Saturday, January 31, 2015

The Antifragile Stock Market --- AND --- Your Weekly Updatei

You are in the post office about to send a gift, a package full of champagne glasses, to a cousin in Central Siberia. As the package can be damaged during transportation, you would stamp "fragile", "breakable", or "handle with care" on it (in red). Now what is the exact opposite of such a situation, the exact opposite of "fragile"?

Almost all people answer that the opposite of "fragile" is "robust", "resilient", "solid", or something of the sort. But the resilient, robust (and company) are items that neither break nor improve, so you would not need to write anything on them---have you ever seen a package with "robust" in thick green letters stamped on it? Logically, the exact opposite of a "fragile" parcel would be a package on which one has written "please mishandle" or "please handle carelessly". Its contents would not just be unbreakable, but would benefit from shocks and a wide array of trauma. The fragile is the package that would be at best unharmed, the robust would be at best and at worst unharmed.

We gave the appellation "antifragile" to such a package: a neologism was necessary as there is no simple, noncompound word in the Oxford English Dictionary that expresses the point of reverse fragility. For the idea of antifragility is not part of our consciousness---but, luckily, it is part of our ancestral behavior, or biological apparatus, and a ubiquitous property of every system that has survived.

Nassim Taleb, in his latest book, Antifragile, Things That Gain from Disorder, from which the above was taken, writes about the things that get better when they experience stress. We're talking muscles, brains, emotions, economies and, yes, stock markets.

You may understand intellectually the importance of stock market corrections, bear markets even. You've heard yourself acknowledge that the market can't go up forever, that it's healthy for it to take a breather every now and again. Same for the economy, you understand that it simply can't expand forever, and when it advances for too long and has been intervened upon too much, bubbles form, then pop. You, in essence, know of this "ubiquitous property of every system that has survived". Ah, but when the developments you say are healthy begin to develop, when gloom hits the headlines, when your portfolio contracts, you become worried, you see darkness in your financial future, you fear that the market may never recover, or that you may not live long enough to experience the "good" times again. Amid a declining stock market, you abandon your wisdom.

But---despite your anxiety---you were right to begin with, corrections and bear markets are indeed antifragile. Balance sheets get clean, poorly run companies fail (if they're not, alas, bailed out that is), profligates get frugal, stuff gets cheap and crooks get caught. Yes, the market gets better when its numbers get worse.

This is me splashing cold water on your face, slapping you back into reality---just in case you're beginning to fret over recent volatility.

According to Bloomberg, in January the Dow dropped 3.69%, the S&P 500 was off 3.10% and the NASDAQ declined 2.13%. Some sectors did better than those major averages, some worse. Non-US (save for commodity dependent countries), for the most part, finished the month ever so slightly in the green. So, frankly, we ain't even close to a legitimate correction (<10-20%>) at this point. I'm guessing (just guessing) that I'll have more opportunities to evoke your wisdom in the weeks and months to come.

This week I'll update last week's themes, and add one more, earnings.

Central Banks:

Last weekend I reported on the amazing symphony of central banks---the worldwide (save for the U.S.) easing of monetary policy. As for this past week, it was all about the U.S. central bank. The Fed held its two-day policy meeting and unanimously voted to leave interest rates as is, at zero. The post-meeting statement reiterated the members' patience, yet acknowledged the momentum in the labor market. I believe the Fed's optimism over employment spooked the stock market. I.e., while the incredible crash in oil prices is influencing the rate of inflation, it's presumed transitoryness makes for a heightened risk of inflation should oil begin to bounce as wages begin to rise.

I know, you're hearing pundits complain about the lack of wage growth. Well, believe me, they're either politically motivated, or don't understand economics. In terms of the latter: first there's the taking up of the labor market's slack, then, as the pool of qualified workers contracts, wages begin to rise. I believe, despite international weakness, despite the strong dollar, and despite the bulging bond market and skittish stock market, the Fed is very likely to push rates a bit higher in 2015. Which very well could put pressure on the stock market. And wouldn't that be wonderful, given the market's antifragility!


Last weekend I reported on the huge 10 million barrel build in crude oil inventories. Well, last week saw another huge build, 8.9 million barrels. While, as I reported, oil rigs are shutting down by the minute, U.S. producers haven't yet begun to let up on their most productive wells. Plus, and this is an important plus, refineries have slowed production (resulting in a piling up of crude inventories) as there exists a large wholesale supply of gasoline and distillates. This is unambiguously good for the U.S. consumer, as it puts further downward pressure on prices. But make no mistake, it can't last forever. Although it's likely to persist awhile with total inventories at, no kidding, an 80-year high.

You may be hearing the experts talk about how cheap energy stocks have become and how, therefore, they present a huge buying opportunity. And while I can't help but agree that, long-term, folks buying now will likely do well, the idea that oil stocks have gotten cheap, if cheap means low valuations, is simply wrong. Cheapness when it comes to stocks has virtually nothing to do with share prices by themselves, it has to do with the level of per share earnings in relation to the price per share. For example, I recently researched one the world's biggest and best oil services companies. My first look at the company, several weeks ago, showed me a price to earnings (p/e) ratio of 16, with a p/e to earnings growth (peg) ratio of a little above 1 (that's attractive). Since then the stock dropped about 12% in price and then rebounded almost back to the price it was when I took that first look, which was still like 30% below where it peaked before oil took the plunge. But the thing is---despite the share price remaining way off its high---it's not nearly as cheap as it was a few weeks ago. Due to legitimately reduced earnings expectations it now trades at a 20 p/e and 1.5+ peg ratio. So, no, energy stocks aren't as cheap as some would have you believe. Although they could very well bounce in a big way when oil looks like it's finding a bottom (or before in anticipation).

The consumer:

As you'll notice in this week's economic highlights the consumer remains very optimistic about his/her future. Which showed up in the consumer spending reading in last week's GDP report as well as in the big December jump in new homes sales, 11.6%. However, interestingly, retail sales have been nothing to get excited about. That'll change if this optimism, and recent momentum in the jobs numbers, holds.

Briefly on Europe:

Despite deflation, Russia and Greece, the Euro Zone stock markets (save for Greece's), when compared to the U.S., held up pretty well in January. Euro QE's biggest detractor, Germany, saw its latest CPI number turn red (deflation), which makes ECB president Mario Draghi look all the more correct in his convincing his board members to go all in on massive bond buying (QE)---which led to the area's January outperformance.

As for Russia, Putin is not, these days, supporting my theory that he's become too much the global player to keep the Ukraine situation alive for long. I've read recent reports where he's giving his super-wealthy supporters the cold shoulder, as they've upped their pleas for him to find an end to the conflict. Clearly, the Russian oligarchs get it, but the man who counts, whose popularity, they say, remains high with his citizens, doesn't. Not, it seems, as long as he has billions in reserves with which to pay the bills. Should Putin wake up and find a face-saving way to save his economy, I believe Russian and Euro Zone stocks would give him quite the rising ovation. We'll see...

As for Greece:

In Friday's audio commentary I told you about a news flash that said Greece was essentially done with reform and wasn't interested in receiving any additional bailout money. I said that I didn't believe that to be a sustainable position, and even questioned the validity of the headline. Well, as it turned out Greece's new finance minister made a statement in Greek that was misinterpreted by a reporter. Newly-elected Prime Minister Tsipras was quick to quell the rumor. He told Bloomberg:
"The deliberation with our European partners has just begun," he said.

"Despite the fact that there are differences in perspective, I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole."

Cockiness, and a willingness to promise whatever it takes, can win you an election when your people are desperate to hear what they want to hear. But when you take the reins of a country whose debt is 175% of its GDP you really don't have a lot to work with. And you can go from rock star to goat in a hurry when the people catch on that all those promises were literally unkeepable. Just ask the once popular French president Francois Hollande:
A Harris Interactive poll published on Monday found that 92 percent of respondents said they were not satisfied with Hollande's track record, with 96 percent saying he had not held to his campaign promises made before coming to power in 2012.

Q4 earnings:

According to Bloomberg, the percent of S&P 500 companies that have thus far exceeded analysts' earnings expectations (226 having reported) is a whopping 78.32. But the thing is, the bar (expectations) had been lowered measurably. Still---lowered bar notwithstanding---you'd think the market would be rallying on such news. But it's not what companies earned yesterday that counts, it's what the expectations are for tomorrow's earnings that drives share prices. And being that big companies, the components in the major averages, do a substantial share of their business abroad, they're concerned about the impact of the strong U.S. dollar, as I explained last week.

That---voiced concerns over the strong dollar---has been no small contributor to recent volatility.

Having devoted much of last week's commentary to this topic, I'll leave it here for now.

As I've been promising, the global dynamics going forward could make for a very volatile 2015. If you're prone to worry, you might bookmark this one and refer back to the opening paragraphs if or when you feel that anxiety coming on. And if you're our client there's absolutely no reason to wait for our next review meeting if you'd like to get together and confirm that your allocation matches your temperament and time horizon. In fact, if you're ever feeling anxious, I strongly encourage it. So please don't hesitate to give us a call.

