Your Weekly Update

Current themes:

Central Banks:

Janet Yellen didn't disappoint traders last week during her semi-annual testimony to Congress. She promised no rate hikes for at least the next two meetings and, even then, only upon evidence that the labor market is sufficiently tight and inflation is of enough concern to warrant the first step in getting rates to a point where they somewhat reflect present-day reality (i.e., the U.S. economy---contrary to what a zero interest rate policy typically portends---is doing pretty well these days).

The European Central Bank begins its bazooka of a QE program this month. And, my, how the pundits have come out of the woodwork predicting good things for the area's stocks going forward. As you know, I've been feeling pretty good about Eurozone equities myself of late.

Here's from my 11/24/2014 commentary:

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

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

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

Oil:

The price of a barrel of oil has been bouncing all around $50 of late, while inventories have been building like there's no tomorrow---up another 8.4 million barrels last week alone, remaining at an 80-year high. Not only does this ongoing build suggest that prices are anything but poised to move higher, we can make the case that there's a decent chance of another good leg lower before it all shakes out---despite the futures curve showing $60 by year's end.

You see, there are these speculators who have the foresight, and the funding, to buy up physical oil and simply stick it in storage in the hopes that they'll sell it later in the year for a cool 20+% profit. But what happens if we run out of storage capacity? What happens to the price when the market has to absorb all that excess production, and those speculators (perhaps) give up and get out of those losing positions? That's right, the price plummets. Could happen!

I'll bet you're wondering how oil prices can remain so low while the cost of filling your tank has been on the rise. Well, primarily (at present), that would have to do with refining. And I suspect the ongoing USW refinery workers' strike (the magnitude of which hasn't been seen in 35 years) is impacting output, along with the seasonal retooling for summer-grade gasoline.

The Consumer:

Depending on whether you're tracking Bloomberg's weekly consumer comfort survey or The University of Michigan's monthly consumer confidence index---or, mortgage apps or new home sales---consumer confidence is either waning or improving. Given a vastly improving jobs market, and still-lower-than-last-year energy prices, I'm thinking the consumer is feeling pretty good about his/her prospects going forward. 

Europe: 

See "Central Banks" above... And let me add that the Eurozone has begun showing real economic signs of life of late. Next week's calendar is full of releases that should give us a pretty good picture of how the Eurozone members are faring.

The Stock Market:

Here’s a look at the year-to-date results for the major U.S. indices, and non-US indices using index ETFs as our proxies (according to Morningstar and Bloomberg):

Dow Jones Industrials:  +2.21%

S&P 500:  +2.57%

NASDAQ Comp:  +5.02%

EFA (Europe, Australia and Far East):  +7.00%

FEZ (Eurozone):  +6.51%

VWO (Emerging Markets):  +4.45%

Sector ETFs:

Here’s a look at the year-to-date results for a number of sector ETFs:

XLB (MATERIALS):  +8.13%

XHB (HOMEBUILDERS):  +6.51%

IYH (HEATHCARE):  +6.16%

XLY (DISCRETIONARY):  +5.29%

XLK (TECH):  +4.21%

XLP (CONS STAPLES):  +3.19%

XLI (INDUSTRIALS):  +1.61%

XLE (ENERGY):  -0.18%

IYT (TRANSP):  -1.09%

XLF (FINANCIALS):  -1.54%

XLU (UTILITIES):  -4.21%

To put the inevitable (volatility and down markets) into perspective, allow me to repeat last week’s comments:

In last weekend’s commentary I attempted to put a rough January into proper perspective by urging you to view the stock market as an “antifragile” (benefits from stress) entity. Again, periodic market downturns are an essential aspect of the long-term investing process. As I stated in our year-end letter, and several commentaries since, I expect financial markets in 2015 to exhibit the kind of volatility that will challenge the resolve of many a short-term investor. Good thing you and I think long-term!

One additional note on volatility: The past couple of weeks I’ve shared with you the very short-term results for markets and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). As you may have noticed, my beginning of the year optimism over non-US and the housing sector (to name two), and pessimism over utilities, appears to be justified by recent results. I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced these few short weeks into 2015. My optimism or concerns are based on factors such as valuations, trends, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along  the way.

The Bond Market:

The yield on the 10-year treasury bond declined .12% last week to 1.99%. You can no doubt thank Janet Yellen, per the above, for last week's rally in bond prices.

Bond bulls cite softer economic data of late and virtually no risk of rising inflation anytime soon---not to mention record low yields on other nations' debt---as sufficient to keep rates very low for a very long time going forward. And while that all makes sense, if we cast just a bit deeper we can fish out a few things that would legitimately question their understandable sanguinity:

As for the somewhat softer data of late, yes, clearly, sentiment in the manufacturing sector has been waning---still positive, just less so recently. But when we consider the complexion of the U.S. economy, it makes little sense to focus primarily on manufacturing. Not when the service sector accounts for 80+% of U.S. economic activity and provides better than 80% of all U.S. jobs. When we focus our attention there, suddenly things look pretty darn good and we begin to wonder if the inflation doves aren't missing something.

Here are a few excerpts on the service sector activity from last week's notes:

MARKIT'S FLASH SERVICES PMI speaks hugely to the employment picture going forward---as U.S. employment is primarily service-based. It also speaks to the health of the U.S. consumer, as the U.S. economy is indeed service-based. Here's Markit's chief economist:

“Stronger growth of service sector activity in February puts a June Fed rate rise firmly back on the table.

“While parts of the East coast have struggled in the face of adverse weather, other regions basked in unusually warm temperatures, boosting business above seasonal norms. Activity levels surged higher and inflows of new business boomed as a result.

“Alongside the upturn signaled by the sister ‘flash’ manufacturing PMI survey, the improved performance of the service sector in February means the economy looks to be enjoying yet another spell of robust growth in the first quarter. The two PMI surveys are so far running at a level consistent with at least 3.0% annualized GDP growth. While the overall rate of business expansion has cooled from the surging pace seen in the middle of last year, growth remains buoyant and, importantly, strong enough to drive yet another month of impressive job creation.

“The Fed will no doubt be encouraged by the resilience of the economy in the face of global headwinds such as the Greek and Russian crises, and increasingly minded to start the process of normalizing monetary policy in June on the basis of these impressive survey results.”

THE RICHMOND FED SERVICE SECTOR SURVEY, contrary to the 5th District's manufacturing survey results, shows activity expanding in February. Continued strength in the service sector surveys much more than offsets recent softness in manufacturing, given the makeup of the U.S. economy.

Here's the Richmond Fed's overview:

Service sector activity expanded at a moderate pace in February, according to the latest survey by the Federal Reserve Bank of Richmond. Revenues strengthened overall, with slightly slower retail sales, even as big-ticket sales improved and shopper traffic picked up. Retail inventories grew about on pace with a month ago. Looking ahead to the next six months, survey participants expected increased demand for their goods and services.

Employment in the sector slowed. Retail employment rose modestly while hiring at non-retail establishments was nearly flat. Average wages increased solidly, albeit more slowly than in January.

Prices rose at a slower pace in February. Survey participants expected prices would increase more rapidly during the next six months.

THE DALLAS FED'S SERVICE OUTLOOK SURVEY, very much like the Richmond Fed's results, in that it contradicts Monday's Dallas Fed's Manuf Survey, expanded in February. To repeat: Continued strength in the service sector surveys much more than offsets recent softness in manufacturing, given the makeup of the U.S. economy. Apparently Texas's dependence on oil production isn't quelling optimism in the service sector. Here's the Dallas Fed's overview:

Texas service sector activity continued to reflect expansion in February, according to business executives responding to the Texas Service Sector Outlook Survey. The revenue index, a key measure of state service sector conditions, edged up from 12.1 to 13.6 but remained below its 2014 average.

Labor market indicators reflected faster employment growth and slightly longer workweeks. The employment index rose from 5.8 to 12 in February, indicating hiring picked up pace this month. The hours worked index was unchanged at 1.4 this month, suggesting work hours increased at the same pace as in January.

Perceptions of broader economic conditions reflected slightly more optimism in February. The general business activity index rebounded from a negative reading last month to 1.7. The company outlook index moved up from 0.3 to 3.5, with 18 percent of respondents reporting that their outlook improved from last month and 14 percent noting that it worsened.

Price and wage pressures increased slightly this month. The selling prices index ticked up a point to 3.9. The wages and benefits index rose slightly from 13.5 to 15.4, although the great majority of firms continued to note no change in compensation costs.

