Weekly Update (audio version)

Note: With regard to market timing, where I say "I've been doing it for 30 years", I'm referring to counseling investors, not market timing.

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Your Weekly Update

Current Themes:

The Fed:

Janet Yellen gave a speech on Friday. While most of the expert commentary I listened to scored the presentation as a confirmation of the Fed's patience with regard to raising interest rates, personally, I got the impression that she's signaling to the market that they'll indeed be raising their key rate in the not too distant future. Perhaps, in the experts eyes, patience means September---as opposed to June.

Recent economic news has been nothing to write home about (save for a few strong data points, like new home sales, mortgage apps, sentiment and jobless claims), which some believe explains last week's sell off in stocks. The problem with that view is that if stocks sold off on economic concerns, bonds---the place you go when the economy's weak---should have rallied. But they didn't. In fact, the yield on the 10-year treasury note finished last week 3 basis points higher than where it began (i.e., the price dropped).

While I don't pretend to know precisely what inspires buyers and sellers on a weekly basis, my best guess is that last week was about traders anticipating a disappointing Q1 earnings reporting season, which---falling stock prices notwithstanding---will not deter the Fed. And why wouldn't falling stock prices deter the Fed, particularly when---as I suggested last week---the Fed is fixated on the wealth effect of monetary policy? Because Q1's economic weakness was largely due to really bad weather and, to a lesser degree, a spiking dollar. And as the weather warms, and the dollar cools (or at least stabilizes)*, it's a pretty good bet that the economy will pick up some noticeable steam during the last three quarters of the year. Meaning the market should ultimately shake off its Q1 blues and the Fed can move forward with, albeit gingerly, raising interest rates. Which---as I've been suggesting for months---will be the test for the market.

*Note: per my comment under "The U.S. Dollar" below, the dollar---despite popular opinion---doesn't have to cool for the economy to grow. Any strong-dollar-induced economic loss of traction is more about the rapid pace at which the dollar has advanced, as opposed to the ultimate effects.

Oil:

At one point last week a barrel of West Texas Crude (WTI) saw $51.60, which was way above where it sat ($46.15) as I typed last week's update. So is this it? Is this what certain have-to-be-frustrated hedge fund managers---who've been billing the decimation of oil stocks as a generational buying opportunity---have been promising? Not so fast! Crude inventories grew by another 8 million barrels last week, which is anything but a reason to call a bottom. The main oil event last week was Saudi Arabia and company's bombing of rebels in Yemen, which sparked the price spike. As of this moment, WTI has settled back to $48.87.

The Consumer:

Last week I shared my observation that sentiment surveys and the stock market correlate strongly to one another. And that, if so, last week's Bloomberg Consumer Comfort Index could see a bounce---given the previous week's nice rally in stocks. Sure enough, last week's number matched the second highest since 2007. Here's from the release:

Among the three components of the Bloomberg comfort index, the gauge of Americans’ views on the state of the economy rose to 37.7 last week from 37.2. An index of the buying climate, showing whether this is a good time to purchase goods and services, increased by 1.5 points to 39.8, matching the second-highest reading since April 2007. A measure of personal finances climbed to 58.9 from 57.1.

While retail sales could be better, the trend has been positive for the past few weeks. Up 2.8% year-over-year, and up a strong 1.1% week-over-week---per the Johnson Redbook report.

As for housing, existing home sales for February rose moderately, while new home sales---despite the weather---blew away expectations. Here's from last week's economic log:

NEW HOME SALES surged in February to 539K. The consensus estimate was 462k. And, to top it off, January was revised up to 500k, from 481k. These are the first 500K+ readings since early 2008. Again, I like housing right now and this pickup supports the notion that what I'm seeing under the surface may blossom into a robust expansion in the sector---potential hiccups due to rising rates notwithstanding.

Europe:

Last week I suggested that the Eurozone economy is picking up. Here's what I'm talking about (click to enlarge):

Eurozone Consumer Confidence:



Eurozone Retail Sales:

 

Eurozone Composite Purchasing Managers Index (PMI):

 

The U.S. Dollar:

The Euro/US Dollar pair hung around between $1.08 and $1.10 all of last week---after touching $1.04 the week prior. As I've been reporting, it's hard to find an expert these days who isn't predicting at least parity at some point in the very near future. And that has traders very much on edge. For a higher dollar means higher-priced U.S. exports and lower translated earnings (money made in the Eurozone, in my example, translates to fewer dollars when the dollar's on the rise). And this will be the topic du jour come earnings reporting season.

Of course a strong currency isn't all bad. In fact, it's very good! I know I've made this point multiple times of late, but it's worth repeating: A strong dollar is wonderful if you're a U.S. consumer, international traveler or importer of foreign goods. And being that the U.S. economy is two-thirds consumer spending and only 13% exports, I'm thinking the good of a strong dollar has been getting a bad rap of late.

The Stock Market:

Last week was a rough one for stocks, particularly U.S. stocks. As you'll see, the Dow and the S&P 500 are back at square one on the year.

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 Bloomberg):

Dow Jones Industrials:  -0.05%

S&P 500:  +0.61%

NASDAQ Comp:  +3.64%

EFA (Europe, Australia and Far East):  +7.07%

FEZ (Eurozone):  +6.58%

VWO (Emerging Markets):  +0.33%

Sector ETFs:

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

IYH (HEATHCARE):  +7.81%

XHB (HOMEBUILDERS):  +6.22%

XLY (DISCRETIONARY):  +4.17%

XLP (CONS STAPLES):  +1.06%

XLK (TECH):  +0.46%

XLB (MATERIALS):  +0.44%

XLI (INDUSTRIALS):  -1.37%

XLE (ENERGY):  -2.84%

XLF (FINANCIALS):  -2.88%

IYT (TRANSP):  -4.63%

XLU (UTILITIES):  -6.35%

Once again, here’s my latest reminder on volatility:

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:

As I type, the yield on the 10-year treasury bond sits at 1.95%, up .02% from last week at this time. As I suggested above, were last week's sell off in stocks all about a weaker U.S. economy, we would've seen bond yields drop as traders bid prices up. If, as I suspect it might, the economy accelerates into the rest of the year and, as I suspect it might, potential inflation becomes a more serious conversation, I see the risk/return trade-off not working for the bond market going forward. Not that bonds won't deliver positive returns in 2015---I suspect they will if stocks don't---but what little they'll likely deliver does not compensate, in my view, for the risk that current price levels present.

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

MARCH 23, 2015

THE CHICAGO FED NATIONAL ACTIVITY INDEX for February tells of an economy that is growing slightly below its historical trend. The three-month moving average reading of -0.08 is well above the recessionary level of -0.70 (following a period of expansion)... and well below the +0.70 that denotes a period of sustained increasing inflation. The diffusion index came in neutral, with 48 of the 85 individuals making positive contributions.

EXISTING HOME SALES rose moderately in February. Here's NAR's chief economist on the challenges posed by lack of inventory and rising home prices:

“Insufficient supply appears to be hampering prospective buyers in several areas of the country and is hiking prices to near unsuitable levels,” he said. “Stronger price growth is a boon for homeowners looking to build additional equity, but it continues to be an obstacle for current buyers looking to close before rates rise.”

And on the weather:

“Severe below-freezing winter weather likely had an impact on sales as more moderate activity was observed in the Northeast and Midwest compared to other regions of the country."

My view is that rising prices are the cure for lack of inventory, as it inspires builders and homeowners to bring inventory to market. I remain bullish on housing going forward, however, I do expect a knee-jerk negative reaction when a Fed rate hike becomes a certainty.

MARCH 24, 2015

CPI for February showed prices rising slightly above estimates. The core (ex-food and energy) number came in at .2% month-on-month and 1.7% year-on-year... Factoring in food and energy:  .2% month-on-month and 0% year on year. While the world seems very relaxed about U.S. inflation, I'm thinking that a pickup in wages (which is virtually inevitable in the coming months in my view) and a bottoming in oil (not likely till much later in the year, if not in 2016) is going to show up measurably in future inflation readings.

CHAIN STORE SALES grew last week at an annual 3.0% pace, which is an improvement over what we've seen so far this year...

THE JOHNSON REDBOOK RETAIL REPORT continues to show growth in retail sales. Up 2.8% annualized, versus 2.7% the previous week. On a week-over-week basis, retail sales were up a solid 1.1%.