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

JANUAR 26, 2015

THE DALLAS FED MANUFACTURING SURVEY shows factory output essentially unchanged in December, .7 (zero is breakeven). Other components showed sluggishness during the month. Capacity utilization, shipments and new orders all moved noticeably lower on the month. While the labor market components showed continued employment increases, sentiment about future business activity fell measurably. I suspect Texas's exposure to the energy sector is influencing sentiment in the state.

JANUARY 27, 2015

DURABLE GOODS ORDERS unexpectedly dropped 3.4% in December, versus a consensus estimate of 0.7% increase. Nondefense aircraft, plunging 55.5%, and defense aircraft down 19.9% acounted for much of the decline. Outside of transportation (autos rose 2.7% btw), fabricated metals and electrical equipment posted gains while primary metals, machinery,  and computers and electronics declined. The rapidly rising dollar clearly isn't helping the durable goods number.

THE JOHNSON REDBOOK RETAIL REPORT shows same store sales running at a relatively slow 3.2% pace. The report cites weather as a factor. Recent consumer sentiment indicators and improved jobs numbers would suggest this reading will improve over the coming months.

THE CASE-SHILLER HOME PRICE INDEX shows signs of life, rising .7% for the composite-20 city index. I remain optimistic on the housing market going forward.

MARKIT'S FLASH SERVICES PMI shows the service sector growing slightly, at 54 in January, versus December's 53.6 reading. Despite the relatively slow growth, respondents continue to add to payrolls, although at a relatively slow pace. This would be another indicator that we'll likely see improvements going forward, given recent reads on the consumer.

NEW HOME SALES jumped an impressive 11.6% in December to an annual rate of 481,000, which is substantially higher than the consensus estimate. Another positive for the housing sector was the 2.2% monthly increase in the median price of a home ($298,100). The year over year price increase is a solid 8.2%. The sales gain brought inventories down to 5.5 months, from 6.0 months in December, which is a negative for January sales, but motivation for builders to pick up the pace. Again, I like the sector going forward.

THE CONFERENCE BOARD CONSUMER CONFIDENCE INDEX for January confirmed that the U.S. consumer is in a very good mood these days. The 102.9 reading topped the consensus estimate (96). This is the index's best reading of the recovery.  Here's Econoday's commentary:
Consumer confidence is up very sharply this month, to a January reading and recovery best of 102.9 that is outside the Econoday forecast range (93.5 to 100.0). Gains sweep most readings including a 12.7 point surge in the present situation component to 112.6. Here, the jobs-hard-to-get subcomponent shows special strength in the jobs market, down 1.6 percentage points to 25.7 percent in a reading that is a positive indication for the monthly employment report.

The expectations component also shows strength, up 7.9 points to 96.4 with the income subcomponent up sharply. Strength in expectations for future income points to a combination of strength in the jobs market, the stock market, and also the positive effect of lower gasoline prices. Inflation expectations, reflecting lower gas prices, are steady at 5.0 percent which is very low for this reading.

Another positive in the report is a jump in vehicle buying plans in yet another indication of consumer confidence. Nevertheless, readings on consumer spirits, including this report, have been far outstripping actual gains in underlying consumer spending, at least so far.

THE RICHMOND FED MANUFACTURING INDEX, like most of other recent surveys, points to slowing in the manufacturing sector, with a reading of 6 versus last month's 7.  Like the Dallas Fed Index, however, employment continues to expand, but at a slower pace of late.

THE STATE STREET CONSUMER CONFIDENCE INDEX shows institutional investor confidence easing a bit, 106.7 versus December's 112.1. While the European component comes in at a strong 113.9, it nonetheless represents a 6 point drop from last month. The report blames political concerns in Europe and global deflation for January's dip.

JANUARY 28, 2015

MBA PURCHASE APPLICATIONS were flat last week, off .1%. Refinances dropped 5%.  This one will be interesting to watch going forward as, clearly, the housing market is showing signs of life...

THE EIA PETROLEUM STATUS REPORT continues to show huge builds of crude inventory, another 8.9 million barrels last week. At 406.7 million barrels, crude inventory is at its highest level in 80 years! Gasoline and distillate inventories, however, declined, by 2.6 m and 3.9 m barrels respectively. What we're seeing are high wholesale supplies of gas and distillates which is causing refineries to cut back on production, which exacerbates the rise in crude inventories. This does not offer much hope for a bounce in the price of oil anytime soon. Good news for consumers!

THE FOMC ANNOUNCEMENT following its 2-day policy meeting said that the Fed remains patient with regard to raising interest rates. The market sold off heavily on the day, and I suspect the Fed's commentary regarding the improving labor market had something to do with it. The Fed has previously cited slack in the labor market as a primary excuse for keeping rates at record lows. I believe the market sees an improving labor market as a potential impetus for getting the Fed off of zero.

JANUARY 29, 2015

WEEKLY JOBLESS CLAIMS plunged 43,000 to 265,000. This was way below the consensus estimate of 300k. This has been a most volatile indicator of late. Surely, the MLK holiday played its part. But of course last weekend wasn't the only 3-day weekend since April 2000, which was the last time we saw a reading this low.

THE BLOOMBERG CONSUMER COMFORT INDEX climbed yet again last week to a 47.3 reading versus 44.7 the week prior. This is the strongest weekly advance since March 2010. The optimism-on-the-economy gauge is showing its strongest reading in almost 8 years. The recent consumer reads are extremely bullish for the U.S. economy going forward, despite the recent weakness in manufacturing.

THE PENDING HOME SALES INDEX FOR DECEMBER completely bucked the recent uptrend in the housing indicators. The consensus estimate was for a .9% increase, and the number came in at -3.7%. Final sales of existing homes did rise last week, but the trend remains relatively flat. This one doesn't at all jibe with other recent indicators. Hmm...

NAT GAS INVENTORIES fell 94 bcf last week, to 2,543 bcf.

THE FED BALANCE SHEET dropped $12.9 billion, to $4.50 trillion.

M2 MONEY SUPPLY (currency, checking accounts, savings accounts, small time deposits and retail money market mutual funds) grew by $6.9 billion last week.

JANUARY 30, 2015

Q4 GDP (advance estimate) came in below expectations, at 2.6%. The number was weighed down a bit by an increase in imports, a decrease in government spending and---the only true negative in my opinion---decelerating nonresidential fixed investments. Personal consumption was a major positive, up 4%.  Here's from the BEA report:
Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 2.6 percent in the fourth quarter of 2014, according to the "advance" estimate released by the Bureau of Economic Analysis.  In the third quarter, real GDP increased 5.0 percent.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4 and "Comparisons of Revisions to GDP" on page 5).  The "second" estimate for the fourth quarter, based on more complete data, will be released on February 27, 2015.

The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment that were partly offset by a negative contribution from federal government spending.  Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the fourth quarter primarily reflected an upturn in imports, a downturn in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by an upturn in private inventory investment and an acceleration in PCE.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 0.3 percent in the fourth quarter, in contrast to an increase of 1.4 percent in the third. Excluding food and energy prices, the price index for gross domestic purchases increased 0.7 percent, compared with an increase of 1.6 percent.

THE Q4 EMPLOYMENT COST INDEX increased at a 2.2% over the past year. This reading, which includes wages, salaries and benefits is noticeable higher than the 1.7% hourly earnings increase noted in the December employment report. Clearly, the average worker is doing better than some would have us believe. I believe we will see wages improve going forward as slack in the labor market appears to be abating.

THE CHICAGO PMI, which covers both manufacturing and services, paints a much better picture than other PMIs of late, coming in at 59.4. Here's Econoday's commentary:
Growth in the Chicago economy is strong and picking up steam, based on the Chicago PMI which rose to a January reading of 59.4 vs a revised 58.8 in December. Growth in new orders and growth in production both turned higher while, in a convincing sign of strength, businesses in the area picked up hiring to the highest rate since November 2013. Price data show the lowest level of pressure in 4-1/2 years. This report covers both the manufacturing and non-manufacturing sectors and typically runs hot relative to other data.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX confirms that, per virtually every other survey of late, the U.S. consumer is feeling very good these days.... The reading for January is 98.1, with the current conditions component coming in at 109.3. The expectations component came in at 91.0.

