Market Commentary (audio)

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Weekly Update (audio version)

At 2:07, where I say "earnings growth has been basically flat", I meant to say "revenue growth has been basically flat":

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Your Weekly Update

Another spotty week for economic data, and yet the S&P 500 and the Nasdaq Composite indexes posted new all time highs. Go figure!

So what gives? My best guess is that the data suggest that the U.S. economy---despite the coming weak Q1 GDP number---is in decent enough shape to avoid recession in the foreseeable future, but not robust enough to get the Fed itching to raise interest rates before, say, the very end of this year. That keeps traders interested enough to buoy stock prices enough to entice return-hungry investors to join the party. 

While that may sound hunky-dory, trust me folks, we really need more to go on if this bull market is going to go on a lot further. As I type, 201 of the S&P 500 companies have reported Q1 earnings  and revenue results. And while a whopping 77% of those beat analysts' earnings estimates (that had been ratcheted noticeably lower), only 47% beat the estimates on revenue. And while earnings growth has come in thus far at a decent-enough 6.55% pace, revenues are essentially flat, at +0.25%. And this is with only 11 of the 41 energy companies in the S&P having reported. So, therefore, the growth rates are indeed coming down before it's all said and done.

But of course this is not breaking news---which means the reality of the previous paragraph virtually has to already be discounted in the price of your average share of stock. So then, traders/investors are either, as I suggested above, simply resigning to the fact that, in the present environment, stocks are the only game in town, and will remain so at least till the Fed begins tightening , or are, like me, optimistic over the U.S.'s economic prospects going forward---and hope that that translates into revenue gains, as well as the kind of confidence among businesses that'll lead to productivity-enhancing capital investment.

Like I said in paragraph two, I'm guessing, for now, that it's the former. However, the latter is what would make the beginning of the Fed's next tightening cycle, at worst, a correction-inspiring affair, rather than a bear market-inducing event.

Next week is going to be huge in terms of economic data.  While the first reading of Q1 GDP will be on everyone's watch list (due Wednesday), I'll be paying particular attention to Thursday's release of the Employment Cost Index (ECI). The ECI---which measures the cost of most companies' largest input---is huge as an inflation gauge, and is closely monitored by the Fed. Also, the Fed's meeting next week will be very much in focus. I don't expect any fireworks coming from this particular meeting. 

I'll get into the weeds this week by adding a paragraph under each of the indices/sectors I report on---offering my thoughts on each as well as what's behind the good, or not so good, year-to-date results.

The Stock Market:

For starters, I'll repeat last week's opening paragraph:

Non-US markets continue to measurably outperform the U.S. in 2015. Don't be surprised if that remains the story throughout most of the year. That said, there are a number of potential international hot buttons that could easily delay the narrowing of the gap between the valuations of U.S. and non-U.S. securities. That's why we think long-term and stay diversified!

Once or twice each week I update a spreadsheet that tracks a number of personally-selected valuation metrics for the S&P 500 Index, the Russell 2000 (small cap) Index, the indices that track major sectors in the U.S., as well as twenty different regions and individual countries. I then color code each as a visual to share with clients during our portfolio review sessions. 

In the following, when referencing an index that I include on my valuation spreadsheet, I'll highlight the title---which will include its year-to-date performance---accordingly. Green for attractively valued, yellow means I'm neutral, red means it's expensive. 

Note: if you happen to be reading this on an Apple device in the “reader view” you won’t see the highlights. You’ll have to exit reader view to get the visual…

Keep in mind that while, as you'll see below, I find value in various pockets of the U.S. equity market, at any moment the market can and will punish any and all sectors, regardless of how advisers/investors may feel about their present valuations or prospects.

Dow Jones Industrials:  +2.13%

The Dow is the index I quote most often on TV and in my audio commentaries. Not because it’s by any means the best market measure, but simply because it’s the one most folks identify with. It’s simply a price-weighted index of 30 select large U.S. companies. I don’t maintain valuation stats on the Dow.

S&P 500:  +3.47%

The S&P 500, which is comprised of, interestingly, 502 (due to the inclusion of different share classes of a couple of companies) companies' stocks, is a legitimate benchmark for the U.S. large cap universe.

The S&P is, in my view, very close to what I’d consider fully, or fairly, valued. I.e., In terms of valuation, I’m not crazy bullish nor bearish on the prospects for the broad U.S. market at present. We’re going to have to see a pickup in earnings to go with the inevitable pickup in interest rates if this bull market is going to make it far into the next Fed tightening cycle. An earnings pickup can come by way of greater revenues, greater productivity (or both), or yet more financial engineering (share buybacks). While I have nothing against share buybacks, the former two are what we want to see.

NASDAQ Comp:  +7.94%

Just last week, the Nasdaq finally eclipsed its all-time high set way back in the year 2000. While that may spark fear in the hearts of those who suffered the wrath of the most ridiculous of bubbles (the tech bubble explosion), there are two things that should entirely eliminate all remnants of that PTSD. One would be inflation, which if it's run at, say, 2.25% per year since 2000, the index still has quite a ways to go before besting it's old record. My calculator says 6,800+ --- it closed Friday at 5,092.

The second would be the fact that today's Nasdaq Composite is not your father's Nasdaq Composite. Roughly two-thirds of the 2001 index was dedicated to tech stocks (many of whose names I've forgotten, although I do recall they all ended in dotcom); tech stocks today comprise 43% of the index (companies that actually make money, such as Apple, Google and Cisco Systems, to name a few). Consumer services were 8.7% of the index back then, today they're 21%. Healthcare was 9.2%, today it's 16.2%...  You get the picture.

I don't keep tabs on the Nasdaq Composite's overall valuation, but as you'll see below, I closely track its sectors.

EFA (Europe, Australia and the Far East [EAFE]):  +10.78%

The EAFE Index tracks the developed world outside the U.S.. While I keep tabs on the countries that comprise the index separately, I also do the valuation exercise for the EAFE Index itself. It's presently attractive in my view.

In addition to looking relatively attractive from a valuation standpoint, much of the world that comprises the EAFE resides under the monetary policy of central banks that are pulling out the stops to try and stimulate their economies solidly into expansion mode. While I'm no fan of the notion that a country can print its way to prosperity, this is a strong signal that those economies have yet to leave the runway after that last great recession (i.e., there's lots of room to run). Plus, I recognize the inflation impact such practices tend to have on asset prices (which is one of the intended transmission effects of easy monetary policy). Where valuations are compelling, this is icing on the cake.

FEZ (Eurozone):  +7.39%

Despite the yellow valuation highlight---which is due to this year's rally in share prices outpacing forward earnings expectations---I remain bullish on the Eurozone for now. As I've reported, the zone's economies have been picking up, which, if it continues/accelerates, will put a fire under earnings expectations. Otherwise, ditto the EAFE explanation.

VWO (Emerging Markets):  +11.82%

The countries that comprise the emerging world are countries that are, well, emerging. Meaning, their citizens don't yet enjoy the advancements, nor generally the freedoms, we North Americans, Western Europeans, Australians and Japanese do, but they want to in the worst way. Thus, their economies---in terms of growth---have the potential to (and often do) outpace the developed world in a big way.

Those emerging populations are the targets of smart businesses the world over---both in terms of the opportunities to sell them goods and services as well as to put them to work producing goods and services. Inherent in such phenomenal growth potential lies, alas, phenomenal risk. So, for most clients, we go there somewhat lightly (compared to developed economies).

Emerging markets possess, by far, the most compelling valuations on my spreadsheet.

Sector ETFs:

IYH (HEALTHCARE):  +9.85%

Healthcare was not nearly my number one pick coming into this year. In fact my valuation spreadsheet had it colored red in January. However, to play a little just-in-case economic defense, I maintained my 10% exposure target in client portfolios. Since then, a pickup in the sector's projected earnings growth rate has turned it yellow (to neutral).