THE FHFA HOUSE PRICE INDEX shows prices continuing to climb---up .3% in January... However, the consensus had prices rising faster, at a .5% clip.

MARKIT'S FLASH MANUFACTURING PMI shows the manufacturing sector finally picking up the pace after a weaker-trending January and February.  The following commentary by Markit's Chief Economist mirrors my own recent commentaries on Q1 growth, the headwind posed by the stronger dollar, and its countervailing benefits.

“Manufacturing regained further momentum from the slowdown seen at the turn of the year, with output, new orders and employment growth all accelerating in March. “While economic growth looks set to disappoint again in the first quarter, with GDP set to rise by a rate perhaps slightly below the 2.2% expansion seen in the fourth quarter of last year, the upturn in order books in particular gives some reassurance that the pace of economic growth is likely to pick up as we move towards the summer.

“However, the rate of expansion in manufacturing clearly remains well below the peaks seen last year, which is largely the result of exporters struggling in the face of a strong dollar. The March survey showed exports dropping for the first since November.

 “But the appreciation of the dollar is not all bad news. The greenback’s strength is lowering import prices, which in turned helped drive down manufacturing costs at one of the fastest rates since mid-2012. Lower inflationary pressures should help keep interest rates low for longer.”

NEW HOME SALES surged in February to 539K. The consensus estimate was 462k. And, to top it off, January was revised up to 500k, from 481k. These are the first 500K+ readings since early 2008. Again, I like housing right now and this pickup supports the notion that what I'm seeing under the surface may blossom into a robust expansion in the sector---potential hiccups due to rising rates notwithstanding.

 THE RICHMOND FED MANUFACTURING SURVEY did not confirm Markit's positive PMI for March. Coming in at -8, versus a consensus estimate of +2. However, per the excerpt from the report below, manufacturers in the fifth district are quite optimistic o their prospects going forward. Note, also, their expectations for a pickup in input prices:

Expectations

Manufacturers’ optimism strengthened in March regarding business conditions during the next six months. The expectations index for shipments climbed seven points from the previous month, finishing at 37 in March. The outlook for the volume of new orders increased 11 points to 35, and the indicator for backlogs of orders added five points to February’s expectation for a reading of 16.

Furthermore, survey respondents looked for rising capital expenditures over the next six months. The index moved up to 32 from February’s reading of 27. Vendor lead-time expectations were little changed from a month ago. That index gained one point to end at a reading of 5. The indicator for capacity utilization dropped only a point, to settle at 24.

Producers planned significant hiring in the next six months; the expectations index for the number of employees rose to 23, compared to last month’s reading of 12. Additionally, the gauge for expected average manufacturing wages jumped eight points in March to 31. The index for the average workweek shed two points from the February outlook to end at 8.

Prices

Prices of raw materials continued to rise only slightly, at an annualized rate of 0.62 percent in March, compared to February’s 0.32 percent rate. Prices of finished goods grew nearly on pace with a month ago, at an annualized 0.10 percent rate. In February, finished goods prices rose at 0.09 percent, annualized.

Survey respondents expected input prices would pick up in the next six months, to a 1.53 percent pace. A month ago, expectations were for 0.91 percent annualized future price growth. Prices of finished goods were expected to rise at a 1.09 percent pace over the next six months, according to the March survey. A month ago, the outlook was for 0.48 percent annualized price growth in finished goods prices.

THE RICHMOND FED SERVICE SECTOR INDEX, while positive, showed slower growth than in February, 12 versus 18. However, like manufacturers in the district, service sector employers are optimistic about the future.

MARCH 25, 2015

MORTGAGE PURCHASE APPS jumped 5% last week, posting its best reading since Feb 4th. Refinances surged 12.0%.

THE FEBRUARY DURABLE GOODS REPORT had virtually nothing good going for it. New orders were down 1.4% on the month... Ex-transportation, they were down 0.4%. I suspect the strong dollar will catch the blame...

THE EIA PETROLEUM STATUS REPORT shows yet another monster build in crude oil, 8.2 million barrels. While gasoline inventories declined by 2 mbs and distillates remained the same. Despite the build, oil prices have spiked the past few days. But that has everything to do with Saudi Arabia's military strikes against rebels in Yemen.

MARCH 26, 2015

WEEKLY JOBLESS CLAIMS declined by 9,000 to 282,000. The 4-week average dropped to 297,000. Continuing claims were down 6,000 to 2.416 million. Clearly, the employment picture is strong.

MARKIT'S FLASH SERVICES PMI supports my recent commentary that the service sector is gaining momentum despite the manufacturing sector decelerating against a higher-dollar headwind. However, optimism about the business outlook moderated in March, which would question my view, somewhat, that the service sector will accelerate at an even faster pace over the remainder of 2015. Here's Markit's chief economist on the results:

“The US economy is showing signs of regaining momentum after the slowdown seen at the turn of the year. The flash PMI surveys are registering faster growth of both service sector and factory activity at the end of the first quarter, as well as ongoing strong hiring.

“While the surveys signal that economic growth will have slowed in the first quarter from an already-modest 2.2% pace seen in the final quarter of last year, the upturn in the surveys in March provides a clear advance indication that stronger economic growth will return in the second quarter.

“While weak economic data for the first quarter will keep Fed rate hikes at bay in coming months, ruling out a June hike, the upturn in second quarter GDP signaled by the recent PMI data ups the odds of interest rates starting to rise at the September FOMC meeting.”

BLOOMBERG'S WEEKLY CONSUMER COMFORT INDEX climbed last week to the second-highest reading since July 2007. I suggested last week that this number might improve based on my observation of the correlation between stock market action and respondents' attitudes (last week saw a big rally in stock prices). Of course there's more to it than just stock prices, per the release:

Consumer Comfort in U.S. Matches Second-Highest Level Since 2007

By Shobhana Chandra

(Bloomberg) -- Consumer confidence climbed last week to match the second-highest level since July 2007, propelled in part by gains among lower-income earners and job seekers as the labor market improves.

The Bloomberg Consumer Comfort Index rose to 45.5 in the period ended March 22 from 44.2 the prior week. Measures of the economy, buying climate and households’ financial well-being all improved.

Spirits brightened for those making less than $50,000 a year in wake of bigger February job gains in services that include the retail and restaurant industries. More confidence about finances signals consumers may be inclined to step up purchases and drive the economy after a projected slowdown in the first quarter.

The index was “bolstered by improved ratings of personal finances, gains among women and improvement among lower- and lower-middle income Americans that may signal a widening recovery,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement.

A strengthening labor market and still-cheap gasoline are also delivering a boost to household spending, which accounts for about 70 percent of the economy.

Fewer Americans than forecast filed applications for unemployment benefits last week, a Labor Department report showed Thursday. Jobless claims dropped by 9,000 to 282,000 in the period ended March 21, the lowest level since mid-February.

Among the three components of the Bloomberg comfort index, the gauge of Americans’ views on the state of the economy rose to 37.7 last week from 37.2. An index of the buying climate, showing whether this is a good time to purchase goods and services, increased by 1.5 points to 39.8, matching the second-highest reading since April 2007. A measure of personal finances climbed to 58.9 from 57.1.

Income Groups

Confidence improved for three of four groups of wage earners making less than $50,000 a year. Sentiment among Americans making $25,000 to $40,000 was the strongest since February 2007.

Women were more optimistic than at any time since July 2007, while confidence among seniors, the unemployed and renters was the highest since the start of the last recession. The comfort index for Democratic voters was the highest in 14 years.

NAT GAS INVENTORIES rose last week by 12 billion cubic feet, to 1,479 bcf.

THE KANSAS CITY FED MANUFACTURING INDEX declined in March to -4 versus 1 in February. Respondents complained about snow, oil prices, port disruptions, the strong dollar, and higher health insurance costs. Here's the first paragraph of the summary:

Tenth District manufacturing activity declined in March, and producers’ expectations moderated somewhat but remained slightly positive. Most price indexes continued to decrease, with several reaching their lowest level since 2009. In a special question about the West Coast port disruptions, 32 percent of firms said it had affected them negatively.

THE FED BALANCE SHEET declined by $15.3 billion to a total of $4.481 trillion. Reserve bank credit declined $7.9 billion after gaining $10.7 billion the week before...

M2 MONEY SUPPLY grew by $9.3 billion the week of March 16.