Friday, January 30, 2015

Market Commentary (audio)

Click the play button for today's commentary:

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Wednesday, January 28, 2015

Market Commentary (audio)

Click the play button for today's commentary:

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Monday, January 26, 2015

Market Commentary (audio)

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Sunday, January 25, 2015

Weekly Update (audio summary)

Before clicking the play button, please read the closing paragraph from the written version of this week's update:

I’ll leave you here with a reminder that sane stock market investing is all about seeing the forest through the trees; in believing that, in the long-run, ingenuity and innovation will make major success stories out of smartly-run, globally-focused companies. As for the near-term, my optimistic tone on some sectors/areas notwithstanding, I expect 2015 to bring us a level of volatility that will challenge the resolve of many a short-term investor. Present valuations in U.S. stocks, while not extreme in my view (considering present inflation), virtually have to make for a jittery market as the Fed looks to “normalize” interest rates, as other central banks look to ease their economies’ to prosperity (could inspire upward volatility), and as any number of unforeseen events unfold in the year to come.  And, of course, like every year, how the markets ultimately fare in 2015 is anybody’s guess—which is why long-term investors do not gauge their success in single-year increments…

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Your Weekly Update

Doing true justice to the past week in world finance and economics would mean occupying more space herein than I can in good conscience ask you to take in. I appreciate that while you (who are our clients) have matched my commitment to not bombard your inbox (with written material anyway)---to the extent I have in the past---with your commitment to spending a few minutes each weekend taking in my updates (right?), you, nevertheless, have other stuff going on, I'm assuming.

Therefore, in the following I'll simply touch on what's mattered most of late. Which would be the recent actions of the world's central banks, particularly the European Central Bank, the action in oil and the state of the U.S. consumer.

Starting with central banks:

Over the course of the past few days the European Central Bank (ECB), the Bank of Japan (BOJ), the People's Bank of China (PBOC), the Reserve Bank of India (RBI), the Swiss National Bank (SNB), the Danish Central Bank (DCB) and the Bank of Canada (BOC) all engaged in either introducing a bazooka of a quantitative easing program (ECB), reducing benchmark interest rates (RBI, SNB, DCB, BOC) or expanding the scale and access to various liquidity programs (BOJ, PBOC). In essence, the whole outside world, virtually, is engaging in major monetary stimulus while here at home the Fed is gauging the when, the how and even the why of getting interest rates off of the zero lower bound.

So what's it all mean? It means the outside world is worried about inflation, the lack thereof that is, while the U.S. economy is sitting pretty, relatively speaking that is. What's it all do? Well, for starters, it makes the dollar the king of currencies. I.e., international investors/traders buy the currency that they believe will appreciate the most against their own (and, today, given a growing economy and higher relative interest rates, the dollar would be the one to buy). For example, trade 1 euro for a $1.20, then watch the euro's price drop to, say, $1.12 and viola!, you've just made a cool 7% on your money (as your $1.20 would then buy you 1.07 euros)---not counting any interest, dividends or capital gains you may have made on whatever you stuck that $1.20 into.

So why would a country allow a practice that would likely serve to make its currency worth less in the global marketplace? Well, to help its exporters. Think about it. If yesterday it cost $1.20 to buy 1 euro's worth of goods and today the euro dropped in value to $1.12, then that $1.20 buys you more stuff from Euro Zone exporters. Which you'll indeed do. Then, in theory, the exporting economy benefits as profits rise and companies hire and citizens become happy, and spend. Sounds awesome, doesn't it? Well, sure, except when we consider what it does to the international buying power of said citizens. While---in a rising dollar environment---the U.S. consumer enjoys an increase of affordable goods from abroad, the foreign consumer experiences the opposite. I.e., in my example 1 euro bought him/her $1.20 worth of U.S. stuff yesterday, while today it only buys $1.12 worth. And, thus, the U.S. exporter is none too happy about the rising dollar.

Without getting too involved in the pros and cons of money debasing, the question is, as investors, should we own shares of Euro Zone exporters in this environment? Well, yes, I believe we should (albeit in modest quantity). But we have to initially temper our expectations a bit to compensate for the negative effect of the rising dollar. Remember, per my example, $1.20 invested yesterday, is worth only $1.12 today. Meaning the growth in the price of the Euro Zone stocks we buy have to go up more than the decline in the dollar value of the euro to book a profit. Which explains why, Friday, when Euro Zone markets rallied, the share price of many U.S.-traded Euro Zone focused exchange traded funds (ETFs) actually declined.

Now look further down the road. If greater liquidity, easier lending standards and increasing exports lead to an improving economy, or if for whatever reason(s) the Euro Zone economy begins to brighten, the Euro will find a bottom and---in this optimistic (but not guaranteed) scenario---you get the best of both worlds: a bump in the currency exchange rate along with a bull market in your Euro Zone stocks. Which are, by the way, presently priced noticeably cheaper relative to earnings than are U.S. stocks---in the aggregate in both cases that is.

If you doubt the Euro Zone's potential as a profitable long-term investment destination---given structural issues that desperately need attention---you have good reason, and you're not alone. Which, by the way, is the reason the area's equities are trading at a relative discount (and keep in mind, to trade at a discount to U.S. equities in terms of price to earnings ratios means the companies in question have earnings [attractively so when compared to their share prices], despite the structural issues). If everyone saw an opportunity, well, there'd be no opportunity. Things are never cheap when everyone's after them.

I can't leave the Euro Zone topic without offering a word or two about this Sunday's election in Greece. The far-left Syriza party looks to have the election in the bag. The question is, will they receive enough votes to form a majority of their own or will they have to form a coalition government? In any case, they'll win---to whatever extent---because they've promised to end the pain of reforms that came as the strings attached to Greece's bailout. The next question is, will the Troika (the European Commission, the International Monetary Fund and the European Central Bank) be willing to renegotiate the terms and continue pumping in the money? And what happens if they don't? Even though a Syriza victory is widely anticipated, I wouldn't be at all surprised to see markets sell off on the news. More on this to come...


The Saudi King's passing on Friday saw oil prices spike momentarily, only to resume their decline and finish the day in the red. His successor said there'd be no change in strategy going forward. Per my weekly economic highlights at the bottom, last week saw the biggest build in crude oil inventories in 14 years. Clearly, the forces that have forced oil to present levels have yet to run their course. Make no mistake, however, oil will ultimately find its bottom as the present price per barrel will do a number on production. In fact, oil rigs in the U.S. are already dropping like flies. Here's from Friday's Bloomberg article "Oil Rigs in U.S. at 2-Year Low as Bakken Drillers Bail".
Oil rigs have dropped by an unprecedented 258 in seven weeks, threatening to end the surge in domestic oil production that has turned the U.S. into the world’s largest fuel exporter. The booming production, out of shale formations across the country, has OPEC and other foreign suppliers fighting to preserve their market share. Eight hundred rigs may be pulled out of U.S. fields during the first half of 2015, Penn West Petroleum Ltd. (PWT) Chief Executive OfficerDavid Roberts said at a conference Thursday.

The U.S. Consumer

According to the surveys, it's a good time to be a U.S. consumer. Along with an improving employment picture, the low cost of fueling an automobile is---as you'll see in the highlights below---fueling confidence among the populace. I do like consumer discretionary stocks these days.

As you've read of late, I particularly like home builders, and related companies. While I've received a little pushback on this from folks who are concerned with the negative impact the present oil situation is having on producing states, namely Texas (whose total oil and gas jobs account for less than 3% of the state's employment by the way), the fact that 98.6% of the nation's gas-guzzling workers work outside the gas industry suggests that, absolutely, low gas prices are an unambiguous plus for the U.S. economy.

Here's yet another spiel on why I like housing-related companies (albeit, as with everything else in a well balanced portfolio, in modest quantity) going forward.

I keep track of a number of key macro indicators that assist me in making specific sector recommendations. Here are my most recent notes on housing inventories:
Inventory of new single family homes: 214,000 as of 11/20/14. Up 70k from 2012, but much lower than the long-term average--and way off the 570,000 peak in June 2006. This is bullish for home-builders and related companies. Housing starts are currently running at a 1.089 million annual pace; the latest reading on household formations (folks making homes for themselves) was 809,000. The number of teardowns per 1 million starts is typically 200,000. Therefore, current housing starts are running right with household formations. Which, by itself, suggests no build up or draw down of inventories in the near future. Should the recent consumer optimism result in more household formations we should, all things being equal, see inventories come in and production ramp up, which would be another bullish signal for home builders and related companies.

Total existing homes for sale: 2.09 million. Which is right at the long-term normal reading. The number peaked at 4+ million in July 2007. Along with the low new home inventory and potential for a pickup in household formations, this is bullish for all things housing.

I’ll leave you here with a reminder that sane stock market investing is all about seeing the forest through the trees; in believing that, in the long-run, ingenuity and innovation will make major success stories out of smartly-run, globally-focused companies. As for the near-term, my optimistic tone on some sectors/areas notwithstanding, I expect 2015 to bring us a level of volatility that will challenge the resolve of many a short-term investor. Present valuations in U.S. stocks, while not extreme in my view (considering present inflation), virtually have to make for a jittery market as the Fed looks to “normalize” interest rates, as other central banks look to ease their economies’ to prosperity (could inspire upward volatility), and as any number of unforeseen events unfold in the year to come.  And, of course, like every year, how the markets ultimately fare in 2015 is anybody's guess---which is why long-term investors do not gauge their success in single-year increments...