This year's thus far impressive run can be attributed to the surging biotech sector and a rash of M&A (merger and acquisition) activity. Healthcare (save perhaps for biotech) is not typically your major investment destination during an economic expansion---it's typically where you go when the economy is topping out and/or contracting (folks still buy aspirin when they can't afford Apple watches), hence the economic defense. 

I remain cautious on healthcare.

XLY (DISCRETIONARY):  +7.95%

In last year's year-end letter, I let readers know that---after under-weighting consumer discretionary (which turned out to be a good move) in 2014---I was becoming optimistic on the sector. Here's my last line from that commentary:

Factor in growing consumer optimism, an improving jobs/wage picture and lower energy prices, and one should feel okay about this space going forward. I’m recommending a solid 10% weighting for now.

In terms of valuation, during the course of this year I've gone from yellow to green to now back to yellow. From a cyclical standpoint, and from what I gather from the anecdotal evidence, I remain fairly optimistic on the sector going forward.

XHB (HOMEBUILDERS):  +5.48%

I came into this year very bullish on the housing space---valuations were compelling and I saw the fundamentals lining up very favorably. And, despite the recent pullback (knocking it from its number one performing sector perch), I remain very much a bull.

Speaking of the mixed data, here are a few snippets from last week's log:

MORTGAGE PURCHASE APPS continue to show strength, up 5.0% last week. Once again supporting my optimism for homebuilders/housing-related stocks going forward.

THE FHFA HOUSE PRICE INDEX shows prices rising .7% in February. And 5.4% year-over-year. One major complaint of late over housing is lack of inventory... a problem that should be alleviated largely by higher pricing...

EXISTING HOME SALES IN MARCH jumped 6.1% to a 5.19 million (or 10.4%) annual rate. This would be the best reading, in terms of the number, since September 2013. In percentage terms, it's the best reading since December 2010. The year-over-year rise in the median price of a single family home is up 7.8%, which is the best reading since last February.

As I've suggested of late, higher pricing should bring more inventory to market, which appeared to occur in March for existing homes (2.0 million vs 1.9 million in February). That said, inventories remain historically tight (when we consider how many months at present pace of sales it would take to sell every existing home currently for sale), at 4.6 months.

NEW HOME SALES came in surprisingly weak in March, at 481k versus 539k prior and a consensus estimate of 518k. This of course does not support my optimism for the sector going forward. Despite today's number, and last week's below-expectations starts and permits, what I'm seeing in supporting stats (homebuilder confidence, demographics, household formations, interest rates, a very tight rental environment, not to mention valuations [specifically the PEG ratios]---in the aggregate---for the companies comprising the homebuilder index ETF we use) keeps me bullish on the sector.

XLK (TECH):  +4.73%

Technology stocks are attractively valued in my view. The index I track sports a lower P/E than that of the S&P 500, with an expected earnings growth rate that's 10% higher. Plus, tech is a winner when companies invest (which they're in a position to), and the big tech names are very multi-national in terms of where they do their business. Hence, as other economies begin to catch up to the U.S., and as the dollar calms down,  good things may be in store for tech stock investors.

XLE (ENERGY):  +4.26%

If you had told me a month ago that last week would mark the 14th straight for crude oil inventory gains---on top of a supply number penetrating an 80-year high---that the S&P Energy Index would be up  over 4% on the year, I would've probably said "you could be right", but I sure wouldn't have bet on it.

In fact, despite the amazing freefall of oil prices, and energy stocks, leading up to the recent rally, energy is highlighted bright red on my valuation sheet. That's because earnings expectations for many of these companies have plummeted even further than have their share prices. Despite my skepticism over the recent bounce in oil, and oil companies' share prices (i.e., I'm not yet a believer), I'm not counting out energy as a viable long-term hold going forward. Therefore, while I'm not presently a buyer, I'm not a seller either...

XLB (MATERIALS):  +3.85%

Thanks to a rising dollar and a slowing China—and no doubt a few other things—commodities/materials have not been the place to be thus far in 2015. That said, after a decent run of late, the materials sector—as represented here by XLB (which is heavily weighted to chemical companies)—has done okay on a year-to-date basis. My general optimism over the economy, and housing construction, going forward bodes well for the sector.

XLP (CONS STAPLES):  +2.06%

Consumer staples sit with healthcare as a place people's money frequents even when it's in short supply. I.e., when folks are not inclined to buy cars and computers, Kraft still sells truckloads of mac n' cheese.  For defensive reasons, our typical client portfolio has roughly 10% exposure to staples, despite it showing up red (expensive) on my valuation spreadsheet. We'll likely go there in a much bigger way when the next economic contraction is threatening.

XLI (INDUSTRIALS):  -0.01%

The multinational nature of the major industrial players (and, therefore, their sensitivity to currency fluctuations), an overall decline in government investment (think aerospace and defense), the thus far absence of major capital investment on the part of businesses, and the year-to-date weak performance of the transportation sector have served to hold the industrials at bay so far this year.

In that the above, save perhaps for government spending, are cyclical affairs, there's a decent chance that ultimately the industrial sector will gain some traction. And, as the highlight implies, they're relatively attractive at these levels.

XLF (FINANCIALS):  -1.46%

Financials look compelling to me going forward. Particularly if the inevitable rise in interest rates coincides with a continued expansion. In such a scenario, borrowers are aplenty (recall my optimism over housing), and banks enjoy a higher net interest margin. Plus, I have to believe that the worst of the litigation risk is behind them.

IYT (TRANSPORTATION):  -2.80%

If I had to pick just one U.S. sector to buy at this moment, transportation would be it. While you might have guessed homebuilders, which would definitely be in the running, I'd have to go with transportation due to---by my calculations---its really cheap valuation.

So why, amid cheap valuations, a growing economy and lower energy prices, is the sector down on the year? That would be partly due to underperforming railroads suffering from less business from the energy sector and less cross international border traffic stemming from a rising dollar. Add mixed results from the airlines and UPS's Q4 miss and spotty outlook, taking Fedex with it, and you have the recipe for lower share prices in the transportation sector.

Assuming the economy remains in expansion mode going forward, and energy prices don't regain their pre-crash level anytime soon, the attractive valuation of the transportation space makes it a must have in a diversified portfolio.

XLU (UTILITIES):  -3.64%

If I had to pick one sector to avoid at all costs, at this moment, utilities would be it. After last year's amazing run, they are crazy-expensive by my calculations and are the definition of interest rate sensitive. So much so that I won't even go there as a just-in-case defensive play (they are akin to healthcare and staples in that regard) at this juncture.

Other U.S. indices/sectors on my valuation sheet that I don't report to you on weekly are: The Russell 2000, Telecom Services and REITS.

To put the above commentary in proper context, PLEASE READ THE FOLLOWING on volatility and market timing that I posted back in February:

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 1.91%. Which is up from last week's 1.87%. As you'll see below, last week was, on balance, another less than inspiring one  in terms of U.S. economic indicators. Despite the apparent weakness, yields backed up a bit. While the 10-year treasury has moved in a fairly tight range of late, the bias in the bond market may be starting to trend toward higher inflation going forward.

Like I said last month , I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk---and I'm sticking firmly to that story.

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

APRIL 20, 2015

THE CHICAGO FED NAT'L ACTIVITY INDEX confirms that the first quarter was quite weak for the U.S. economy. Here's Econoday:

March was not a good month for the economy, an assessment confirmed by the national activity index which fell steeply to minus 0.42 vs an already weak and downwardly revised minus 0.18 in February. And the first quarter as a whole was also weak, reflected in the 3-month average which came in at minus 0.27.

The production component, also at minus 0.27, pulled down the index the most in March followed by personal consumption & housing at minus 0.13. Employment also pulled down the index, at minus 0.3 for a big swing downward vs February's plus 0.11. The only component in positive ground in March, and only barely, was sales/orders/inventories at only plus 0.01.

APRIL 21, 2015

THE JOHNSON REDBOOK RETAIL REPORT FOR LAST WEEK, due to Easter falling in early April, should be disregarded. The year-over-year comparison, given that Easter occurred in late April last year, is greatly distorted... Retail sales are expected to return to their 3%+ rate once the distortion passes.

