Sunday, May 17, 2015

Your Weekly Update

If a company's share price is a reflection of its future earnings, and dividends, potential, a thoughtful investor would assess the business environment in which the company in question presently finds itself. Thoughtful investors, like you and me, who find solace  in diversifying away the risk that one company's unanticipated poor management decisions might detrimentally impact our long-term investment success, consider the  macroeconomic environment when assessing our portfolios' near-term prospects.

So then, with the major U.S. averages hitting all-time highs (although that's just a shade above where they started the year), we must surmise that the macro environment is quite robust, wouldn't ya think? Well, if you've been reading my weekly economic highlights for the U.S., while you may be generally optimistic, robust would not be how you'd describe the present macro environment---last week's highlights below being no exception.

So what gives? How does the market maintain such historically high levels amid such tentative economic results? Allow me to pose two possibilities:

1. Investors, by my definition (long-term buyers of companies they believe in), are not the drivers of short-term market moves. Those (the drivers) would be traders (short-term buyers and sellers of the companies' stocks they believe will move massively over short periods of time). And traders are presently fixated on the Fed. Thus, when the economy is showing nary a sign of robust growth, traders bid prices up on the prospects for the Fed moving out that fateful day when they begin inching up the overnight lending rate.  I.e., ultra-low interest rates are generally good news for stocks and, therefore, blah news is good news---at least in the short run.

2. Investors, experienced ones, are indeed in control of the trend, and investors know that bull markets tend to top amid mass euphoria---and, therefore, a lack of liquidity. And given that euphoria is anything but justified---and, indeed, is not the prevailing sentiment---as the economy meanders its way around the runway, investors are comfortable holding their ground, and buying the dips, as traders fuss and fret over every published data point and whisper from the mouths of the members of the Federal Open Market Committee (FOMC).
"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria" Sir John Templeton.

In both scenarios, I presume, blah news is good news.

All that said, make no mistake, the Fed is chomping at the bit to get the Fed funds rate off of the zero lower bound. And while I subscribe to Mr. Templeton's edict , lived it even, I'm thinking it's time the economy leave the runway and take wing, for in my view the Fed has waited (to tighten policy) far too long into the profit cycle this go round. Meaning, while I suspect the next true bear market will come, as have its predecessors, with the next recession---and there's little recession risk showing up in today's indicators---without a pickup in top line (revenue) growth, pushing upward on earnings, rising interest rates will make today's fully-priced (in my view) market an overpriced market in need of a healthy correction. Which, frankly, wouldn't be all that bad right about now.

Stay tuned...

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---given many foreign markets' cheaper valuations, early-stage recoveries and, yes, accommodative central banks. 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 (according to Bloomberg) for the major U.S. indices, non-U.S. indices and U.S. sectors---using index ETFs as our non-U.S. and sector proxies:

Dow Jones Industrials:  +3.48%

S&P 500:  +3.89%

NASDAQ Comp:  +7.14%

EFA (Europe, Australia and Far East):  +12.46%

FEZ (Eurozone):  +10.27%

VWO (Emerging Markets):  +9.94%

Sector ETFs:

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

IYH (HEATHCARE):  +9.35%

XLY (DISCRETIONARY):  +6.51%

XLB (MATERIALS):  +6.43%

XHB (HOMEBUILDERS):  +5.48%

XLK (TECH):  +5.17%

XLP (CONS STAPLES):  +3.22%

XLE (ENERGY):  +2.18%

XLI (INDUSTRIALS):  +1.40%

XLF (FINANCIALS):  +.25%

IYT (TRANSP):  -4.85%

XLU (UTILITIES):  -6.63%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.14%. Right where it sat a week ago today.

TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price decline another 0.75%  last week (off 6.91% over the past month).  As I keep repeating, I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk.

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.

