Friday, April 3, 2015

Your Weekly Update

Current Themes:

The Fed:

Barring a surprise, and persistent, deterioration in the macro economic data---beyond what looks to be a weak first quarter---the Fed has signaled that this will be the year they start "normalizing" interest rates. As I've shared with you, and charted, it's my view that---contrary to what many of the pundits seem to expect---U.S. stocks may not take this one in stride, despite what will surely be Janet Yellen's efforts to soothe the market with talk of moderation, patience and measuredness.

And, frankly, I hope I'm right. I hope the Fed can indeed inspire what would be a sorely overdue 10 to 20% correction. Seriously, what better a time for the market to catch its breath than when the economy is showing virtually no signs of the stress typically associated with cycle tops (as bear markets [20%+ declines with legs] are generally things of recessions), and when valuations for many sectors are looking a bit stretched: My U.S. sector valuation chart features substantially more red (denotes high relative valuations) than it did a year ago.

I penned the above two paragraphs Thursday evening. It's now Friday morning and we just got the March employment report, which showed 126,000 new jobs created. That's a shockingly low number, given that the consensus estimate among economists was nearly twice that amount. You'd think the March and February data had been somehow reversed. The February report (originally reporting 295k [now revised to 264k]), with its terrible weather, was supposed to come in below trend (although still better than 126k), which would have set up a nice rebound in a more temperate March. Go figure!

The market's reaction will be interesting to see. If March's employment report is not considered a temporary counter-trend setback, which I'm guessing it is (like I said above "looks to be a weak first quarter"), and viewed as a signal of something more pernicious, traders will expect the Fed to back off on its campaign to prepare the market for 2015 rate hikes. Which could maybe result in a rally. However, if the immediate reaction in the futures pit says anything---Dow down 165---there'll be an initial sell off.

The latter would be the healthier, and more legitimate, reaction in my view.


$48.87 was the price of a barrel of West Texas Intermediate Crude (WTI) as I typed last week's update. It sits at $49.14 at the moment. It was trading above $50 just before Thursday's news alert that there'd be a forthcoming announcement regarding the outcome of negotiations over Iran's nuclear ambitions. Traders then bid down the price in anticipation that a deal had been struck that would ultimately result in Iran bringing yet more oil supply to the world market. And that was essentially the gist of the announcement, as long as certain conditions are met. "Ultimately" would be the operative word here.

In the meantime, oil inventories keep on building---by 4.8 million barrels last week. Stockpiles remain at a startling 80-year high, despite the slashing of the U.S. rig count. I've maintained for weeks that the fundamentals are offering virtually no hope for a sustainable price rebound anytime soon. And while "anytime soon", depending on how you define it, may yet be an accurate assessment of when oil prices will not bottom, something occurred last week that could give one pause---American production declined for the first time since January, to the tune of .4%, or 36,000 barrels per day. This could be a sign of the inevitable---a leveling off of production resulting from the plunge in price. But I'm not ready to hold my breath, or grab more energy exposure, just yet...

The Consumer:

Despite the rough go the market experienced last week, this week's Bloomberg Consumer Comfort Survey posted its second highest reading since July 2007. Respondents' optimistic views of the buying climate and their personal finances drove this week's impressive result.

Retail sales continue to improve: This week's Johnson Redbook Report showed sales increasing at a 3.0% year-over-year clip, and at a very strong 1.2% month-over-month.

Pending home sales for February were released this week and, supporting my optimism on housing, blew away expectations with a 3.1% month-over-month increase. Year-over-year, pending sales were up a whopping 12%. Here's the National Association of Realtors chief economist on February's numbers:
“Pending sales showed solid gains last month, driven by a steadily-improving labor market, mortgage rates hovering around 4 percent and the likelihood of more renters looking to hedge against increasing rents,” he said. “These factors bode well for the prospect of an uptick in sales in coming months. However, the underlying obstacle – especially for first-time buyers – continues to be the depressed level of homes available for sale.”

With regard to his concern over the dearth in inventory, the Case-Shiller Home Price Index holds the key---showing a .9% month-over-month increase in home prices in February. I.e., higher prices will inspire home builders and existing home owners to bring inventory to market.

And to top it (the housing data) off, new purchase mortgage apps posted a second week of strong growth, up 6%.

Auto sales jumped in March, up 6.2% to 17.2 million.

Given recent indicators---and the fact that consumer spending is two-thirds of GDP---please feel free to feel good about the prospects for the U.S. economy going forward.