Respondents’ expectations regarding future business conditions reflected more optimism in February. The index of future general business activity edged up from 6.1 to 8.9. The index of future company outlook rose from 8.8 to 14.3. Indexes of future service sector activity, such as future revenue and employment, remained in solid positive territory this month.

THE CPI FOR JANUARY came in down .7%. But that was all about energy prices. Ex-food and energy, the core was up .2% month-over-month. While recent inflation numbers embolden those who'd prefer the Fed not raise the Fed Funds rate this year, if ever, when we look at the rise in prices in the sector that matters most in the U.S., services (comprises more than 80% of the U.S. economy and, btw, produces more than 80% of U.S. jobs), we see inflation running at 2.5%, which is 25% above the Fed's target! My concern is that should wage inflation takeoff (we're now seeing real gains) and, say, oil bottom around the same time, inflation becomes a real concern---and the Fed Funds rate is at zero. Truly, we'd see rates rise in a hurry and financial markets get creamed... You couldn't pay me to own bonds in this environment.

And, once again, here's my weekly repeat on the bond market:

... complacency can be a very dangerous thing. In my view U.S. bond investors have been the definition of complacent for a very long time. And who can blame them when the U.S. economy, until recently, has delivered probably the most sluggish expansion in its history and the rest of the developed world is sporting interest rates near zero, or below. I.e., there’s been little risk of inflation here at home, and the U.S. treasury has offered the most attractive yields among the world’s safest debt issuers. Not to mention how the strengthening dollar has enticed foreign investors into the U.S. bond market.

So what might alter the debt investor’s paradigm and inspire him to give up his treasury bonds? Well, it could be a number of things. Not the least of which would be signs that the U.S. economy is gaining momentum and that the Fed will have to begin raising interest rates sooner than later. Bond prices took it in the chin last week as the yield on the 10-year treasury jumped from 1.66% to 1.95% (that’s a 17% increase). Another excuse would be a sudden decline in the dollar (I know, that contradicts the present economic backdrop and the prospects for higher interest rates. But the consensus lives in that camp, and the consensus is very often wrong). Should, let’s say, the Eurozone begin to show real signs of life and, thus, the Euro begin to gain against the dollar, we could see money fly out of treasuries in a big way as those carry-traders (they borrow in low-yielding, declining currencies and invest in higher yielding, strengthening currencies) rush to exit their positions: A reversal in the currency exchange trend can be a killer (say you borrowed 1 Euro and lent it in the U.S. at a $1.12 exchange rate. If the dollar moves to $1.20/Euro, you no longer have enough dollars to pay back your Euro loan).

Suffice it to say that the bond market (as well as other interest-rate-sensitive sectors [think utilities]) is in a precarious position these days. Short-term rates at zero while the economy is gaining momentum is an utterly unsustainable scenario.

 

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

FEBRUARY 23, 2015

THE CHICAGO FED NATIONAL ACTIVITY INDEX edged up .13 in January versus down .07 in December.  In Summary: Employment-related indicators contributed .18 in January. Production-related indicators contributed .02. Consumption and housing contributed -.10. Three of the four broad components made positive contributions from December. The historical line graph remains positive, from a past pre-recession indication standpoint.

EXISTING HOME SALES, while higher year-on-year, decreased in January (on a month-to-month) basis to their lowest rate in 9 months. The NAR's chief economist speaks to the obvious headwind posed by low inventory and rising prices:

Lawrence Yun, NAR chief economist, says the housing market got off to a somewhat disappointing start to begin the year with January closings down throughout the country. “January housing data can be volatile because of seasonal influences, but low housing supply and the ongoing rise in home prices above the pace of inflation appeared to slow sales despite interest rates remaining near historic lows,” he said. “Realtors® are reporting that low rates are attracting potential buyers, but the lack of new and affordable listings is leading some to delay decisions.”

Comparing today's housing fundamentals to long-term averages and the 2007 speak paints a bullish picture for housing going forward---despite recent softness.

THE DALLAS FED MANUFACTURING SURVEY posted its second month of no growth in February. The report was pretty negative across the board. I suspect the plunge in oil prices is impacting sentiment in Texas. Here's the Dallas Fed's overview:

Texas factory activity posted a second month of no growth in February, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, remained near zero (0.7) and indicated output was essentially unchanged from January levels.

Other measures of current manufacturing activity reflected contraction in February. The new orders index pushed further into negative territory, coming in at -12.2, its lowest reading since June 2009. The shipments index fell to -3.3, also reaching a low not seen since 2009. The capacity utilization index turned negative as well, dropping from 5.1 to -4.9.

Perceptions of broader business conditions remained rather pessimistic this month. The general business activity index moved further negative to -11.2, posting its lowest reading in nearly two years. The company outlook index remained slightly negative and edged down from -3.8 to -4.4.

Labor market indicators reflected only minor employment growth and slightly shorter workweeks. The February employment index moved down from 9 to 1.3. Fifteen percent of firms reported net hiring, compared with 14 percent reporting net layoffs. The hours worked index edged further into negative territory, coming in at -1.6.

Prices fell slightly in February and upward pressure on wages continued to ease. The raw materials prices index held steady at -1.7, indicating marginal downward pressure on input costs. The finished goods prices index was also slightly negative but edged up from -6.7 to -4.4. Manufacturers are no longer expecting sizeable price increases six months ahead, as the indexes of future prices were in single digits this month, down markedly from 2014 readings. The wages and benefitsindex edged down for a second month in a row and came in at 16.8.

Expectations regarding future business conditions rebounded somewhat in February. The index of future general business activity shot up 12 points to 5.5 after posting a negative reading in January. The index of future company outlook rose nearly 10 points to 11.8, although it remains well below the index level seen throughout 2014. Indexes for future manufacturing activity showed mixed movements in February but remained in solidly positive territory.

FEBRUARY 24, 2015

THE S&P CASE-SHILLER HOME PRICE INDEX shows prices on the rise. Which makes perfect sense given the present lack of inventory. Up 4.5% year over year. In theory, rising prices should bring more sellers, and hence, more inventory to market.

THE JOHNSON REDBOOK RETAIL REPORT shows year-on-year growth slowing to 2.8%, versus 3.2% last week. Here's Econoday's summary:

Chain-store sales slowed to year-on-year growth of plus 2.8 percent in the February 21 week, down from 3.2 percent in the prior week. The reporting week was unusually cold in many parts of the country. Still, February is showing strength relative to January in Redbook's sample, at plus 0.8 percent that points to strength for core retail sales in February (ex-auto ex-gas).

MARKIT'S FLASH SERVICES PMI speaks hugely to the employment picture going forward---as U.S. employment is primarily service-based. It also speaks to the health of the U.S. consumer, as the U.S. economy is indeed service-based. Here's Markit's chief economist:

Williamson, chief economist at Markit said:

“Stronger growth of service sector activity in February puts a June Fed rate rise firmly back on the table.

“While parts of the East coast have struggled in the face of adverse weather, other regions basked in unusually warm temperatures, boosting business above seasonal norms. Activity levels surged higher and inflows of new business boomed as a result.

“Alongside the upturn signaled by the sister ‘flash’ manufacturing PMI survey, the improved performance of the service sector in February means the economy looks to be enjoying yet another spell of robust growth in the first quarter. The two PMI surveys are so far running at a level consistent with at least 3.0% annualized GDP growth. While the overall rate of business expansion has cooled from the surging pace seen in the middle of last year, growth remains buoyant and, importantly, strong enough to drive yet another month of impressive job creation.

“The Fed will no doubt be encouraged by the resilience of the economy in the face of global headwinds such as the Greek and Russian crises, and increasingly minded to start the process of normalizing monetary policy in June on the basis of these impressive survey results.”

THE CONFERENCE BOARD CONSUMER CONFIDENCE SURVEY declined to 96.4 in February from January's 103.8. While February's result were indeed a retreat, they came off of a robust move in January. All in all the consumer remains generally positive, just not as positive in January, about the future. Here's CB's director on February's results:

“After a large gain in January, consumer confidence retreated in February, but still remains at pre-recession levels (September 2007, Index, 99.5). Consumers’ assessment of current conditions remained positive, but short-term expectations declined. While the number of consumers expecting conditions to deteriorate was virtually unchanged, fewer consumers expect conditions to improve, prompting a less upbeat outlook. Despite this month’s decline, consumers remain confident that the economy will continue to expand at the current pace in the months ahead.”