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

MAY 11, 2015

THE CONFERENCE BOARD EMPLOYMENT TRENDS INDEX for April improved to 128.22, from 127.15 in March. The year-over-year gain is 5.8%. Here's from the release:
April’s increase in the ETI was driven by positive contributions from seven of the eight components. In order from the largest positive contributor to the smallest, these were: Percentage of Firms with Positions Not Able to Fill Right Now, Ratio of Involuntarily Part-time to All Part-time Workers, Real Manufacturing and Trade Sales, Number of Employees Hired by the Temporary-Help Industry, Initial Claims for Unemployment Insurance, Job Openings, and Industrial Production.

THE FED LABOR MARKET CONDITIONS INDEX (derived from 19 labor market indicators) for April, doesn't jibe with the Conference Boards Employment Trends Index, reading negative for the second straight month. A read below zero denotes deteriorating labor market activity, April's level was -1.9.

MAY 12, 2015

THE JOHNSON REDBOOK RETAIL SALES REPORT didn't explode out of this year's Easter timing distortion. Here's Econoday:
Retail sales picked up slightly in the May 9 week as Easter-effects finally fade, but at a year-on-year plus 2.1 percent sales remain soft. Redbook reports an as-expected Mother's Day holiday in the week and reports early buying for graduation. Tomorrow the government will post its April retail sales report which is expected to show a solid rate excluding autos.

THE NFIB SMALL BUSINESS OPTIMISM INDEX improved almost across the board in April. However, the underlying overall tone remains cautious. That is, if NFIB's chief economist's tone accurately reflects that of the survey's respondents. While Mr. Dunkleberg always makes good points, it's clear to me that his politics indeed cloud his perspective. While, clearly, based on the flow of April data, the economy is not exploding out of Q1, producer surveys from the services sector and small businesses are telling of a degree of optimism among major needle-movers that should translate to decent (but not recordbreaking) economic growth going forward. Here's some of that optimism from the report:
The Small Business Optimism Index increased 1.7 points from March to 96.9, this in spite of a quarter of virtually no economic growth. Unfortunately, the Index remained below the January reading. Nine of the 10 Index components gained, only real sales expectations were weaker. But this still leaves the Index below its historical average, oscillating between 95 and 98 but never breaking out except for December, when the Index just tipped past 100, only to fall again.

LABOR MARKETS

Small businesses posted another decent month of job creation. Those that hired were more aggressive than those reducing employment, producing an average increase of 0.14 workers per firm, continuing a string of solid readings for 2015. Fifty-three percent reported hiring or trying to hire (up 3 points), but 44 percent reported few or no qualified applicants for the positions they were trying to fill. Thirteen percent reported using temporary workers, up 3 points. Twenty-seven percent of all owners reported job openings they could not fill in the current period, up 3 points from March. A net 11 percent plan to create new jobs, up 1 point and a solid reading.

CAPITAL SPENDING

Sixty percent reported outlays, up 2 points in spite of the collapse of spending in energy and gas exploration. The percent of owners planning capital outlays in the next 3 to 6 months rose 2 points to 26 percent, not a strong reading historically but among the best in this expansion. Forty-four percent expected improved real sales volumes, 18 percent expected declines, leaving the net percent expecting higher real sales 3 points lower at a net 10 percent of all owners.

THE LABOR DEPT'S JOB OPENINGS AND LABOR TURNOVER SURVEY (JOLTS) showed softness in the labor market in March, as job openings fell 2.9% to 4.994 million, from February's 5.144 million. One brightspot in the report was the all-important quits rate, which rose .1% to 2.0%. Folks generally don't quit their job unless they are confident better prospects await.

MAY 13, 2015

NEW PURCHASE MORTGAGE APPLICATIONS declined 0.2% last week as the average 30-year rate jumped to 4.0%. Refinances continued their decline, plunging another 6%. 

IMPORT AND EXPORT PRICES for April give credence to those who argue that the Fed can sit tight amid an environment of low inflation. Here's Econoday:
There were some expectations for energy-related pressure to appear in today's import & export price report but the pressure is not enough to raise general prices. Import prices fell 0.3 percent in April which is well below the Econoday consensus for a 0.4 percent gain. Excluding petroleum products, where import prices jumped 1.0 percent in the month, prices are still in the negative column, at minus 0.4 percent.

