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.

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