALES grew last quarter to 4.9%, from 4.0% in Q2. E-commerce currently accounts for 6.6% of total retail sales... Which is a new record...


Very heavy foreign buying of US Treasuries as well as agency and corporate bonds fed a very robust net inflow of $164.3 billion in long term securities during September. Net foreign buying of Treasuries totaled $48.2 billion in the month with agency buying at $21.0 billion and corporate bonds at $20.7 billion. Foreign accounts were also buyers of US equities at a net $4.4 billion which is a respectable gain for this category.

Adding to the month's unusual inflow was unusually heavy selling of foreign long term securities by US accounts, at $70.1 billion (details for this reading are not available).

Turning back to foreign buying of Treasuries, Mainland China remains the top holder at $1.27 trillion followed by Japan at $1.22 trillion. Belgium remains a distant third at $354 billion followed by Caribbean Banking Centers at $312 billion.

Strong foreign investment in US securities is an important positive for the economy and helps to offset the nation's trade and government imbalances.


NOVEMBER 19, 2014

MBA PURCHASE APPLICATIONS spiked 12% week over week. That's a big move... The year over year rate, which has remained stubbornly in double-digit negative, is down 6%. Recent data show signs of life in the housing market.

HOUSING STARTS came in below estimates at 1.009 million, vs 1.038 estimate and 1.017 prior. Or 2.8% below September's number. Housing permits, however, gained 4.8%, on top of September's 2.8%. While not all the data is encouraging, clearly, there's improvement.

CRUDE INVENTORIES grew 2.6 million barrels last week. Gasoline inventories grew by 1.8m. Distillates declined by 2.8m.

FOMC MINUTES FROM OCTOBER MEETING reiterated the "data dependency" of the inevitable rate decision (but that should go without saying). There is some division in terms of the use of "considerable time", with regard to the first Fed Funds hike. They are taking seriously the headwinds out of Europe and Asia and still see the jobs market as sluggish, despite the recent drop in unemployment. They are not the least bit concerned over the potential for rising inflation. In fact, they're a bit worried about too low inflation. Clearly, the majority is in no rush to raise rates.


NOVEMBER 20, 2014

CPI FOR OCTOBER was flat, 0%, after rising .1% in September. Core CPI (ex-food and energy) was up .2%. Year over year up 1.7%, same as September. Comfortable below the Fed's 2% target.

WEEKLY JOBLESS CLAIMS remain low at 291k.

FLASH MANUFACTURING PMI showed a slowing in growth to 54.7 from 55.9 in October. Slowing output and new orders were the big negatives in the report. Employment, once again, was a positive. Price pressure for raw materials eased to the slowest pace in 1.5 years. Manufacturing indicators have been coming in somewhat mixed of late... this report contrasts with the very positive ISM manufacturing report. The one virtually across the board constant has been the improving employment outlook.

THE BLOOMBERG CONSUMER CONFIDENCE INDEX continues to show rising optimism, coming in at 38.5, it's highest level since January 2008.

THE PHILADELPHIA FED SURVEY came in hugely above expectations, at 40.8 vs 18.0 estimate and 20.7 prior. That's in sharp contrast to this morning's Flash PMI. Here's Econoday:

Spectacular strength is being reported this month from the Mid-Atlantic manufacturing sector where the general business conditions has surged to 40.8, almost doubling October's very strong growth of 20.7. The gain is backed by new orders which are at 35.7 vs October's 17.3. Shipments are at 31.9 vs 16.6 with employment nearly doubling, to 22.4 vs 12.1. November's numbers are total standouts for this report which goes back nearly 50 years.

And despite the surge in demand, price pressures, due to falling oil prices, are easing. Inventories look lean and delivery times are up, two other indications of general strength.

This report could not contrast more against this morning's PMI flash report where growth rates slowed significantly. Anecdotal reports on the manufacturing sector should be averaged together. It's still too early in the month to get a convincing assessment.

EXISTING HOME SALES seem to be improving modestly, up 1.5% in October, after being up 2.5% in September. Year over year up 2.5%. Housing, overall, is beginning to look up...

THE INDEX OF ECONOMIC INDICATORS is signaling a pickup in economic growth going forward, up .9% vs .5% estimate, and .7% increase in September. Low interest rates, low unemployment claims and housing permits were big positives in the index, offsetting the October weakness in the stock market. Not so rosy were the coincident and lagging indicators which came in at +.1% and -.1% respectively. But of course it's the forward look we're most interested in.

NAT GAS INVENTORIES declined by 17bcf last week.


NOVEMBER 21, 2014

KANSAS CITY FED MANUFACTURING INDEX came in better than anticipated, 7 vs 6...  THE COMPOSITE INDEX came in at 9 vs 3 prior.



  1. […] unusual measures, at this juncture, going into next year based on the above. I do, however—as I suggested last week—believe we would be well-served to take advantage of present dynamics in other parts of the […]

  2. […] you’ve noticed  (here, here and here), the Eurozone has been on my radar of late. Other than a passing remark regarding […]