APRIL 22, 2015

MORTGAGE PURCHASE APPS continue to show strength, up 5.0% last week. Once again supporting my optimism for homebuilders/housing-related stocks going forward.

THE FHFA HOUSE PRICE INDEX shows prices rising .7% in February. And 5.4% year-over-year. One major complaint of late over housing has been a lack of inventory... a problem that should be alleviated largely by higher pricing...

EXISTING HOME SALES IN MARCH jumped 6.1% to a 5.19 million (or 10.4%) annual rate. This would be the best reading, in terms of the number, since September 2013. In percentage terms, it's the best reading since December 2010. The year-over-year rise in the median price of a single family home is up 7.8%, which is the best reading since last February.

As I've suggested of late, higher pricing should bring more inventory to market, which appeared to occur in March for existing homes (2.0 million vs 1.9 million in February). That said, inventories remain historically tight (when we consider how many months at present pace of sales it would take to sell every existing home currently for sale), at 4.6 months.

THE EIA PETROLEUM STATUS REPORT showed crude inventories rising by a very large 5.3 million barrels last week. I find it a bit intriguing (but not necessarily bewildering) that oil prices have rallied of late against 14 straight weeks of inventory builds adding to an 80-year high. Clearly, traders see the massive cut in U.S. rig counts, among other things, ultimately leading to production cuts sufficient to turn the supply/demand tide. Ultimately, that makes sense, but for now the producers aren't missing a beat. I'm not at all convinced, just yet, that oil has found its bottom. GASOLINE INVENTORIES fell 2.1 million barrels and DISTILLATES rose .4 million.

APRIL 23, 2015

WEEKLY JOBLESS CLAIMS continue to paint a positive picture of the jobs market. Below 300,000 is, historically-speaking, solidly in expansion-mode. Last week's number was 295,000. The 4-week average---a better metric in that it smooths out the bumps---is currently 284,500. Continuing claims, always reported with a 1-week lag, were 2.325 million, with a 4-week average of 2.309 million. The unemployment rate for insured workers remains at a 15-year low of 1.7%.

MARKIT'S FLASH PMI INDEX FOR APRIL paints the same (of late) discouraging story for manufacturing. While above 54.2 is solidly in expansion territory (above 50), the trend has been on the decline. What is on the rise, and very importantly I might add, is the employment component---which speaks favorably about confidence in the sector going forward.

THE BLOOMBERG CONSUMER COMFORT INDEX shows folks losing a bit of their optimism---declining for a second straight week. Although I should add that that's coming off of a nearly 8-year high. Here's the release:

Consumer Comfort in U.S. Falls for Second Week on Finances View

By Nina Glinski

(Bloomberg) -- Consumer confidence retreated for a second week after reaching an almost eight-year high as lower- and middle-income Americans’ views of their financial well-being dimmed.

The Bloomberg Consumer Comfort Index fell to a five-week low of 45.4 in the period ended April 19 from 46.6. Sentiment of those earning less than $50,000 a year was the weakest in almost two months, while those at the highest end of the income scale were the most upbeat since August 2007.

“Heightened economic disparity may be related to countervailing trends,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement. A well-performing stock market is boosting spirits of higher income households, while “lagging wage growth combined with disproportionate low-wage job creation” limits sentiment among lower-income individuals, Langer said.

The employment picture softened somewhat in March with payrolls advancing the least since 2013 as businesses in energy-producing states cut back. Average hourly earnings rose 2.1 percent from the same month last year, in line with the pace since the end of the recession in 2009.

Even with last week’s decline, the sentiment gauge remains well above last year’s average of 36.7, which was the best since 2007.

The measure of personal finances fell to a six-week low of 56 from 58.4. A gauge of the buying climate, showing whether this is a good time to purchase goods and services, decreased to 42.5 from 43.7 the prior week, while the index of views on the state of the economy were little changed.

Income Groups

Workers earning between $15,000 and $25,000 a year saw the biggest decline in comfort last week, dropping 5.6 points to 25.7, the lowest level since December. The measure for individuals earning $100,000 or more rose for the sixth straight week.

Benchmark stock indexes hovering near records are boosting the financial picture for households with investment portfolios, which are typically those at the upper end of the income scale

Home prices also advanced more than forecast in February, increasing homeowners’ net worth. Prices climbed 0.7 percent on a seasonally adjusted basis from January, the Federal Housing Finance Agency said in a report Wednesday.

NEW HOME SALES came in surprisingly weak in March, at 481k versus 539k prior and a consensus estimate of 518k. This of course does not support my optimism for the sector going forward. Despite today's number, and last week's below-expectations starts and permits, what I'm seeing in supporting stats (homebuilder confidence, demographics, household formations, interest rates, a very tight rental environment, not to mention valuations [specifically the PEG ratios]---in the aggregate---for the companies comprising the homebuilder index ETF we use) keeps me bullish on the sector. Econoday does a good job summing up the results:

One day up, one day down is a fit description for recent housing data. Last week's declines in housing starts & permits were a surprising blow to the outlook, reversed in part by yesterday's very strong report on existing home sales. But today it's bad news again as new home sales fell a very steep 11.4 percent to a 481,000 annual rate.

The bulk of the decline came in the largest region, the South, where sales fell 15.8 percent. The drop here does follow a 9.3 percent gain in the prior month but the latest result is not good news for the region's builders. Also contributing to the decline was the Northeast, but sales in this region are very small, as well as the West, a much larger region where sales were down 3.4 percent. Sales in the Midwest rose 5.9 percent in the month.

More new homes actually came onto the market in March, up 4,000 to 213,000 nationwide, but supply relative to sales rose sharply because of the drop in sales, to 5.3 months from 4.6 months. This reading, however, is still pretty thin and won't scale back builder plans.

Softness in sales is confirmed by price data where the median price fell 1.5 percent to $277,400. Year-on-year, the median price is down 1.7 percent while sales are up 19.4 percent, a discrepancy that points to price discounting by builders.

It's difficult to draw firm conclusions from this report because of the sample size which is often small and therefore increases volatility in the readings. But today's report echoes last week's housing starts & permits data and points to stubborn weakness in the new homes market.

NAT GAS INVENTORIES rose 90 billion cubic feet last week to 1,629.

THE FED BALANCE SHEET rose $4.3 billion last week to $4.49 trillion. RESERVE BANK CREDIT decreased by $1.4 billion.

M2 MONEY SUPPLY declined by $40.6 billion last week, after rising $78.9 billion the week prior.

APRIL 24, 2015

THE ADVANCE REPORT ON DURABLE GOODS FOR MARCH, at first blush, looked pretty good, up 4%. Strip away transportation, however, and the report looks pretty bad, -.2%. Given recent poor productivity reports I'm looking intently at capital goods orders and expectations. Both of which do not look promising going forward.. Of course, the prospects for capex in the energy sector are abysmal, which is no doubt impacting the data...

Weekly Update (audio version)

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Your Weekly Update

"Nobody expects that there will be a solution" said Wolfgang Shauble, Germany's finance minister/senior Eurozone policy maker, in reference to a meeting next week with the Greeks.

“We never had an advanced economy actually asking for that kind of thing, delayed payment” said International Monetary Fund's managing director Christine Lagarde on Thursday in reference to Greece's obligations. She added, “And I very much hope that this is not the case with Greece. I would certainly, for myself, not support it.”

"The surge recently has been a little too fast for the regulators' comfort" said Hah Hong, Bocom International Holdings' chief China strategist on Friday, in reference to the Chinese stock market---particularly the stocks that comprise the Shanghai Composite Index.

"The underlying tone in the economy and the strengthening labor markets are giving you a little bit more core inflation" said Alliance Bernstein's director of global economic research Joe Carson about Friday's release of the March U.S. Consumer Price Index.

So there you have it, the recipe, we'll suppose, for a sizable one-day sell off in global equities (that would be last Friday).