MARCH 27, 2015

THE FINAL GDP number for Q4 remained unchanged at an annual rate of 2.2%. However, the makeup changed: consumption was revised higher, while corporate profits were revised lower.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX rebounded in March to 93.0. A strong report that showed gains in the current conditions and future expectations components.

Market Commentary (audio)

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Weekly Update (audio version)

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Your Weekly Update

You've heard me complain that zero interest rate policy (ZIRP) is inconsistent with today's economic reality. That maintaining policy typically reserved for the severest of crises while the economy's mode is anything but crisis can prove to be problematic in the long run. I've many times voiced my disappointment in the Fed's fear of financial markets. That doesn't mean, however, that I can't appreciate the predicament they've gotten themselves into.

You see, the Fed's mandate demands that they do all they can to goose the economy until it reaches what they view as full employment---as long as price stability (low inflation) is maintained.

The Fed's actions impact the economy through a number of what they call "transmission channels, mechanisms or effects". Such as interest rates, currency exchange rates, wealth, bank lending and capital formation.

The Fed's, as I put it, fear of financial markets has to do with the wealth effect. I'd say there's a large contingent of folks who entirely credit (erroneously in my view) the present bull market in stocks to Fed policy. And even if the Fed governors don't believe that themselves, they are keenly aware that there's a contingent who does. And that awareness is what makes for their precarious situation. When they finally abandon ZIRP, they fear the market will tumble as those Fed followers hit the exits.

If, at that time, the economy isn't firing on enough other cylinders, they fear that what might otherwise be a healthy market correction could cause folks (then feeling less wealthy) to pull in and put an end to what they view as a nascent recovery in very short order. There's more nuance to the wealth effect, such as the increased confidence to expand operations---and the heightened access to attractively priced (low interest rate) credit---a publicly-traded company enjoys when its market capitalization is high; and not so much when its share price declines. Not to mention, as described under "the U.S. dollar" below, the wealth effect impact of the exchange rate mechanism.

Make no mistake, while it appears as though they're dreaming up excuses to not raise rates, the Fed governors have to be growing impatient with ZIRP. They have to know that the longer this goes on, the harder the market may fall when they finally pull the trigger. And, sadly, some of the folks whom they least want to see suffer will, they fear, suffer mightily:

I received an email the other day from a dear client who had just left her accountant's office. She---given her portfolio's dearth of interest income---inquired as to whether we should consider adding exposure to dividend paying stocks. She's a client with a very conservative profile whose objective is to do better than the bank while maintaining relatively low volatility. I.e., we have to own equities to, over time, meet her return objectives, but we have to maintain low to moderate exposure. This, I assure you, is a phenomenon that is running rampant in today's market---folks who used to rely on insured CDs for income are abandoning the safety of the FDIC and venturing into the stock market for yield. And while investors moving out on the risk spectrum---and boosting asset prices---is the wealth transmission mechanism in action, it was not the Fed's intent to inspire everyday retirees to expose their portfolios and, therefore, their nerves/sense of wellbeing to equities to an inappropriately risky degree.

The fear of a market-overreaction hitting the economy, and the retiree, has Janet Yellen choosing her words most carefully these days. My fear is that her (and her colleagues') fear will keep the Fed too easy for too long, which may mean having to tighten more aggressively later and exacerbating the very thing they're trying to avoid, a major market correction.

In the meantime, here's the latest on the key themes of the day:

Central Banks:

See above...

Oil:

Back on February 8th, I suggested that the then spike in oil prices (up to the mid-50s) could turn out to be a head fake. I can't say that I was making a prediction, it was simply that supplies continued to build unabated, offering no fundamental support for the spike. And, sure enough, a barrel of West Texas crude sells for $46.15 as I type---last week marked the 10th in a row that saw oil inventories rising (by a whopping 9.6 million barrels, according to the EIA). While there's no doubt in my mind that oil will find a bottom, present trends suggest it'll be lower than $46.15.

The Consumer:

Last week's Bloomberg Consumer Comfort Index bounced a titch, as respondents felt better about their personal finances. However, when it comes to their outlook on the economy, they were less optimistic---that component fell to a 3-month low, after hitting a 4-year high the previous week. Weekly reads are always noisy, and when it comes to consumer sentiment, my view is that there's strong correlation to the stock market. Which means, if I'm right, we could see a bounce in the coming week's number based on last week's rally in stocks.

Retail sales continue to come in  relatively soft, by historical standards. However the trend has been positive (2.7% year/year from 2.6% the prior week), particularly on a month/month basis (up 1.0% the past two weeks running). Look for this reading to improve based on employment data and warmer weather going forward.

As for the housing market, it was an interesting week, to say the least. Here's from last week's economic log:

HOUSING STARTS in February came in way below expectations, at 897k.. estimates were for 1.05 million. The regional breakdown virtually assures that weather's to blame. I believe we'll see marked acceleration in the housing data as the balance of this year unfolds.

HOUSING PERMITS countered the starts number by rising 3% in February, exceeding the consensus estimate by 34k (1.092 million vs 1.058 million).

As you know---despite the volatile weekly and monthly data---I've been bullish on housing. Last week's earnings reports for Lennar and KB Homes---both posting impressive, expectation-beating, numbers---confirmed my optimism.

Europe:

Despite the uncertainty of the Russia/Ukraine situation, and Greece's woes, the Eurozone economy---while not robust by any means---continues to improve. As you'll see in the stock market section below, it's been good to be an international investor so far this year---even in U.S. dollar terms.

The U.S. Dollar:

In response to last week's midweek blog post, a client asked me via email:

How can fear over a qtr % rate hike cause a 4-500 pt change? 

I explained that the Fed is never one and done---that the first hike is typically the beginning of a series. And that the dollar's been on a tear (the exchange rate transmission effect) and that the consensus believes that a rate hike would send it yet higher. And that the Fed is concerned with the high-dollar-headwind, as exporters see lower revenues/earnings and, thus, slow down on capital expenditures (expansion)---which we're seeing big time in the energy space.

And, sure enough, the dollar tanked on Wednesday (when the Fed replaced "patient" with essentially very patient) and stocks rallied. Friday's rally also coincided with another dip in the dollar.

Read last week's update for more...

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 Bloomberg):

Dow Jones Industrials:  +2.29%

S&P 500:  +2.86%

NASDAQ Comp:  +6.47%

EFA (Europe, Australia and Far East):  +7.92%

FEZ (Eurozone):  +6.71%

VWO (Emerging Markets):  +1.75%

Sector ETFs:

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

IYH (HEATHCARE):  +10.59%

XHB (HOMEBUILDERS):  +6.89%

XLY (DISCRETIONARY):  +6.76%

XLK (TECH):  +3.30%

XLB (MATERIALS):  +1.72%

XLP (CONS STAPLES):  +1.54%

XLI (INDUSTRIALS):  +1.42%

XLF (FINANCIALS):  +0.29%

IYT (TRANSP):  +0.17%

XLE (ENERGY):  -2.19%

XLU (UTILITIES):  -4.00%

Once again, here’s my latest reminder on volatility:

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 retreated yet again last week as bond prices were buoyed by the Fed's dovishness. As I type the 10-year treasury yields 1.93%, down from 2.09% a week ago last Friday.

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

MARCH 16, 2015

THE EMPIRE STATE MANUFACTURING INDEX FOR MARCH falls in line with other softening anecdotal indicators for the sector. One glaringly contradictory component is employment. Which, like many of the other surveys, shows real strength and, thus, optimism in the manufacturing space. Here's the report's overview:

The March 2015 Empire State Manufacturing Survey indicates that business activity continued to expand at a modest pace for New York manufacturers. The headline general business conditions index, at 6.9, remained close to last month’s level. The new orders index fell four points to -2.4, pointing to a small decline in orders, and the shipments index declined six points to 7.9. Labor market indicators pointed to a solid increase in employment levels and a lengthening in the average workweek. Pricing pressures remained subdued, with the prices paid index inching down two points to 12.4, and the prices received index at 8.3. As in February, indexes for the six-month outlook conveyed less optimism than in many of the preceding months, and the capital spending and technology spending indexes declined.

INDUSTRIAL PRODUCTION barely increased by .1% in February, vs a .3% consensus estimate. Manufacturing output confirms recently soft industry reports, down .2%. Here's from the report:

Industrial production increased 0.1 percent in February after decreasing 0.3 percent in January. In February, manufacturing output moved down 0.2 percent, its third consecutive monthly decline. The rates of change for the total index in January and for manufacturing in both December and January are lower than previously reported. The index for mining fell 2.5 percent in February; drops in the indexes for coal mining and for oil and gas well drilling and servicing primarily accounted for the decrease. The output of utilities jumped 7.3 percent, as especially cold temperatures drove up demand for heating. At 105.8 percent of its 2007 average, total industrial production in February was 3.5 percent above its level of a year earlier.

CAPACITY UTILIZATION, declining to 78.9%---being a classic inflation indicator---by itself puts no pressure on the Fed to raise rates anytime soon.

THE NAHB HOUSING MARKET INDEX continues to show optimism among homebuilders, coming in at 53 (above 50 means net optimism). However, not as much as last month (55)... Here's NAHB's chief economist David Crowe.

“Even with this slight slip, the HMI remains in positive territory and we expect the market to improve as we enter the spring buying season.”

“The drop in builder confidence is largely attributable to supply chain issues, such as lot and labor shortages as well as tight underwriting standards. These obstacles notwithstanding, we are expecting solid gains in the housing market this year, buoyed by sustained job growth, low mortgage interest rates and pent-up demand.”

TREASURY INTERNATIONAL CAPITAL, which tracks the flows of financial instruments into and out of the U.S., shows net sales of U.S. long-term securities by foreign investors of $27.2 billion in January. Foreign accounts were net  sellers of treasuries, and net buyers of agency and corporate bonds. Equities were flat. U.S. investors were net buyers of foreign bonds ($26.1B) and net sellers of foreign equities ($-13.4b).

MARCH 17, 2015

HOUSING STARTS in February came in way below expectations, at 897k.. estimates were for 1.05 million. The regional breakdown virtually assures that weather's to blame. I believe we'll see marked acceleration in the housing data as the balance of this year unfolds.

HOUSING PERMITS countered the starts number by rising 3% in February, exceeding the consensus estimate by 34k (1.092 million vs 1.058 million).

THE JOHNSON REDBOOK RETAIL REPORT continues to surprise me with its softness, although the trend---2.7% year-over-year sales increase last week vs 2.6% the week earlier---improved a little. The report estimates a strong March based on this year's early Easter. It also anticipates a spring bounce as the weather warms up. I will say that the month/month results are improving noticeably---up 1.0% for two weeks running.

MARCH 18, 2015

MORTGAGE NEW PURCHASE APPLICATIONS declined 2% last week despite lower mortgage rates. Refis declined 5%.  The weekly numbers are always very noisy... On balance, the mortgage data of late does not confirm nor contradict my optimism on housing going forward...

THE EIA PETROLEUM STATUS REPORT shows crude inventories continuing to build at an amazing pace. Up 9.6 million barrels last week to 458.8 mbs, an 80-year high. Gasoline inventories fell 4.5 mbs and distillates rose .4 mbs.

THE FOMC wrapped up its two-day policy meeting with an announcement that didn't include "patient", but offered up, in my view, language that strongly hinted that the Fed is as dovish as ever. Barring some shocking near-term data, I'd say a June rate hike is off the table.

MARCH 19, 2015

WEEKLY JOBLESS CLAIMS rose by 1,000 to 291k from a revised prior week. The 4-week average rose by 21,750, to 304,750. Both the current number and the average---and continuing claims (down 1k to 2.418 m)---are consistent with healthy economic expansion.

THE Q4 CURRENT ACCOUNT (TRADE) DEFICIT increased sharply (to $113.5 billion), as expected given the strong dollar. The deficit (utterly meaningless in my view) is all about primary income (investment income and compensation) and goods. With regard to services, the U.S. realizes a surplus, which increased by $1 billion in Q4. With regard to primary income's contribution to the deficit, it too is in surplus, however the surplus shrank $50.6 billion in Q4 from Q3's $59.8 billion.

THE BLOOMBERG CONSUMER COMFORT INDEX rose slightly last week to 44.2, which is a one-month high---fueled by a jump in the personal finance gauge. Drilling down, however, shows sentiment weakening in the consumer's outlook on the economy. As I've posited many times, I see a strong correlation between the stock market and the mood of respondents. If that holds true, we may see an outlook improvement in next week's results, given last week's rally in stocks. Here's Bloomberg's commentary:

Consumers’ U.S. Economic Outlook Retreats From Four-Year High

By Victoria Stilwell

(Bloomberg) -- Americans’ outlooks for the U.S. economy dimmed in March from a four-year high as feeble wage gains and harsh winter weather weighed on sentiment.

The Bloomberg Consumer Comfort Index’s monthly economic expectations gauge fell to a three-month low of 51.5 from a February reading of 54 that was the strongest since January 2011. In contrast, the weekly sentiment measure improved to a one-month high of 44.2 in the period ended March 15 from 43.3.

“Despite solid employment numbers, wages are stagnant, and recent reports show retail sales, manufacturing and housing starts all struggled in February,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement.

Limited pay gains, higher heating bills and gasoline prices above their January lows combined to leave households less upbeat this month. At the same time, the setback in March sentiment may prove short-lived as employers keep taking on more workers and inflation remains low.

The weekly personal finances gauge climbed to 57.1, the highest since early February, from 54.8 in the previous week. The weekly measure of Americans’ views on the current state of the economy was little changed at 37.2 after 37.1. A gauge of the buying climate, which indicates whether consumers think now is a good time to purchase goods and services, was 38.3 last week after 38.2.

Economy Outlook

Some 30 percent of respondents this month said the economy is getting better, the smallest share since November. Forty-three percent said it’s staying the same, up from 38 percent a month earlier.

Even with the March decline, the monthly economic expectations gauge has averaged 52.8 this year, the strongest for a comparable period since March-May 2002.

Solid job growth has helped sustain confidence, with payrolls climbing by 295,000 in February following a gain of 239,000 the previous month. At 5.5 percent, the unemployment rate is the lowest in almost seven years, according to the Labor Department.

Those gains may be giving hope to job seekers. Confidence among the unemployed climbed to the highest level since August 2007. Those 35 to 44 years old, who are in their prime earning years, were more confident than at any time since October 2007.

Wage Growth

Even with the progress in the labor market, faster wage growth has failed to materialize. Average hourly earnings climbed 2 percent in February from the year before, matching the mean pace of the expansion.

The weekly measure of sentiment rose in five of seven income brackets. Confidence for those making $40,000 to $50,000 was the highest since December 2007, while optimism among $75,000-to-$100,000 earners was the weakest in three months.

In the Northeast, where higher heating bills are coming due after temperatures plunged a month earlier, sentiment fell to the lowest level since early November. Confidence rose in the Midwest, West and South, where it climbed to the highest level since September 2007.

THE PHILLY FED SURVEY fell in line with this week's Empire State survey, and is consistent with the overall softer reads on manufacturing of late. Here's Econoday's commentary:

Slow growth with weakness in orders is the common thread for both the Empire State report, released earlier this week, and now the Philly Fed where the general conditions index held little changed at 5.0 in March vs 5.2 in February. New orders, at 3.9, are not much above zero while unfilled orders are suddenly well below zero, at minus 13.8 in a sharp decline from February's plus 7.3.

Weakness in orders points to softness in shipments, which are already below zero at minus 7.8, as well as softness in employment which is struggling to stay above zero at 3.5. Price data show contraction for both inputs, at minus 3.0, and finished goods, at minus 6.4.

The early indications on March are not that positive in what would extend a series of weak months for the manufacturing sector, a sector that the FOMC noted yesterday is being hurt by weak exports tied to weak foreign demand and complicated by the strong dollar.

THE INDEX OF LEADING ECONOMIC INDICATORS held steady in February. Econoday sums it up nicely:

Growth in the index of leading economic indicators held steady at 0.2 percent in February, pointing to moderate growth for the economy over the next 6 months. Once again the yield spread is the biggest positive for the index reflecting the Fed's near zero rate policy. The stock market is the next biggest positive followed by the report's credit index, an index that has however consistently been pointing to healthier borrowing conditions than government reports. Consumer expectations are also a positive in February but are very likely to reverse in March given the mid-month plunge in the consumer sentiment index.

Other readings include a 0.2 percent rise in the coincident index, which points to moderate ongoing growth, and a 0.3 percent rise in the lagging index, which points to moderate past growth. Growth may be slow but it is sustainable, reducing the risk of overheating and keeping the Fed's rate hike at bay.

NAT GAS INVENTORIES dropped by 45 billion cubic feet last week, to 1,467.