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

JANUARY 20, 2015

THE NAHB HOUSING MARKET INDEX continues to show real optimism among home builders. From Econoday's commentary:

Home builders continue to report solid conditions with the housing market index at 57 in January vs an upwardly revised 58 in December. January is the 7th plus-50 score in a row. January's strength is led by the most heavily weighted component, present sales, which held steady at 62. But the second most heavily weighted component, traffic, remains weak, down 2 points to 44 and reflecting a significant lack of first-time buyers in the new home market. The final component, future sales, did fall 4 points but remains very solid at 60. A look at regions shows the West well ahead at 65 with the South, which is by far the largest region for new home sales and roughly double the size of the West, at 55. The two smallest regions, the Midwest and Northeast, are at 60 and 43.

JANUARY 21, 2015

MORTGAGE APPLICATIONS are showing wild week to week readings. After jumping 24% last week, new purchase apps declined 3% while refinances increased by another 22%. On a year over year basis new purchase apps are up 3%, which is an improvement but nothing to write home about. I believe the best for the current expansion is yet to come for housing.

HOUSING STARTS exceeded expectations, coming in at 1.089 million versus the 1.041 consensus estimate and nicely above the 1.028 prior month reading. Starts are up 5.3% on year over year basis. Offsetting the good news, however, was decline in building permits: coming in at 1.032 million versus 1.06 estimate and 1.035 prior. The trend, therefore looks basically flat (although the decline in permits was concentrated in the multi-family space). Thus, the shift toward the single-family home component can be taken as a positive going forward. Here's Bloomberg on the subject:
Builders broke ground in December on the most single-family homes in almost seven years, propelling an unexpectedly large gain in U.S. housing starts that signals construction will contribute more to economic growth in 2015.

Work began on 728,000 houses at an annual rate, a 7.2 percent increase from November and the most since March 2008, a Commerce Department report showed Wednesday in Washington. Total housing starts, which include apartments, climbed 4.4 percent to a 1.09 million pace.

The improvement in single-family construction at year-end signals the industry is beginning to focus on the biggest part of the market, perhaps encouraged by gains in employment and consumer confidence that make Americans more likely to marry and have children. Historically low borrowing costs and more access to credit would raise the odds that a household will decide to buy a property rather than rent.

“The strength is where you’d like to see it, in single-family housing,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who had forecast starts would rise to 1.07 million. “It bodes well for residential real estate. It’s another thing going in the right direction for the economy.”

Permits, a proxy for future construction, declined 1.9 percent in December to a 1.03 million pace. They were depressed by a setback in multifamily projects, which can be volatile from month to month. Applications for single-family homes increased to a seven-year high.

Builders began work on 1.01 million homes in 2014, the most since 2007. The construction boom peaked at a three-decade high of 2.07 million in 2005, before plunging to a record-low 554,000 in 2009.

The rebound in residential real-estate since the recession has been mainly driven by gains in multifamily projects, including apartment buildings, as Americans soured on homeownership and opted to rent instead. A more solid recovery in construction of single-family homes would signal the industry is on sounder footing.

Single-Family Share

Single-family houses accounted for 64 percent of all housing starts in 2014, the least since 1985.

“Looking out to 2015, we think that a stronger labor market may support a pickup in household formation, which in turn may underpin further gains in housing construction,” John Ryding, chief economist at RDQ Economics in New York, said in a research note. “We also think that with housing still relatively affordable and with households increasingly employed and feeling that economic conditions are more normal, that single-family housing will carry more of the gains in housing construction in 2015.”

Sentiment in the industry is hovering close to a nine-year high. While the National Association of Home Builders/Wells Fargo builder sentiment gauge fell to 57 in January from 58 the prior month, readings greater than 50 mean more respondents report market conditions are good, according to figures from the Washington-based group on Tuesday.

THE JOHNSON REDBOOK RETAIL REPORT came in at a disappointing 3% year over year rate. Versus a 3.8% last week. Since 3.5% plus is your typical pace during economic expansions, this one bears close monitoring going forward. That said, January is typically a volatile month for department stores as they unwind and clean out winter inventories in preparation for the spring. I expect better readings beyond January given other consumer-related data.

JANUARY 22, 2015

WEEKLY JOBLESS CLAIMS dropped 10k last week. But they remain north of 300k, at 307k. The current 4-week average sits at 306,500, which is up 6,500 from the prior week's reading. Continuing claims, which are reported with a one week lag, rose 15,000 to 2.443 million, with the 4-week average up 9,000 to 2.427 million. The unemployment rate for insured workers remained at 1.8%. While the week over week number improved, and the present level should not spark recession worries (300k is a historically average number), the trend of late bears close monitoring. My best guess, given robust sentiment reads of late, that the trend will reverse going forward and that the recent uptick will be blamed on seasonal factors. We'll see...

 THE FHFA HOUSE PRICE INDEX points to improvement in the housing sector (as I've been expecting of late). Home prices gained .8% in November, after a .4% October increase, while the consensus estimate was for a .3% increase. Year over year prices are up 5.3% from a 4.4% gain in Ocober.

THE BLOOMBERG CONSUMER COMFORT INDEX continues to tell of a very optimistic U.S. consumer. Which, given that consumption is two-thirds of GDP, speaks positively about the U.S. economy going forward. Here's Bloomberg's press release:
American Consumers Most Optimistic About Economy in Four Years

By Michelle Jamrisko

(Bloomberg) -- Americans’ expectations for the economy improved in January to reach the highest level in four years as the cost of gasoline continued to fall and the job market strengthened.

A measure tracking the economic outlook rose by 2 points to 53, the strongest since January 2011, data from the Bloomberg Consumer Comfort Index showed Thursday. Thirty-six percent said the economy is getting better, up from 32 last month and the second-largest share since 2002. The weekly sentiment index eased to 44.7 in the period ended Jan. 18 from 45.4.

Gasoline prices approaching a nationwide average of $2 a gallon and the lowest unemployment rate since mid-2008 are making households more upbeat about the expansion. Stronger wage growth would help to further propel sentiment and spark bigger gains in consumer spending.

The weekly comfort measure “has rallied impressively, improving at least numerically in all but three of the past 12 weeks,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement.

More Americans than forecast filed applications for unemployment benefits last week, a sign of lingering holiday turnover, another report showed. Jobless claims decreased by 10,000 to 307,000 in the week ended Jan. 17, the Labor Department said. The median forecast in a Bloomberg survey called for 300,000 claims.

Stocks Advance

Stocks climbed as European Central Bank president Mario Draghi announced an expanded asset-purchase program to spur growth and counter deflationary pressures. The Standard & Poor’s 500 Index advanced 0.4 percent to 2,039.92 at 9:34 a.m. in New York.

The brighter outlook for the world’s largest economy was paced by gains among women, full-time workers, 18- to 34-year-olds, residents in the West and Democrats. Married adults and those with at least some college education also registered advances.

While the weekly measure of confidence dropped, it was the second-strongest in seven years. The comfort index averaged 44.8 in 2007, the last year of the past expansion.

All three sub-indexes cooled last week. A gauge on the current state of the national economy decreased to 38.9 from 39.1. A measure of personal finances fell to 56.6 from 57.4, and the buying climate index declined to 38.5 from 39.9.

Gasoline Prices

Lower energy prices and job gains are underpinning sentiment. The cost of a gallon of regular gasoline fell to $2.04 as of yesterday, the lowest since April 2009, according to figures from AAA, the largest U.S. auto organization. About 3 million more Americans found work in 2014, the most in 15 years, and unemployment in December dropped to 5.6 percent, Labor Department data showed.

Comfort gauges for almost every income group showed a decrease last week, with confidence among those making less than $15,000 a year at its lowest in five weeks. Sentiment among Americans earning $100,000 or more advanced from the prior period.

NAT GAS INVENTORIES declined another 216 bcf last week. Despite the reduced inventory, the price has come off of its December high of 3.23, at 2.90 as I type (up 2.1% from yesterday however)...

CRUDE INVENTORIES jumped by a huge 10 million barrels last week. That's the biggest weekly build in 14 years. Prices of course dropped on the news. In response to big wholesale supplies of gasoline and distillates, refineries have cut production, which limits gas and distillates inventories (up .6 m and down 3.3 m respectively). The present low prices will absolutely lead to reduced production over time and, hence, higher prices. The question is, over what period of time?

THE KANSAS CITY FED MANUFACTURING INDEX for January softened month over month, while producers' expectations for future activity in the 10th district remained at elevated levels. The weakest activity occurred in Oklahoma, an energy-dependent state.

 THE FED BALANCE SHEET dropped by $3.1 billion last week, after increasing $16.6 billion the week before. Total assets sit at $4.513 trillion.

JANUARY 23, 2015

EXISTING HOME SALES IN DECEMBER jumped 2.4% to an annual rate of 5.04 million. The gain, as reported in Wednesday's housing starts number, was led by single-family homes. The full-year results, however, were negative. Here's Bloomberg on the numbers and the prospects going forward:
Home-Sales Fall in 2014 Has U.S. Waiting for This Year: Economy

By Shobhana Chandra

(Bloomberg) -- A three-year winning streak for sales of previously owned homes in the U.S. ended in 2014 as some investors stepped out of the market and first-time buyers failed to fill the void.