THE RICHMOND FED MANUFACTURING SURVEY shows activity slowing in February. Here's the Richmond Fed's overview:

Fifth District manufacturing activity slowed in February, according to the most recent survey by the Federal Reserve Bank of Richmond. Shipments and the volume of new orders flattened, while the backlog of orders declined. Hiring in the sector was weak and the average workweek shrank, although wage growth advanced modestly. Despite the soft current conditions, producers were upbeat about future business opportunities. Expectations were for solid increases in shipments and new orders in the six months ahead, with greater capacity utilization. In addition, manufacturers looked for a build-up in backlogged orders and minimal vendor lead-times.

Compared to January's outlook, producers expected slower employment growth and less growth in the average workweek. Although wage growth expectations remained solid in February, the outlook was less robust than a month earlier.

Prices of raw materials and finished goods were little changed in February. Looking ahead, manufacturers expected slower price growth over the next six months than they had a month ago.

THE RICHMOND FED SERVICE SECTOR SURVEY, contrary to the 5th District's manufacturing survey results, shows activity expanding in February. continued strength in the service sector surveys much more than offsets recent softness in manufacturing, given the makeup of the U.S. economy. Here's the Richmond Fed's overview:

Service sector activity expanded at a moderate pace in February, according to the latest survey by the Federal Reserve Bank of Richmond. Revenues strengthened overall, with slightly slower retail sales, even as big-ticket sales improved and shopper traffic picked up. Retail inventories grew about on pace with a month ago. Looking ahead to the next six months, survey participants expected increased demand for their goods and services.

Employment in the sector slowed. Retail employment rose modestly while hiring at non-retail establishments was nearly flat. Average wages increased solidly, albeit more slowly than in January.

Prices rose at a slower pace in February. Survey participants expected prices would increase more rapidly during the next six months.

THE DALLAS FED'S SERVICE OUTLOOK SURVEY, very much like the Richmond Fed's results, in that it contradicts Monday's Dallas Fed's Manuf Survey, expanded in February. To repeat: continued strength in the service sector surveys much more than offsets recent softness in manufacturing, given the makeup of the U.S. economy. Apparently Texas's dependence on oil production isn't quelling optimism in the service sector. Here's the Dallas Fed's overview:

Texas service sector activity continued to reflect expansion in February, according to business executives responding to the Texas Service Sector Outlook Survey. The revenue index, a key measure of state service sector conditions, edged up from 12.1 to 13.6 but remained below its 2014 average.

Labor market indicators reflected faster employment growth and slightly longer workweeks. The employment index rose from 5.8 to 12 in February, indicating hiring picked up pace this month. The hours worked index was unchanged at 1.4 this month, suggesting work hours increased at the same pace as in January.

Perceptions of broader economic conditions reflected slightly more optimism in February. The general business activity index rebounded from a negative reading last month to 1.7. The company outlook index moved up from 0.3 to 3.5, with 18 percent of respondents reporting that their outlook improved from last month and 14 percent noting that it worsened.

Price and wage pressures increased slightly this month. The selling prices index ticked up a point to 3.9. The wages and benefits index rose slightly from 13.5 to 15.4, although the great majority of firms continued to note no change in compensation costs.

Respondents’ expectations regarding future business conditions reflected more optimism in February. The index of future general business activity edged up from 6.1 to 8.9. The index of future company outlook rose from 8.8 to 14.3. Indexes of future service sector activity, such as future revenue and employment, remained in solid positive territory this month.

THE API WEEKLY CRUDE STOCK continues to show huge adds to inventory. Last week to the tune of 8.9 million barrels. Gasoline declined by 1.6 mbs and distillates declined by 2.4 mbs.

FEBRUARY 25, 2015

MORTGAGE APPLICATIONS decreased 3.5% last week. However, purchase apps bucked the recent trend, jumping 5% week over week. As I've stressed consistently of late, I see real potential for the housing market going forward. Despite recent softness.

NEW HOMES SALES in January came in better than expected, at annual pace of 481,000.

EIA WEEKLY CRUDE INVENTORIES show no letting up whatsoever in production... Up 8.42 million barrels last week. Gasoline inventories decined 3.118 mbs and distillates declined 2.711 mbs.

FEBRUARY 26, 2015

DURABLE GOODS ORDERS for January broke a two-month streak of declines by rising 2.8%. Transportation led the way with a 9.1% increase. Ex-transportation orders grew only .3%. Of concern is the continued build in inventories. While the 9.5% increase in capital goods orders would be a positive, given what it says about expansion and productivity going forward. Here's from the Census Bureau's report:

New Orders

New orders for manufactured durable goods in January increased $6.5 billion or 2.8 percent to $236.1 billion, the U.S. Census Bureau announced today. This increase, up following two consecutive monthly decreases, followed a 3.7 percent December decrease. Excluding transportation, new orders increased 0.3 percent. Excluding defense, new orders increased 3.0 percent. Transportation equipment, also up following two consecutive monthly decreases, led the increase, $6.0 billion or 9.1 percent to $72.1 billion.

Shipments

Shipments of manufactured durable goods in January, down three of the last four months, decreased $2.7 billion or 1.1 percent to $245.1 billion. This followed a 1.5 percent December increase. Transportation equipment, down two of the last three months, led the decrease, $1.3 billion or 1.7 percent to $73.9 billion.

Unfilled Orders

Unfilled orders for manufactured durable goods in January, down two consecutive months, decreased $2.0 billion or 0.2 percent to $1,163.4 billion. This followed a 0.9 percent December decrease. Transportation equipment, also down two consecutive months, led the decrease, $1.9 billion or 0.3 percent to $736.8 billion.

Inventories

Inventories of manufactured durable goods in January, up twenty-one of the last twenty-two months, increased $1.8 billion or 0.4 percent to $412.5 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.5 percent December increase. Transportation equipment, also up twenty-one of the last twenty-two months, led the increase, $0.7 billion or 0.5 percent to $134.4 billion.

Capital Goods

Nondefense new orders for capital goods in January increased $6.9 billion or 9.5 percent to $79.8 billion. Shipments increased $0.8 billion or 1.0 percent to $80.2 billion. Unfilled orders decreased $0.5 billion or 0.1 percent to $731.0 billion. Inventories increased $0.2 billion or 0.1 percent to $186.9 billion. Defense new orders for capital goods in January decreased $0.4 billion or 5.2 percent to $7.6 billion. Shipments decreased $1.3 billion or 12.0 percent to $9.2 billion. Unfilled orders decreased $1.7 billion or 1.1 percent to $153.4 billion. Inventories increased $0.2 billion or 0.7 percent to $24.2 billion.

Revised December Data

Revised seasonally adjusted December figures for all manufacturing industries were: new orders, $470.6 billion (revised from $471.5 billion); shipments, $488.7 billion (revised from $488.2 billion); unfilled orders, $1,165.5 billion (revised from $1,166.9 billion); and total inventories, $653.1 billion (revised from $653.9 billion). 

REAL EARNINGS increased substantially above expectations in January (1.2% month-over-month vs .3% expected). This of course speaks to the falling rate of inflation (when we count energy). Year-over-year real earnings increased by 3.0% (2.4% earnings + .6% average workweek).

THE CPI FOR JANUARY came in down .7%. But that was all about energy prices. Ex-food and energy, the core, was up .2% month-over-month. While recent inflation numbers embolden those who'd prefer the Fed not raise the Fed Funds rate this year, if ever, when we look at the rise in prices in the sector that matters most in the U.S., services (comprises more than 80% of the U.S. economy and, btw, produces more than 80% of U.S. jobs), we see inflation running at 2.5%, which is 25% above the Fed's target! My concern is that should wage inflation takeoff (we're now seeing real gains) and, say, oil bottom around the same time, inflation becomes a real concern---and the Fed Funds rate is at zero. Truly, we'd see rates rise in a hurry and financial markets get creamed... You couldn't pay me to own bonds in this environment.

WEEKLY JOBLESS CLAIMS jumped 31,000 last week to 313,000. The 4-week moving averages (puts the noisy weekly data into better [trendingly speaking] perspective) stands at a comfortable (historically-speaking) 294,500. Continuing claims total 2,401, down 21k from prior reading.

THE FHFA HOUSE PRICE INDEX shows prices rose .8% in December and 4.9% year over year. As suggested below, low inventories, along with a better labor market are pushing home prices higher. In theory, higher prices should inspire new sellers (existing homes, and new construction) into the market, alleviating the inventory issue.