THE FED BALANCE SHEET grew by $6.6 billion. Given that QE has ended and the Fed continues to reinvest the proceeds from maturing securities, the weekly changes in the Fed balance sheet are market related. I.e., when yields drop, as they did last week, and bond/mortgage backed securities prices increase, the balance sheet grows. And vice versa. Total assets currently  stand at $4.496 trillion.

M2 MONEY SUPPLY declined last week by $21.8 billion.

MARCH 20, 2015

ATLANTA FED BUSINESS INFLATION EXPECTATIONS remain subdued at 1.7%...

The stock market is NOT ready for the first Fed rate hike...

Janet Yellen and the members of the Federal Open Market Committee read the financial news, watch CNBC and Bloomberg and note how the investment community and other economists position their portfolios and their prognostications based on the words issued in Fed meeting minutes, post-meeting announcements and press conferences. Ms. Yellen and crew absolutely knew that the removal of the word "patient" from today's announcement could roil the financial markets. That's been all the chatter in the days leading up to this week's meeting. I even blogged about it myself and discussed it in my weekly television spot this morning.

Many "experts" would have us believe that the hint from the Fed (that they're ready to move on rates), if not even the first rate hike itself, is already factored into stock prices. As I've been reporting, I completely disagree!

Now I don't pretend to be a good market timer (or a market timer at all), but seeing how stocks have been trading on fed-speak tells me virtually unequivocally that the market has not discounted the inevitable. And today's action proved it.

Yes, the Fed removed "patient", but they decided to test our semantic aptitude. Ms Yellen said:

"Just because we removed the word patient from the statement doesn't mean we are going to be impatient," 

Oh okay, so they're not impatient.... Hmmm.... What does that mean??

Basically folks, the Fed remains patient, and a June rate hike is, for the moment, off the table.

The Dow was down triple-digits just before the announcement, then rallied 300 points on "doesn't mean we are going to be impatient." That, I assure you, is not the action of a market that has discounted the inevitable...

Market Commentary (audio)

Where I mention waning economic indicators, I should have added "with the exception of the labor market, where all arrows point to continued strength going forward". Click the play button for today's commentary:

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20150317-131156.mp4"][/video]

Weekly Update (audio version)

Click the play button below for today's commentary:

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20150315-215941.mp4"][/video]

Your Weekly Update

A week ago Friday's 270+ point Dow sell off was all about an impressive jobs number and, thus, fear over the heightened prospects for a June rate hike by the Fed. Last week saw the Dow and the S&P 500 give back this year's gains, and a little, capping it off with a 146 point Dow decline on Friday. The fact that last week's economic data came in somewhat soft---and literally benign in terms of inflation---and the market didn't rally on the heightened prospects for the Fed putting off a rate hike suggests maybe last week's weakness was about something else. The strong U.S. dollar perhaps.

And that (the strong dollar) is the consensus on last week's decline. And while I so resist going with the consensus, I think, for the most part, it has last week right. While the rest of the world's central banks print money like there's no tomorrow---or like there'll be no tomorrow if they don't print money like there's no tomorrow---and the U.S. Fed is trying to figure out how to raise interest rates without puncturing the financial markets, it makes sense that the dollar continues its ascent.

So why would a strong dollar be a bad thing for the stock market? Great question! Yes, why would the rest of the world preferring your currency over their own be a bad thing? In truth, it's not. Well, not entirely. You see, a strong dollar holds both good and not-so-good prospects. It's good if you're a consumer of foreign stuff or a traveler to foreign lands. When your currency's strong it buys more stuff, and/or experiences. It's good if you're a consumer of commodities, like oil, that are traded in U.S. dollars the world over.

It's not-so-good if you cater to foreign consumers, or to foreign travelers. When your currency is strengthening relative to theirs' they can't buy as much of the stuff, and/or experiences, you have to offer. And when you and your peers comprise a large section of the U.S. large company universe, it makes sense that traders will bid your stock prices lower in anticipation of lower sales in the months to come. Never mind that you buy many of the components that go into the manufacturing of your stuff from abroad with your strong dollars, or that your energy costs have been slashed markedly as the dollar has risen --- the world presently views weak currencies good, strong currencies bad, at least when we're talking equity prices.

But the thing is, history doesn't always support the notion that a strong U.S. dollar is bad for the U.S. stock market. The following 30-year graph (click to enlarge) shows that U.S. stocks (yellow line) and the U.S. dollar (white line) at times like each other, and at times don't.

 

My guess is that if 2015 is to bring the elusive 10%+ decline in U.S. stocks, it'll not be because of the dollar, it'll be because of higher interest rates.

Those who see the strong dollar as a strong economic headwind believe it would be foolhardy on the part of the Fed to raise interest rates come June. For, surely, higher interest rates will only force the dollar higher, as it would attract yet more capital to the U.S.---with its 10-year yield of 2.10%---and away from the currencies of countries like Germany and Japan, whose interest rates on 10-year government debt are 0.26% and 0.41% respectively.

And, yes, they make sense. But, like stocks and the dollar, history doesn't entirely support the notion that rising interest rates always equate to higher home currencies. Like I said last week:

....history doesn’t always support the notion that the currencies of the countries whose central banks are easing monetary policy always tank relative to those whose central banks aren’t. For example, in 1999 Japan sported the lowest interest rates among the world’s major economies—much like the Eurozone does today. Yet, despite that interest rate differential (low yielding yen versus the rest of the developed world), the yen rallied strongly against other currencies. Why? Because the world viewed Japanese stocks as being very cheap and bet that the Bank of Japan’s monetary stimulus would work. I.e., global funds found their way to Japan in a big way.

Another similar situation occurred in 2001 on behalf of the U.S. dollar. While the Fed cut interest rates aggressively in response to a slowing economy, rather than sell the low-yielding dollar and buy higher-yielding foreign currencies, the world—thinking that the action of the Fed would result in the U.S. becoming the first major economy to emerge from the global slowdown—rushed to the dollar, pushing it higher despite its globally-low yield.

In fact, I just did a little charting on the topic. The upward pointing red arrows mark the first rate hike in every Fed (white line) tightening campaign since the early '70s. The downward pointing red arrows mark periods where the dollar (green line) actually began declining immediately or very shortly after that first rate hike (which is precisely the opposite of what the consensus expects this go round). The crossing yellow arrows mark periods when the dollar rose despite the Fed slashing interest rates. In essence, I'm suggesting here (and in the above excerpt from last week) that while at times the dollar does move in the direction of the fed funds rate or seems unaffected (the stretches with no arrows), to conclude that the direction of interest rates and the value of the dollar will correlate perfectly going forward is a faulty, and very dangerous, conclusion to make.  



Current themes:

Central Banks:

All eyes will be focused on the Fed this week, as it holds its two-day policy meeting. If the word "patient" is missing from the post-meeting announcement, I'm guessing the markets will conclude that the first rate hike will come in June and sell off on the news. Bonds may get particularly ugly next week. If "patient" remains, it's safe to assume that traders, of both bonds and stocks, will like that a lot.

Oil:

Inventories continue to climb. Week before last's message tells you what that means.

The Consumer:

While both Bloomberg's weekly survey and University of Michigan's monthly show optimism waning a bit, confidence among consumers, by and large, remains high.

Retail numbers---coming in on the soft side---continue to surprise me, amid a very good employment picture and relatively high consumer confidence. The diehard optimists are blaming a cold February in parts of the country. I'm not entirely buying the weather excuse... That said, on-line sales did jump 2.2%, and are up 8.6% year-over-year.

Mortgage rates rose to north of 4% last week, and yet new purchase applications rose by 2%. I remain an optimist on U.S. housing going forward.

Europe:

On balance, the Eurozone economy is looking better. Unlike the U.S. market, the area's stock prices improved nicely last week---but only in local currency terms. In dollar terms Eurozone stocks fell on the week. I.e., the rise in the dollar more than offset the rise in Eurozone stocks.

The U.S. Dollar:

See above...