Purchases totaled 4.93 million last year, down 3.1 percent from the 5.09 million houses sold in 2013, figures from the National Association of Realtors showed Friday in Washington.

The share of American homebuyers making their first purchase dropped in 2014 to its lowest level in almost three decades, according to the Realtors group. At the same time, employment gains, growing consumer confidence, mortgage rates at historically low levels and government efforts to lower purchasing costs probably will help bolster demand in 2015.

“Demand has been pretty sideways,” said Jay Feldman, an economist at Credit Suisse in New York. “There are various positives and I don’t see any big negatives for housing. The improving labor market and low mortgage rates will support the housing recovery.”

Stocks dropped after a four-day rally as weaker-than-forecast results at companies from United Parcel Service Inc. to Kimberly-Clark Corp. offset confidence that central banks will support global growth. The Standard & Poor’s 500 Index fell 0.2 percent to 2,058.85 at 1:20 p.m. in New York. The S&P Homebuilding Supercomposite Index declined 0.7 percent.

Survey Results

Purchases climbed a less-than-forecast 2.4 percent in December from the prior month to a 5.04 million annual rate, the report showed.

The median forecast of 76 economists in a Bloomberg survey called for sales of previously owned homes to rise to a 5.08 million pace in December. Estimates ranged from 4.93 million to 5.25 million. The November reading was revised down to 4.92 million from a previously reported 4.93 million.

First-time buyers accounted for 29 percent of all purchases in December, down from 31 percent a month earlier, the report showed. A separate survey from the group showed they made up 33 percent for all of 2014, the fewest since 1987.

“First-time buyers are still missing in action,” Lawrence Yun, NAR chief economist, said at a news conference today as the figures were released. The market in 2014 was “mildly disappointing.”

Falling interest rates, more jobs and higher levels of confidence indicate “pent-up demand continues to build,” he said. “2015 should be a better year.”

Supply, Prices

A lack of supply and rising prices are probably among reasons younger and first-time buyers have yet to enter the market. Those issues are also driving out investors, who led the early stages of the recovery.

The median price of an existing home advanced 6 percent in December from the same period a year earlier, to $209,500, the Realtors’ report showed. In 2014, it was the highest in seven years.

The number of previously owned homes on the market fell to 1.85 million, the second-smallest reading for any December since 1999.

Investors made up 17 percent of all buyers in December, down from 21 percent in the same month in 2013.

Another report Friday showed prospects for economic growth were improving. The Conference Board’s index of leading indicators, a gauge of the outlook for the next three to six months, increased 0.5 percent in December, after a revised 0.4 percent gain in November, the New York-based group said.

An improving job market and plunging gasoline prices continue to support consumer spending that makes up almost 70 percent of the economy. A strong domestic market is buffering the U.S. against global weakness as Federal Reserve policy makers prepare to meet next week to discuss if and when to raise interest rates.

Rosier Outlook

It’s “more or less consistent with our expectation for continued expansion as we turn the corner here into 2015,” said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who’s among the top LEI forecasters over the past two years, according to data compiled by Bloomberg. “If there’s something that has shifted over the last year or so, it’s that the consumer spending outlook is a little bit brighter.”

More jobs and a drop in mortgage rates will help. The labor market is coming off its best year since 1999, with almost 3 million jobs added and an unemployment rate of 5.6 percent, a more than six-year low.

The average rate on a 30-year fixed mortgage was 3.63 percent in the week ended Jan. 22, according to data from Freddie Mac in McLean, Virginia. It reached a low of 3.31 percent in November 2012.

Easier Credit

Credit conditions continue to ease. The proportion of banks reporting loosening standards for prime mortgages in the past two quarters was the highest since the Fed began record-keeping in 2007, according to the central bank’s October survey of senior loan officers.

The federal government is also trying to make it cheaper to buy. President Barack Obama unveiled a plan earlier this month aimed at boosting homeownership for borrowers with lower credit scores by reducing the premiums they pay on Federal Housing Administration mortgages. The agency’s loans are meant for lower-income borrowers, who have been largely shut out of the housing recovery. The move, which will go into effect on Jan. 26, would help the typical first-time homebuyer save about $900 in their annual loan payment, according to the FHA.

Minneapolis-based U.S. Bancorp, the nation’s largest regional lender, is among companies encouraged by the recovery in housing. Chief Executive Officer Richard Davis said the outlook for the mortgage business is “really nice,” in part because Americans are putting money into home improvements.

Home Improvements

“People who have houses now feel that they’re no longer under water and they’re willing to invest in them,” he said during an earnings call on Jan. 21. “People who have houses that are now above water are willing to use it as collateral for something else, like a small business, and housing prices slowly but surely are recovering.”

While increasing property values hurt affordability for some prospective buyers, they give homeowners the ability to sell their dwellings, which will help boost supply.

MARKIT'S FLASH MANUFACTURING PMI INDEX came in at 53.7. While in expansionary range (above 50) this index has trended down to its lowest readings in a year. The slowing in oil and gas activity and lower exports get the blame. However, those lower oil prices are a big plus in terms of input costs, which this report shows declining for the first time in 2 1/2 years.

THE CHICAGO FED NATIONAL ACTIVITY INDEX showed December as being a weak month for the U.S. economy, at minus .05. The three month average, however, remains in the green, at plus .39. The production and consumption, and housing components came in at minus .12. The employment remains nicely positive , at .16.

THE INDEX OF LEADING ECONOMIC INDICATORS shows strength in the U.S. economy. Let's say the result was good, but not great, as Econoday points out below:
The index of leading economic indicators rose a solid 0.5 percent in December in what, however, is a somewhat shallow gain reflecting the Fed's zero interest-rate policy, a policy that looks to be shifting higher, and the report's credit index that has long been signaling strength in lending activity that has yet to be confirmed by other data.

Otherwise, the month's strength is mostly negligible though a decline in unemployment claims is the third largest factor, but here too claims so far this month have been on the rise. A clear negative reading in the report is a decline in building permits.

This report is ambitious by its definition and, in December's case at least, unconvincing

Friday, January 23, 2015

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Tuesday, January 20, 2015

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Friday, January 16, 2015

What Just Happened in Switzerland?---AND---Your Weekly Update

So let's say one U.S. dollar will buy you one Swiss Franc. And that you can borrow in Switzerland for 2.5% and lend in the U.S. at 3.5%. What a deal! You net 1% on someone else's money. That's what they call a carry trade. Now let's say that the Swiss decide to no longer peg the Franc to the Euro---which was a commitment they made three years ago as a way to protect their exporters from the potential fallout from the Euro Zone debt crisis (to, in essence, keep their currency from rising against those of their trading partners). And let's say that as a result the Franc skyrockets 20% versus the dollar. You've been, forgive me, utterly screwed. The, say, $10 million (you're crazy rich) you lent to some American institution will now only buy you 8 million Swiss Francs, and, alas, you owe 10 million Swiss Francs. That supposedly easy $100k per year arbitrage turns into your worst nightmare!

In case you're wondering, that's what all the excitement was about this week when the Swiss National Bank (SNB) announced its de-pegging from the Euro. Forex (as in foreign exchange) trading firms---particularly the smaller ones---that were levered in Francs, are in a world of hurt. As are no small number of the now poor individuals who bought into that Interactive Brokers Commercial that suggested they can trade currencies on IB's platform from the comfort of their own homes.

So why did the SNB do it? Because the pegging to a falling currency has meant accumulating a monster balance sheet as they had to buy up boat loads of foreign currency investments to keep the Franc down there with the Euro. Clearly, they see quantitative easing (printing of Euros) coming very soon from the European Central Bank. Which the text book would tell you will further depress the Euro. Which means holding the peg would have grown ever more expensive. Essentially, the SNB decided to take a huge dose of pain now to avert yet more pain later. They also lowered interest rates by .50% to try and offset a bit of the rally. Was it a smart move? I can't, at this juncture, say one way or the other. I can tell you this, however, most economist' commentaries I've read say it wasn't and Swiss exporters are screaming bloody murder.

Onto the weekly update:

As you'll read in the notes from my log below, if you believe that people walk their talk, it was a good week in terms of the prospects for the U.S. economy (see my notes on the NFIB Small Business Optimism Index and the Bloomberg and University of Michigan consumer surveys). Remember, the consumer is two-thirds of GDP.

Two areas that I've been commenting on, with a positive tone, of late have been the Euro Zone and U.S. home builders' (and home builder-related) stocks. While the Dow and the S&P saw declines of 1.27%* and 1.24%* respectively this week, the ETF that tracks the Euro Stoxx 50 Index jumped 3.23%*. Now, bear in mind, one week does not a trend make. However, I do believe there's a legitimate long-term case to be made that present valuations and, yes, macro circumstances (sounds crazy, I know) suggest that now may be a good time (if you're patient) to add a little at the margin to Euro Zone stocks.