As you know, I've been bullish on Eurozone stocks since late last year. And when I make my case to clients, every now and again I get a little pushback: "what about Greece?" "what about Russia?" "what about etcetera, etcetera?". My answer: Were it not for Greece, Russia, etcetera and etcetera, we probably wouldn't be having this conversation. Were it not for the uncertainty, surely, Eurozone stocks would be trading closer to where their fundamentals would otherwise suggest. Which, in my view, would be higher than where they trade today---despite their year-to-date impressive performance.

Bottom line: Things are starting to look up in the Eurozone. Here's a chart (click to enlarge) to sum up last week's three. This is Citigroup's Economic Surprise Index - Eurozone, which tracks economic data relative to market expectations.

Eurozone Economic Surprise Index


The Chinese Central Bank forced the spotlight onto itself early this week when its governor called for vigilance against the threat of deflation. You see, China set itself a growth target of 7% for 2015, and based on Q1 data, it looks to be already missing the mark. Its efforts to become a consumer-driven---as opposed to a primarily export-driven---economy notwithstanding, I believe the powers that be are in no mood to withstand missing their growth projection.

On Monday, Chinese authorities lowered the minimum down payment on second homes to 40% (from 60%) and waived the business tax on the resale of property after two years---this follows two interest rate cuts since last November. Monday saw a big rally in global equities on the news.

The U.S. Dollar:

Manufacturers are set to report some pretty poor Q1 earnings results. And, make no mistake, the strong U.S. dollar (hitting exports) will receive the brunt of the blame. Although I suspect that rough winter weather and port strikes will share the blame-stage as well.

I believe, for now, that I've beaten this topic into submission. You can click here for my recent analysis of the dollar's present trend and what it portends for the markets and the economy.

The Stock Market:

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

Dow Jones Industrials:  +0.27%

S&P 500:  +0.92%

NASDAQ Comp:  +3.57%

EFA (Europe, Australia and Far East):  +7.15%

FEZ (Eurozone):  +7.47%

VWO (Emerging Markets):  +5.28%

Sector ETFs:

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


IYH (HEATHCARE):  +6.22%



XLB (MATERIALS):  +1.18%

XLK (TECH):  +0.46%


XLE (ENERGY):  -1.16%


IYT (TRANSP):  -5.70%

XLU (UTILITIES):  -4.92%

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:

As I type, the yield on the 10-year treasury bond is plunging---down to 1.84% from 1.91% last evening. That would be on today's jobs number. As I stated last week, I see bonds in general sporting a risk/return tradeoff that makes going out on the yield curve not worth the risk.

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

MARCH 30, 2015

CORE PCE PRICE INDEX came in at 1.4% on a year-over-year basis in February... Versus 1.3% in January. This is the Fed's preferred measure of inflation, which for now remains well below their 2% target...

PERSONAL INCOME in February rose .4% on a month-over-month basis. Which matches January, and .1% ahead of the consensus expectation.

PERSONAL CONSUMPTION in February declined .1% month-over-month. This supports the consensus opinion that Q1 GDP will come in on the soft side, relative to initial expectations.

PENDING HOME SALES came in way above expectations in February, +3.1%, vs .4% estimated. This is yet another indicator that supports my recent optimism on the housing sector. Here's the National Association of Realtors chief economist:
 “Pending sales showed solid gains last month, driven by a steadily-improving labor market, mortgage rates hovering around 4 percent and the likelihood of more renters looking to hedge against increasing rents,” he said. “These factors bode well for the prospect of an uptick in sales in coming months. However, the underlying obstacle – especially for first-time buyers – continues to be the depressed level of homes available for sale.”

As I continue to state, higher prices---which we're now seeing---are the cure for low inventory.

THE DALLAS FED'S MANUFACTURING ACTIVITY INDEX for March shows Texas manufacturing activity slowing for a third consecutive month, and at an accelerated pace. The number came in at -17.4 vs. -9.5 forecast. Interestingly, the index for future manufacturing activity improved markedly, posting double-digit gains versus February's reading.

It'll be interesting to see how the Dallas Fed Service Index reports for March. In contrast to February's weak manufacturing reading, the services sector showed solid growth.

MARCH 31, 2015

THE JOHNSON REDBOOK RETAIL REPORT continues to show strength... up 3.0% last week, on a year-over-year basis. Up a very strong 1.2% week over week....