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:  -0.41%

S&P 500:  -0.27%

NASDAQ Comp:  +2.87%

EFA (Europe, Australia and Far East):  +4.64%

FEZ (Eurozone):  +2.20%

VWO (Emerging Markets):  -2.05%

Sector ETFs:

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

IYH (HEATHCARE):  +5.88%

XLY (DISCRETIONARY):  +4.17%

XHB (HOMEBUILDERS):  +3.49%

XLB (MATERIALS):  +2.59%

XLK (TECH):  +2.52%

XLP (CONS STAPLES):  -0.43%

XLI (INDUSTRIALS):  -0.88%

XLF (FINANCIALS):  -1.66%

IYT (TRANSP):  -1.89%

XLE (ENERGY):  -5.72%

XLU (UTILITIES):  -7.92%

Once again, here's my latest reminder on volatility:

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 retreated last week as bond prices were buoyed by soft economic data. As I type the 10-year treasury yields 2.09%, down from 2.25% a week ago last Friday. As I stated above, no sign of the word "patient" in this week's Fed announcement is likely to send yields higher.

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

MARCH 9, 2015

THE CONFERENCE BOARD EMPLOYMENT TRENDS INDEX barely moved above January's level, 127.76 vs 127.62. Last February's number was 116.39... Clearly, the labor market is looking up.

(The eight labor-market indicators listed below aggregated into the Employment Trends Index.

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).Number of employees hired by the temporary-help industry (U.S. Bureau of Labor Statistics).Part-time Workers for Economic Reasons (BLS).Job Openings (BLS). Industrial Production (Federal Reserve Board).Real Manufacturing and Trade Sales (U.S. Bureau of Economic Analysis)).

MARCH 10, 2015

THE JOHNSON REDBOOK RETAIL REPORT continues to show tepid growth in year-over-year growth, 2.6% last week. Month-over-month, however, sales were up a full 1%...

THE NFIB SMALL BUSINESS OPTIMISM INDEX for February shows a slight uptick in the outlook given by its respondents. Of note is the number of respondents with increased job openings and who comment that qualified labor is hard to find. That sort of commentary portends a tighter labor market and wage gains in the offing. Here's NFIB's chief economist:

“In spite of slow economic activity and awful weather in a lot of the country, small business owners are finding reasons to hire and spend which is great news. Of the ten components, owners reporting hard-to-fill job openings was the largest gain increasing three points to a 29 percent which is a nine year high.

“Large firms have been powering the economic recovery since the Great Recession, but that may be shifting to the small business sector. February’s data suggests there are fundamental domestic economic currents leading business owners to add workers and these should bubble up in the official statistics and support stronger growth in domestic output.”

THE BLS JOB OPENINGS AND LABOR TURNOVER (JOLTS) REPORT showed job openings (5 million) coming in barely higher in January vs December (although, at the highest level since January 2001). The all-important quits rate held at 2% of the 4.8 million separations in January. When a person quits a job it's generally because he/she has better prospects elsewhere, thus a rising quits rate reflects an improving economy. Total hires were 5 million.

WHOLESALE INVENTORIES grew .3% in January, which, by itself, is mild enough. But when we factor in a 3.1% plunge in wholesale sales, we can get very nervous about production going forward. That's what, surprisingly, occurred in January. Bringing the inventory-to-sales ratio to 1.27 from 1.22. The 1.27 is the highest reading since July 2009. While such a reading is generally cause for alarm, there's absolutely no question that the huge build in oil inventory is the culprit. Here's Econoday suggesting weather is a factor:

The drop in wholesale sales is a puzzle given no worse than mixed readings on business and consumer spending. Winter months are often distorted due to weather and related adjustments and perhaps today's results will be smoothed out in the coming months. 

API CRUDE INVENTORIES report a .4 million barrel draw last week. That's the first decline in inventories in weeks (although it's tomorrow's EIA number that everybody focuses on). Gasoline and distillate inventories each grew by 1.7 million barrels.

MARCH 11, 2015

THE WEEKLY MBA MORTGAGE NUMBERS, in terms of new purchase apps, bucked the recent declining trend with a 2% increase last week, versus prior, and a 2% year-over-year change. The pickup occurred despite higher mortgage rates (now at 4.1% for 30-yr fixed). Refis, however, declined 3%... I remain very optimistic on housing going forward...

THE CENSUS BUREAU'S QUARTERLY SERVICES SURVEY, which focuses on information and technology-related service industries shows revenue rising 1.4% in Q4. And year-on-year growth of 4.5%.

THE EIA PETROLEUM STATUS REPORT does not at all agree with API's number. Showing yet another build last week, to the tune of 4.5 million barrels. While, clearly, refineries have cut back production, there seems to be no let up, just yet, in crude oil production. Gasoline declined .2 million barrels, while distillates grew by 2.5 million barrels.

MARCH 12, 2015

WEEKLY JOBLESS CLAMIS plunged last week by 36,000 to 289,000. The 4-week average came in at 302,250. Next week's 4-week average will lose a very low 280k number in its calculation. Continuing claims, on a 1-week lag, were down 5k to 2.418 million. The 4-week average however rose 13,000 to 2.417 million.

All in all, the employment picture in the U.S. is the best it's been in several years, and speaks optimistically about the U.S. economy throughout the course of 2015.

RETAILS SALES surprised with a .6% decline in February. The core number, which excludes autos, was down .1%. Expectations were for a .5% increase, after last month's 1.1% decline. Optimists blame the results on poor February weather in parts of the country. One detail in the report offers some support to that notion --- the 2.2% increase in nonstore (on line) business.... which was also up 8.6% year-over-year. The store sales that saw increases were food and beverage, gas stations, and sporting goods, hobby, book and music stores. Every other area, save for gas stations, saw an increase in sales on a year-over-year basis.

The recent retail readings have flown in the face of better jobs and wage numbers, and consumer optimism. As spring arrives we should see better results.

IMPORT PRICES, year-over-year, have been hammered (-9.4%) by oil prices and the stronger dollar. Although were up .4% on the month due to a rise in petroleum prices. EXPORT PRICES are down 5.9% year-over-year, -.1% on the month.

THE BLOOMBERG COSUMER COMFORT INDEX budged slightly lower last week, 43.3 vs 45.5. As seen in the commentary below, sentiment varies among gender and income levels. The volatile stock market having a negative effect on the outlook of those whose income levels suggest they have exposure to the market, while the improved jobs picture and lower energy prices boosts the attitudes of lower income individuals:

 (Bloomberg) -- Consumer confidence was little changed last week at the second-lowest level of the year as fewer Americans said it was a good time to shop.

The Bloomberg Consumer Comfort Index retreated to 43.3 in the period ended March 8 from 43.5 in the prior week. A measure of the buying climate in the U.S. was the weakest in a month.

Disappointing wage growth and a propensity to sock away gas savings may be limiting consumers’ willingness to spend, while a drop in stock prices damped enthusiasm among wealthier households. At the same time, healthy job growth will probably keep sentiment from faltering.

“Weak wage growth may be a factor, while employment pulls in the positive direction,” said Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg.

The Bloomberg measure has averaged 44.5 so far this year, up from a 36.7 average in 2014. The gauge stood at 40 in the final week of December 2007, the month that marked the beginning of the last recession.

An index of the buying climate dropped to 38.2 last week from a reading of 39.3 in the prior period, while a measure of the state of the economy held at 37.1. The personal finances gauge rose to a three-week high of 54.8 from 54.1.

Sentiment among women last week was the strongest since August 2007, and confidence of 35- to 44-year-olds was the highest since October 2007.

Comfort among respondents in the two-highest income groups declined last week as the Standard & Poor’s 500 dropped to its lowest level in almost a month. Those making $100,000 or more a year were the most downbeat since November.

Sentiment picked up for Americans making less than $15,000 a year.

BUSINESS INVENTORIES relative to sales have been on the rise of late. While inventories have been flat, sales have been on the decline. While some will say this widening ratio is unintentional, in that business aren't growing their inventories, the fact that they're maintaining them against weak winter sales, tells me that it very well could be intentional. Given the improving employment picture and the results of business surveys, I'm thinking optimism among business owners is the likely reason for the higher inventory to sales ratio --- at 1.35 vw 1.33 in December and 1.31 in November...

MARCH 13, 2015

THE PRODUCER PRICE INDEX FOR FINAL DEMAND declined .5% in February, following a 0.8% decline in January. Versus estimates of a 3% rebound. Clearly, on the surface, the Fed has little pressure to push the fed funds rate higher based on recent inflation readings.