As for home builders, not such a good week. The ETF that tracks the S&P Homebuilders Index was down 3.66%*, and that's after gaining 1.85%* today. While KB Homes sounded pessimistic (on 2015) the other day, and Lennar sounded, let's say, guarded, the MBA weekly mortgage purchase app index jumped 24% week over week. And don't forget about all that optimism among consumers. Again, one week does not a trend make. However, as I've been reporting, the macro developments are such that, historically-speaking, they bode well for the sector's prospects going forward.

The really big news this week, aside from the Swiss National Bank (that was huge news), was the late-week bounce in oil, and oil related stocks. The International Energy Agency (IEA) lowered its forecast for supplies from outside OPEC, which seemed to have been the catalyst. Plus, talk about oversold! The plunge in oil prices has been eye-popping! The bounce, however, would be suspect (i.e., just an oversold bounce) if the IEA is right on its demand outlook (stagnant) for 2015. I.e., if it's right, it's a bit too soon for the industry to break out the bubbly. My guess is it's wrong on the demand outlook---I expect we'll see demand increase in the months to come (which is an easy call for the U.S., but I expect a pickup, albeit slower and smaller, internationally as well). Although it may, nonetheless, be yet too soon to break out the bubbly. As for energy stocks: I suspect today's huge bounce (the ETF that tracks the S&P Energy Index jumped 3.25%* today) had a lot to do with panicked short sellers bailing on their positions (not that it couldn't turn out to be the spark that brings in the bargain hunters). Next week will be very interesting.

*returns data provided by

In other news, banks had a rough week as heavyweights JP Morgan, BofA and Citi missed analysts' Q4 estimates. I remain long-term optimistic on financials, as I reported in our year-end letter.

I'll leave you here with a reminder that sane stock market investing is all about seeing the forest through the trees; in believing that, in the long-run, ingenuity and innovation will make major success stories out of smartly-run, globally-focused companies. As for the near-term, my optimistic tone on some sectors/areas notwithstanding, I expect 2015 to bring us a level of volatility that will challenge the resolve of many a short-term investor. Present valuations in U.S. stocks, while not extreme in my view (considering present inflation), virtually have to make for a jittery market as the Fed looks to "normalize" interest rates, as other central banks look to ease their economies' to prosperity (could inspire upward volatility), and as any number of unforeseen events unfold in the year to come.

Here are this week's U.S. highlights from my economic journal:

JANUARY 12, 2015

THE CONFERENCE BOARD'S EMPLOYMENT TRENDS INDEX increased to 128.43 in December. Up 7.5% year on year.  Here's the index's composition followed by the opening paragraph from the press release, which speaks plain and simply to what I've been suggesting for weeks:
The eight labor-market indicators aggregated into the Employment Trends Index include:

Percentage of Respondents Who Say They Find “Jobs Hard to Get” (The Conference Board Consumer Confidence Survey®)

Initial Claims for Unemployment Insurance (U.S. Department of Labor)

* Percentage of Firms With Positions Not Able to Fill Right Now (© National Federation of Independent Business Research Foundation)

Number of Employees Hired by the Temporary-Help Industry (U.S. Bureau of Labor Statistics)

Ratio of Involuntarily Part-time to All Part-time Workers (BLS)

Job Openings (BLS)**

Industrial Production (Federal Reserve Board)*

Real Manufacturing and Trade Sales (U.S. Bureau of Economic Analysis)**

Statistical imputation for the recent month

Statistical imputation for two most recent months

“The Employment Trends Index increased in every single month of 2014, capping the year off with strong growth, 2.3 percent, in the final quarter,” said Gad Levanon, Managing Director of Macroeconomic and Labor Market Research at The Conference Board. “The strengthening in the ETI suggests that rapid job growth is likely to continue throughout the first half of 2015. And as the labor market tightens further, acceleration in wage growth is soon to follow.”

JANUARY 13, 2015

THE JOHNSON REDBOOK RETAIL REPORT showed year over year same store sales slowing last week to a 3.8% pace, from 4.3% the prior week. This is one to watch, as, typically, 3.5%+ is where this number typically comes in when the economy's in good shape. I expect this indicator, while there'll be the off week every now and again, to be a positive going forward given what I'm seeing in the consumer-related data.

THE NFIB SMALL BUSINESS OPTIMISM INDEX December reading is huge. By far the best reading post-recession. Here's commentary from NFIB's Chief Economist:
“The Index showed strength in November but most of the gains were confined to just two categories. The December Index shows much broader strength led by a significant increase in the number of owners who expect higher sales. This could be a breakout for small business. There’s no question that small business owners are feeling better about the economy. If they continue to feel that way 2015 could be a very good year.” 

 THE LABOR DEPT'S JOB OPENINGS AND LABOR TURNOVER SURVEY (JOLTS) showed job openings slightly higher in November over October. Again, the employment picture is looking healthy these days.

THE AMERICAN PETROLEUM INSTITUTE (API) shows weekly crude oil stock rising by 3.9 million barrels, distillates by .426 m and gasoline by 1.6 m... More reason to not expect prices to come bounding back anytime soon.

JANUARY 14, 2015

THE MBA WEEKLY MORTGAGE APPS INDEX surged last week. The composite rose by a whopping 49.1%... With refinances up 66% and purchases up 24%... This hugely supports my optimism over homebuilders and related industries going forward. Although it's just one week's reading...

THE CENSUS BUREAU'S RETAIL SALES REPORT for December disappointed measurably. Falling .9% versus a consensus estimate of minus .1%. While gas station sales of course plunged (with the price of gas), and was no small factor, the weakness was broadly based. The following comment from Econoday speaks to these unintuitive (given related indicators) results and offers up the possibility that more money is going to services, which are not a component of this report:
Today's retail sales report is a surprise on the downside. But it also is a quandary. Consumer confidence is up and discretionary income is up with gasoline prices down. It is possible that more money is going to services which do not show up in the retail sales report. Probably the biggest positive in the report is the boost in food services & drinking places which is a very discretionary spending item-suggesting a positive mood for the consumer. But looking at the numbers technically, fourth quarter GDP forecasts likely are being shaved.

IMPORT AND EXPORT PRICES for December make the Fed's job ever-more difficult in 2015... I.e., they're down while, clearly, the Fed would---rightly in my view---like to get interest rates off of the zero line. But will they when the world frets deflation? Here's Econoday's commentary:
Today's import & export price data underscore last week's surprising decline in average hourly earnings, heightening the lack of price pressures as a central concern for Federal Reserve policy makers. Import prices fell a very steep 2.5 percent in December following a downwardly revised contraction of 1.8 percent in November and declines of 1.4 percent and 0.8 percent in the prior 2 months. Year-on-year, import prices are down 5.5 percent.

The contraction in oil prices is of course the central factor behind the deflation with petroleum prices down 16.6 percent in December alone for a year-on-year decline of 30.1 percent. But excluding petroleum, import prices are no better than flat, up 0.1 percent in December and unchanged year-on-year.

Export prices, where petroleum is less of a factor, are also down. Export prices fell 1.2 percent in the month for a year-on-year decline of 3.2 percent. Agricultural prices are key on the export side and are down 0.7 percent on the month and down 4.9 percent on the year.

Prices of imported and exported finished goods show less downward pressure though there's still plenty of minus signs. Year-on-year, prices of imported vehicles are down 0.8 percent with imported capital goods down 0.5 percent.

Today's report points to further deflationary concerns ahead for tomorrow's producer price report and Friday's consumer price report.

THE ATLANTA FED BUSINESS INFLATION EXPECTATIONS survey supports the notion that inflation is not an immediate worry for the Fed. Respondents see inflation rising 1.7% going forward.

BUSINESS INVENTORIES remain under control at a moderate 1.31 inventory to sales ratio.

THE EIA PETROLEUM STATUS REPORT, like the API report, showed inventories building last week: 5.4m crude, 3.2m gasoline and 2.9m distillates. Oil prices dropped on the news.

THE FED'S BEIGE BOOK shows economic activity growing at a moderate pace across its districts. Here's from Econoday's summary:
The latest Beige Book indicated that economic activity continued to expand at a "modest" or "moderate" pace of growth. Business contacts expect somewhat faster growth over the coming months. Consumer spending increased in most Districts, with generally modest year-over-year gains in retail sales. Auto sales showed moderate to strong growth. Travel and tourism picked up during the reporting period. The pace of growth of demand for nonfinancial services varied widely across Districts and across sectors, but appeared to be moderate on balance. Manufacturing activity expanded in most Districts. Single-family residential real estate sales and construction were largely flat on balance across the Districts, while commercial real estate activity expanded.

JANUARY 15, 2015

WEEKLY JOBLESS CLAIMS surprised big time to the upside. Jumping 19,00 to 316,000.  The 4-week average remains slightly below 300k (298k). It'll be interesting to see if a new trend is in the offing or if we can chalk this one up to first-of-the-year volatility. I think it'll be the latter, given the positives in the anecdotal evidence of late.