“Contrary to prior indications of a possible slowdown, home price appreciation in the fourth quarter was relatively strong,” said FHFA Principal Economist Andrew Leventis.  “The key drivers of appreciation over the last few years—low inventories of homes available for sale and improvement in labor markets—likely played a role in driving up prices during the quarter.”

THE BLOOMBER CONSUMER COMFORT SURVEY strongly suggests that the price of a gallon of gas is a serious influence on the personal outlook of the U.S. consumer.  The report also sites sluggish wage growth, however I suspect that's a trend that'll soon be improving. Here's from the press release:

Consumer Comfort Falls to 2015 Low as View of U.S. Economy Dims

By Nina Glinski

(Bloomberg) -- Consumer sentiment retreated last week to the lowest level of the year as Americans’ views of the economy and their finances dimmed.

The Bloomberg Consumer Comfort Index fell to 42.7 in the period ended Feb. 22 from 44.6 a week earlier. The 1.9-point decline was the biggest since May 2014. A gauge of the current state of the economy slumped by the most in almost four years.

Confidence has deteriorated in three of the last four weeks as gasoline prices started climbing from the lowest level since 2009. Sentiment is also being restrained by what Federal Reserve Chair Janet Yellen this week called “sluggish” wage growth, even as the labor market continues to improve.

The drop in in sentiment last week coincided with “still largely stagnant wages, tough sledding in the stock market and a recent rise in gas prices after a record four-month decline,” said Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg.

The measure of Americans’ views of the economy dropped 3.2 points, the most since March 2011, to an eight-week low of 35.7. The gauge of personal finances fell to 53.8, also the weakest reading this year, from 56.6. It was the fourth straight decline.

A gauge of the buying climate, which shows whether now is a good time to make purchases, was little changed.

Households are becoming less enthusiastic as prices at the gas pump rebound from an almost six-year low at the end of January. The average price of a gallon of regular fuel was $2.33 on Feb. 24, up from $2.03 on Jan. 25. It’s still a dollar a gallon cheaper than the five-year average price of $3.33.

NATURAL GAS INVENTORIES declined last week by 219 billion cubic feet.

THE KANSAS CITY FED MANUFACTURING INDEX showed that " Tenth District manufacturing activity expanded just slightly in February, but producers expected activity to pick up moderately in the months ahead. Most price indexes continued to decrease, with several reaching their lowest $4.487 trillion.

M2 MONEY SUPPLY grew by $29 billion last week.

FEBRUARY 27, 2015

Q4 GDP (the second estimate) came in at 2.2%, just above the consensus estimate of 2.1%. This is off .4% from last month's advance Q4 reading. The downward revision reflects more complete data showing private inventory investment increasing less than the advance estimate, while nonresidential fixed investment (capital investment) increased more than estimated last month (but not enough to offset the decline in inventories). This comes after a huge 5% jump in GDP in Q3.

The price index for gross domestic purchases decreased .1% in Q4. Ex-food and energy, the price index increased .7%. Services increased 4.1%.

Consumer spending increased 4.2%.

THE CHICAGO PMI INDEX for February came in at 45.8, which was shockingly lower than the consensus estimate of 58.7. This is the lowest reading since July 2009. The report blames the decline on bad weather along with the West Coast port slowdown. This glaringly contradicts other anecdotal evidence to the point that it probably should be dismissed, in acceptance of the bad weather and port issues.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX for February tells a different story than did this week's Bloomberg Consumer Comfort Index. While Bloomberg's survey shows waning optimism among consumers (although Bloomberg's is a weekly survey), the University of Michigan survey has consumer sentiment improving sharply, at 95.4 versus 93.6 in January. Here's Econoday:

The sharpest moves are in the current conditions component which rose to 106.9 from 103.1 at mid month. This puts the pace for the last two weeks in the 109 area which is little changed from January's final reading of 109.3. This component points to steady rates of consumer activity for February compared to January.

The expectations component rose 1.5 points from mid-month to 88.0, pointing to a nearly 90 pace over the last two weeks. The final reading for January was 91.0. Note that expectations typically hinge on the outlooks for employment and income.

Inflation expectations are unchanged from mid-month, at 2.8 percent for the 1-year outlook and 2.7 percent for the 5-year outlook. The 1-year rate is up 3 tenths from January while the 5-year rate is down 1 tenth.

February readings on consumer spirits had been on the decline before today's report, one that underscores consumer strength, strength derived from the strong jobs market.

THE NAR PENDING HOME SALES INDEX, unlike certain other housing indicators of late, supports my optimism over the housing sector going forward. Climbing 1.7% to 104.2 in January, which is its highest reading since August 2013. Here's NAR's chief economist on January's positive results and his concerns over a lack of inventory:

Lawrence Yun, NAR chief economist, says for the most part buyers in January were able to overcome tight supply to sign contracts at a pace that highlights the underlying demand that exists in today's market. “Contract activity is convincingly up compared to a year ago despite comparable inventory levels,” he said. “The difference this year is the positive factors supporting stronger sales, such as slightly improving credit conditions, more jobs and slower price growth.”

Yun also points to more favorable conditions for traditional buyers entering the market. All-cash sales and sales to investors are both down from a year ago1, creating less competition and some relief for buyers who still face the challenge of limited homes available for sale.

“All indications point to modest sales gains as we head into the spring buying season,” says Yun. “However, the pace will greatly depend on how much upward pressure the impact of low inventory will have on home prices. Appreciation anywhere near double-digits isn't healthy or sustainable in the current economic environment.”

Your Weekly Update

If you're one to fret over falling stock prices, and have been paying attention these past few years, you're keyed on the Fed. That is, you're worried about interest rates. Or, more specifically, you're worried about when the Fed will start raising the fed funds rate (the interest rate at which banks lend to each other on very short-term loans). If that happens to be you, the past couple of weeks felt good as the U.S. economic indicators came in on the soft side. Still showing growth mind you, just a slower pace than had been anticipated. And soft indicators spell uncertainty and low levels of inflation. Hence, no pressure on the Fed to raise interest rates.

But the data are influenced by numerous, if not countless, factors. In terms of inflation, even though we look at it, the core anyway, ex-energy, make no mistake, the price of oil---be it high or low---does, to some degree, bleed through to the pricing of other goods and services. Plus, employment costs---generally a company's largest input---impact the pricing of goods and services to no small degree. I know, you're hearing pundits point out that wages aren't rising (tell that to Walmart). But I'm here to tell you that wages indeed rise as expansions expand and labor market slack contracts. So then, what happens when oil bottoms and wages begin rising? And/or what happens when the monster benefits of lower oil prices to the consumer show up as more demand for other goods and services, and wages begin rising? You got it, folks anticipate higher interest rates, then create them by selling their bonds---and the Fed gets off the dime. Which, to validate your fear---as I've previously addressed---spells potential (short-term at least) trouble for the stock market.

Honestly, and with all due respect, if you're one to fret over falling stock prices, while a seeming lack of inflationary pressures, very low odds of a U.S. recession anytime soon, a potential kicking of Greece's problematic can a few months down the road and Eurozone quantitative easing set to begin next month may fade your fretting for the time being, fretting over falling stock prices is akin to fretting over foul weather. It may not show up in the forecast, but it's always somewhere on the horizon---and forecasters miss more often than they care to confess. In other words, don't fret over falling stock prices, they're normal, essential even.

Current themes:

Central Banks:

As suggested above, recent indicators presumably allow the Fed to remain patient when it comes to  raising the Fed funds rate. This week's release of the minutes from the last FOMC meeting showed that, on net, the committee remains cautious, or dovish, on rates. Janet Yellen's appearance before Congress next week might give us a hint as to whether Fed sentiment has changed after the impressive January jobs report.

Oil:

West Texas crude dropped around $2/barrel last week as inventories continue to build. The EIA's report showed another 7.7 million barrels added to what is now an 80-year high in inventory. Near-term bullishness for the price of oil finds no support in present supply. It'll of course get there as capacity continues to get cut, just can't say when.

The Consumer:

On the week, Valentine's Day gave a lift to retail sales while mortgage purchase apps dipped 7% and housing starts came in just shy of estimates---at 1.065 million vs 1.07 expected. Year-over-year housing starts are up a very healthy 18.7%. Although the comp was easy, in light of last January's polar vortex. The recent softer data in housing is a bit befuddling. Looking at present household formations, record low mortgage rates and rising consumer confidence, you'd think housing would be booming right about now. Housing-related stocks, up very nicely this year, seem to be discounting something special going forward.