Allow me to shed a little light on the looming darkness conjured up by each of the above threats:

Greece: It's crunch time, once again, for Greece. Crunch time is when he with the upper hand has a green light to bluff away. Why would one with the upper hand need to bluff? you ask. Good question. It's---in this particular poker game---because he desperately needs his opponent to fold, rather than call. For should his opponent throw in even his very last chip---and, thus, call---while our protagonist still wins, he fears his victory will be most Pyrrhic in nature. Meaning, if Greece doesn't surrender to its keepers' demands and, thus, defaults on its debt and leaves the Euro, suffice it to say that Friday's global market sell-off equates to a mere pittance of a pot. And, make no mistake, you don't want to be on either side of the publicly-appointed table when markets plunge and your nascent economic recovery potentially dies an early death.

While Greece may indeed leave the Euro (which is, in my view, likely the best longer-term scenario), I say the political risk remains too great on either side of the table, and odds are, therefore, that the can gets kicked---and the pot grows larger.

As for the markets' Friday slide: The Eurozone is the world's largest trading block, and Euro/U.S. dollar (EUR/USD) is the world's most actively traded currency pair. I.e., the Eurozone economy is finally beginning to lift off the runway and the U.S. market is in no mood these days for the dollar to go spiking ever higher. Although the consensus clearly has it continuing to appreciate going forward.

China: A 104% twelve-month return (the Shanghai index) can be a scary thing. Especially when the last few dozen percentage points have occurred while margin debt (borrowing against your equity positions to buy more equities) has literally exploded to the upside. So, the powers that be in China saw fit to put a halt to a particularly creative form of taking your margin debt beyond typical limits and, in addition, to widen the scope of opportunities for short-sellers (those who bet on a stock's decline) to have their way with shares they view as overpriced.

The inevitable out-sized drop that'll occur when Asian markets open for business a few hours from now will have been entirely by design. Better to let a little air out of the bubble now versus risking a huge explosion later, thinks China's policy makers.

As for the markets' Friday slide: China is the world's second largest economy, and is a monster driver of global economic growth. Need I say more?

U.S. Inflation: I spoke too soon on Friday morning's audio when I said that March's Consumer Price Index (CPI) came in relatively tame. That was the way I heard it on early morning financial radio. Upon inspection, I don't quite agree with the radio pundit's analysis. Sure, when we consider inflation with energy included, well, there ain't none. Oh but when we remove energy (which---understandably---everyone is so eager to do when energy prices are pushing the headline number higher), suddenly we see a rising inflationary trend. February's year-over-year reading was 1.7%. March's was 1.8%. Month-over-month we've seen two in a row with a .2% increase (do the math). Here's something I wrote in a February update (I'll highlight the part that's particularly pertinent to today's point):

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

So here's the thing, energy prices are still low and wages are just now beginning to grow. And we're getting a CPI read that is a mere .2% under the Fed's target. Uh oh!

As for the markets' Friday slide: An acceleration of U.S. inflation could raise the near-term odds of a Fed rate hike exponentially. That first hike, I'm guessing, will---as market action would suggest---spell a bit of trouble for stocks.

Now, I need to dial that back just a bit and acknowledge that the CPI is not the Fed's favored inflation indicator. They prefer the PCE (Personal Consumption Expenditures) Deflator. Personal Consumption Expenditures, which, rather than measuring a fixed basket of goods and services (as does the CPI), takes into account where folks actually spend their money. For example, when New York steak jumps in price, lots of folks forego it and buy less expensive cuts instead. The CPI method would factor in the rising price of New York steak, even though lots of folks aren't feeling that pinch. I agree with the Fed, the PCE Deflator better measures the impact of inflation on the consumer---and its last read, ex-energy, was a comfortable 1.4% year-over-year.

So what's the verdict? Well, presenting a verdict, would be akin to predicting where the market goes in the short-run. And that I do not do! However, I will offer up what I believe to be the likeliest near-term scenarios---as long as you promise not to trade on them:

The Eurozone recovery continues and Greece gets more time. And Eurozone stocks experience lots of volatility while outperforming much of the rest of the developed world this year.

The Chinese central bank efforts mightily to stimulate its way to at least 7% annual growth, and its market does not crash and burn in 2015.

The U.S. survives a rough Q1, and growth accelerates throughout the remainder of the year. The Fed ever so gingerly bumps up its key rate sometime in the fall and markets hate it (could spark a long-overdue 10+% correction) initially. However, in the absence of a recession, no great bear market materializes as a result.

Could I be wrong in suggesting there'll be no U.S. recession in 2015? Could the next great bear market be lurking round the very next bend? Absolutely! Should it matter if you're a long-term, patient investor with a well-balanced/diversified portfolio who's never prone to panic? Absolutely not!

From here we'll jump straight to the markets, followed by the U.S. highlights from my economic journal. This week's highlights effectively cover the other U.S.-centric current themes.

The Stock Market:

Non-US markets have measurably outperformed the U.S. year-to-date. Don't be surprised if that remains the story throughout most of the year. That said, there are a number of potential international hot buttons that could easily delay the narrowing of the gap between the valuations of U.S. and non-U.S. securities. That's why we think long-term and stay diversified!

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:  +0.67%

S&P 500:  +1.67%

NASDAQ Comp:  +4.53%

EFA (Europe, Australia and Far East):  +8.43%

FEZ (Eurozone):  +5.52%

VWO (Emerging Markets):  +8.94%

Sector ETFs:

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

IYH (HEATHCARE):  +8.19%

XLY (DISCRETIONARY):  +4.62%

XHB (HOMEBUILDERS):  +4.48%

XLB (MATERIALS):  +2.52%

XLP (CONS STAPLES):  +1.79%

XLK (TECH):  +0.70%

XLE (ENERGY):  +4.17%

XLI (INDUSTRIALS):  -0.93%

XLF (FINANCIALS):  -2.07%

IYT (TRANSP):  -5.37%

XLU (UTILITIES):  -5.88%

Once again, the reminder on volatility I posted earlier in the year:

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 1.87%. Which is down noticeably from last week's 1.95%. As you'll see below, last week was, on balance, not a great week in terms of U.S. economic indicators---hence the drop in yields. Like I said three weekends ago, I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk---and I'm sticking firmly to that story.

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

APRIL 13, 2015

THE TREASURY BUDGET came in with a deficit of $52.9 billion in March... The 2015 deficit is, thus far, running at a higher clip than 2014. Here's Econoday's summary (note the increase in tax receipts, which is an economically bullish sign):

The government's deficit came in at $52.9 billion in March, up from $36.9 billion last March. Six months into fiscal 2015, the government's deficit is up 6.3 percent from last year to $439.5 billion. Helping the balance so far this year are receipts, up 7.3 percent year-to-date and reflecting strong tax receipts where gains reflect economic strength. The downward pull is on the spending side, which is up 7.3 percent including an outsized 9.4 percent increase in Medicare spending tied to Obamacare that offsets a 3.0 percent decline in defense spending. But the government's deficit, though large, is not a factor right now in the economic outlook.

APRIL 14, 2015

PPI FOR FINAL DEMAND shows inflation at the producer level remaining very low. Up .2% in March, meeting expectations. Year-over-year, PPI-FD ex-food and energy increased by .9%.

THE CENSUS BUREAU'S RETAIL SALES number ended three straight months of declines, with a .9% increase---slightly below the consensus estimate of 1.0%... Year-over-year, retail sales grew 1.3%... While not crazy-robust, retail sales reflect improving economic prospects and sentiment on behalf of the consumer.

THE JOHNSON REDBOOK RETAIL REPORT came in low last week, at a 1.1% year-over-year rate. Here's Econoday explaining it away based on Easter's timing this year:

In an Easter comparison distortion, year-on-year same-store sales were up only 1.1 percent in the April 11 week. The rate reflects the timing of this year's Easter which fell two weeks earlier than last year. Month-over-month, Redbook is forecasting a 0.2 percent gain which is an early hint of strength for the May retail sales report. Today's April retail sales report, released earlier this morning, shows wide strength.