Export prices, pulled down by a drop in prices for farm products, really fell in the month, down 0.7 percent vs the Econoday low-end estimate for minus 0.2 percent.

Year-on-year, import prices are down a very steep 10.7 percent with export prices down 6.3 percent. Oil may be bouncing back, but the effect so far on the price picture is limited, once again giving the edge, at least for now, to the doves at the Fed.

THE ATLANTA FED BUSINESS INFLATION EXPECTATIONS, as opposed to April's Import and Export Prices, should spark a little fear in the hearts of those who are betting the Fed will stay on hold into 2016. Emphasis on paragraph two of Econoday's highlight below:
Federal Reserve policy makers are focused on inflation expectations and whether they will begin to rise as the price of oil rises and as the economy bounces back from a slow first quarter. And there is a hint of pressure in today's Atlanta Fed business report where year-on-year inflation expectations, that is projected unit costs, are up 2 tenths this month to 1.9 percent from April's 1.7 percent. This is also 3 tenths higher than the current 1.6 percent year-on-year increase in costs.

And there's also a little hint of wage pressures with 67 percent of firms reporting increases underway for compensation costs, with 81 percent of this group saying they are passing costs, at least partially, along to customers. Other data include an uptick in sales and no change for profit margins since April.

RETAIL SALES, according to the U.S. Bureau of Census's Monthly Retail Survey, were unchanged in April. Sales were up slightly, excluding autos, but certainly nothing to write home about. In fact, the April results mark the lowest readings since late 2009. Clearly, April did not deliver the robust rebound many expected coming off of a weak Q1.

BUSINESS INVENTORIES came down just a bit in March. Bringing the inventory to sales ration down to 1.36 from 1.37. This is a ratio that reads high, relatively speaking. Clearly, the slow first quarter created an inventory overhang that doesn't bode all that well for second quarter growth.

CRUDE OIL INVENTORIES declined for the second straight week, by 2.2 million barrels. Still, inventories remain very high, just off an 80-year high. I remain unconvinced that, given the level of global production that continues, oil prices are yet off to the races. Seasonal factors may offer some support to the price going forward, but that'll simply inspire a reramping of capacity, which could easily see the price back to the sub-50s. Whether or not my presumption holds true this year, I do expect that when it's all said and done, the price will settle (for awhile) well above the $50 level. GASOLINE inventories were down 1.1 mbs and DISTILLATES were down 2.5 mbs last week.

MAY 14, 2015

WEEKLY JOBLESS CLAIMS continues to be a huge bright spot among recent economic indicators. Coming in last week at 264k, which marks the third week in a row in the 260k range, which marks a 15-year low. The 4-week average sits at a very low 271.75k. Continuing claims were unchanged, remaining at a 15-year low of 2.229 million. The 4-week continuing claims level made a new 15-year low at 2.26 million. While other recent data suggest that employers aren't hiring like mad, clearly, based on weekly jobless claims, they're hanging on to the employees they have.

THE PRODUCER PRICE INDEX FOR FINAL DEMAND shows inflation remaining subdued. Falling .4% in April.  Down 1.3% year-over-year.

NAT GAS INVENTORIES rose 111 billion cubic feet last week to 1.897 bcf.

THE FED BALANCE SHEET grew by $28.5 billion this week after increasing by $1.2 billion last week. Totaling $4.501 trillion. RESERVE BANK CREDIT increased by $6.3 billion after declining $11.3 billion last week.

M2 MONEY SUPPLY grew by $27.6 billion last week, after declining by $27.5 billion the week prior.