Here's a chart (click on it to enlarge) showing the rise in household formations (folks establishing their own homes [not necessarily buying a house]) in red, the pace of new housing starts (purple, 1.005 mill), new home inventory (green, 218k) and total inventory (white, 1.8 mill) going into this year. As you can see, starts and inventories remain at or below average (and way below the mid-2000s peaks) while household formations have exploded of late. You can see why suddenly the market's bullish on housing-related stocks.



Weekly jobless claims declined by 21,000 and the 4-week average dropped to a comfortable 283,250, the lowest level in about 4 months. Optimism picked up last week as the expectations component of Bloomberg's Consumer Comfort Index logged a 4-year high.

Europe: 

Europe has, in my view, been a dominant force in the market so far this year. The Eurozone economy is finally showing signs of life---that's positive. The ECB is about to start printing money---that's viewed as positive. And it appears that an agreement, pending approval by the folks who write the checks, was reached on Friday that will give Greece a few months to pay its bills and figure out how it's going to convince the Troika (EC, ECB and IMF) that it can do the impossible---fix its fiscal mess. It's impossible, that is, if it's to come by way of receiving more bailout money while not fully engaging in a major, and very painful, overhaul of its economic system. The problem for Alexis Tsipras, the new prime minister, is that he won office by promising to give back all the debt-financed goodies that the previous government had to take away in order to receive enough help to pay the bills. Clearly, the players on both sides fear the near-term consequences of Greece leaving the Euro. Which, in my humble view, is Greece's best chance of ever---well, let's say in the next 75 years or so---working its way out of this mess its gotten itself into.

I hear that Yanis Varoufakis, Greece's new finance minister, is considered an expert in game theory (he's written a number of books on the subject). I wonder how good he is at the game kick-the-can. For that's the only game he and Tsipras---being that they want to stay in the Euro and remain in office---can play at the moment. Let's call it "semantic kick-the-can". For, to not anger the electorate, they have to get more aid while insisting that it's not more bailout.

On to Russia: Hundreds in Ukraine have died since last Sunday's "ceasefire". Clearly, there's more playing out of this horrific game to come. At the moment, given recent economic indicators, the Eurozone seems to be overcoming the ill effects of retaliatory sanctions from Russia. As long as the prospects for a bargain remain, I expect Eurozone sentiment (picking up of late) will remain relatively positive. Enough said for now...

Q4 Earnings (here I’ll simply update the numbers to last week’s paragraph):

Of the 440 of the S&P 500 companies having thus far reported, an impressive 74% have bested analysts’ expectations. On the revenue side, 56% did better than expected. The rate of growth however has been nothing to write home about, 4.4% and 1.2% respectively. Of course the energy sector, seeing declines of 20% and 15% in earnings and revenue respectively, is no small influence on the overall numbers.

The Stock Market:

Here's a look at the year-to-date results for the major U.S. indices, and the non-US indices using index ETFs as our proxies (according to Morningstar and Ycharts):

Dow Jones Industrials:  +2.20%

S&P 500:  +2.82%

NASDAQ Comp:  +4.84%

EFA (Europe, Australia and Far East):  +6.89%

FEZ (Eurozone):  +6.38%

VWO (Emerging Markets):  +4.08%

Sector ETFs:

Here’s a look at the year-to-date results for a number of sector ETFs:

XHB (HOMEBUILDERS):  +7.27%

XLB (MATERIALS):  +6.94%

IYH (HEATHCARE):  +5.54%

XLY (DISCRETIONARY):  +4.53%

XLK (TECH):  +4.19%

XLI (INDUSTRIALS):  +2.82%

XLP (CONS STAPLES):  +2.23%

XLE (ENERGY):  +1.75%

IYT (TRANSP):  +0.01%

XLF (FINANCIALS):  -0.99%

XLU (UTILITIES):  -3.15%

To put the inevitable (volatility and down markets) into perspective, allow me to repeat last week’s comments:

In last weekend’s commentary I attempted to put a rough January into proper perspective by urging you to view the stock market as an “antifragile” (benefits from stress) entity. Again, periodic market downturns are an essential aspect of the long-term investing process. As I stated in our year-end letter, and several commentaries since, I expect financial markets in 2015 to exhibit the kind of volatility that will challenge the resolve of many a short-term investor. Good thing you and I think long-term!

One additional note on volatility: The past couple of weeks I’ve shared with you the very short-term results for markets and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). As you may have noticed, my beginning of the year optimism over non-US and the housing sector (to name two), and pessimism over utilities, appears to be justified by recent results. I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced these few short weeks into 2015. My optimism or concerns are based on factors such as valuations, trends, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along  the way.

 

The Bond Market:

Despite softer economic news, rates continued to creep higher the past couple of weeks. The yield on the 10-year treasury bond rose .12% last week to 2.11%. Here I'll express my concerns once again with my message from two weeks ago (plus, see my comments on Treasury International Capital in the February 18th economic notes below):

As I suggested above, complacency can be a very dangerous thing. In my view U.S. bond investors have been the definition of complacent for a very long time. And who can blame them when the U.S. economy, until recently, has delivered probably the most sluggish expansion in its history and the rest of the developed world is sporting interest rates near zero, or below. I.e., there’s been little risk of inflation here at home, and the U.S. treasury has offered the most attractive yields among the world’s safest debt issuers. Not to mention how the strengthening dollar has enticed foreign investors into the U.S. bond market.

So what might alter the debt investor’s paradigm and inspire him to give up his treasury bonds? Well, it could be a number of things. Not the least of which would be signs that the U.S. economy is gaining momentum and that the Fed will have to begin raising interest rates sooner than later. Bond prices took it in the chin last week as the yield on the 10-year treasury jumped from 1.66% to 1.95% (that’s a 17% increase). Another excuse would be a sudden decline in the dollar (I know, that contradicts the present economic backdrop and the prospects for higher interest rates. But the consensus lives in that camp, and the consensus is very often wrong). Should, let’s say, the Eurozone begin to show real signs of life and, thus, the Euro begin to gain against the dollar, we could see money fly out of treasuries in a big way as those carry-traders (they borrow in low-yielding, declining currencies and invest in higher yielding, strengthening currencies) rush to exit their positions: A reversal in the currency exchange trend can be a killer (say you borrowed 1 Euro and lent it in the U.S. at a $1.12 exchange rate. If the dollar moves to $1.20/Euro, you no longer have enough dollars to pay back your Euro loan).

Suffice it to say that the bond market (as well as other interest-rate-sensitive sectors [think utilities]) is in a precarious position these days. Short-term rates at zero while the economy is gaining momentum is an utterly unsustainable scenario.

 

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

FEBRUARY 17, 2015

THE EMPIRE STATE MANUFACTURING SURVEY shows modest growth in the New York region. The outlook component fell noticeably while the current conditions component declined only slightly. Shipments were strong enough, up 14.12, best since September. However, new orders growth came in basically flat... The employment component remained solid, coming in at 10.11 vs 13.68 and 8.33 in January and December respectively. One interesting, and contradictory, point worth making is that despite the decline in sentiment, plans for expansion jumped from 14.74 to 32.58, for the largest one-month increase since April 2009...

THE NAHB HOMEBUILDERS INDEX declined from 57 in January to 55 this month. However, that's still a bullish read (above 50). The traffic component was down (weather perhaps). The expectations and present sales components both came in strong at 60 and 60.

Homebuilder optimism is reflected in their expectations for sales acceleration going forward. They expect to sell 572,000 new homes this year, vs 435,000 last, and for 2016 they expect sales to surge to 807,000...

E-COMMERCE RETAIL SALES reflect the surprising slowdown we've seen of late in the overall retail sector. The Q4 quarter-to-quarter growth in sales was 2.3%, vs 3.6% and 5.0% in the two previous quarters. Nonetheless, e-commerce's share of total retail sales inched up 1/10th of a % to 6.7%. Year-over-year, e-commerce sales rose 14.6% in the fourth quarter. Down from 15.8% in each of the two prior quarters. The gain is about 3 times greater than waht we've seen in core retail sales, up 5% year-on-year in Q4...

 

FEBRUARY 18, 2015

MBA PURCHASE APPLICATIONS continue to surprise me, as, last week, they posted their second consecutive weekly loss. Refinances dropped 16%, while new purchase mortgage apps declined by 7%, matching the previous week's decline. Mortgage rates have been on the rise the past couple of weeks, but the decline amid other strong housing-related indicators is a mystery. Of course weekly numbers can be noisy, and I do expect, given other data, to see these numbers improve as 2015 unfolds.