THE UNIVERSITY OF MICHIGAN CONSUMER CONFIDENCE INDEX declined sharply in March, to 91.2 versus 95.4 in February. However, comparing to last March's 80, and the historical average, the consumer remains generally optimistic on his/her outlook. Here's UIM's Surveys of Consumers chief economist:

Consumer optimism slipped in early March among lower and middle income households (-6.5% from February) while confidence improved among households with incomes in the top third (+3.2%). The renewed concerns expressed by lower and middle income households mainly involved income declines and higher utility costs as well as disruptions to shopping and businesses due to the harsh winter. Among those with incomes in the top third, strong gains were concentrated in the near term outlook for the economy and buying plans. Despite the small temporary setbacks, the overall level of consumer confidence remains favorable enough to support 3.3% growth rate in personal consumption expenditures during 2015.

It's interesting to note the divergence of results among income levels when compared to Bloomberg's weekly Consumer Comfort Index --- although UIM's is a monthly survey.... I.e., Bloomberg's survey showed low income earners optimistic with upper incomes' optimism waning, while UIM's survey suggests the opposite. Personally, as I've observed the sentiment indicators over the years, I have found them to be somewhat volatile and strongly correlated to short-term moves in the stock market.

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Your Weekly Update

Last week I stressed that while manufacturing data is always billed as a critical indicator of U.S. growth, it utterly pales in comparison to the less-fanfared service sector.

I.e:

.... 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.

The breakdown of February's jobs number (reported Friday) nails my point:

Net jobs created in goods-producing industries:  29,000

Net jobs created by Government:  7,000

Net jobs created in service-providing industries:  259,000

And guess how many of the goods-producing jobs were created in the construction industry, 29,000! --- "mostly in the residential component", according to the report (hence my recent commentaries on housing). All other categories were balanced with gains and losses. For example; the 8,000 gain in manufacturing jobs was offset by a loss of 8,000 mining and logging jobs.

The stock market's negative reaction to the jobs number speaks to the last sentence from last week's excerpt above (regarding the service sector): "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."

Friday's market sell-off was all about fear over the inflation doves possibly missing something. Or, more accurately at the moment, fear over higher interest rates --- for raising interest rates is the Fed's first line of defense against the threat of rising inflation.

Here again is my graph (click to enlarge) that charts the S&P 500's price to earnings ratio (white line) against U.S. inflation (red line). As you'll see, history suggests that while inflation remains low, valuations can comfortably remain at present levels. Oh but when inflation rises, an altogether different picture develops.

 

Therefore, if indeed higher interest rates are the antidote to inflation---and if inflation becomes a threat---the Fed raising the fed funds rate is a good thing, not a bad thing, right?

Well, "right", if you're a patient logically-thinking long-term investor. If, however, you're an impatient short-term thinking short-term trader you're thinking about how higher interest rates create competition for stocks. And how higher interest rates mean the cost of capital goes up for businesses (pressuring profits). And when you calculate valuations, a higher discount rate means share prices need to come down if earnings don't happen to accelerate. Actually, if you're a short-term thinker you're thinking other short-term thinkers are thinking what you're thinking and you want to get out before they do.

Investment bliss is NOT being a short-term thinker!

As I ponder all that bears reporting in this weekly missive I realize that should I try to present it all---all with proper explanations---a simple scrolling down the text would send most of my readers' cursors to the X in the upper right corner and off to clean their patios, or to the car wash, or, better yet, the golf course. I know, the text is always huge, but it includes the weekly U.S. highlights from my economic log, which you're okay skipping if that's not your thing.

So here I'll hit the issues and try to keep redundancy to a minimum:

Central Banks:

The above and last week's message suffice for now.

Oil:

Another 10+ million barrels hit the inventory last week. Last week's message tells you what that means.

The Consumer:

Per the notes below, Bloomberg's weekly Consumer Comfort Index showed confidence rebounding. The next few weeks will be interesting in that my observation is that the stock market has a major impact on how consumers respond to these surveys.

Europe:

While "out of the woods" is not how I'd yet characterize Europe, things are clearly looking up. For example: Eurozone retail sales were up 3.7% year-over-year in January, the purchasing managers indexes are coming in above 50 (denotes expansion), and the European Central Bank begins buying 60 billion euros a month worth of bonds on Monday (a plus, at least, for sentiment).

The U.S. Dollar:

Virtually every economist and foreign exchange guru I've listened to of late is certain that the dollar continues its march higher from here. And---while the rest of the world's central banks are taking measures that the textbook says will devalue their currencies, and the Fed ceased quantitative easing last October and is looking to begin raising the fed funds rate, and U.S. interest rates are higher than many foreign equivalents---they're probably right. Which, while a good thing for the U.S. spender and, on balance, the U.S. economy (in that consumer spending is two-thirds of the GDP calculation), it poses a headwind for U.S. exporters---as their goods are more expensive in foreign currency terms.

Like I said, the experts are "probably right". But history doesn't always support the notion that the currencies of the countries whose central banks are easing monetary policy always tank relative to those whose central banks aren't. For example, in 1999 Japan sported the lowest interest rates among the world's major economies---much like the Eurozone does today. Yet, despite that interest rate differential (low yielding yen versus the rest of the developed world), the yen rallied strongly against other currencies. Why? Because the world viewed Japanese stocks as being very cheap and bet that the Bank of Japan's monetary stimulus would work. I.e., global funds found their way to Japan in a big way.

Another similar situation occurred in 2001 on behalf of the U.S. dollar. While the Fed cut interest rates aggressively in response to a slowing economy, rather than sell the low-yielding dollar and buy higher-yielding foreign currencies, the world---thinking that the action of the Fed would result in the U.S. becoming the first major economy to emerge from the global slowdown---rushed to the dollar, pushing it higher despite its globally-low yield.

Could it happen in the Eurozone? Could an improving Eurozone economy spur a rush of investment from the U.S., halting the dollar's advance, if not sparking its decline? Again, the pundits say not this time. But history leaves a little doubt...

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)---as you can see, last week took everything down a peg:

Dow Jones Industrials:  +0.68%

S&P 500:  +1.00%

NASDAQ Comp:  +4.27%

EFA (Europe, Australia and Far East):  +4.88%

FEZ (Eurozone):  +3.58%

VWO (Emerging Markets):  +0.30%

Sector ETFs:

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

IYH (HEATHCARE):  +5.23%

XLY (DISCRETIONARY):  +4.52%

XLB (MATERIALS):  +3.87%

XHB (HOMEBUILDERS):  +3.49%

XLK (TECH):  +2.52%

XLP (CONS STAPLES):  +0.56%

XLI (INDUSTRIALS):  -0.21%

XLF (FINANCIALS):  -2.02%

IYT (TRANSP):  -2.33%

XLE (ENERGY):  -3.01%

XLU (UTILITIES):  -8.11%

Once again, here's my latest reminder on volatility:

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 spiked .25% last week to 2.24%. You can thank Friday's jobs number for that hit to bond prices.

I've been preaching for too long about the present risk to bonds. As Friday illustrated, data pointing to an accelerating economy could turn into a rout in a bond market that I view as bubbly. The next big thing to watch will be the commentary following this month's Fed meeting. If "patient" leaves the narrative, look for bonds to fall further (yields to rise).

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

MARCH 2, 2015

CORE PERSONAL CONSUMPTION EXPENDITURES (PCE) increased .1% in January, and 1.3% year over year. Inflation reads continue to come in noticeably below the Fed's 2% target.

REAL PERSONAL INCOME grew .3% in January. And 4.6% year-over-year.

CONSUMER SPENDING declined .2% in January. However, the decline was price-related. Price adjusted, personal spending increased .3%.

MARKIT'S MANUFACTURING PMI showed growth hitting a four-month high in February: 55.1, vs 53.9 in January. Here's Markit's chief economist:

“Manufacturing braved the cold weather in February, reporting an upturn in the pace of growth. A flurry of activity towards the month end helped raise production to a greater extent than signalled by the earlier flash reading. The upbeat survey points to minimal impact from the adverse weather that affected many parts of the country during the month.

“While growth of manufacturing output remained below the peaks seen last year, the survey is broadly consistent with production rising at an annualized rate approaching 4%.

“Employment continued to rise, albeit with the rate of job creation slipping as many companies cited increased uncertainty about the outlook, especially with the strong dollar hitting competitiveness.

“Lower oil prices meanwhile once again helped reduce firms’ costs slightly for a second month running, but average selling prices rose at the fastest rate since November, suggesting core inflationary pressures are in fact rising.

“The combination of strong production growth, ongoing job creation and rising factory prices will keep alive the possibility that the Fed could be encouraged to start hiking interest rates as early as June."