THE NFIB SMALL BUSINESS OPTIMISM FOR MARCH was essentially the icing on the cake of an economically rough Q1. Falling 2.8 points from February's encouraging 98. The report's first paragraph pretty much sums it up:

The Small Business Optimism Index fell 2.8 points to 95.2, declining in sympathy with the rather weak stream of reports on the economy. Bad weather was certainly depressing, for both shoppers and the construction industry. All 10 Index components declined, contributing to the 31 point decline in net positive responses. The only good news is that the 10 Index components didn’t fall further, not much to hang on to. Consumer spending has not shown much strength and the saving rate has increased. Not a recession scenario overall for sure, but there is not much growth energy in the economy, especially with the energy boom deflating a bit.

I, personally, disagree with the sentiment of that last sentence. The "deflating" of the energy boom is actually a boon to the U.S. consumer at large, and, thus, the U.S. economy...

BUSINESS INVENTORIES didn't exceed sales growth in February, which is a good thing. However, the inventory-to-sales ratio remains at a high 1.36. Which doesn't speak optimistically about production in the near-term. While inventory growth reflects positively on GDP, it does not inspire companies to expand or hire (unless it's due to increased optimism), and I suspect it's a contributing factor to March's weak employment number.

APRIL 15, 2015

MORTGAGE PURCHASE APPS broke their three-week winning streak last week with a 2.3% decline. The weekly read is historically volatile.... when we look at year-over-year results purchase apps are up 7%... Here's Econoday:

After three straight weeks of impressive gains, the purchase index slipped back 3.0 percent in the April 10 week. Year-on-year, the index is still up a solid 7.0 percent in a reading that points to strength for the spring housing market. The refinance index fell for a second week, down 2 percent. Rates are very low with the average 30-year fixed-rate mortgage for conforming loans ($417,000 or less) at 3.87 percent, up 1 basis point in the week.

THE EMPIRE STATE MANUFACUTURING SURVEY, at first blush, shows continued weakness among NY manufacturers---which has been pretty much the state of manufacturing throughout the country of late. However, when we explore inside the report, we see some positive signals. Per the following from the report:

The April 2015 Empire State Manufacturing Survey indicates that business activity was flat for New York manufacturers. The headline general business conditions index turned slightly negative for the first time since December, falling eight points to -1.2. The new orders index, negative for a second consecutive month, dropped four points to -6.0—evidence that orders were declining. The shipments index climbed to 15.2, indicating that shipments expanded at a solid pace. Labor market indicators pointed to an increase in employment levels but a somewhat shorter workweek. Input price increases picked up, with the prices paid index rising seven points to 19.2, while the prices received index fell four points to 4.3. The future general business conditions index climbed for a second consecutive month, suggesting greater optimism among manufacturers than in February and March, and the capital spending and technology spending indexes also advanced.

INDUSTRIAL PRODUCTION fell in March, by .6%. Yet another sign of weakness in the US manufacturing sector. As the below excerpt from the report suggests, the decline in oil and gas drilling, plus lower output from the utility sector, as March begins its thaw, contributed measurably to the result:

Industrial production decreased 0.6 percent in March after increasing 0.1 percent in February. For the first quarter of 2015 as a whole, industrial production declined at an annual rate of 1.0 percent, the first quarterly decrease since the second quarter of 2009. The decline last quarter resulted from a drop in oil and gas well drilling and servicing of more than 60 percent at an annual rate and from a decrease in manufacturing production of 1.2 percent. In March, manufacturing output moved up 0.1 percent for its first monthly gain since November; however, factory output in January is now estimated to have fallen 0.6 percent, about twice the size of the previously reported decline. The index for mining decreased 0.7 percent in March. The output of utilities fell 5.9 percent to largely reverse a similarly sized increase in February, which was related to unseasonably cold temperatures. At 105.2 percent of its 2007 average, total industrial production in March was 2.0 percent above its level of a year earlier.

CAPACITY UTILIZATION declined to 78.4 from 79.0 in February... No reason here for the Fed to worry too much about inflation...

THE ATLANTA FED BUSINESS INFLATION EXPECTATIONS SURVEY shows inflation predictions unchanged at 1.7%.

THE NAHB HOUSING MARKET INDEX shows optimism remains on the rise among the nation's home builders. Which affirms my continued optimism for the sector going forward. Here's from the release:

April 15, 2015 - Builder confidence in the market for newly built, single-family homes in April rose four points to a level of 56 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today.

“As the spring buying season gets underway, home builders are confident that current low interest rates and continued job growth will draw consumers to the market,” said NAHB Chairman Tom Woods, a home builder from Blue Springs, Mo. 

“The HMI component index measuring future sales expectations rose five points in April to its highest level of the year,” said NAHB Chief Economist David Crowe. “This uptick shows builders are feeling optimistic that the housing market will continue to strengthen throughout 2015.”

All three HMI components registered gains in April. The component charting sales expectations in the next six months jumped five points to 64, the index measuring buyer traffic increased four points to 41, and the component gauging current sales conditions rose three points to 61.

THE EIA PETROLEUM STATUS REPORT shows another build, although in much smaller quantity than recent weeks, in crude inventories---up 1.3 million barrels. Which takes total inventories to a fresh 80-year high. The fact that refineries are past their maintenance and turnover season I'm sure is no small factor in the number---as they're now operating at 92.3% of capacity. The price has been rising of late against fundamentals that continue to deteriorate---at an albeit slower pace. Clearly speculators are betting the bottom's in... I like the bounce in our portfolios' energy exposure, and while there's no question a bottom, and I suspect a bounce, in price is out there, I remain somewhat skeptical that we're there just yet. Gasoline inventories dropped by 2.1 million barrels, while distillates increased by 2 million.

THE FED BEIGE BOOK reported generally moderately improving conditions overall. Service industries, in particular, saw rising activity and expect good growth going forward---across the twelve districts. Housing activity was a noted positive as well...

TREASURY INTERNATIONAL CAPITAL for February shows decent foreign demand for U.S. corporate bonds and agency bonds, modest demand for U.S. equities and net selling of treasuries (interesting). Net foreign long-term transactions inflow to the U.S. was $9.8 billion, after seeing net outflows of $27.4 billion (revised up from -$27.2b) in January.

APRIL 16, 2015

HOUSING STARTS rebounded 2% in March after plunging 15% in frigid February. However, the 926k number was below the 1.04 million estimate. And down 2.5% on a year-ago basis. PERMITS were up 2.9% versus a year ago, however, the 1.039 million was below the forecast of 1.085 million. These data do not support my recent optimism over the housing market. Although I remain bullish as, while not yet robust, we are seeing measurable improvements in the sector. Yesterday's homebuilder's optimism index agrees with my position...

WEEKLY JOBLESS CLAIMS are trending in a range that is solidly in line with past expansions... Coming in at 294k last week, with the 4-week average little changed at 282,750...

THE BLOOMBERG CONSUMER COMFORT INDEX shows consumer optimism cooling a bit last week. Coming off of an 8-year high the previous week... 46.6 vs 47.9... Here's from the release:

Consumer Comfort in U.S. Cools From Highest Level Since 2007

By Shobhana Chandra

(Bloomberg) -- Consumer confidence cooled last week from an almost eight-year high as Americans took a less favorable view of their finances and the economy amid smaller gains in hiring.

The Bloomberg Consumer Comfort Index fell to 46.6 in the period ended April 12, from the prior week’s 47.9 reading that was the strongest since May 2007. The economic expectations gauge for April declined for a second month.

The comfort measure “hit a fresh pothole on its road to recovery,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement. Recent “economic news is mixed, with weaker-than-expected job growth and payroll increases in March, but gains that have put the stock markets back near record highs.”

Hiring advanced in March by the least since December 2013 as businesses aligned headcounts with slower growth that reflects the strong dollar’s hit to exports and manufacturing, and a pullback in energy-related capital investment due to lower oil prices. Even so, stock-market gains and strong sentiment will sustain consumer spending, the biggest part of the economy.