MAY 15, 2015

THE EMPIRE STATE MANUFACTURING SURVEY for May came in uninspiring, relative to expectations. Here's from the report (note the weak read on inflation):
The May 2015 Empire State Manufacturing Survey indicates that business conditions improved slightly for New York manufacturers. The headline general business conditions index climbed four points to 3.1. The new orders index rose ten points to 3.9, and the shipments index was little changed at 14.9. Labor market indicators pointed to a small increase in employment levels but a slight decline in the average workweek. The prices paid index fell ten points to 9.4, its lowest level in nearly three years, and the prices received index edged down to 1.0, indicating that selling prices were flat. The index for future general business conditions fell noticeably, reflecting a positive but less favorable outlook than in April.

INDUSTRIAL PRODUCTION has been essentially flat, as evidenced by April's report. I'm looking forward to the next anecdotal read on the services sector, which doesn't come until the Flash Services PMI report on May 27. Services sector actors have been noticeably more upbeat about their prospects going forward, it'll be interesting to see if that's held of late. CAPACITY UTILIZATION decreased to 78.2 in May. Fed worriers have got to be feeling pretty good about this week's data releases. Here's from the report:
Industrial production decreased 0.3 percent in April for its fifth consecutive monthly loss. Manufacturing output was unchanged in April after recording an upwardly revised gain of 0.3 percent in March. In April, the index for mining moved down 0.8 percent, its fourth consecutive monthly decrease; a sharp fall in oil and gas well drilling has more than accounted for the overall decline in mining this year. The output of utilities fell 1.3 percent in April. At 105.2 percent of its 2007 average, total industrial production in April was 1.9 percent above its year-earlier level. Capacity utilization for the industrial sector decreased 0.4 percentage point in April to 78.2 percent, a rate that is 1.9 percentage points below its long-run (1972–2014) average.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT for May is yet another indication that, despite paragraph 2 below, Fed worriers and contrarian investors who subscribe to the bull-markets-climb-a-wall-of-worry credo have little to worry about in the near-term. Here's from Econoday:
Consumer confidence had been holding, as the FOMC assured us just a couple of weeks ago, at high levels, but perhaps less so now with the consumer sentiment index at 88.6 which is nearly 5 points below Econoday's low-side forecast. Both components show weakness with current conditions down 7.2 points to 99.8 and expectations down 7.3 points to 81.5. These are the lowest readings since October and November of last year.

At the same time that confidence is going down, inflation expectations, reflecting rising gasoline prices, are going up. Expectations 1-year out are up 3 tenths to 2.9 percent while expectations 5-years out are up 2 tenths to 2.8 percent. Despite the turn higher, however, these are still low levels.

The drop in current conditions hints at softness in this month's jobs market while the drop in expectations is a downgrade for the outlook on jobs. The hawks at the Fed have been anticipating, perhaps over anticipating, that strong consumer confidence levels would eventually translate to gains for retail sales. Retail sales have been flat along and now consumer confidence, based at least on today's consumer sentiment report, is moving backwards. 

E-COMMERCE RETAIL SALES results continue to suggest that some of the sluggishness we're seeing in brick and mortar retail venues is in part due to more folks shopping online. Here's Econoday:
Growth in e-commerce sales picked up in the first quarter, to 3.5 percent vs a downward revised 1.8 percent in the fourth quarter. Year-on-year, e-commerce growth rose to 14.5 percent which is up 5 tenths from the fourth quarter but well down from the 15.6 and 15.0 percent rates of the two prior quarters. Despite the slowing trend, e-commerce as a percentage of total retail sales continues to climb to records, up a strong 4 tenths to 7.0 percent.

TREASURY INTERNATIONAL CAPITAL data for March showed foreigners heavily buying U.S. treasuries, particularly the Chinese. Hmm? Perhaps China is looking to boost its exports by propping up the dollar against the yuan... It'll be interesting to see this report for May, as, in the first half, treasuries were sold off notably---pushing yields to their year-to-date high.

Foreigners were net sellers of U.S. equities, while U.S. investors were heavy buyers of foreign equities.

 

 

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