Sunday, March 15, 2015

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.

 Fed funds and the dollar

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.  

Fed Funds Hikes and the Dollar

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.


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.


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%



XLB (MATERIALS):  +2.59%

XLK (TECH):  +2.52%




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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