The comfort index’s outlook gauge for April fell to 50, a five-month low, from 51.5. The share of households saying the economy is improving held at 30 percent and equaled the fraction believing its weakening.

The Bloomberg weekly comfort gauge remains well above last year’s average of 36.7, which was the best since 2007.

Among its three components, the measure of personal finances fell to 58.4 last week from 60.5. The index of Americans’ views on the state of the economy dropped to 37.7 from 39.5. A gauge of the buying climate, showing whether this is a good time to purchase goods and services, was little changed at 43.7 compared with 43.8 the prior week.

Income Disparity

Moods improved for Americans at the top of the wage scale and worsened for those at the bottom. The comfort gauge for workers earning $100,000 or more climbed to 71.9, its second-highest level since August 2007. For the under $50,000 category, it fell to 34.5 last week from 36.1. The 37.4-point gap is the second-biggest between the groups so far this year.

“Economic disparity is one of the challenges facing consumer sentiment,” Langer said in the statement.

Even as hiring cooled in March, sustained improvement in the labor market is allowing consumers to keep up their spending, which accounts for about 70 percent of the economy. While payrolls rose by a less-than-forecast 126,000 workers last month, the advance followed a 12-month streak of increases exceeding 200,000.

Stock Prices

Household finances are also getting help from gains in share prices as some corporate earnings come in better than anticipated and investors bet the Federal Reserve will be in no rush to begin raising interest rates. The Standard & Poor’s 500 Index is hovering around a record.

THE PHILADELPHIA FED MANUFACTURING INDEX gained over March, 7.5 vs 5. Here's the report's opening paragraph:

Manufacturing activity in the region increased modestly in April, according to firms responding to this month’s Manufacturing Business Outlook Survey. Indicators for general activity and new orders were positive but remained at low readings. Firms reported overall declines in shipments this month, but employment and work hours increased at the reporting firms. Firms reported continued price reductions in April, with indicators for prices of inputs and the firms’ own products remaining negative. The survey’s indicators of future activity suggest a continuation of modest growth in the manufacturing sector over the next six months.

NAT GAS INVENTORIES grew by 63 billion cubic feet last week to 1,539 bcf.

THE FED BALANCE SHEET grew last week by $1.9 billion to $4.485 trillion. RESERVE BANK CREDIT grew by $4.4 billion...

APRIL 17, 2015

THE CONSUMER PRICE INDEX for March came in at a minus .1% year-over-year rate. A reading that, on its face, would chill the argument of those who fear the Fed, in not raising interest rates, soon risks falling behind the inflation curve. When we take out food and energy, however, the so-called "core" reading jumps to 1.8% year-over-year. Month-over-month, both headline and core CPI grew by .2%. While the ex-energy reading shouldn't provoke panic, when we consider the flow through effect of energy prices to other industries, the 1.8% looks concerning to me when we consider what begins to happen once oil find its bottom---not to mention, and very importantly, what happens as wages pick up steam...

REAL AVERAGE HOURLY EARNINGS (growth in earnings minus inflation) grew by .1% (.3% increase minus .2% CPI) from February to March. However, when we factor in a .3% decrease in the average workweek, we get an average weekly earnings decrease of .2%. Year-over-year, real average hourly, and weekly, earnings grew by 2.2%. I believe that, as the labor market continues to tighten (which I expect on a trend basis going forward), we'll see this number rise noticeably later in 2015.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INCOME FOR APRIL came in very strong, at 95.9, up from 93.0 in March. Here's from Econoday's commentary:

Consumer sentiment remains very strong, at 95.9 for the mid-month April reading vs a final March reading of 93.0 and well up from 91.2 at mid-month March. The index hit an 8-year high of 98.1 in January.

A solid gain in the current conditions component to 108.2 vs a final March reading of 105.0 hints at strength this month for consumer activity, perhaps even for retail sales. The expectations component is at 88.0, up from 85.3 and pointing to rising confidence in the jobs outlook.

THE CONFERENCE BOARD LEADING ECONOMIC INDEX shows continued growth in the U.S. economy, however, at a slowing pace. Clearly, Q1 was rough. While the CB economist quoted below suggests that the slowing growth rate of the past few months suggests weaker growth ahead, I see the Q1 headwinds of weather, port strikes and maybe the impact of a rapidly rising dollar all abating. I'm expecting to see U.S. growth ramp back up as we move ahead. Here's from the press release:

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.2 percent in March to 121.4 (2010 = 100), following a 0.1 percent increase in February, and a 0.2 percent increase in January.

“Although the leading economic index still points to a moderate expansion in economic activity, its slowing growth rate over recent months suggests weaker growth may be ahead,” said Ataman Ozyildirim, Economist at The Conference Board. “Building permits was the weakest component this month, but average working hours and manufacturing new orders have also slowed the LEI’s growth over the last six months.”

The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.1 percent in March to 112.0 (2010 = 100), following a 0.2 percent increase in February, and a 0.2 percent increase in January.

The Conference Board Lagging Economic Index®(LAG) for the U.S. increased 0.4 percent in March to 116.2 (2010 = 100), following a 0.3 percent increase in February, and a 0.3 percent increase in January.

Market Commentary (audio)

Click the play button for today's commentary:

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20150417-073719.mp4"][/video]

Your Weekly Update

While rough weather, a spiking U.S. dollar and port closures no doubt did a number on first quarter GDP, not to mention corporate earnings, I strongly suspect that nicer weather, port reopenings and lower energy prices will result in quite the rebound in the second quarter and beyond.

This week’s economic releases were, on balance, positive. Particularly when it comes to what matters most in the U.S.—the consumer, whose spending activities account for two-thirds of the GDP calculation, and the services sector, which accounts for 80+ percent of the economy and provides 80+ percent of all employment.

Yes, I’m very bullish on the U.S. economy, near-term (beyond Q1′s results of course). But while I wouldn’t say that I’m necessarily bearish, I’m not so sure the near-term picture is all that rosy for the U.S. stock market.

Confused? Since the economy ultimately drives earnings, how is it that one who’s “very bullish” on near-term economic prospects isn’t feeling the same with regard to near-term stock market prospects?

Well, for starters, I can indeed make a near-term bullish case for the U.S. market, which I may as well do now:

My bullish near-term case for stocks would be that the estimates for Q1 corporate earnings have been so underwhelming that companies are likely to beat them to a greater extent than the market is currently discounting. That the sectors that benefit most from lower energy prices, such as retail and transportation---and the beleaguered financial sector, whose earnings are expected to show impressively in Q1 against stock prices that are in the red year-to-date---may pull the rest of the market back into record territory when earnings season is all said and done. Plus---speaking very near-term---April has historically been the very best month of the year for the stock market.

Okay, so here's why I'm not-so-sure about the U.S. market, near-term:

For starters, "not so sure", means how it sounds---I don't have a strong bearish commitment. So, let's go with "cautious".

My cautious near-term case for the U.S. market comes from the understanding that stock prices anticipate the future. And the fact that the S&P 500 is currently trading at a price-to-(2015) earnings ratio that---should inflation peek its tiny head above the surface and bond investors leave the very crowded room---would be somewhat rich in my view. Particularly when recent reads on corporate productivity are going in the wrong direction. I.e., labor costs are increasing faster than output. Which---unless companies raise their prices (inflation), or find ways to become more productive (capital investment)---means reduced profit margins: Not a good thing should we have to discount future cash flows with higher interest rates to determine where stocks are valued.

Of course there are myriad more cases, positive (I can make a strong case that capital investment is poised to pick up [which is a longer-term positive], for example) and negative, to be made for the market's prospects, but there's lots more I want to share this week. So we'll leave this short-term prognosticating on this all-important (so much so that I'll bold it) note:

The wonderful news is that you and I are long-term investors. Right? (say "yes!"), which makes virtually everything I just typed utterly mute. I'm simply attempting to shape your perspective as 2015 unfolds and remind you of who you are (a long-term investor. Right? Say "yes!").