HOUSING STARTS slipped in January, although the 1.065 million was close to the 1.07 consensus estimate. The year-over-year pace is a healthy 18.7%. Again, if I'm right on the fundamentals, we'll see these stats improve going forward.

PPI-FD (final demand) illustrates the sharp drop in energy prices. Down .8% in January, vs a consensus estimate of -.5%. Ex-food and energy, inflation dipped .1%. PPI-FD for services rose 1.9% on year-on-year basis.

THE JOHNSON REDBOOK RETAIL REPORT rose as expected during the Valentine's Day week. Up 3.2% vs a 2.1% increase the prior week. Still not robust, and not reflecting recent consumer sentiment. The report notes that heavy weather has held down early sales of sporting goods in the Northeast.

INDUSTRIAL PRODUCTION rose modestly in January, up .2% versus decreasing .3% in December. The consensus estimate, however, was for a .4% increase. The capacity utilization rate remains at a non-inflation-threatening 79.4%.

THE FOMC MINUTES FOR THE JANUARY MEETING told of the ongoing debate among the members with regard to when to raise interest rates and how to signal it to the markets. Econoday does a good job of summing it up:

The Fed minutes for the January FOMC minutes indicated that the Fed had increased debate but still remains "patient" for when the first policy rate increase will occur. While some hawks are worried about rates being raised too late, most on the FOMC remain dovish. Foreign issues remain a notable downside risk and inflation is low. Many participants see an early rate increase as damping the recovery.

Even though energy is holding down inflation currently, inflation is seen as eventually returning to goal of 2 percent. But soft wage growth is a notable concern.

The Fed is getting more technical with staff presentations on unwinding operations regarding the Fed balance sheet. There were discussions regarding interest on excess reserves and on reverse repos. These are relatively new policy rates that have only been experimentally used for practice by the Fed for future tightening.

Overall, the tenor of the minutes clearly was dovish. A first rate hike is not likely before June-and increases are likely to be very gradual.

TREASURY INTERNATIONAL CAPITAL, which tracks the flows of financial instruments into and out of the U.S., shows the U.S. receiving a net inflow of 35.4 billion dollars in December. What's interesting is that foreign accounts were big sellers of U.S. treasuries, but were net buyers of U.S. stocks. U.S. accounts were big sellers of foreign bonds, and also were net sellers of foreign equities (although not nearly to the extent they sold bonds).

API WEEKLY CRUDE STOCK grew by a whopping 14.3 million barrels!! Gasoline inventories rose 1.3 mbs and distillates declined 2.7 mbs. Tomorrow's EIA report will, I suspect, also show a substantial build. This flies smack in the face of the notion that oil prices have bottomed out.

FEBRUARY 19, 2015

WEEKLY JOBLESS CLAIMS declined last week by 21,000 to 283,000. That's a significant decline. Clearly, the weekly numbers can be extremely volatile (up 25,000 the week prior). Thus, the 4-week average is important to track, which has declined for a 4th straight week to 283,250 --- it's lowest level since early November.

Continuing claims, which lag a week, increased by 58,000, however the 4-week average dropped by 10,000 to 2.398 million. The unemployment rate for insured workers remains at 1.8%.

THE BLOOMBERG CONSUMER COMFORT INDEX rose to a 4-year high last week. Here's Bloomberg's commentary:

Consumers’ Outlooks on U.S. Economy Improve to Four-Year High

By Victoria Stilwell

(Bloomberg) -- Consumers are more upbeat about the U.S. economic outlook than at any time in the last four years, bolstered by cheap gasoline and a sustained pickup in hiring.

The Bloomberg Consumer Comfort Index’s monthly economic expectations gauge rose by 1 point to 54 in February, the highest since January 2011. The weekly index was little changed at 44.6 in the period ended Feb. 15 compared with 44.3 the previous week.

Household sentiment has climbed in recent months as fuel prices plunged and payroll gains accelerated. Now that energy costs have stabilized, it will probably take a pickup in wages for American consumers to keep feeling optimistic.

The improvement in the monthly outlook index is “a positive sign regardless of a stall in views of current economic conditions,” said Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg.

The weekly measure of Americans’ views on the current state of the economy climbed to 38.9 from 38.1 the previous period. A gauge of the buying climate, which shows whether now is a good time to purchase goods and services, rose to 38.4 from 37.2. The personal finances index, still the strongest of the three components, fell to a four-week low of 56.6 from 57.4.

Some 26 percent of Americans surveyed this month said the economy is getting worse, the least since January 2011. Thirty-five percent said it’s getting better.

Job Growth

More employment opportunities are helping quell pessimism as payrolls in January capped their best three months of job growth in 17 years. Still, wages have been slow to rise, meaning that some consumers who have come to count on savings from low gas prices may be pinched as costs start to rebound.

The average price of a gallon of regular gasoline was $2.27 on Feb. 17, up from an almost six-year low of $2.03 on Jan. 25. That compares with an average price of $3.33 over the past five years.

Cheap gasoline is especially important to lower-income households, who tend to spend a greater share of their earnings than their wealthier counterparts.

The weekly measure of sentiment rose in five of seven income brackets. Attitudes for those making $25,000 to $40,000 were the most positive since December 2007, while those making $40,000 to $50,000 suffered the biggest decline, falling to a seven-week low.

Among regions, the Northeast saw the biggest increase in confidence, which climbed to an eight-week high, showing harsh weather hasn’t damped spirits in the region. Sentiment in the South also advanced. The West saw confidence decline and attitudes in the Midwest were little changed.

THE PHILADELPHIA FED SURVEY, as have many manufacturing surveys of late, while on net positive, suggest a waning in optimism within the space. Here's Econoday with the plusses and minuses of today's release:

Slow growth is February's signal from both the Empire State report, posted on Tuesday, and today's manufacturing report from the Philly Fed where the general conditions index held little changed at 5.2 vs January's 6.3. Something else both reports have in common is substantial cooling in optimism with the Philly Fed's 6-month outlook falling to 29.7, which is still impressive looking but not compared to December's 50.9.

The new orders index is a positive in today's, still on the plus side at 5.4 vs January's 8.5. And unfilled orders are a special positive, rising to 7.3 from January's contraction of minus 8.6. Employment also is back in positive ground, at 3.9 from minus 2.0. Price indications are flat with inputs showing only marginal monthly growth and finished goods very slight contraction for a 2nd month in a row.

The sudden falloff in outlook is a peculiar twist in this week's manufacturing reports, perhaps hinting that manufacturers are less confident in their order books this year. Otherwise, the reports point to steady, non-accelerating growth at a moderate pace.

THE INDEX OF LEADING ECONOMIC INDICATORS (LEI), while remaining positive, slowed to a .2%, versus a .5% increase in December and a consensus estimate of .3%. The report's negatives were not extreme, with stock prices (January was a down month) and ISM new orders coming in the weakest. As of this writing, the stock market has recouped all of January's decline and some, which would, if it sticks for February, bode positively for February's LEI.

THE EIA NATURAL GAS REPORT shows a decline of 111 bcf in inventories.

THE EIA PETROLIUM STATUS REPORT, much anticipated after this week's monstrous (in inventory build) reading from the API, showed crude inventories growing by 7.7 million barrels last week. Clearly, recent cuts in capacity have not stemmed the glut in any way whatsoever (therefore, we should not be bullish on the price in the very near-term). Although, it's a given (barring a global economic slowdown zapping demand) that they will.  Gasoline inventories grew by .5 million barrels and distillates declined by 3.8 million barrels.

THE FED BALANCE SHEET declined $4.8 billion last week to $4.497 trillion.

M2 MONEY SUPPLY declined by $9.8 billion last week.

FEBRUARY 20, 2015

FLASH MANUFACTURING PMI, amid softening manufacturing readings from other surveys, shows a net pickup in February. Although, on balance, its components reflect the overall moderate growth results in the other surveys.

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Your Weekly Update

As of this writing January's swoon in stocks has been more than offset by February's swing. Where we go from here of course is anybody's guess, for the markets are unequivocally unpredictable (particularly in the short-term). The U.S. economic indicators, while somewhat mixed of late, are, on balance, positive. Particularly for job growth going forward. The "somewhat mixed" aspect of the recent data I believe gives hope to those who fear that the first Fed rate hike lies just around the next bend. I happen to be one of those offbeat ones who fears that the first Fed rate hike doesn't lie just around the next bend. Believe me, while I suspect the stock market may not at all appreciate the first Fed rate hike, holding rates at a level that suggests we're in the middle of a great financial crisis, which clearly we aren't, makes no sense whatsoever. And is ultimately a dangerous strategy should, say, oil prices normalize and wage pressures begin to mount (two inevitabilities I assure you) both at the same time. 