THE PRODUCER PRICE FINAL DEMAND INDEX declined in December on lower energy costs. Ex-energy final demand was up 2.1% versus 1.7% in November.

THE EMPIRE STATE MANUFACTURING INDEX, the first manufacturing indicator for the year, came in positive, 9.95, versus a revised -1.23 in December.  Here's from Econoday's summary:
New orders show respectable strength at plus 6.09 vs a near zero reading in December while shipments rose to plus 9.95 from plus 2.25. A big positive in the report is a solid gain in employment which rose to 13.68 vs 8.33. The gain here points to confidence in Empire State's sample underscored by a more than 9 point jump in the 6-outlook to 48.35.

THE BLOOMBERG CONSUMER COMFORT INDEX continues its weekly rise. At 45.4 last week, it's reached a level not seen since mid-2007.  According to the survey, Americans are bullish on the current state of the economy as well as their personal finances.

THE PHILADELPHIA FED SURVEY, the second read on manufacturing this year, didn't jibe with the Empire State Index. Here's Econoday's commentary:
Abrupt slowing is the signal from the manufacturing report of the Philly Fed whose general conditions index for January fell to plus 6.3 from December's plus 24.3 (revised from 24.5). Growth in new orders, however, does remain solid at plus 8.5 though down from December's plus 13.6. The 6-month general outlook also is a positive, at a very strong 50.9 vs December's 50.4.

Now the weak readings led by shipments, which are in contraction at minus 6.9 vs December's plus 15.1, and employment, now also in contraction at minus 2.0 vs December's plus 8.4. Unfilled orders also are in the negative column, at minus 8.6 vs plus 2.7 in December. Price readings are soft with input price inflation moderating further and output prices now in modest contraction.

Though the headline index levels for this report and the Empire State report, released earlier this morning at plus 9.95, are similar, this report is signaling month-to-month slowing while Empire State is signaling month-to-month acceleration from a contractionary reading in December. The next report on January manufacturing will be next Thursday with the PMI flash. Tomorrow will offer key hard data on the sector with the industrial production report for December.

NAT GAS INVENTORIES fell 236 bcf last week. And, as the recent drop in supply would suggest, the price is up this week, better than 10%...

THE FED BALANCE SHEET grew by $16.6 billion over the past seven days. The total assets are $4.526 trillion.

M2 MONEY SUPPLY rose by $39.9 billion last week.

JANUARY 16, 2015

THE CONSUMER PRICE INDEX fell .4% in December. Of course that was all about energy prices. Excluding food (which rose .3%) and energy, the index was unchanged month over month. Year over year CPI was up .7%, excluding food and energy it was up 1.6%--versus November's 1.7% reading. Food entirely bucked the trend with a sizeable 3.4% increase last year, after rising only 1.1% in 2013. So while folks are saving big time at the pump, there's a bit of an offset on another essential, food. Although as you can see based on how food and energy take the headline number below zero, the savings in energy has been huge.

INDUSTRIAL PRODUCTION for December came down .1%. Take away utilities, however, which plunged 7.3%, and you have a pretty good reading. Manufacturing gained .3%. Mining jumped 2.2%. Durable goods increased .2%, and nondurables rose .4%..

CAPACITY UTILIZATION declined to 79.7% from 80% in November. Below 80% is typically a safe number from an inflation risk standpoint.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX, like virtually all the sentiment indicators of late, is booming--despite recent reads on home and retail sales. The mid-January read of 98.2 is the highest since January 2004. You can credit an improving labor market and lower gas prices for the consumer's confidence. The current conditions component is at its highest level in 7 years.

Thursday, January 15, 2015

Market Commentary (audio)

Click the play button for today's commentary:

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Tuesday, January 13, 2015

Market Commentary (audio)

Click the play button for today's commentary (correction to my opening statement, it's '2015'):

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Market Commentary (audio)

Click the play button for today's commentary:

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Sunday, January 11, 2015

Market Commentary (audio)

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Friday, January 9, 2015

Weekly Audio Update

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Weekly Update

2015 is off to quite the start. The first few days delivered a doozy of a sell off. Then came this Wednesday with its calming Fed meeting minutes, followed by Thursday with reports of good chain store sales, the fewest annual layoffs since 1997, lower weekly jobless claims, consumer optimism that just keeps on growing, and data out of Europe suggesting that the European Central Bank (ECB) will be hard-pressed not to start buying government bonds immediately following its January 22 meeting. All in, Wednesday and Thursday were good for over 500 Dow points to the upside. Ah, but then there was today with the Dow dipping 170 points, supposedly on the negative wages news that accompanied an otherwise robust jobs report (see the economic notes below for more detail).

If you’re watching the market daily (poor you), and if it effects you (poor poor you), this was indeed a stressful week. And while I’ll never promise you anything but volatility when it comes to the near-term prospects for the market, and I’ll never pretend I know where we’re heading even in the long-run, I will share with you the things I track that have been—historically-speaking—decent recession-risk indicators. I track such things because the true bear markets (20%+ market declines that last awhile) of the past tended to have been the stuff of recessions. 

Below are my charts, all updated this week, each preceded by a brief explanation (click them to enlarge):

Recessions typically don't occur until after the treasury yield curve inverts (short-term rates exceed long-term rates). As I described last SeptemberThat’s when short-term interest rates turn higher than long-term interest rates; an ominous indication of pessimism—as investors shun short-term treasuries (forcing their yields higher) and buy low-yielding longer-term treasuries. Only one who sees real near-term danger would buy a low-yielding long-term instrument over a comparably or higher-yielding short-term instrument. Their bet is that the economy is about to tank, sending interest rates yet lower and sending the market value of their existing longer-term bonds higher. I placed arrows at past interest rate inversions. Notice the present healthy gap between  3-month and 10-year treasuries. 

And while the gap remains healthy, it has flattened a bit since last September. Those who would discount the possibility that this flattening might signal a weakening economy credit the fact that while U.S. yields are historically low, they remain higher than comparable government debt throughout the rest of the world. Thus inspiring investors to buy U.S. debt, keeping yields low...  Time will tell.

The white arrows point to times when the three-year treasury yield exceeded that of the ten-year (inversions). The red rectangles are recessions:

Recessions and inverted yield curves

As you can see below, the unemployment rate graph tends to take on a certain shape prior to recessions. So far so good:

Recessions and the unemployment rate

The spread between high yield bonds (debt issued by borrowers with less than perfect credit profiles) and treasury bonds can---when it expands---be a signal of stress in the system. That is, when investors require higher returns from questionable borrowers. Which happens when they see a higher risk of default. As you'll notice below, the yield spread has expanded of late. As I explained in mid-December, the energy sector has a little something to do with it. Nonetheless, this one deserves close monitoring:
Recessions and high yield credit spreads

The Index of Leading Economic Indicators (comprised of the average weekly hours worked by manufacturing workers, the average number of initial applications for unemployment insurance, the amount of manufacturers' new orders for consumer goods and materials, the speed of delivery of new merchandise to vendors from suppliers, the amount of new orders for capital goods unrelated to defense, the amount of new building permits for residential buildings, the S&P 500 stock index, the inflation-adjusted monetary supply (M2), the spread between long and short interest rates, and consumer sentiment) looks good:


I'll simply copy and paste my comments on the Recession Probabilities Index from last September. The chart below is just barely more current than the one I featured back then. The Fed hasn't updated it since 10/1. The National Bureau of Economic Research (NBER) is the official arbiter of recessions. It is common thought that four indicators weigh the heaviest on their analysis (although they make reference to a number of others on their website): industrial production, real personal income (excluding transfer payments), nonfarm payrolls and real retail sales. University of Oregon economics professor Jeremy Piger maintains real time recession probabilities by melding these four indicators into a Recession Probabilities Index. Notice (click to enlarge) the upward move in the index that preceded each of the past seven recessions, and notice its current position (no worries for now): 

Recession Probability Index

The St. Louis Fed Financial Stress Index (as of last Friday), while still comfortably below zero (low stress), has ticked up a bit since I last reported it to you in September. Here's my description followed by the current chart: The St. Louis Fed publishes what it calls the Financial Stress Index. It aggregates seven interest rate series, six yield spreads and five other indicators. It is understood that these data series, each capturing an aspect of financial stress, move together as the level of financial stress in the economy changes. The average value for the index is zero (beginning in 1993), which represents normal financial market stress. A move in the index below zero denotes below-average stress, while a move above zero denotes above-average financial market stress.

St. Louis Fed Financial Stress Index

I saved the best, because it speaks to today's ill-founded fear of low oil prices, for last. Notice how recessions tend to be preceded by higher, not lower, oil prices. Now that makes perfect sense to you, right? And notice how oil prices tend to decline during recessions, then (often) bottom sometime past the mid-recession point. At its lowest point this week, oil got all the way down to the March 2009 low. You may recall that March 2009 marked the beginning of what has become a nearly 6-year bull market in stocks.