Current Themes:

The Fed:

The minutes from last month's Fed meeting were released this week and, in my view, barring economic deterioration beyond Q1---which, per the above, I'm not anticipating---it's clear that the board's intent is to bump up the fed funds rate sometime this year. In last week's update I linked to another commentary where I made the case that the market may greet the beginning of the "normalization" process unwelcomely.

That said, the Fed's plan is to signal and soften it like of a son-of-a-gun---so as to mitigate any potential negative market reaction. And they just may pull it off---but I'm skeptical.

Read last week's comments on the Fed for more...

Oil:

$49.14 was the price of a barrel of West Texas Intermediate Crude (WTI) as I typed last week's update. At this moment it sits at $51.77. Comments out of Iran, a declining U.S. rig count and a huge inventory build, among other things, made for an extremely volatile week in the oil market. At one point WTI was pushing $54 a barrel.

Here are my comments from this week's economic log:

THE EIA PETROLEUM STATUS REPORT continues to bolster my pessimism over the price of oil, having surged by another 10.9 million barrels last week. Inventories remain at an 80-year high. This phenomenon will eventually come to an end as cutbacks in production will ultimately provide a floor for the price. The timing, however, is difficult to call. While some credible experts see the bottom forming this quarter, others point to coming increased production out of the gulf of Mexico, more potentially from Libya, and the prospects for a nuclear arms deal with Iran that would allow the country to export in much freer fashion than it can currently, as perpetuating the downward pressure on the price. The futures curve shows WTI in barely the mid-50s by year-end.

The Consumer:

The consumer is a huge bright spot for economic prospects going forward! Last week's Bloomberg Consumer Comfort Index hit a nearly 8-year high. Respondents expressed optimism over the current state of the economy, the buying climate and their personal finances (see the April 7 notes below).

Retail sales continue to improve. Here's from this week's log:

THE JOHNSON REDBOOK RETAIL REPORT continues to confirm my optimism over consumer activity in 2015, up 3.4% year-over-year---firmly in expansion mode. The month-over-month increase came in at a very strong 1.3%. I believe that's the fourth consecutive week of 1%+ montly gains.  My optimism aside, we must keep in mind that this year's early Easter probably bolstered this number.

I remain optimistic on housing. Here's from the log:

MORTGAGE PURCHASE APPS continue to bolster my enthusiasm over the housing sector, having surged for a 3rd straight week, up 7%. Up 12% year-over-year.

Last week's employment stats came in mixed. Which was to be expected given what we're seeing coming out of Q1.

Europe:

As I've charted for you the past couple of weeks, the Eurozone economy's recent performance strongly confirms the optimism I hold for the region---which I began expressing late last year. This week's indicators---from Spanish unemployment, to the Purchasing Managers Indices, to German factory orders---all imply that the Eurozone is, for now, moving in the right direction.

In terms of the Eurozone as an investment destination, it's in a vastly different near-term position than is the U.S.: While the U.S. Central Bank is trying to figure out how to begin withdrawing stimulus without upsetting the applecart, the European Central Bank is stimulating like mad. While U.S. companies, in the aggregate, are sporting record profit margins, Eurozone companies, in the aggregate, are not even halfway there. While the U.S. economy has been in, albeit tepidly, expansion mode for several years, the Eurozone economy is just now appearing to find its legs. And while the U.S. stock market has, in my view, largely discounted an improving economy, the Eurozone market is just beginning to believe.

China:

Last week I suggested that Chinese authorities are in no mood to miss their 7% growth objective for this year.

Here's from this morning's Bloomberg China update:

China Premier Li Urges Acceleration of Railway Spending

 (Bloomberg) -- China must enhance railway construction in central and western part of its country to help economic growth, Chinese Premier Li Keqiang says.

• Reiterates target of spending 800b yuan on railway infrastructure in 2015, goal of putting at least 8,000 kms new railways into use this year


• All government departments must support railway construction


• Greater efforts must be made to attract private capital for railway investment

The Stock Market:

Note that while the U.S. (the Dow and S&P that is) is finally inching into the black, non-U.S. markets have delivered strong year-to-date results. As I've preached for years, emerging markets hold the greatest growth potential, however, we go somewhat lightly for most clients due to the extreme volatility inherent in developing economies. Two weeks ago VWO (our proxy ETF for emerging markets) was barely positive on the year, by .33%. As of yesterday it was up 9.42%---that's what I'm talking about in terms of both growth prospects and volatility.

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:  +1.95%

S&P 500:  +2.69%

NASDAQ Comp:  +5.89%

EFA (Europe, Australia and Far East):  +8.91%

FEZ (Eurozone):  +7.64%

VWO (Emerging Markets):  +9.42%

Sector ETFs:

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

IYH (HEATHCARE):  +9.34%

XHB (HOMEBUILDERS):  +7.10%

XLY (DISCRETIONARY):  +6.62%

XLP (CONS STAPLES):  +2.91%

XLB (MATERIALS):  +2.69%

XLK (TECH):  +2.18%

XLE (ENERGY):  +1.92%

XLI (INDUSTRIALS):  +1.15%

XLF (FINANCIALS):  -1.62%

IYT (TRANSP):  -3.96%

XLU (UTILITIES):  -4.68%

Once again, here's the reminder on volatility I posted earlier in the year:

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%. Which is up noticeably from last week's 1.84%. As I stated week before last , I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk.

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

APRIL 6, 2015

MARKIT SERVICES PMI came in at a strong 59.2, the highest reading since August 2014. Markit's respondents have been more upbeat than comparable surveys from other firms. THE COMPOSITE PMI posted a strong 59.2 as well... Despite the strong reading and what it portends for Q2, confidence going forward waned a bit. Per Markit's senior economist's commentary:

" The lastest survey highlights a strong underlying pace of US economic growth moving into the second quarter of 2015. New business trends across the service sector have picked up especially sharply from the lows seen earlier in the year, and job hiring has strengthened as a result.

However, service providers' business confidence dipped in March and remained well below the peaks recorded in 2014, weighted down in part by the prospect of a Fed rate rise later this year. Meanwhile, subdued input price pressures were reported in March, although the overall rate of cost inflation has ticked up slightly from a recent five-year low."

THE FED LABOR MARKET CONDITIONS INDEX, which is derived from 19 indicators, which is heavily weighted to the unemployment rate and private payrolls, weakened in March, to -.3. No doubt March's surprisingly weak jobs number measurably impacted the index.

THE CONFERENCE BOARD EMPLOYMENT TRENDS INDEX softened a bit in March, but remains 5.6% higher year-over-year. Here's the CB's director of labor market research:

“The growth in the Employment Trends Index slowed down in the first quarter of 2015,” said Gad Levanon, Managing Director of Macroeconomic and Labor Market Research at The Conference Board. “The combination of the disappointing March employment report and the recent weakness in the ETI suggests that the likelihood of a slowdown in employment has increased. Even so, it is unlikely that job growth in the second quarter would fall much below the trend of 200,000 jobs per month.”

THE ISM NON-MANUFACTURING INDEX came in just under February's reading, 56.9 vs. 56.4 (flat, essentially). Overall, the report shows continued strength in the service sector going forward (at an albeit slower pace, on balance)---with the business activity component declining vs. Febraury's results (57.5 vs 59.4), the employment component came in basically flat relative to February (56.6 vs. 56.4) and the new orders component showed a better month-over-month number (57.8 vs. 56.7). Here's from the report, note the optimism in the respondents' commentary:

"The NMI® registered 56.5 percent in March, 0.4 percentage point lower than the February reading of 56.9 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 57.5 percent, which is 1.9 percentage points lower than the February reading of 59.4 percent, reflecting growth for the 68th consecutive month at a slower rate. The New Orders Index registered 57.8 percent, 1.1 percentage points higher than the reading of 56.7 percent registered in February. The Employment Index increased 0.2 percentage point to 56.6 percent from the February reading of 56.4 percent and indicates growth for the 13th consecutive month. The Prices Index increased 2.7 percentage points from the February reading of 49.7 percent to 52.4 percent, indicating prices increased in March after three consecutive months of decreasing. According to the NMI®, 14 non-manufacturing industries reported growth in March. The majority of respondents’ comments reflect stability and are mostly positive about business conditions and the overall economy."

INDUSTRY PERFORMANCE

The 14 non-manufacturing industries reporting growth in March — listed in order — are: Management of Companies & Support Services; Real Estate, Rental & Leasing; Accommodation & Food Services; Transportation & Warehousing; Agriculture, Forestry, Fishing & Hunting; Arts, Entertainment & Recreation; Retail Trade; Finance & Insurance; Public Administration; Information; Wholesale Trade; Professional, Scientific & Technical Services; Health Care & Social Assistance; and Construction. The four industries reporting contraction in March are: Mining; Educational Services; Other Services; and Utilities.

WHAT RESPONDENTS ARE SAYING ...

"Business remains strong this month." (Health Care & Social Assistance)

"Current business conditions are positive and the outlook for 2015 is on track this first quarter." (Finance & Insurance)

"See tremendous increase of business activities due to increase of capital investment, sales efforts and competition for human resources." (Professional, Scientific & Technical Services)

"Some increase in activity related to pre-construction season spending for budgeted capital projects." (Public Administration)

"Business slightly increasing year-over-year, but about the same as last month." (Retail Trade)

"Lower fuel prices improving overall profits, but do not appear to be lowering freight costs." (Transportation & Warehousing)

"Fuel costs continue to remain low; however, suppliers not willing to give back on fuel surcharges or to reduce fuel cost components of transportation." (Utilities)

"Overall business is continuing to expand for 2015." (Wholesale Trade)

APRIL 7, 2015

THE GALLUP ECONOMIC INDEX showed its first negative reading of 2015, -2 vs. 1 in February. Makes sense given Q1's struggles.

THE JOHNSON REDBOOK RETAIL REPORT continues to confirm my optimism over consumer activity in 2015, up 3.4% year-over-year---firmly in expansion mode. The month-over-month increase came in at a very strong 1.3%. I believe that's the fourth consecutive week of 1%+ monthly gains.  My optimism aside, we must keep in mind that this year's early Easter probably bolstered this number.

THE JOLTS (JOB OPENINGS AND LABOR TURNOVER) REPORT showed little change from January, with 5.133 million openings vs. 4.998 million in January... The number of hires, separations and the all-important quits (higher when the economy's growing, in that it denotes optimism that one can find a better job elsewhere) rate all came in very close to January's number.

CONSUMER CREDIT grew by $15.5 billion in February. Which, on its face, suggests confidence on the part of the consumer going forward. However, when we look below the surface we find a $3.7 billion decline in revolving credit (as a financial planner I like that, although [short-term] that's negative as a barometer of consumer confidence). The non-revolving component, rising $19.2 billion, is bullish when we're talking auto loans, but not so much when we're talking student loans (the number reflected increases in both).

THE IBD (INVESTORS BUSINESS DAILY)/TIPP (TIPPONLINE) US CONSUMER CONFIDENCE INDEX jumped notably in March, 51.3 vs. 49.1 in February (over 50 denotes optimism)... The survey points to a stark contrast among the states, with respondents from the heavy oil producing states not feeling so great right about now, vs. those in other states who are benefiting measurably from lower energy prices.

APRIL 8, 2015

MORTGAGE PURCHASE APPS continue to bolster my enthusiasm over the housing sector, having surged for a 3rd straight week, up 7%. Up 12% year-over-year. Refinances, however, declined 3% last week, after having increased nicely the two prior weeks...

THE EIA PETROLEUM STATUS REPORT continues to bolster my pessimism over the price of oil, having surged by another 10.9 million barrels last week. Inventories remain at an 80-year high. This phenomenon will eventually come to an end as cutbacks in production will ultimately provide a floor for the price. The timing, however, is difficult to call. While some credible experts see the bottom forming this quarter, others point to coming increased production out of the gulf of Mexico, more potentially from Libya, and the prospects for a nuclear arms deal with Iran that would allow the country to export in much freer fashion than it can currently, as perpetuating the downward pressure on the price. The futures curve shows WTI in barely the mid-50s by year-end. Gasoline inventories rose by .8 mbs adn distillates declined by .3 mbs.

APRIL 9, 2014

THE BLOOMBERG CONSUMER COMFORT INDEX jumped again last week---to a nearly 8-year high. Respondents expressed optimism over the current state of the economy, the buying climate and their personal finances. Here's the release:

Consumer Comfort in U.S. Climbs to Highest Level Since May 2007

By Victoria Stilwell

(Bloomberg) -- Consumer confidence increased last week to an almost eight-year high as Americans viewed the U.S. economy in a more favorable light and said it was better time to spend.

The Bloomberg Consumer Comfort Index climbed to 47.9 in the period ended April 5, the highest level since May 2007, from 46.2. A measure of buying conditions was the strongest since November 2006, while attitudes about the economy were the brightest in nine weeks.

The pickup in confidence could signal a rebound in demand, fueling an economy that softened in recent months under the strain of harsh winter weather, a strengthening dollar and tepid global growth.

Persistent job-market progress and faster wage gains will help to further boost sentiment and spending, which accounts for 70 percent of the economy.

The sentiment index’s “advance is buttressed by other recent indicators, including strong car sales, rising mortgage applications, gains in new- and existing-home sales and a five-month high in manufacturing, even as March jobs data disappointed,” said Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement.

The increase in the comfort index from a week earlier was the biggest since the end of January. The gauge remains well above last year’s average of 36.7, which was the best since 2007.

The measure of Americans’ views on the current state of the economy climbed to 39.5 last week from 37.1 in the prior period, the report showed Thursday. The buying climate gauge, which measures whether now is a good time to purchase goods and services, advanced to 43.8 from 41.3.

Personal Finances

The index of personal finances rose to 60.5, the second-highest level since October 2007, from 60.1.

A strong trend in job growth has probably helped lift sentiment. While March payrolls growth was the weakest since December 2013, employment gains have averaged 260,670 a month for the past year, according to Labor Department data.

Wage growth may also be showing some signs of life. Average hourly earnings climbed 0.3 percent in March from the month before, compared with a 0.1 percent February gain.

Sentiment last week climbed in six of seven income brackets led by households making $100,000 or more, whose confidence soared to the second-highest level since August 2007. Those making $25,000 to $40,000 were the only households to experience a drop in sentiment.

On a regional basis, confidence improved in all areas except the Midwest. In the South, sentiment was the strongest since September 2007.

WEEKLY JOBLESS CLAIMS rose last week, to 281k vs 268k the week prior. However, sub 300,000 is a very strong indicator of labor market strength. The 4-week average is 3k lower to 282.2k. Continuing claims, which are reported on a one-week lag, dropped 23k to 2.304 million, which is a new post recession low. The 4-week average for continuing claims was down 27k to 2.361 million. The unemployment rate for insured workers remains at a recovery low of 1.7%.

WHOLESALE INVENTORIES are a troubling sign, as they've remained relatively high for two straight months. In February, inventories rose .3% against a sales decline of .2%. The wholesale inventory to sales ratio sits at 1.29, which is the highest post-recession reading. January's number was revised upward by .1%, while sales were revised lower by .5%. January sales of course reflected plunging oil prices. February, however, saw bigger declines in electrical goods, machinery and metals, all pointing to softness in the manufacturing sector, which I suspect is related to lower exports as a consequence of the rapid pace in which the dollar has advanced.

NAT GAS INVENTORIES rose by 15 billion cubic feet last week, to 1,476 bcf...

APRIL 10, 2015

IMPORT AND EXPORT PRICES in March should embolden those who think it unwise for the Fed to raise interest rates anytime soon. That is, if inflation is the deciding factor... On a year-over-year basis, import prices were down 10.5% and export prices were down 6.7%... Month-on-month, imports were down .3% while exports were up .1%...