Last week's sizeable gains appeared to be largely in response to hopeful news out of Europe. Putin agreed to a ceasefire beginning Sunday (we should be very skeptical) and rumors suggest that talks on how to keep Greece from imploding, which resume on Monday, will bear fruit kick the can further down the road. Like I said last week, we should expect good news out of Russia to spark a rally in global stocks, and good news out of Greece to do the same, as well as rally the Euro. That's precisely what played out the past few days. Although, mind you, both situations are extremely tentative.

Speaking of Europe, some of last week's data, as did the previous week's, suggest strengthening among the Eurozone's biggest players. German exports grew by 3.4% last month, Eurozone Investor Confidence surged, and French and Italian industrial production actually rose. Still a long long way to go however.

Current themes:

Central Banks:

The U.S. Fed is clearly testing the water as several of its members are publicly making the case for hiking rates by mid-year. The rest of the world's central banks are, in action, vowing to do whatever it takes to get their economies in gear. The problem is, central banks may not have all that it takes to do whatever it takes---the likes of Greece, a country in desperate need of further painful structural reform, is a prime example.

Oil:

West Texas crude has been bouncing all around fifty bucks a barrel for the past couple of weeks. The amazing build in inventories (see my notes below) suggest that a true bottom has yet to be reached. Not, of course, to say that it hasn't (no one knows for sure). I assure you, no one a year ago was predicting $50 bucks a barrel in early 2015.

The Consumer:

Last week's sentiment indicators suggest the consumer remains positive, but not as positive as he/she was, say, two weeks ago. The employment indicators remain strong. Sentiment, spending and employment related to construction speaks positively about the housing market going forward.

Europe: see above

Q4 Earnings (here I'll simply update the numbers to last week's paragraph):

Of the 391 of the S&P 500 companies having thus far reported, an impressive 76% have bested analysts’ expectations. On the revenue side, 56% did better than expected. The rate of growth however has been nothing to write home about, 5.1% and 1.1% respectively. Of course the energy sector, seeing declines of 19% and 17% in earnings and revenue respectively, is no small influence on the overall numbers.

The Stock Market:

Last week was the second positive week in a row for U.S. stocks. According to Morningstar, the Dow was up 1.09%, the S&P 500 rose 2.02% and the NASDAQ Composite gained a big 3.15% on the week. Using ETFs as our proxies, non-US markets also logged nice gains on the week: EFA (tracks the Morgan Stanley Europe, Australia and Far East Index) was up 1.53%, while FEZ (tracks the Euro Stoxx 50 Index) gained 1.96%. VWO (tracks the FTSE Emerging Markets Index) was up 1.56%.  (The non-US ETF's data are in U.S. dollar terms)

Here’s a look at each of the above on a year-to-date basis:

Dow Jones Industrials:  +1.10%

S&P 500:  +1.85%

NASDAQ Comp:  +3.33%

EFA:  +3.71%

FEZ:  +3.42%

VWO:  +4.03% 

Sector ETFs:

Energy-related stocks extended their rally last week. XLE (tracks the S&P Energy Sector Index) gained 2.92%. However, it was bested by XLK (tracks the S&P Information Technology Index), with a 3.83% one-week gain, and XLB (tracks the S&P Materials Sector Index), up 3.12%. XLY (tracks the S&P Consumer Discretionary Index) had another big week, up 2.66%. XHB (tracks the S&P Homebuilders Index)---a narrower index---continued to shine with a 2.53% gain last week. The big loser (for the second straight week)—on the back of a rise in interest rates—was utilities, with XLU (tracks the S&P Utilities Sector ETF) posting a 2.98% decline.

Here’s a look at those sector ETFs, and a few others, on a year-to-date basis (according to Morningstar):

XHB (HOMEBUILDERS):  +6.57%

XLB (MATERIALS):  +5.90%

XLY (DISCRETIONARY):  +3.72%

XLE (ENERGY):  +3.69%

IYH (HEATHCARE):  +3.47%

XLK (TECH):  +3.26%

XLP (CONS STAPLES):  +2.07%

XLI (INDUSTRIALS):  +1.06%

XLF (FINANCIALS):  -1.11%

IYT (TRANSP):  -1.10%

XLU (UTILITIES):  -4.30%

To put the inevitable (volatility and down markets) into perspective, here I repeat last week's comment:

In last weekend’s commentary I attempted to put a rough January into proper perspective by urging you to view the stock market as an “antifragile” (benefits from stress) entity. Again, periodic market downturns are an essential aspect of the long-term investing process. As I stated in our year-end letter, and several commentaries since, I expect financial markets in 2015 to exhibit the kind of volatility that will challenge the resolve of many a short-term investor. Good thing you and I think long-term!

One additional note on volatility: The past couple of weeks I've shared with you the very short-term results for markets and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). As you may have noticed, my beginning of the year optimism over non-US and the housing sector (to name two), and pessimism over utilities, appears to be justified by recent results. I need to strongly (very strongly!) emphasize that I was not predicting what we've experienced these few short weeks into 2015. My optimism or concerns are based on factors such as valuations, trends, monetary policy and cyclicality---and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along  the way.

The Bond Market:

The yield on the 10-year treasury bond rose .04% last week to 1.99%. To reiterate my concerns with regard to bonds, here's from last week's commentary:

As I suggested above, complacency can be a very dangerous thing. In my view U.S. bond investors have been the definition of complacent for a very long time. And who can blame them when the U.S. economy, until recently, has delivered probably the most sluggish expansion in its history and the rest of the developed world is sporting interest rates near zero, or below. I.e., there’s been little risk of inflation here at home, and the U.S. treasury has offered the most attractive yields among the world’s safest debt issuers. Not to mention how the strengthening dollar has enticed foreign investors into the U.S. bond market.

So what might alter the debt investor’s paradigm and inspire him to give up his treasury bonds? Well, it could be a number of things. Not the least of which would be signs that the U.S. economy is gaining momentum and that the Fed will have to begin raising interest rates sooner than later. Bond prices took it in the chin last week as the yield on the 10-year treasury jumped from 1.66% to 1.95% (that’s a 17% increase). Another excuse would be a sudden decline in the dollar (I know, that contradicts the present economic backdrop and the prospects for higher interest rates. But the consensus lives in that camp, and the consensus is very often wrong). Should, let’s say, the Eurozone begin to show real signs of life and, thus, the Euro begin to gain against the dollar, we could see money fly out of treasuries in a big way as those carry-traders (they borrow in low-yielding, declining currencies and invest in higher yielding, strengthening currencies) rush to exit their positions: A reversal in the currency exchange trend can be a killer (say you borrowed 1 Euro and lent it in the U.S. at a $1.12 exchange rate. If the dollar moves to $1.20/Euro, you no longer have enough dollars to pay back your Euro loan).

Suffice it to say that the bond market (as well as other interest-rate-sensitive sectors [think utilities]) is in a precarious position these days. Short-term rates at zero while the economy is gaining momentum is an utterly unsustainable scenario.

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

FEBRUARY 9, 2015

THE CONFERENCE BOARD EMPLOYMENT TRENDS INDEX shows "that strong job growth is likely to continue". Here's from the press release:

The Conference Board Employment Trends Index™ (ETI) increased in January. The index now stands at 127.86, up from 127.17 (a downward revision) in December. This represents a 7.6 percent gain in the ETI compared to a year ago.

“The Employment Trends Index suggests that strong job growth is likely to continue through the first half of the year,” said Gad Levanon, Managing Director of Macroeconomic and Labor Market Research at The Conference Board. “As a result, wage growth will accelerate, thereby increasing pressure on profitability which is already suffering from low productivity growth and the strong dollar.”

January’s increase in the ETI was driven by positive contributions from six of the eight components. In order from the largest positive contributor to the smallest, these were: Percentage of Respondents Who Say They Find “Jobs Hard to Get,” Real Manufacturing and Trade Sales, Industrial Production, Percentage of Firms With Positions Not Able to Fill Right Now, Job Openings, and Ratio of Involuntarily Part-time to All Part-time Workers.

THE FED LABOR MARKET INDEX dipped in January but the present trend remains intact. Here's from Haver Analytics' commentary:

The change in the LMCI dipped to 4.9 during January from 7.3 in December. The m/m fall reflected the lessened gain in nonfarm payrolls, the uptick in the unemployment rate and the stability of the insured unemployment rate offsetting improvement in other indicators such as the change in average hourly earnings and the rise in the labor force participation rate. Despite the latest decline, the index continued to suggest steady improvement in the labor market as it has trended sideways.