Some see the plunge in oil prices as a harbinger of bad economic things to come. Thing is, that's just not how it works: Ask yourself this simple question; wouldn't the huge savings at the pump for literally every car driver in the country produce an economic stimulus that would more than offset the hit to the U.S. oil industry? Uh, yes! It would. And, make no mistake, while the U.S. has indeed become a huge oil producer, we are still net importers. Which means the U.S. consumer is presently benefiting from a redistribution of Middle-East wealth. Please, don't complain!

Recessions and oil prices

Just one more chart. This one's for those who fear that U.S. stock market valuations just have to be getting to dangerous levels. While it is indeed higher than it was at, say, the start of 2013, the price to earnings ratio (p/e) of the S&P 500 index, by itself, doesn't frighten me in the current inflation environment.

In the chart below I show the trailing 12-month p/e for the S&P 500 and the U.S. Consumer Price Index (CPI) all the way back to the mid-1950s. I placed parallel lines at 15 and 5. As you can see, p/es (white line) tend to remain above 15 during times when inflation (red line) is running below 5% (not even close currently).

Could it be that stocks are presently overvalued, as many suggest, even while inflation remains below 5%. Absolutely! It's just that, historically-speaking, a short/mid-term investor, with a little awareness, probably wouldn't panic just yet. Of course long-term, well-balanced, investors never panic...


Now, all that said, and shown, please, do not take this as my prediction that we've nothing but blue skies to come. It's been my experience over the past 30-years that even when all the indicators line up positively the market can cut through charts like these like a knife through butter. 

In fact, I recently offered up a detailed chart, along with some data that suggested that today's market could suffer a greater than your garden variety recession once the Fed gets off the dime and begins "normalizing" interest rates. Which remains, in my view, a likely scenario. 

So, expect volatility, lots and lots of it in 2015 as short-term traders drive each other crazy.

I'll say it again:
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.

Per the following highlights from this week's economic journal, the U.S economy, on balance, remains in expansion mode:

JANUARY 5, 2015

DECEMBER AUTO SALES softened 1.7%. Although, overall, still a strong and expansionary number---coming off of an extremely strong November.

THE GALLUP CONSUMER SPENDING MEASURE FOR DECEMBER had Americans spending $98 per day. This is at the upper end of the number since 2008. However, it's not much of a bump off of November's $95/day, or the $96/day in December 2013. While positive, this particular measure does not support my position that the retail numbers will come in substantially greater than we've seen in recent years.

JANUARY 6, 2015

GALLUP'S US ECONOMIC CONFIDENCE INDEX continues to improve, to -5, from -8 prior. To put this into perspective, the number was -65 in late 2008...

THE JOHNSON REDBOOK RETAIL REPORT showed sales slowing last week to a year over year rate of 4.3%, from 5.4% the week prior.

MARKIT'S SERVICES PMI slowed in December to 53.3, which was close enough to the consensus estimate of 53.6. While growth in new business, output and employment slowed---which bears close watching going forward---the number is still comfortably in expansion mode (above 50)...

FACTORY ORDERS declined once again at a -.7% clip. Which was the same as last month and below the consensus estimate of -.6%. Nondefense capital goods were a minor bright spot, up just .1%... Overall, another weak report. The slowing in shipments and new orders hasn't resulted in a build in inventories, which is good.. Plus, unfilled orders remains steady...

THE ISM NON-MFG (SERVICES) INDEX slowed to 56.2 from November's 59.3. However, the November number was unusually strong. Despite the slowing pace (business activity and new orders) from November, the employment component is registering continued strength, which denotes optimism... Plus, the overall read, is still very solidly in expansion territory.  Here's Econoday's commentary:
December growth in ISM's non-manufacturing sample, at 56.2, slowed substantially from, however, November's unusually strong 59.3.

Details show particular slowing in business activity, down 7.2 points to 57.2, followed by slowing in new orders, down 2.5 points to 58.9. A plus is respectable strength for employment, down only 7 tenths to 56.0. Prices paid, reflecting lower fuel costs, fell 4.9 points to 49.5 for the first sub-50 reading since September 2009.

Despite the slowing, signals from this report are still very healthy, underscored by the breadth of strength among individual industries with 12 of 18 reporting monthly growth. The two leading industries for December –- retail and accommodation & food services –- point specifically to consumer strength during the holidays. Other readings include a gain for construction and monthly contraction for mining.

API WEEKLY CRUDE INVENTORIES declined by 4 million barrels, which would be bullish for the price. However, as follows, distillate and gasoline inventories grew.

API WEEKLY DISTILLATES STOCKS grew 9.1 million barrels.

API WEEKLY GASOLINE STOCKS grew 6.9 million barrels.

JANUARY 7, 2014

MORTGAGE PURCHASE APPLICATIONS fell noticeably, down 5%, during the two weeks ending January 2 (two-week report, vs the usual one-week, due to holiday). This doesn't square well with what the mortgage rates, the jobs picture and consumer optimism of late would be signalling. Refinances were down 12% for the period. This will be interesting to track going forward. The aforementioned indicators would suggest much better results going forward...

THE ADP EMPLOYMENT REPORT FOR DECEMBER came in at a strong 241,000... And November was revised higher by 19,000, to 227,000. This number supports what I'm seeing in the various employer surveys, etc...

THE GALLUP US JOB CREATION INDEX, a survey of 15,000 full and part-time workers asking what their employers are up to, came in at 27, which is nicely higher than January's number, 19, but basically flat, save for a spike to 30 in September, during the second half of the year. While positive on the year, this one's flatness runs counter to what I'm seeing in the surveys and in the actual jobs numbers of late.

THE US TRADE DEFICIT, a sadly confused (by the masses and too many economists) statistic, shows a shrinkage that is no doubt due primarily to the lower pricing of oil imports. This result will help the Q4 GDP number.

Like Tuesday's API report, THE EIA PETROLEUM STATUS REPORT showed a draw down in crude last week, and a big build in gasoline and distillates: -3.1 million barrels, +8.1 million barrels and 11.2 million barrels respectively.

THE FOMC MINUTES confirmed the notion that this Fed, while acknowledging that it'll likely happen this year, is in no hurry to raise interest rates. Stocks appeared to rally big time on the news...

JANUARY 8, 2014

CHAIN STORE SALES justified my optimism over this year's retail season, showing an annual increase of 4.9%. Your typical expansion range is 3.5%+...

THE CHALLENGER JOB-CUT REPORT came in impressively, for the full year, with 483,171---the lowest total since 1997. In December, layoffs totaled 32,649 vs 35,940 in November and 30,623 last December...

WEEKLY JOBLESS CLAIMS declined by 4,000 last week to 294,000. The 4-week average is now at 290,500. Continuing claims for the Dec. 27 week rose 101,000 to 2.452 million, however the 4-week average fell 17,000 to 2.397 million. The unemployment rate for insured workers remains at 1.8%.

THE BLOOMBERG CONSUMER COMFORT INDEX continues to show real optimism. Coming in at 43.6 vs the prior week's 42.7. The advance was led by increased optimism over the economy and personal finances. Bloomberg believes the higher sentiment in 8 out of the last 10 weeks will likely support gains in household spending, thus helping drive the U.S. expansion.

NAT GAS INVENTORIES declined by 131 bcf according to the EIA... Total inventory: 3,089 bcf.

THE FED BALANCE SHEET grew by $1.9 billion last week after declining by $11.8 billion the week before. Total assets stand at $4.5 trillion.

M2 MONEY SUPPLY grew by $12.0 billion the week 12/29 week. M2 consists of savings deposits, small time deposits and retail money market mutual funds.

JANUARY 9, 2015

THE DECEMBER EMPLOYMENT SITUATION REPORT showed job creation of 252,000, which is a strong number and confirms what I'm seeing in both the consumer and employer surveys. Plus, October and November were revised by a net 50,000 higher. The unemployment dropped to 5.6%. Average weekly hours, as expected, were unchanged at 34.6. Construction jobs, which speaks loudly to my optimism over the home builders going forward, advanced by 67,000, after growing by 20,000 the month before. Manufacturing employment rose by 17,000, after rising 29,000 in November.

All that sounds great, however, much to my, as well as the consensus's, surprise, average hourly earnings declined by .2%. Which makes for a mixed report.

In terms of wages: they're always late to join an expansion. The labor market has to tighten first, then, when the available worker pool shrinks, employers are forced to compete on price... I'm optimistic on wage growth in 2015...

WHOLESALE INVENTORIES jumped by .8% in November, vs .4% in October and a consensus estimate of .3%. While this helps the GDP number for Q4, and some might say denotes optimism, it's not good news in my view. Rising inventories generally result in slower production during the ensuing weeks, maybe months. At 1.21, the inventory to sales ratio is not horrible, it suggests an increasing trend of late (1.19 in September, 1.20 in October)... My best guess, based on the overall optimism displayed in the surveys, is that this data will improve in the coming months...