CONSTRUCTION SPENDING declined 1.1% in January. Government outlays, dropping 2.6%, lead the way lower. While non-residential construction was down 1.6%, private residential spending rose .6%, after increasing .7% in December, which denotes optimism among home builders.... plus, inventories have been quite low.

THE ISM MANUFACTURING PMI came in a little below expectations, at 52.9, in February. This report is not nearly as optimistic as Markit's survey released today. Many respondents noted the West Coast port strike (now resolved) as having a measurable effect on their businesses.

MARCH 3, 2015

JOHNSON REDBOOK RETAIL REPORTS continues to report surprisingly weak results in my view. Coming in at 2.7% year over year vs 2.8% the week prior. Econoday comments positively on the month over month results and the possibilities for March:

Redbook's same-store sales index came in at a soft plus 2.7 percent in the February 28 week, little changed from 2.8 percent in the prior week. Nevertheless, Redbook's data do point to a 0.8 percent gain vs January in what is a positive indication for February core retail sales (ex-auto ex-gas). For March, Redbook notes that Easter falls two weeks earlier than last year which will move sales into the month at the expense of April.

AUTO SALES came in soft in February, down 2.6% to 16.2 million.

GALLUP'S ECONOMIC CONFIDENCE INDEX came in positive for the second consecutive month, and only the second time in seven years. Although it edged down to 1 from 3 in January.

THE API WEEKLY CRUDE STOCK showed oil inventories rising by 2.9 million barrels last week, with gasoline rising .53 mbs and distillates declining .296 mbs. Tomorrow's EIA number is always the one to watch.

MARCH 4, 2015

THE MBA MORTGAGE PURCHASE APP INDEX continues to show surprising weakness in mortgage activity. The purchase index was down .2% last week, while the refinance index was up 1%. The underlying fundamentals in my view promote optimism on housing going forward. One current hurdle seems to be low inventory. Would-be buyers have little to choose from... Thus, prices have been on the rise of late... which, ultimately, should inspire sellers and builders to bring inventory to the market. All that said, last week's pending home sales report for January showed strength above expectations.

THE ADP EMPLOYMENT REPORT showed 212,000 net new jobs created in February. While it was just off of expectations, 200,000+ is a very healthy number. As I stated last week, we really want to keep our eyes on the service sector, as illustrated in this report with it producing 181,000 of those new jobs. On the goods-producing side, 90% of the jobs were created in construction.

MARKIT'S COMPOSITE PMI for February came in at a very positive 57.1, vs 56.8 in January.

MARKIT'S SERVICES PMI for February came in at 57.1 as well, vs 57.0 in January.

THE ISM SERVICES ("Non-Manufacturing") PMI came in strong at 56.9. The employment component remains a strong contributor, up 5 points to 56.4. As suggested below by ISM's chair, there were some ups and downs in February's survey, but, again, on balance the reading is positive:

"The NMI® registered 56.9 percent in February, 0.2 percentage point higher than the January reading of 56.7 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 59.4 percent, which is 2.1 percentage points lower than the January reading of 61.5 percent, reflecting growth for the 67th consecutive month at a slower rate. The New Orders Index registered 56.7 percent, 2.8 percentage points lower than the reading of 59.5 percent registered in January. The Employment Index increased 4.8 percentage points to 56.4 percent from the January reading of 51.6 percent and indicates growth for the 12th consecutive month. The Prices Index increased 4.2 percentage points from the January reading of 45.5 percent to 49.7 percent, indicating prices contracted in February for the third consecutive month. According to the NMI®, 14 non-manufacturing industries reported growth in February. Comments from respondents have increased in regards to the affects of the reduction in fuel costs and the impact of the West Coast port labor issues on the continuity of supply. Overall, supply managers feel mostly positive about the direction of the economy."

THE EIA CRUDE OIL INVENTORIES REPORT showed that inventories grew yet again last week by a huge 10.3 million barrels. Clearly---as gasoline inventory remained static and distillate inventories delined by 1.7 million barrels---refiners have cut back on production of late.

MARCH 5, 2015

THE CHALLENGER JOB-CUT REPORT is showing layoffs rising this year. February by 50,579, following January's 53,041. The energy sector, which should be no surprise, has been the recent leader in layoffs.

WEEKLY JOBLESS CLAIMS jumped a surprising 7,000, to 320,000, last week. That was 20,000 more than the consensus estimate. The 4-week average is now at 304,750. With surveys showing continued strength in job creation, I expect weekly claims to hang near 300k or below over the intermediate term.

NON-FARM PRODUCTIVITY declined 2.2% in Q4---as hours worked increased 4.9% against output growth of 2.6%. Unit labor costs (1.9% gain in hourly comp plus the 2.2% drop in productivity) increased 4.1% in the quarter, versus a 3.3% estimate. The estimate for Q4 productivity was -2.3%... This is one to watch closely as it is consistent with maturing expansions (as labor costs increase amid a tightening labor market) and ultimately results in higher inflation.

THE BLOOMBERG CONSUMER COMFORT INDEX says consumer confidence grew last week---coming it at 43.5 vs 42.7 the week prior. It's been my observation over the years that consumer confidence correlates closely with the stock market, as Bloomberg suggest below:

Consumer Comfort in U.S. Rises as Stock Prices Reach Records

By Shobhana Chandra

(Bloomberg) -- Consumer confidence in the U.S. rebounded last week from its lowest level of the year as stocks reached record highs, bolstering Americans’ wealth.

The Bloomberg Consumer Comfort Index rose to 43.5 in the period ended March 1 from a reading of 42.7 the prior week that was the lowest this year. Measures of the current state of the economy, personal finances and the buying climate advanced.

The moods of wealthier consumers, who tend to own stocks, rose to a five-week high as the Standard & Poor’s 500 index and the Dow Jones Industrial Average advanced to their highs, the report showed. The best labor market since 1999 and cheaper gasoline also are delivering a boost to household spending, which accounts for about 70 percent of the economy.

The recovery in confidence was “likely in celebration of the stock market’s advances,” said Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg. Among those with annual incomes of more than $100,000, “it’s been higher in this group just twice since October 2007.”

The gauge of Americans’ views on the state of the economy rose to 37.1 last week from 35.7 the previous week. An index of the buying climate, showing whether this is a good time to purchase goods and services, increased to a seven-week high of 39.3, and a measure of personal finances climbed to 54.1 from 53.8.

The S&P 500 rose to fresh records four times in February, and the Dow posted its best month in two years, helping explain why confidence surged among Americans making more than $100,000 a year. The gauge jumped to 69.2 last week, the highest level since the end of January.

Low-Income Earners

Moods worsened for those at the bottom of the wage scale. The comfort gauge for workers earning less than $15,000 a year declined to the lowest since mid-December.

Democratic voters saw an improvement in confidence, with the index increasing to 51.9, the second-highest in 14 years. That compares with 41.3 for Republicans and 38.9 among political independents.

FACTORY ORDERS declined by .2% in February. Non-durables, influenced by energy, fell 3.1%. Durables increased by 2.8%. Leading durables was a big gain in commercial aircraft, 9.7%.

NAT GAS INVENTORIES declined 228 billion cubic feet last week.

THE FED BALANCE SHEET inched up by $0.9 billion last week, to 4.488 trillion.

M2 MONEY SUPPLY grew $43.5 billion last week.

MARCH 6, 2015

THE BLS EMPLOYMENT SITUATIONS REPORT blew away expectations with 295,000 net new jobs created in February. The unemployment rate fell further than expected, to 5.5%, which was influenced by a slight down tick in the labor force participation rate (i.e., some folks left the workforce altogether). Wages, after jumping .5% in January, budged just slightly---up .1%. While the naysayers will cite the lack of wage growth, make no mistake, this was a very robust jobs report that will surely change the narrative with regard to when the Fed will begin raising the fed funds rate. And I strongly suspect we're on the verge of a steady move higher in wages that will reflect in the reports to come.

THE U.S. TRADE DEFICIT narrowed in January, to $41.8 billion from $46.6 billion in December, on lower oil prices.

CONSUMER CREDIT rose $11.6 billion in January versus $17.9 billion in December. Unlike December, consumers did not tap their credit cards in a big way. While in December a jump in credit card usage was described as a signal of high consumer optimism, robust jobs growth and low gas prices are being credited for the consumer's lack of reason to turn to his/her credit cards in January...