THE CASE-SHILLER HOME PRICE INDEX continues to show prices rising... up .9% month-over-month. However, somewhat soft, 4.6%, year-over-year. As I suspected going into the year, the housing sector looks to be gaining steam.

THE CHICAGO PMI REPORT confirms other weak regional reads on manufacturing, coming in at 46.3 for March... although this report covers both the manufacturing and non-manufacturing sectors. It'll be interesting to see how these reports trend the remainder of 2015....

THE CONFERENCE BOARD'S CONSUMER CONFIDENCE INDEX jumped to a strong 101.3 in March. The expectations component---on optimism over jobs and income---drove the index with a 4-year high reading.

THE STATE STREET INVESTOR CONFIDENCE INDEX shows institutional investors feeling very good about the prospects for North America. However, less so on Europe and Asia --- citing Greece and slow growth in China...

THE DALLAS FED SERVICE SECTOR ACTIVITY REPORT shows activity expanding, although at a lower than recent pace. With the general business activity index declining into negative territory, -4.6. The outlook index came in neutral.

APRIL 1, 2015

MOTOR VEHICLE SALES gained nicely in March, up 6.2% to 17.2 million... for the best number since last November. This along with other recent data shows the consumer may finally be in a spending mood.

MORTGAGE APPLICATIONS are yet another sign that the housing market is really picking up... new purchase apps up 6.0% last week, which is a sharp increase for the second consecutive week. Refinances were up 4.0%.

THE ADP EMPLOYMENT REPORT came in below expectations in March, at 189,000. While the ADP number does not always track well with the BLS's # (this Friday), 189k is plenty to continue to put downward pressure on the unemployment rate...

THE MARKIT MANUFACTURING PMI INDEX FOR MARCH conflicts with the regional reads, showing pretty robust results, at 55.7. Here's from the report:
March data pointed to a positive month for U.S. manufacturing business conditions, with momentum building again after a slowdown at the turn of the year. This was highlighted by stronger rates of output and new business growth, alongside sustained job creation during the latest survey period. New export sales remained a source of weakness in March, partly reflecting the stronger exchange rate. Meanwhile, input costs decreased for the third month running, which led to the weakest rise in factory gate charges since May 2014.

At 55.7 in March, up from 55.1 in February, the seasonally adjusted final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered above the 50.0 no-change threshold, thereby signalling an overall upturn in business conditions. The latest survey indicated a robust and accelerated expansion of manufacturing production levels. Anecdotal evidence cited stronger inflows of new business and improving domestic economic conditions. That said, the overall rate of output growth remained slower than the peaks seen last summer.

THE ISM MANUFACTURING INDEX FOR MARCH is more in line (than Markit's) with what we've seen from other surveys in March... coming in at 51.5, down from 52.9 in February and missing the 52.5 consensus estimate. Here's Econoday's summary:
Weak exports are pulling down ISM's manufacturing sample whose index fell 1.4 points to 51.5. This is below what was a soft consensus forecast of 52.5 and is the lowest reading since May 2013.

New orders fell 7 tenths to 51.8 for its lowest reading since April 2013. New export orders are in contraction for a 3rd straight month, down 1.0 point to 47.5 for their lowest reading since November 2012.

There was no net hiring in ISM's sample during March with the employment index at 50.0 which is the lowest reading since May 2013. Prices paid, at 39.0, remains in contraction for a 5th straight month.

This report points to another month of trouble for government data on manufacturing, a sector that, due to weak foreign demand, appears to be pulling down the nation's growth.

CONSTRUCTION SPENDING, in my view, was disrupted by February's weather, declining 1.1%, versus a consensus estimate of +.2%... Feb's decrease was led by public outlays which dropped .8%. Private nonresidential construction actually rose a nice .5%, while residential spending dropped .2%... I look for a rebound, particularly in residential in the spring...

THE EIA PETROLEUM STATUS REPORT shows inventories of crude growing another 4.8 million barrels last week---still at an 80-year high... Gasoline inventories declined by 4.3 mbs and distillates grew by 1.3 mbs...

APRIL 2, 2015

THE CHALLENGER JOB-CUT REPORT showed the layoff count easing to 36,594 from 50,000 in February. Healthcare and telecom were where the majority occurred.

THE TRADE DEFICIT came in surprisingly low, relative to expectations, in February---at -$35.4 billion. Exports fell by 1.6%, while imports declined 4.4%. I suspect that the stronger dollar, making imports cheaper (meaning we very well may have imported just as much stuff in terms of units, but at substantially lower prices due to the strengthening dollar) had something to do with the results. Although the strong dollar's contribution to the results will surely be expressed in the media as being the driver of the lower export number.