FEBRUARY 10, 2015

THE JOHNSON REDBOOK RETAIL REPORT shows a substantial slowing in retail sales last week, to 2.1% year over year, versus 3.8% the prior week. The report blames the Super Bowl for diverting consumer away from the stores and expect a pickup next week due to Valentine's Day.

THE NFIB SMALL BUSINESS OPTIMISM INDEX retreated from two months of strong growth, slipping 2.5 points from December's results to 97.9. All in all, January's results were essentially okay (coming off of December's hugely positive 100.4 [best post-recession results]), with the employment components remaining especially strong. Here's from NFIB's chief economist's commentary:

Overall, job creation plans were solid across the board, but especially in Construction, Professional Services, and Manufacturing with the help of strong car sales including the bestselling luxury car defined as $50,000 or higher in price, Ford’s F150 truck.

The job growth in construction supports my optimistic view of the housing market going forward.

THE JOLTS (JOB OPENINGS AND LABOR TURNOVER) REPORT improved in December, showing 5.028 million job openings, up from 4.847 million in November. The total hires, 5.148 million (vs 5.054 in November)  was the highest level since November 2007. Construction was the one sector in the report noted as seeing increased hiring over the month. The number of folks who quit their jobs rose to 2.72 million, vs November's 2.66 million. This is a positive read on confidence as people generally don't quit their jobs unless they believe prospects are better elsewhere.

WHOLESALE INVETORIES rose again in December, by .1% (rose .8% in November). As I suggested last month this is not a good reading in my view as higher inventories generally mean lower production going forward. The build shows up primarily in the non-durable component, where sales fell 1.7%. Petroleum is the biggest contributor, as sales declined 13.7% on the month---and crude oil inventory has been rising nonstop of late. Showing a big draw in inventories, however, were lumber and electrical goods, which is yet another indicator that suggests increasing demand from the construction sector.

FEBRUARY 11, 2015

THE MBA PURCHASE APPLICATIONS INDEX does not support my optimism on housing. Dropping 7.0% last week. On a year over year basis the index remains in the positive, but by only 1.0%. Even refinainces declined 10.0%. The average 30-year mortgage rate was a smidge higher at 3.84%.

THE EIA PETROLEUM STATUS REPORT showed crude inventories rising yet again last week by a whopping 4.9 million barrels. Total inventories remain at an 80-year high of 417.9 million barrels. This flies strongly in the face of those who believe the recent strength in the price is sustainable. While I suspect that (sustainably higher prices) is coming, I can't join that camp amid the present supply/demand/inventory data. Gasoline inventories increased by 2 million barrels. Distillate inventories declined by 3.3 million barrels.

FEBRUARY 12, 2015

WEEKLY JOBLESS CLAIMS rose to 304,000 last week, while the 4-week moving average fell to 289,750. The week to week numbers have been volatile, but the 4-week average shows a favorable trend. Continuing claims fell 51,000 to 2.354 million, while the 4-week average declined by 19,000 to 2.404 million. The unemployment rate for insured workers remained at 1.8%.

RETAIL SALES (The govt's numbers) were dragged lower primarily by gasoline prices. Auto sales declined by .5%... Ex out autos and gasoline and sales rose .2%. Although the consensus was looking for a .4% increase. The bright spots in the report were building materials and garden supplies (supporting my view on housing), electronics, miscellaneous store retailers, nonstore retailers and food services/drinking places.  Here's an interesting perspective from Econoday:

The latest retail sales numbers are not consistent with increased discretionary income and higher confidence. One explanation may be that consumers are spending more on services than on "hard" items found in the retail sales report. The big picture is that the consumer sector is improved but the next broad data will be in the next GDP and personal income reports.

BLOOMBERG'S CONSUMER COMFORT INDEX while remaining near its high since 2007 declined for the second straight week. Here's Bloomberg's press release:

American Consumer Sentiment Declines for Second Straight Week

By Nina Glinski

(Bloomberg) -- Consumer confidence declined for a second straight week, interrupting a four-month surge as Americans’ perceptions of their finances and the economy waned.

The Bloomberg index of consumer comfort retreated to a five-week low of 44.3 in the period ended Feb. 8 after dropping to 45.5 the prior week, the first back-to-back decline since September. Even with the recent setback, the gauge of sentiment is hovering close to the highest level since July 2007.

A fluctuating stock market and rebounding gasoline prices since the end of January are probably keeping confidence from advancing further. At the same time, increased employment opportunities and signs of a pickup in wage growth point to sustained gains in consumer spending, which accounts for about 70 percent of the economy.

“It’s a pause from the party,” said Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg. “That said, this week’s result is better than any of the index’s weekly readings from mid-October 2007 through the end of 2014.”

The Bloomberg measure for the state of the national economy fell to a five-week low of 38.1 from 39.9. The index for personal finances declined to 57.4 from 59.2. The gauge for whether it is a good time to make purchases also decreased, to 37.2, the lowest since November, from 37.5.

By region, a gauge of sentiment among Americans in the South fell 4 points, the most since October 2013, to a six-week low of 40.1. Confidence in the Midwest also declined. It increased in the Northeast and West.

Income Groups

Comfort among the lowest income earners fell last week, while those at the upper end of the scale were more upbeat. For those making $75,000 to $100,000 a year, the gauge of confidence climbed 5 points to the highest level since July 2007. Sentiment among Americans earning less than $15,000 was the weakest this year.

Last week’s drop in comfort extended to almost every age group. The biggest decline was among 35-to-44 year olds.

An improving job market may be giving part-time employees optimism that they can find full-time jobs. Sentiment among part-time workers increased for the first time in four weeks.

Job openings rose 181,000 in December to 5.03 million, the most since January 2001, the Labor Department reported Feb. 10 in Washington. Some 2.72 million people quit their jobs in December, the highest in four months and up from 2.66 million in November.

BUSINESS INVENTORIES rose .1% in December, which isn't major, however, sales fell by a substantial .9%. The present inventory to sales ratio sits at 1.33 which is the highest read since July 2009. This does not bode favorably for production going forward. While there's reason to believe this metric will improve going forward, it bears close watching.

NAT GAS INVENTORIES fell by 160 billion cubic feet last week, following a 115 bcf draw the week prior. This would be bullish for nat gas prices.

THE FED BALANCE SHEET rose 1.3 billion last week to 4.502 trillion.

M2 MONEY SUPPLY grew by 71.6 billion week before last.

FEBRUARY 13, 2015

IMPORT AND EXPORT PRICES continue their decline, which, some believe, will inspire the Fed to put off any near-term plans to raise interest rates. Here's Econoday's commentary:

Deflation is a rising risk for the economic outlook based on import and export price data where contraction is at its most severe since the 2008-2009 recession. Import prices fell 2.8 percent in January alone for year-on-year contraction of 8.0 percent. And it's much more than just the impact of the strong dollar as export prices are also in contraction, at minus 2.0 percent for the month and minus 5.4 percent on the year.

The contraction is centered in petroleum where import prices fell a monthly 17.7 percent for year-on-year contraction of 40.1 percent. Excluding petroleum, import prices are still down sharply, at minus 0.7 percent for the month, which is the sharpest drop for this core reading since March 2009, and minus 1.2 percent for the year.

Turning to details on export prices, agricultural prices fell 1.2 percent for a year-on-year minus 6.3 percent. Excluding agriculture, export prices are down 2.1 percent, which is the largest drop since November 2008, and down 5.3 percent on the year.

The deflationary pull from inputs is now visibly pulling down prices of finished products. Showing an unusual sweep of steep monthly declines are import prices for capital goods (minus 0.4 percent), motor vehicles (minus 0.5 percent), and consumer goods (minus 0.3 percent). Year-on-year, all are also in contraction. The export side is less severe but does tell a similar story with consumer goods showing the most contraction, at minus 0.8 percent for the month and minus 1.4 percent for the year.

Fed policy makers are hoping that deflationary effects, tied mostly to oil prices, will prove limited, but there's no evidence right now that prices are pulling higher, on the contrary, price contraction is accelerating. Today's reports point to deflationary readings for the coming producer and consumer price reports.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX remains strong, but it did decline this month to 93.6, from 98.1 in January (the best reading in 11 years). Which is consistent with the slight declines noted in other consumer sentiment indicators. Nothing here suggests the consumer is ready to pull in measurably at this point.