WEEKLY JOBLESS CLAIMS declined sharply last week, to 268k. The 4-week moving average now sits at 285,000. This speaks volumes about the growing strength of the U.S. economy---despite the expectations of a slower-moving first quarter.

BLOOMBERG'S CONSUMER COMFORT INDEX posted its second highest reading since July 2007. Here's the release:
Consumer Comfort in U.S. Climbs to Second-Highest Since 2007

By Nina Glinski

(Bloomberg) -- Consumer confidence rose for a third straight week, capping the best quarter in almost eight years as greater purchasing power boosted Americans’ views of their finances and buying climate.

The Bloomberg Consumer Comfort Index climbed to 46.2 in the week ended March 29, its second-highest reading since July 2007, from 45.5 the prior week. The index averaged 44.7 in the first quarter, its best performance since the second quarter of 2007.

Americans may be more inclined to spend as a stronger dollar makes imported merchandise cheaper and low gasoline prices lifts discretionary income. Better employment opportunities, buying conditions and attitudes about household finances lay the groundwork for a pickup in consumer spending, which makes up about 70 percent of the U.S. economy.

Among the three components that make up the Bloomberg comfort index, the gauge of Americans’ views of the buying climate increased by 1.5 points to 41.3 last week, the highest since March 2007.

The reading for personal finances climbed to 60.1, the second-highest since October 2007, from 58.9. The sentiment gauge about the state of the economy cooled to a three-week low of 37.1 from 37.7.

Confidence among seniors increased to the highest level since July 2007, while the outlook among the 18-to-34 year-old cohort rose to an 11-week high. It gained among all other age groups except those 45 to 54 years old.

Income Brackets

Sentiment among wage earners making $25,000 to $40,000 was the strongest since November 2006.

Confidence was also higher among those with incomes greater than $50,000.

Renters were more optimistic last week than at any time since August 2007. Republicans were the most upbeat since April 2008, narrowing the gap with Democratic voters to the smallest since late January.

FACTORY ORDERS finally, after six straight declines, picked up a little steam in February, rising .2%.

NAT GAS INVENTORIES declined last week by 18 billion cubic feet, to 1,46 1 bcf.

THE FED BALANCE SHEET grew by $1.2 billion this week... Totalling $4.482 trillion...

M2 MONEY SUPPLY grew by $3.1 billion last week...

APRIL 3, 2015

THE BLS EMPLOYMENT SITUATIONS REPORT came in shockingly below expectations, at 126k. This one will confuse the markets as---other than an expectedly weak Q1---if flies in the face of what the overall data suggests, and calls into question the next Fed move. Here's from the report:
Total nonfarm payroll employment increased in March (+126,000). Over the prior 12 months,
employment growth had averaged 269,000 per month. In March, employment continued to trend
up in professional and business services, health care, and retail trade, while employment
in mining declined. (See table B-1.)

Employment in professional and business services trended up in March (+40,000). Job
growth in the first quarter of 2015 averaged 34,000 per month in this industry, below
the average monthly gain of 59,000 in 2014. Within professional and business services,
employment continued to trend up in architectural and engineering services (+4,000),
computer systems design and related services (+4,000), and management and technical
consulting services (+4,000).

Health care continued to add jobs in March (+22,000). Over the year, health care has
added 363,000 jobs. In March, job gains occurred in ambulatory health care services
(+19,000) and hospitals (+8,000), while nursing care facilities lost jobs (-6,000).

In March, employment in retail trade continued to trend up (+26,000), in line with its
prior 12-month average gain. Within retail trade, general merchandise stores added
11,000 jobs in March.

Employment in mining declined by 11,000 in March. The industry has lost 30,000 jobs thus
far in 2015, after adding 41,000 jobs in 2014. The employment declines in the first
quarter of 2015, as well as the gains in 2014, were concentrated in support activities
for mining, which includes support for oil and gas extraction.

Employment in food services and drinking places changed little in March (+9,000),
following a large increase in the prior month (+66,000). Job growth in the first
quarter of 2015 averaged 33,000 per month, the same as the average monthly gain
in 2014.

Employment in other major industries, including construction, manufacturing, wholesale
trade, transportation and warehousing, information, financial activities, and government,
showed little change over the month.

1 comment: