Tuesday, June 30, 2015
Greece Update (audio)
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Market Commentary (audio)
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Monday, June 29, 2015
Market Commentary (audio)
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Sunday, June 28, 2015
Greece Update
In last weekend's commentary I suggested that neither side in the Greek saga had the political will to risk a crash. As of this moment, that opinion appears to be seriously in question.
Last night I wrote that the Greek government was either secretly hoping that---in the referendum scheduled for next Sunday---the Greek people vote to accept the latest round of creditor conditions (affording them political cover [or an opportunity to resign with dignity]) or, was hoping that they can convince their people to vote no, leaving the Eurozone authorities with the option of returning to the table with less onerous proposals.
Looking at the latest headline commentary coming from Eurozone officials (they're worried!), I can see where Tsipras (Greece's Prime Minister) may indeed be betting that a no vote could yield a much better deal for his country. So, therefore, it could very well be the latter. Although I am not entirely sure that, in the event of a thumbs down vote, the other side won't indeed fold up their tents and leave Greece to itself.
Now, all this short-term prognosticating aside, I've maintained from the start that the ultimate best long-term solution would likely be the most frightening in the short-term. That would be Greece exiting the Euro and reestablishing its own currency. While I'm not ready to bet the farm on that one just yet (although I never bet 'the farm' on any one thing), it is fast becoming a distinct possibility---and, again, that would be a good thing!
If you're our client and you're worried about how markets will trade next week in response to the present chaos, well, we need to chat! I.e., investing in the suppliers of goods and services the world over can never be a one-week affair. Or, more simply put, you should never ever invest (as opposed to trade) with a one-week time horizon.
And, FYI, I'll be amazed if, come tomorrow morning, markets across the globe aren't trading firmly in the red (although don't be surprised if the Athens market [along with Greek banks] stays closed tomorrow). Hedge fund titans---like David Einhorn and John Paulson---who recently poured billions into Greece in anticipation of a deal---will be scrambling big time (yes, they were investing trading with a one-week time horizon)!
As for the longer-term implications of a Greek default, as I suggested yesterday, the Eurozone powers believe they have a ring fence around any contagion risk, and, well, frankly, Greece's economy falls somewhere in size between that of Minneapolis and Miami.
Last night I wrote that the Greek government was either secretly hoping that---in the referendum scheduled for next Sunday---the Greek people vote to accept the latest round of creditor conditions (affording them political cover [or an opportunity to resign with dignity]) or, was hoping that they can convince their people to vote no, leaving the Eurozone authorities with the option of returning to the table with less onerous proposals.
Looking at the latest headline commentary coming from Eurozone officials (they're worried!), I can see where Tsipras (Greece's Prime Minister) may indeed be betting that a no vote could yield a much better deal for his country. So, therefore, it could very well be the latter. Although I am not entirely sure that, in the event of a thumbs down vote, the other side won't indeed fold up their tents and leave Greece to itself.
Now, all this short-term prognosticating aside, I've maintained from the start that the ultimate best long-term solution would likely be the most frightening in the short-term. That would be Greece exiting the Euro and reestablishing its own currency. While I'm not ready to bet the farm on that one just yet (although I never bet 'the farm' on any one thing), it is fast becoming a distinct possibility---and, again, that would be a good thing!
If you're our client and you're worried about how markets will trade next week in response to the present chaos, well, we need to chat! I.e., investing in the suppliers of goods and services the world over can never be a one-week affair. Or, more simply put, you should never ever invest (as opposed to trade) with a one-week time horizon.
And, FYI, I'll be amazed if, come tomorrow morning, markets across the globe aren't trading firmly in the red (although don't be surprised if the Athens market [along with Greek banks] stays closed tomorrow). Hedge fund titans---like David Einhorn and John Paulson---who recently poured billions into Greece in anticipation of a deal---will be scrambling big time (yes, they were investing trading with a one-week time horizon)!
As for the longer-term implications of a Greek default, as I suggested yesterday, the Eurozone powers believe they have a ring fence around any contagion risk, and, well, frankly, Greece's economy falls somewhere in size between that of Minneapolis and Miami.
Greece's Impact on the Fed
It occurs to me that the two most prevalent event risks today---the ones I highlighted in this weekend's update---possess substantially negative correlation. Here's what I mean:
Greece:
Should Greece exit the Euro, global markets will surely sell off in notable fashion. As I type, Asian stocks are trading 2 to 7 (yes, 7!) percent lower and Dow futures are signaling a 250 point drop at the open tomorrow morning.
The Fed:
One of the transmission effects of monetary policy is its presumed impact on asset prices. Make money cheap and easy, the theory goes, and folks will spend and companies will profit and their stocks will rise. Reduce interest rates (the "cheap" part) and folks, in search of better returns, will invest in stocks and real estate, pushing up their prices. Folks with portfolios of higher-priced stocks and real estate feel wealthier. And wealthier-feeling folks tend to go out and stimulate economies.
As I've been suggesting from the beginning of the year, I see the Fed as the most likely catalyzer of what is surely a long-overdue correction (-10+%) in U.S. stocks. I.e., if the Fed moves (raises its benchmark rate) before the market anticipates, I see short-term pain resulting.
I believe that Janet Yellen and company, in many respects, are itching to raise interest rates. However, I also believe that they greatly fear roiling the financial markets and killing the wealth effect---just when the economy is finally beginning to find its legs---in the process.
Do you see the negative correlation? The Greek crisis becoming a true crisis can, by itself---as global markets are signaling at this very moment---do a number on the wealth effect. Thus, there'd be absolutely zero chance the Fed would raise interest rates amid the turmoil.
On the other hand, should, for example, the Greek people vote next Sunday to stay in the Euro and accept their creditors' bailout conditions, I can almost promise you that any negative wealth effect occurring between now and then will be more than compensated for in very short order. And, thus, a Fed rate hike will be firmly back on the table for later this year.
My point? As the Peoples Bank of China exhibited over the weekend (an interest rate cut in response to a recent steep selloff in Shanghai-listed stocks) today's central banks are in no mood for financial market turmoil. And as you're about to witness, they are more than eager to do whatever it takes to keep little old Greece from sparking the next great recession/bear market.
I'll no doubt be addressing the potential longer-term perniciousness of such aggressive intervention in future blog posts. I.e., be careful what you wish for!
Greece:
Should Greece exit the Euro, global markets will surely sell off in notable fashion. As I type, Asian stocks are trading 2 to 7 (yes, 7!) percent lower and Dow futures are signaling a 250 point drop at the open tomorrow morning.
The Fed:
One of the transmission effects of monetary policy is its presumed impact on asset prices. Make money cheap and easy, the theory goes, and folks will spend and companies will profit and their stocks will rise. Reduce interest rates (the "cheap" part) and folks, in search of better returns, will invest in stocks and real estate, pushing up their prices. Folks with portfolios of higher-priced stocks and real estate feel wealthier. And wealthier-feeling folks tend to go out and stimulate economies.
As I've been suggesting from the beginning of the year, I see the Fed as the most likely catalyzer of what is surely a long-overdue correction (-10+%) in U.S. stocks. I.e., if the Fed moves (raises its benchmark rate) before the market anticipates, I see short-term pain resulting.
I believe that Janet Yellen and company, in many respects, are itching to raise interest rates. However, I also believe that they greatly fear roiling the financial markets and killing the wealth effect---just when the economy is finally beginning to find its legs---in the process.
Do you see the negative correlation? The Greek crisis becoming a true crisis can, by itself---as global markets are signaling at this very moment---do a number on the wealth effect. Thus, there'd be absolutely zero chance the Fed would raise interest rates amid the turmoil.
On the other hand, should, for example, the Greek people vote next Sunday to stay in the Euro and accept their creditors' bailout conditions, I can almost promise you that any negative wealth effect occurring between now and then will be more than compensated for in very short order. And, thus, a Fed rate hike will be firmly back on the table for later this year.
My point? As the Peoples Bank of China exhibited over the weekend (an interest rate cut in response to a recent steep selloff in Shanghai-listed stocks) today's central banks are in no mood for financial market turmoil. And as you're about to witness, they are more than eager to do whatever it takes to keep little old Greece from sparking the next great recession/bear market.
I'll no doubt be addressing the potential longer-term perniciousness of such aggressive intervention in future blog posts. I.e., be careful what you wish for!
Saturday, June 27, 2015
It's Now (presumably) Up to the Greek People
If you paid attention to European equity, debt and currency markets last week, especially Friday (clearly the markets thought that a short-term Greek deal would be struck this weekend), and have been listening to me say that the political risk is too great for both sides to not come to a short-term deal, as of this moment, you might be shocked.
Amid serious talks that many believed would, at a minimum, yield sufficient relief to get Greece through next Tuesday's payment to the IMF, the Greek negotiators were yanked from the meeting. Soon thereafter it was announced that Prime Minister Alexis Tsipras had called for a referendum to take place on July 5th. The Greek people will vote as to whether to adhere to the latest conditions presented by their country's creditors (even though those conditions had yet to be formally proposed) in order to, essentially, stay financially afloat for now. While their government is urging them to vote no.
The latest polls suggest that should the Greeks be asked to simply vote yea or nay on remaining in the Euro, 70% would vote yea! However, when asked if staying in the Euro meant adhering to what many view as severe austerity, the yeas fall to 55%-60%.
The problem is that by July 5th, Greece will presumably have missed the June 30 deadline to make a major payment to the IMF. Which essentially brings an abrupt end to the possibility of continuation or expansion of the "European financial arrangements". The immediate-term question is will the European Central Bank continue to provide the daily liquidity necessary to keep Greek banks open for business come Monday? We'll know soon enough. Upon today's news, Greeks stormed ATMs and grabbed all they could till the machines went dry.
Make no mistake folks, there are calculations being made here. While Tsipras and company appear adamant in their opposition to the would-be proposals, I can't help but wonder if they're not privately praying that their people vote yea---for a nay would leave the country in immediate shambles, given all we know at the moment. You see, Tsipras made utterly unkeepable campaign promises to get himself elected. Should he concede to creditor demands, he'd be depicted as a liar and a fool. If he allows the Greek people to concede, and the creditors are willing to reopen negotiations, he's either hoping he can salvage his nascent political career or be able to resign with dignity.
On the other hand, perhaps Tsipras truly wants the nay. In which case he'd be betting that the Eurozone leaders have zero appetite for a Greek exit, and would, therefore, return to the table with far less painful proposals.
As for the IMF and the European finance ministers, from what I glean from the interviews and commentary following Greece turning its back on the process, they're in a bit of a state of shock. Emergency meetings will no doubt take place throughout the remainder of the weekend, as the powers that be consider the various scenarios that may play out over the next few days.
As for the markets, while, according to IMF Managing Director Christine Legarde "the euro area authorities stand ready to do whatever is necessary to ensure financial stability in the euro area", I suspect we'll experience unusual volatility come Monday morning---barring some highly improbable about-face. In terms of their wherewithal to do whatever's necessary, certainly they've had ample to time to prepare. And, yes, since 2011 (a Greek exit would've been a vastly different situation then) they've established a variety of facilities to deal with such an event. Here's Ms. Legarde during an interview this morning with CNBC:
I'll keep you posted. And keep in mind what I wrote in this weekend's update:
Amid serious talks that many believed would, at a minimum, yield sufficient relief to get Greece through next Tuesday's payment to the IMF, the Greek negotiators were yanked from the meeting. Soon thereafter it was announced that Prime Minister Alexis Tsipras had called for a referendum to take place on July 5th. The Greek people will vote as to whether to adhere to the latest conditions presented by their country's creditors (even though those conditions had yet to be formally proposed) in order to, essentially, stay financially afloat for now. While their government is urging them to vote no.
The latest polls suggest that should the Greeks be asked to simply vote yea or nay on remaining in the Euro, 70% would vote yea! However, when asked if staying in the Euro meant adhering to what many view as severe austerity, the yeas fall to 55%-60%.
The problem is that by July 5th, Greece will presumably have missed the June 30 deadline to make a major payment to the IMF. Which essentially brings an abrupt end to the possibility of continuation or expansion of the "European financial arrangements". The immediate-term question is will the European Central Bank continue to provide the daily liquidity necessary to keep Greek banks open for business come Monday? We'll know soon enough. Upon today's news, Greeks stormed ATMs and grabbed all they could till the machines went dry.
Make no mistake folks, there are calculations being made here. While Tsipras and company appear adamant in their opposition to the would-be proposals, I can't help but wonder if they're not privately praying that their people vote yea---for a nay would leave the country in immediate shambles, given all we know at the moment. You see, Tsipras made utterly unkeepable campaign promises to get himself elected. Should he concede to creditor demands, he'd be depicted as a liar and a fool. If he allows the Greek people to concede, and the creditors are willing to reopen negotiations, he's either hoping he can salvage his nascent political career or be able to resign with dignity.
On the other hand, perhaps Tsipras truly wants the nay. In which case he'd be betting that the Eurozone leaders have zero appetite for a Greek exit, and would, therefore, return to the table with far less painful proposals.
As for the IMF and the European finance ministers, from what I glean from the interviews and commentary following Greece turning its back on the process, they're in a bit of a state of shock. Emergency meetings will no doubt take place throughout the remainder of the weekend, as the powers that be consider the various scenarios that may play out over the next few days.
As for the markets, while, according to IMF Managing Director Christine Legarde "the euro area authorities stand ready to do whatever is necessary to ensure financial stability in the euro area", I suspect we'll experience unusual volatility come Monday morning---barring some highly improbable about-face. In terms of their wherewithal to do whatever's necessary, certainly they've had ample to time to prepare. And, yes, since 2011 (a Greek exit would've been a vastly different situation then) they've established a variety of facilities to deal with such an event. Here's Ms. Legarde during an interview this morning with CNBC:
You know, I have been around for a long time during those moments of crisis. And certainly the euro area is in a completely different position from where it was back in 2011. Let alone 2008. Whether it’s the ESM, the ESFS - the tool box available and validated and endorsed by the court… the European Court of Justice in particular… by the ECB… and the tools and defenses that can be put to good use which were not available in 2011. So that issue of contagion has a completely different dimension. As far as the neighboring countries are concerned, clearly, there has been a debate. There has been precautions taken in vicinity countries.
I'll keep you posted. And keep in mind what I wrote in this weekend's update:
... if I were an investor, I’d be feeling fine and dandy right about now. For I’d know that in the time horizon for which I’ve committed the equity portion of my portfolio (the rest of my life, or the lives of my heirs, as my case may be), Greece’s present saga will have become all but forgotten, the Fed will have adjusted interest rates many times over, and all manner of event risk will—as it always has—ebb and flow whilst I allow my well-balanced portfolio to ride the inevitable tides. The tides inherent in the ownership of the companies that will stock a desiring world with goods and services in the years to come.
Your Weekly Update
If I were a trader I might be nervous, or maybe excited, or, more likely perhaps, confused right about now. For event risk, or event opportunity (depending on my attitude/strategy), is presently heightened---to say the least.
For example:
Should Greece not bow to its creditors' demands, or vice versa, the tiny country would, at a minimum, find itself in a world of intermediate-term hurt. Which---in my humble opinion---would also, its tininess notwithstanding, put a short-term hurt on global financial markets in a big way, contrary to what a number of bleary-eyed pundits have predicted.
And/or:
Should the Fed heed the signals found in recent economic data and bump up interest rates earlier than traders presently anticipate (and begin replenishing its arsenal [with which to fight future recessionary battles] in the process), the market will likely correct in noteworthy fashion---in my humble opinion, that is.
There's more, but we'll stick with the top two for now.
Ah, but if I were an investor, I'd be feeling fine and dandy right about now. For I'd know that in the time horizon for which I've committed the equity portion of my portfolio (the rest of my life, or the lives of my heirs, as my case may be), Greece's present saga will have become all but forgotten, the Fed will have adjusted interest rates many times over, and all manner of event risk will---as it always has---ebb and flow whilst I allow my well-balanced portfolio to ride the inevitable tides. The tides inherent in the ownership of the companies that will stock a desiring world with goods and services in the years to come.
If you identify with the latter, please feel free to stop reading here and go about your business. As the following is for those who, for whatever reason(s), need clarity on the goings-on of the day.
__________________________________________________________________________
What really matters:
Personal consumption comprises two-thirds of U.S. gross domestic product. Therefore, if you want to narrow the state of the American economy down to its most important indicators, you'd follow those that pertain to employment, to consumer attitudes and to consumer spending. Narrow it even further and you'd simply go with employment.
I.e., you can do as I do (as I feel I must) and dive into the minutia of the PMIs (purchasing managers indices) to try and firmly grasp present trends. Or, better yet, you can skip straight to the employment components. For regardless of what the survey respondents say about new orders, backlogs, input costs, etc., if they're hiring they're optimistic.
You can do as I do and track the sales, earnings, balance sheets and forward outlooks from industry leaders to try and glean the prospects for, say, the tech sector, financials, transportation, retail, etc. Or you can simply skim the consumer sentiment surveys and track consumer spending to gauge the prospects for future corporate earnings---for it's consumers who consume the stuffs of the aforementioned sectors.
You can do as I do and spend the major portion of your waking hours assessing the economy the world over from virtually every conceivable angle (oddly, I love this stuff). Or, well, you can have a life!
Bottom line: If businesses are hiring and if consumers are, naturally, consuming (let's hope they save a little as well) you'll want to own the stocks of the companies that are doing the hiring and that are producing the goods that the hirees' will be consuming: Such as housing-related, technology, transportation, retail, leisure and financial companies.
If, on the other hand, businesses are laying folks off and consumers are cutting their consumption, you'll want to own the companies that produce the stuff that folks have to buy regardless of their financial state: Such as consumer staples, healthcare and utilities.
As for the present state of what really matters. The U.S. economy is looking pretty decent, as the following from my economic log suggests:
JUNE 22, 2015
EXISTING HOME SALES for May jumped 5.1% to 5.35 million (annually). The year-over-year increase was 9.2%, which is the second strongest increase (after March's) in nearly two years. Single family home sales were very strong, with 32% of all sales coming from first-time homebuyers---which is a very bullish sign for housing. Inventories remain quite light at 5.1 months worth of sales.
JUNE 23, 2015
NEW HOME SALES jumped nicely, 2.2%, to 546k (annualized), vs 517k last month and a 525k consensus estimate. New home inventory sits at a very low 4.5 months of sales. As I suggested (at the start of the year) it might, the housing market appears to be accelerating at a very strong pace in 2015.
JUNE 24, 2015
MORTGAGE PURCHASE APPLICATIONS rose 1% last week. Refinances increased 2%. Weekly apps is a very noisy statistic. The trend this year for purchase apps has been decidedly higher, which supports my optimism over housing.
JUNE 25, 2015
WEEKLY JOBLESS CLAIMS have been consistently running below 300k for weeks. That's a hugely positive indicator for the labor market, and the economy. Coming in last week at 271k, with a 4-week average of 273.75k. Continuing claims are running near historic lows at 2.247 million, with a 4-week average of 2.237 million. The unemployment rate for insured workers remains near a record low of 1.7%.
PERSONAL INCOME AND OUTLAYS came in stellarly for May. This supports my recent comments suggesting that underlying trends point to the consumer coming to life in terms of economic activity. The following Econoday commentary speaks to the various factors. My one contention is with the last sentence that suggests the doves (those who think the Fed should not raise rates soon) have little to worry about due to a low-running PCE price index. While that makes sense on the surface, the stuff that's brewing of late (weak production growth amid rising employment costs) spells inflationary pressure coming. Companies will have to begin investing in productivity enhancing capital or we will have issues in the not-too-distant future:
THE BLOOMBERG CONSUMER COMFORT INDEX confirms my suspicion that the consumer is feeling better about his/her present prospects. Here's the release:
JUNE 26, 2015
THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX confirms my optimism over the consumer's growing optimism. Coming in at 96.1 for June. This is huge news for the U.S. economy's prospects going forward. Econoday's summary vividly tells the story:
Yes folks, despite the election-season doom and gloom you're hearing from certain circles, while not robust mind you, the U.S. economy is clearly on the mend! Which, ironically, makes for near-term market uncertainty as the Fed grapples over when to raise its benchmark interest rate.
The Stock Market:
Non-US markets have measurably outperformed the U.S. major averages (save for the NASDAQ Composite Index) 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 price changes (according to CNBC) for the major U.S. indices---and for non-U.S. indices and U.S. sectors---using index ETFs as our non-U.S. and sector proxies:
Dow Jones Industrials: +0.38%
S&P 500: +2.11%
NASDAQ Comp: +7.94%
EFA (Europe, Australia and Far East): +8.05%
FEZ (Eurozone): +7.03%
VWO (Emerging Markets): +3.07%
Sector ETFs:
Here’s a look at the year-to-date results for a number of U.S. sector ETFs:
IYH (HEATHCARE): +12.21%
XHB (HOMEBUILDERS): +9.38%
XLY (DISCRETIONARY): +7.97%
XLK (TECH): +2.20%
XLB (MATERIALS): +1.67%
XLF (FINANCIALS): +0.65%
XLP (CONS STAPLES): -0.12%
XLI (INDUSTRIALS): -2.67%
XLE (ENERGY): -3.89%
IYT (TRANSP): -10.01%
XLU (UTILITIES): -11.50%
The Bond Market:
As I type, the yield on the 10-year treasury bond sits at 2.47%. Which is 8 basis points higher than where it was when I penned last week's update.
TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price (which moves inversely to yields) decline a whopping 3.23% last week (down 8.49% year-to-date). 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:
Here are last week’s U.S. economic highlights:
JUNE 22, 2015
THE CHICAGO FED NATIONAL ACTIVITY INDEX for May improved slightly to -.17 from a revised -.19 in April. Here's Econoday:
EXISTING HOME SALES for May jumped 5.1% to 5.35 million (annually). The year-over-year increase was 9.2%, which is the second strongest increase (after March's) in nearly two years. Single family home sales were very strong, with 32% of all sales coming from first-time homebuyers---which is a very bullish sign for housing. Inventories remain quite light at 5.1 months worth of sales.
JUNE 23, 2015
DURABLE GOODS ORDERS (THE ADVANCED READING) FOR MAY was basically uninspiring. While booking a 1.8% decrease on the headline, ex-transportation (airplane orders were way off), orders were up .5%.
THE JOHNSON REDBOOK RETAIL REPORT continues to come in soft week-on-week, up 1.6% last week. As I've stressed of late, this report stands out as one that doesn't jibe with other recent consumer data. The report cites higher expectations in the coming survey due to Father's Day.
THE FHFA HOUSE PRICE INDEX FOR APRIL shows home prices, up .3%, up 5.3% year-over-year. I expect this statistic to gain steam measureably going forward based very strong data from the housing sector.
MARKIT'S MANUFACTURING PMI (JUNE'S FLASH READING) remains in expansion mode at 53.4. However, that's slightly off last month's 53.8 and below the consensus estimate range of 54-55.5. The slowing centered on production growth, as opposed to orders, which picked up. The report cites caution due to the impact of the strong dollar on exports. Energy equipment production has turned down sharply.
NEW HOME SALES jumped nicely, 2.2%, to 546k (annualized), vs 517k last month and a 525k consensus estimate. New home inventory sits at a very low 4.5 months of sales. As I suggested (at the start of the year) it might, the housing market appears to be accelerating at a very strong pace in 2015.
RICHMOND FED MANUFACTURING INDEX for June improved to 6, from 1 in May. The new orders component rose 9 points to 11. Backlogs came in up 6, which is what has been a rare positive reading. While the manufacturing data remains mixed, mixed is an improvement over what we've seen on balance this year.
JUNE 24, 2015
MORTGAGE PURCHASE APPLICATIONS rose 1% last week. Refinances increased 2%. Weekly apps is a very noisy statistic. The trend this year for purchase apps has been decidedly higher, which supports my optimism over housing.
THE FINAL GDP READING FOR Q1 showed the economy contracting, but not as much as the second revision showed, -.2% vs -.7%. Q2 GDP will rebound.... Economists to mixed on to what extent. I've heard predictions as low as 2% and as high as 3%.
CORPORATE PROFITS for Q1 came in at $1.891 trillion, up 9% year-over-year.
CRUDE OIL INVENTORIES dropped again last week by 4.9 million barrels. However, based on builds in GASOLINE +.7 mbs and DISTILLATES +1.8 mbs the crude draw has largely to do with refineries running at high capacity.... which they are, at 94%... Crude actually dropped (due to the builds in oil biproducts) in price on the news.
JUNE 25, 2015
WEEKLY JOBLESS CLAIMS have been consistently running below 300k for weeks. That's a hugely positive indicator for the labor market, and the economy. Coming in last week at 271k, with a 4-week average of 273.75k. Continuing claims are running near historic lows at 2.247 million, with a 4-week average of 2.237 million. The unemployment rate for insured workers remains near a record low of 1.7%.
PERSONAL INCOME AND OUTLAYS came in stellarly for May. This supports my recent comments suggesting that underlying trends point to the consumer coming to life in terms of economic activity. The following Econoday commentary speaks to the various factors. My one contention is with the last sentence that suggests the doves (those who think the Fed should not raise rates soon) have little to worry about due to a low-running PCE price index. While that makes sense on the surface, the stuff that's brewing of late (weak production growth amid rising employment costs) spells inflationary pressure coming. Companies will have to begin investing in productivity enhancing capital or we will have issues in the not-too-distant future:
PERSONAL CONSUMER EXPENDITURES (PCE) PRICE INDEX: Core 1.2% year-over-year.
MARKIT'S FLASH SERVICE SECTOR PMI FOR JUNE remained solidly in expansion territory (above 50) at 54.6. However, the pace slowed notably from May. Hiring is still a plus, but as much of a plus as prior months this year. Going-forward sentiment seemed to wane a bit, which to me is surprising given other indicators. It'll be interesting to see if service sector activity indeed trends slower in the coming months. One pressing point is the reported spike in input costs---the fastest in 18 months. While the general sentiment is music to Fed dove's ears, the input cost spike is not....
THE BLOOMBERG CONSUMER COMFORT INDEX confirms my suspicion that the consumer is feeling better about his/her present prospects. Here's the release:
NATURAL GAS INVENTORIES continue to rise: by 75 billion cubic feet last week.
THE KANSAS CITY FED MANUFACTURING INDEX doesn't support other recent surveys that report a stabilization in the manufacturing sector---at least not in the Tenth District. The strong dollar's negative affect on exports catches much of the blame. Here's Econoday:
THE FED BALANCE SHEET grew by $7.2 billion last week. RESERVE BANK CREDIT grew by $8.5 billion.
M2 MONEY SUPPLY grew by $29.5 billion last week.
JUNE 26, 2015
THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX confirms my optimism over the consumer's growing optimism. Coming in at 96.1 for June. This is huge news for the U.S. economy's prospects going forward. Econoday's summary vividly tells the story:
For example:
Should Greece not bow to its creditors' demands, or vice versa, the tiny country would, at a minimum, find itself in a world of intermediate-term hurt. Which---in my humble opinion---would also, its tininess notwithstanding, put a short-term hurt on global financial markets in a big way, contrary to what a number of bleary-eyed pundits have predicted.
And/or:
Should the Fed heed the signals found in recent economic data and bump up interest rates earlier than traders presently anticipate (and begin replenishing its arsenal [with which to fight future recessionary battles] in the process), the market will likely correct in noteworthy fashion---in my humble opinion, that is.
There's more, but we'll stick with the top two for now.
Ah, but if I were an investor, I'd be feeling fine and dandy right about now. For I'd know that in the time horizon for which I've committed the equity portion of my portfolio (the rest of my life, or the lives of my heirs, as my case may be), Greece's present saga will have become all but forgotten, the Fed will have adjusted interest rates many times over, and all manner of event risk will---as it always has---ebb and flow whilst I allow my well-balanced portfolio to ride the inevitable tides. The tides inherent in the ownership of the companies that will stock a desiring world with goods and services in the years to come.
If you identify with the latter, please feel free to stop reading here and go about your business. As the following is for those who, for whatever reason(s), need clarity on the goings-on of the day.
__________________________________________________________________________
What really matters:
Personal consumption comprises two-thirds of U.S. gross domestic product. Therefore, if you want to narrow the state of the American economy down to its most important indicators, you'd follow those that pertain to employment, to consumer attitudes and to consumer spending. Narrow it even further and you'd simply go with employment.
I.e., you can do as I do (as I feel I must) and dive into the minutia of the PMIs (purchasing managers indices) to try and firmly grasp present trends. Or, better yet, you can skip straight to the employment components. For regardless of what the survey respondents say about new orders, backlogs, input costs, etc., if they're hiring they're optimistic.
You can do as I do and track the sales, earnings, balance sheets and forward outlooks from industry leaders to try and glean the prospects for, say, the tech sector, financials, transportation, retail, etc. Or you can simply skim the consumer sentiment surveys and track consumer spending to gauge the prospects for future corporate earnings---for it's consumers who consume the stuffs of the aforementioned sectors.
You can do as I do and spend the major portion of your waking hours assessing the economy the world over from virtually every conceivable angle (oddly, I love this stuff). Or, well, you can have a life!
Bottom line: If businesses are hiring and if consumers are, naturally, consuming (let's hope they save a little as well) you'll want to own the stocks of the companies that are doing the hiring and that are producing the goods that the hirees' will be consuming: Such as housing-related, technology, transportation, retail, leisure and financial companies.
If, on the other hand, businesses are laying folks off and consumers are cutting their consumption, you'll want to own the companies that produce the stuff that folks have to buy regardless of their financial state: Such as consumer staples, healthcare and utilities.
As for the present state of what really matters. The U.S. economy is looking pretty decent, as the following from my economic log suggests:
JUNE 22, 2015
EXISTING HOME SALES for May jumped 5.1% to 5.35 million (annually). The year-over-year increase was 9.2%, which is the second strongest increase (after March's) in nearly two years. Single family home sales were very strong, with 32% of all sales coming from first-time homebuyers---which is a very bullish sign for housing. Inventories remain quite light at 5.1 months worth of sales.
JUNE 23, 2015
NEW HOME SALES jumped nicely, 2.2%, to 546k (annualized), vs 517k last month and a 525k consensus estimate. New home inventory sits at a very low 4.5 months of sales. As I suggested (at the start of the year) it might, the housing market appears to be accelerating at a very strong pace in 2015.
JUNE 24, 2015
MORTGAGE PURCHASE APPLICATIONS rose 1% last week. Refinances increased 2%. Weekly apps is a very noisy statistic. The trend this year for purchase apps has been decidedly higher, which supports my optimism over housing.
JUNE 25, 2015
WEEKLY JOBLESS CLAIMS have been consistently running below 300k for weeks. That's a hugely positive indicator for the labor market, and the economy. Coming in last week at 271k, with a 4-week average of 273.75k. Continuing claims are running near historic lows at 2.247 million, with a 4-week average of 2.237 million. The unemployment rate for insured workers remains near a record low of 1.7%.
PERSONAL INCOME AND OUTLAYS came in stellarly for May. This supports my recent comments suggesting that underlying trends point to the consumer coming to life in terms of economic activity. The following Econoday commentary speaks to the various factors. My one contention is with the last sentence that suggests the doves (those who think the Fed should not raise rates soon) have little to worry about due to a low-running PCE price index. While that makes sense on the surface, the stuff that's brewing of late (weak production growth amid rising employment costs) spells inflationary pressure coming. Companies will have to begin investing in productivity enhancing capital or we will have issues in the not-too-distant future:
The consumer came to life in May, boosted by a 0.5 percent rise in personal income and helping to support a 0.9 percent surge in personal outlays that reflects heavy spending on autos and retail goods. And gains are not inflationary, at least yet, based on the very closely watched core PCE price index which edged only 0.1 tenth higher in May and is at a very benign 1.2 percent year-on-year rate which is actually down a tenth from an upward revised April.
Components on the income side are very solid with wages & salaries up 0.5 percent in the month. Both proprietors' income and rental income show especially strong gains. Spending components show special strength for durables, again tied especially to autos, and also strong gains for non-durables, here tied to higher pump prices. Spending on services once again shows an incremental gain.
Turning back to PCE prices, the overall price index looks a little hot in May at plus 0.3 percent but the year-on-year rate is unchanged at only 0.1 percent. That's right, that's the year-on-year rate at only the most incremental level of inflation. And the 1.2 percent year-on-year core appears to be moving in reverse, down 1 tenth in each of the last two reports and further away from the Fed's 2 percent target.
Consumers, in an expression of their confidence, dipped into their savings to spend, with the savings rate down 3 tenths to 5.1 percent. This is a good report for the bulls, showing a strong non-inflationary bounce for the second quarter. This report won't be keeping the doves up at night and does not move forward the Fed's coming rate hike.
THE BLOOMBERG CONSUMER COMFORT INDEX confirms my suspicion that the consumer is feeling better about his/her present prospects. Here's the release:
Consumer Comfort in U.S. Increased Last Week by Most Since April
By Erin Roman
(Bloomberg) -- Consumer confidence rose last week by the most since the beginning of April as Americans’ views of the buying climate and their finances improved.
The Bloomberg Consumer Comfort Index increased to 42.6 in the period ended June 21 after climbing to 40.9 the prior week. The turnaround follows an almost 8 point drop since reaching an eight-year high in mid-April.
“Motoring in tandem with gasoline prices, consumer sentiment moved in the right direction after a two-month downturn, boosted by better ratings of finances and, particularly, the buying climate,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement.
Prices at the gas pump are leveling off after advancing about 40 cents a gallon since early April, contributing to the biggest one-week improvement in buying attitudes in more than two years. A stronger labor market and rising home prices are making households more upbeat about their finances and the economy.
The comfort index’s buying climate gauge, which measures whether now is a good time to purchase goods and services, increased to 37 this week from 34.2, the biggest gain since April 2013.
Part of the reason for the increase can be found at service stations, where the nationwide average price of a gallon of gasoline is stabilizing around $2.80, based on data from the auto group AAA.
Personal Finances
The gauge of personal finances rose to 56.4, the highest since mid-April, from 54.8. A measure of consumers’ views on the current state of the economy advanced to 34.3 from 33.7 the prior week.
Confidence among homeowners was particularly strong, with that measure increasing by the most since January. The housing market is gaining momentum, with purchases of new properties in May rising to the highest level in seven years.
Near-record stock prices are making wealthier Americans more upbeat. Comfort among those earning more than $100,000 a year increased 3.9 points in the latest period after a 4.9 point gain -- the biggest two-week jump since 2010.
Sentiment improved in five of seven major income groups last week while better job prospects led to more sanguine attitudes among the employed and unemployed alike. Confidence of respondents looking for work climbed to a six-week high.
Employers in May added jobs at the fastest pace in five months, while a record number of help-wanted signs in April pushed job openings above hires for the first time ever, according to two Labor Department reports.
JUNE 26, 2015
THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX confirms my optimism over the consumer's growing optimism. Coming in at 96.1 for June. This is huge news for the U.S. economy's prospects going forward. Econoday's summary vividly tells the story:
Optimism is absolutely as strong as it gets giving a major boost to consumer sentiment which jumped well beyond forecasts, to 96.1 vs Econoday's median consensus for 94.6 and high-end forecast of 95.2. The expectations component, reflecting strong optimism for the jobs market, is an absolute standout, at 97.8 for a 12-year high and an 11.0 point surge from mid-month and a 13.6 point surge from final May. The 13.6 point spread is the largest monthly gain since March 1991.
The current conditions index also shows a very strong gain to 108.9 vs 106.8 at mid-month and 100.8 for final May. The current conditions was slightly higher in January though the 8.1 point gain from final May is the strongest since December 2013. Gains in this component point to gains for May-to-June readings on jobs and consumer spending.
In a further surprise, all this strength isn't triggering inflationary expectations which, compared to final May, are down 1 tenth for the 1-year outlook to 2.7 percent and down 2 tenths for the 5-year outlook to 2.6 percent. Both of these are very low readings for this report.
This is a stunning report, lining up with other recent positive indications on the consumer including jobless data and yesterday's strength in income and spending, the latter including big spending on autos. The consumer is very upbeat -- earning more and spending more.
Yes folks, despite the election-season doom and gloom you're hearing from certain circles, while not robust mind you, the U.S. economy is clearly on the mend! Which, ironically, makes for near-term market uncertainty as the Fed grapples over when to raise its benchmark interest rate.
The Stock Market:
Non-US markets have measurably outperformed the U.S. major averages (save for the NASDAQ Composite Index) 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 price changes (according to CNBC) for the major U.S. indices---and for non-U.S. indices and U.S. sectors---using index ETFs as our non-U.S. and sector proxies:
Dow Jones Industrials: +0.38%
S&P 500: +2.11%
NASDAQ Comp: +7.94%
EFA (Europe, Australia and Far East): +8.05%
FEZ (Eurozone): +7.03%
VWO (Emerging Markets): +3.07%
Sector ETFs:
Here’s a look at the year-to-date results for a number of U.S. sector ETFs:
IYH (HEATHCARE): +12.21%
XHB (HOMEBUILDERS): +9.38%
XLY (DISCRETIONARY): +7.97%
XLK (TECH): +2.20%
XLB (MATERIALS): +1.67%
XLF (FINANCIALS): +0.65%
XLP (CONS STAPLES): -0.12%
XLI (INDUSTRIALS): -2.67%
XLE (ENERGY): -3.89%
IYT (TRANSP): -10.01%
XLU (UTILITIES): -11.50%
The Bond Market:
As I type, the yield on the 10-year treasury bond sits at 2.47%. Which is 8 basis points higher than where it was when I penned last week's update.
TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price (which moves inversely to yields) decline a whopping 3.23% last week (down 8.49% year-to-date). 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:
JUNE 22, 2015
THE CHICAGO FED NATIONAL ACTIVITY INDEX for May improved slightly to -.17 from a revised -.19 in April. Here's Econoday:
There was net improvement in May's run of economic data but not much at least based on the national activity index which comes in at minus 0.17 vs a downward revised minus 0.19 in April. The 3-month average is telling the same story of weakness, at minus 0.16 vs a revised minus 0.20 in April.
Much stronger payroll growth, at 280,000, was May's highlight but the gain was offset by a 1 tenth tick higher in the unemployment rate to 5.5 percent which leaves the month's total employment contribution to the index unchanged at plus 0.10. Other readings were also little changed and all soft: production-related indicators at minus 0.17 vs April's minus 0.19, sales/orders/inventories at zero vs minus 0.1, and personal consumption & housing at minus 0.09.
The big bounce, according to today's report, that was expected following the transitory factors of a very soft first quarter has yet to appear.
EXISTING HOME SALES for May jumped 5.1% to 5.35 million (annually). The year-over-year increase was 9.2%, which is the second strongest increase (after March's) in nearly two years. Single family home sales were very strong, with 32% of all sales coming from first-time homebuyers---which is a very bullish sign for housing. Inventories remain quite light at 5.1 months worth of sales.
JUNE 23, 2015
DURABLE GOODS ORDERS (THE ADVANCED READING) FOR MAY was basically uninspiring. While booking a 1.8% decrease on the headline, ex-transportation (airplane orders were way off), orders were up .5%.
THE JOHNSON REDBOOK RETAIL REPORT continues to come in soft week-on-week, up 1.6% last week. As I've stressed of late, this report stands out as one that doesn't jibe with other recent consumer data. The report cites higher expectations in the coming survey due to Father's Day.
THE FHFA HOUSE PRICE INDEX FOR APRIL shows home prices, up .3%, up 5.3% year-over-year. I expect this statistic to gain steam measureably going forward based very strong data from the housing sector.
MARKIT'S MANUFACTURING PMI (JUNE'S FLASH READING) remains in expansion mode at 53.4. However, that's slightly off last month's 53.8 and below the consensus estimate range of 54-55.5. The slowing centered on production growth, as opposed to orders, which picked up. The report cites caution due to the impact of the strong dollar on exports. Energy equipment production has turned down sharply.
NEW HOME SALES jumped nicely, 2.2%, to 546k (annualized), vs 517k last month and a 525k consensus estimate. New home inventory sits at a very low 4.5 months of sales. As I suggested (at the start of the year) it might, the housing market appears to be accelerating at a very strong pace in 2015.
RICHMOND FED MANUFACTURING INDEX for June improved to 6, from 1 in May. The new orders component rose 9 points to 11. Backlogs came in up 6, which is what has been a rare positive reading. While the manufacturing data remains mixed, mixed is an improvement over what we've seen on balance this year.
JUNE 24, 2015
MORTGAGE PURCHASE APPLICATIONS rose 1% last week. Refinances increased 2%. Weekly apps is a very noisy statistic. The trend this year for purchase apps has been decidedly higher, which supports my optimism over housing.
THE FINAL GDP READING FOR Q1 showed the economy contracting, but not as much as the second revision showed, -.2% vs -.7%. Q2 GDP will rebound.... Economists to mixed on to what extent. I've heard predictions as low as 2% and as high as 3%.
CORPORATE PROFITS for Q1 came in at $1.891 trillion, up 9% year-over-year.
CRUDE OIL INVENTORIES dropped again last week by 4.9 million barrels. However, based on builds in GASOLINE +.7 mbs and DISTILLATES +1.8 mbs the crude draw has largely to do with refineries running at high capacity.... which they are, at 94%... Crude actually dropped (due to the builds in oil biproducts) in price on the news.
JUNE 25, 2015
WEEKLY JOBLESS CLAIMS have been consistently running below 300k for weeks. That's a hugely positive indicator for the labor market, and the economy. Coming in last week at 271k, with a 4-week average of 273.75k. Continuing claims are running near historic lows at 2.247 million, with a 4-week average of 2.237 million. The unemployment rate for insured workers remains near a record low of 1.7%.
PERSONAL INCOME AND OUTLAYS came in stellarly for May. This supports my recent comments suggesting that underlying trends point to the consumer coming to life in terms of economic activity. The following Econoday commentary speaks to the various factors. My one contention is with the last sentence that suggests the doves (those who think the Fed should not raise rates soon) have little to worry about due to a low-running PCE price index. While that makes sense on the surface, the stuff that's brewing of late (weak production growth amid rising employment costs) spells inflationary pressure coming. Companies will have to begin investing in productivity enhancing capital or we will have issues in the not-too-distant future:
The consumer came to life in May, boosted by a 0.5 percent rise in personal income and helping to support a 0.9 percent surge in personal outlays that reflects heavy spending on autos and retail goods. And gains are not inflationary, at least yet, based on the very closely watched core PCE price index which edged only 0.1 tenth higher in May and is at a very benign 1.2 percent year-on-year rate which is actually down a tenth from an upward revised April.
Components on the income side are very solid with wages & salaries up 0.5 percent in the month. Both proprietors' income and rental income show especially strong gains. Spending components show special strength for durables, again tied especially to autos, and also strong gains for non-durables, here tied to higher pump prices. Spending on services once again shows an incremental gain.
Turning back to PCE prices, the overall price index looks a little hot in May at plus 0.3 percent but the year-on-year rate is unchanged at only 0.1 percent. That's right, that's the year-on-year rate at only the most incremental level of inflation. And the 1.2 percent year-on-year core appears to be moving in reverse, down 1 tenth in each of the last two reports and further away from the Fed's 2 percent target.
Consumers, in an expression of their confidence, dipped into their savings to spend, with the savings rate down 3 tenths to 5.1 percent. This is a good report for the bulls, showing a strong non-inflationary bounce for the second quarter. This report won't be keeping the doves up at night and does not move forward the Fed's coming rate hike.
PERSONAL CONSUMER EXPENDITURES (PCE) PRICE INDEX: Core 1.2% year-over-year.
MARKIT'S FLASH SERVICE SECTOR PMI FOR JUNE remained solidly in expansion territory (above 50) at 54.6. However, the pace slowed notably from May. Hiring is still a plus, but as much of a plus as prior months this year. Going-forward sentiment seemed to wane a bit, which to me is surprising given other indicators. It'll be interesting to see if service sector activity indeed trends slower in the coming months. One pressing point is the reported spike in input costs---the fastest in 18 months. While the general sentiment is music to Fed dove's ears, the input cost spike is not....
THE BLOOMBERG CONSUMER COMFORT INDEX confirms my suspicion that the consumer is feeling better about his/her present prospects. Here's the release:
Consumer Comfort in U.S. Increased Last Week by Most Since April
By Erin Roman
(Bloomberg) -- Consumer confidence rose last week by the most since the beginning of April as Americans’ views of the buying climate and their finances improved.
The Bloomberg Consumer Comfort Index increased to 42.6 in the period ended June 21 after climbing to 40.9 the prior week. The turnaround follows an almost 8 point drop since reaching an eight-year high in mid-April.
“Motoring in tandem with gasoline prices, consumer sentiment moved in the right direction after a two-month downturn, boosted by better ratings of finances and, particularly, the buying climate,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement.
Prices at the gas pump are leveling off after advancing about 40 cents a gallon since early April, contributing to the biggest one-week improvement in buying attitudes in more than two years. A stronger labor market and rising home prices are making households more upbeat about their finances and the economy.
The comfort index’s buying climate gauge, which measures whether now is a good time to purchase goods and services, increased to 37 this week from 34.2, the biggest gain since April 2013.
Part of the reason for the increase can be found at service stations, where the nationwide average price of a gallon of gasoline is stabilizing around $2.80, based on data from the auto group AAA.
Personal Finances
The gauge of personal finances rose to 56.4, the highest since mid-April, from 54.8. A measure of consumers’ views on the current state of the economy advanced to 34.3 from 33.7 the prior week.
Confidence among homeowners was particularly strong, with that measure increasing by the most since January. The housing market is gaining momentum, with purchases of new properties in May rising to the highest level in seven years.
Near-record stock prices are making wealthier Americans more upbeat. Comfort among those earning more than $100,000 a year increased 3.9 points in the latest period after a 4.9 point gain -- the biggest two-week jump since 2010.
Sentiment improved in five of seven major income groups last week while better job prospects led to more sanguine attitudes among the employed and unemployed alike. Confidence of respondents looking for work climbed to a six-week high.
Employers in May added jobs at the fastest pace in five months, while a record number of help-wanted signs in April pushed job openings above hires for the first time ever, according to two Labor Department reports.
By region, comfort climbed in the Northeast by the most since Feb. 8, and rose for a fourth week in the South. Sentiment in the Midwest registered the biggest gain since the end of March.
The Bloomberg Comfort Index, presented on a scale of zero to 100, is a four-week rolling average and based on a national sample of 1,000 adults. The report’s gauges have a margin of error of plus or minus 3.5 points.
NATURAL GAS INVENTORIES continue to rise: by 75 billion cubic feet last week.
THE KANSAS CITY FED MANUFACTURING INDEX doesn't support other recent surveys that report a stabilization in the manufacturing sector---at least not in the Tenth District. The strong dollar's negative affect on exports catches much of the blame. Here's Econoday:
The Kansas City manufacturing index remains depressed, at minus 9 in June vs minus 13 and minus 9 in the two prior readings. If there is a positive, it's that new orders are only marginally in the negative column at minus 3. But everything else is mostly in the deep part of the negative column including production, at minus 21, and shipments at minus 15. The workweek is in contraction as is hiring. Price readings are mixed with raw material costs jumping, which is consistent with other reports, and little change for prices of final goods.
Weakness in exports, the result in part of the strong dollar, continues to be a major negative for the manufacturing sector. This report offers a separate reading on export orders and it's at minus 5, up a bit from minus 9 and minus 12 in the two prior reports.
Early indications on this month's manufacturing sector are mixed with slightly more however, including today's report, pointing to another month of bumps. Watch for the final regional Fed indication on June's manufacturing sector with Monday's Dallas Fed report.
THE FED BALANCE SHEET grew by $7.2 billion last week. RESERVE BANK CREDIT grew by $8.5 billion.
M2 MONEY SUPPLY grew by $29.5 billion last week.
JUNE 26, 2015
THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX confirms my optimism over the consumer's growing optimism. Coming in at 96.1 for June. This is huge news for the U.S. economy's prospects going forward. Econoday's summary vividly tells the story:
Optimism is absolutely as strong as it gets giving a major boost to consumer sentiment which jumped well beyond forecasts, to 96.1 vs Econoday's median consensus for 94.6 and high-end forecast of 95.2. The expectations component, reflecting strong optimism for the jobs market, is an absolute standout, at 97.8 for a 12-year high and an 11.0 point surge from mid-month and a 13.6 point surge from final May. The 13.6 point spread is the largest monthly gain since March 1991.
The current conditions index also shows a very strong gain to 108.9 vs 106.8 at mid-month and 100.8 for final May. The current conditions was slightly higher in January though the 8.1 point gain from final May is the strongest since December 2013. Gains in this component point to gains for May-to-June readings on jobs and consumer spending.
In a further surprise, all this strength isn't triggering inflationary expectations which, compared to final May, are down 1 tenth for the 1-year outlook to 2.7 percent and down 2 tenths for the 5-year outlook to 2.6 percent. Both of these are very low readings for this report.
This is a stunning report, lining up with other recent positive indications on the consumer including jobless data and yesterday's strength in income and spending, the latter including big spending on autos. The consumer is very upbeat -- earning more and spending more.
Friday, June 26, 2015
Monday, June 22, 2015
Weekly Update (audio version)
[video mp4="http://www.betweenthelines.us/wp-content/uploads/20150622-083958.mp4"][/video]
Saturday, June 20, 2015
Your Weekly Update - Or- A Fairy Tale and a Game of Chicken
Janet Yellen is truly a gifted storyteller. Last Wednesday I was taken back to my youth, memories of Mom reading me Goldilocks and the Three Bears: The story of a famished young wanderer who found herself in a cozy forest cottage taste-testing three abandoned bowls of porridge, then relaxing and falling fast asleep after she partook of the helping that was not too hot and not too cold.
Last Wednesday and Thursday the Goldilocks market relaxed (and rallied) after Grandma Yellen told her
economic tale.
While the FOMC's post-meeting statement offered the following about
the labor market,
(tasted hot!)
during the subsequent press conference Ms. Yellen cooled it off with,
She toned her raising rates rhetoric perfectly; warning that delaying action would risk overheating the
economy. But raising too early could derail the recovery. Masterful!
She told an otherwise scary (to some) story in a manner that didn't provoke sleeplessness among the
children. In other words, she accomplished her goal of warning of a potential 2015 rate increase without
roiling the financial markets in the process. Or did she?
Well, she indeed didn't roil the markets, however, the question would be, is the market heeding her warning? Listening to the pundits, I'd say no. Traders, in my view, took Ms. Yellen's tone---not necessarily her words---to heart and took a September (if not a 2015 entirely) rate hike off the table. And I'm not so sure that she in any way intended to move the radar off of September.
"Data dependent", that's the key! Hence---given present market myopia---I maintain my position that
really good economic news remains, for now, not so good stock market news. Longer-term, however, a good economy and, therefore, higher corporate earnings growth, is what'll keep the bull market alive---
and, thus, the bears from coming home---beyond whatever correction may or may not occur as the Fed achieves liftoff.
Last week I suggested that Greece would not be the market's main focus while the world awaited the Fed's commentary. While that was indeed the case Wednesday and Thursday, the other days' action appeared to be driven by that great game of chicken being played by, let's say, the driver of a tiny Volkswagen Beatle (Greece)---with an outstanding loan against it (a hundred times greater than the value of the car) financed no less by the manufacturer---and the driver of a Mercedes-made semi truck (The IMF, ECB, EC, Germany). At first blush you might think a collision would amount to little more than the semi driver stopping to have a look, assessing what little damage there is to his own vehicle, then motoring on as if nothing ever happened.
Upon deeper thought you realize that, should the Volkswagen driver not survive, the semi driver would be tried for murder. Or, should the Volkswagen driver somehow make it out alive, then fully recover, others like him (let's say Portugal, Ireland, Spain and Italy)---thinking that the main road is just too treacherous these days---may believe that they can survive the detour out of the Euro themselves and, therefore, take the off ramp (potentially doing harm to the merchants assembled along the road). Or, should the semi driver pull completely out of the way and allow his opponent to continue screaming down the road in a car that's hopelessly upside down in debt, other like-drivers---no longer respecting the big truck drivers---may once again step on the gas and run wild, inspiring safer drivers (investors) to take detours of their own, thus doing great harm to the merchants assembled along the road.
Bottom line folks: Both sides are bluffing their way to what they hope will be their best possible respective outcomes. As I type, they're running out of Autobahn and both are about to flinch. The thing is, if they flinch in the same direction they crash.
While the stock and bond markets appear to be mildly worried that a collision will occur, the currency markets of late seem to be pricing in virtually no worries. My guess is that the currency markets have it right---that neither driver has the political will to risk a crash---and, therefore, there'll be an 11th-hour compromise. Not, mind you, that that would be the best longer-term outcome. I think a better plan---immediate panic/pain notwithstanding---might be for Greece to default on its debt, leave the Euro, go back to the drachma (its old currency) and suffer through the tough reforms it would take to get its economy on sustainable footing (while shrewd global capitalists swoop in and buy up the pieces). I'll keep you posted...
The Stock Markets:
Non-US markets---Europe (due primarily to Greece) and Emerging Markets (due largely to fear over higher U.S. interest rates) in particular---have given back a noticeable portion of their earlier gains. Although the broad EAFE (Europe, Australia and the Far East) continues to measurably outperform the Dow and the S&P. The NASDAQ, fueled largely of late by biotechs, continues to show an impressive year-to-date gain.
Given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I see more attractive opportunities outside the U.S. in the intermediate term---despite recent weakness. 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 Morningstar) for the major U.S. indices. And (according to ETFdb.com) the results for non-U.S. indices and U.S. sectors—using index ETFs as our non-U.S. and sector proxies:
Dow Jones Industrials: +2.27 %
S&P 500: +3.48 %
NASDAQ Comp: +8.63 %
EFA (Europe, Australia and Far East): +8.58 %
FEZ (Eurozone): +3.67%
VWO (Emerging Markets): +3.80 %
Sector ETFs:
Here’s a look at the year-to-date results for a number of U.S. sector ETFs:
IYH (HEATHCARE): +12.35%
XHB (HOMEBUILDERS): +8.09%
XLY (DISCRETIONARY): +7.70%
XLB (MATERIALS): +3.74%
XLK (TECH): +3.29%
XLF (FINANCIALS): +0.40%
XLP (CONS STAPLES): -0.96%
XLI (INDUSTRIALS): -1.07%
XLE (ENERGY): -3.46%
IYT (TRANSP): -7.62%
XLU (UTILITIES): -8.67%
The Bond Market:
As I type, the yield on the 10-year treasury bond sits at 2.26%. Which is 13 basis points lower than where it was when I penned last week’s update. We can chalk up last week's rally in bond prices (prices and yields move inversely to one another) primarily to concerns over Greece.
TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price rise 0.96% last week (down 4.46% year-to-date). 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:
Here are last week’s U.S. economic highlights:
JUNE 15, 2015
THE EMPIRE STATE MANUFACTURING SURVEY shows New York manufacturers feeling relatively glum about their go-forward prospects. Shipments were good, but their dismal outlook suggests they won't stay good for long. Employment remains a positive, which begs the comment that employers generally don't hire when they're decidedly glum about the future... I.e., the positive employment outlook suggests that the outlook isn't as soft as the other components portend...
INDUSTRIAL PRODUCTION FOR MAY came in surprisingly weak (-.2%), except for two key areas---autos (+1.7%) and capital goods (+.2%). This report jibes with the Empire State Survey's weak reading... Manufacturing, in the aggregate, doesn't appear to be picking up much steam of late...
THE NAHB HOUSING MARKET INDEX sprung higher to 59, which was well above the consensus estimate. This speaks to my optimism over housing going forward. The future sales component scored a high 69, with present sales scoring an also high 65. Traffic lags, at 44, but that's up 5 points for the month.
TREASURY INTERNATIONAL CAPITAL FOR APRIL showed foreigners buying a net $1.2 billion of US long-term securities while Americans were net sellers of $12.8 billion of foreign long-term securities. That brings net long-term inflow to a $53.9 billion. March saw $25.6 billion net inflow. Thank the strong U.S. dollar!
Breaking it down: Foreign investors bought lots of agency and treasury bonds, but barely any U.S. stocks. Americans were heavy buyers of foreign equities and net sellers of foreign bonds...
JUNE 16, 2015
HOUSING STARTS IN MAY declined 11% from April's reading. However, April was one of highest readings on record. The 1.036 million starts in May is a good number. Permits in May absolutely surged! Up 11.8% to 1.275 million. Permits are a leading indicator and point to strong growth going forward.
THE JOHNSON REDBOOK RETAIL REPORT continues to show readings inconsistent with what other indicators suggest. Here's Econoday:
JUNE 17, 2015
MORTGAGE PURCHASE APPS declined 4% last week. This comes after a surge the prior week and may reflect last week's upward spike in mortgage rates. More sensitive refinance apps declined 7%.
CRUDE OIL INVENTORIES declined again last week, by 2.7 million barrels. Refineries remain active, at 93.1% of capacity. However, GASOLINE INVENTORIES rose by .5 mbs and DISTILLATES by .5 mbs and .1 mbs respectively.
THE JUNE FOMC MEETING ended with no move on rates and commentary confirming a likely hike this year shrouded in very dovish language nonetheless.
JUNE 18, 2015
THE CPI FOR MAY came in a tenth under April's reading (for core), at 1.7%. Month-on-month, the core reading moved a mere .1%. Add in food and energy and year-over-year didn't budge, at 0%, while the month-on-month headline reading came in up .4%. Energy prices jumped last month, which explains to high .4% headline reading. These results support the argument that the Fed can be patient with raising the Fed funds rate.
WEEKLY JOBLESS CLAIMS continue to show real strength in the labor market, coming in at 267k (readings below 300k are bullish). The 4-week average sat at 276k. Continuing claims were down 50k to 2.222 million. The 4-week average for continuing claims was 2.231 million. The unemployment rate for insured workers remained at a very low 1.7%.
THE TRADE DEFICIT for Q1 came in at $113.3 billion, which was on the low-end of expectations. Goods saw a $189 billion deficit, while services saw a $59.7 billion surplus.
THE BLOOMBERG CONSUMER COMFORT INDEX, as I suggested last week that it might, showed gains following 9 weeks of declines. The components tracking economic outlook the buying climate improved. Here's the release:
THE PHILADEPHIA FED BUSINESS OUTLOOK SURVEY FOR JUNE flew strongly in the face of Monday's weak Empire State survey, coming in way better than the consensus expectation. Here's Econoday:
THE CONFERENCE BOARD'S INDEX OF LEADING ECONOMIC INDICATORS showed continued strength in May. Confirming my optimism for the U.S. economy going forward. Here's the release:
NATURAL GAS INVENTORIES rose again last week, by 89 bcf...
THE FED BALANCE SHEET rose last week by $19.8 billion, to $4.487 trillion. RESERVE BANK CREDIT increased by $23.1 billion.
JUNE 19, 2015
ATLANTA FED BUSINESS INFLATION EXPECTATIONS IN JUNE remained at the relatively tame May reading at 1.9%.
Last Wednesday and Thursday the Goldilocks market relaxed (and rallied) after Grandma Yellen told her
economic tale.
While the FOMC's post-meeting statement offered the following about
the labor market,
Labor market conditions have improved further, with strong job gains and a lower unemployment rate.
(tasted hot!)
during the subsequent press conference Ms. Yellen cooled it off with,
“Wage increases are still running at a low level but there have been
some tentative signs that wage growth is picking up. We have seen an increase in the growth rate of the employment cost index and a mild uptick in the growth of average hourly earnings. I would call these tentative signs of stronger wage growth.”
"So in spite of the fact that there is some progress on that front the
committee wants to see some further progress before feeling that it will be appropriate to
raise rates.”
She toned her raising rates rhetoric perfectly; warning that delaying action would risk overheating the
economy. But raising too early could derail the recovery. Masterful!
She told an otherwise scary (to some) story in a manner that didn't provoke sleeplessness among the
children. In other words, she accomplished her goal of warning of a potential 2015 rate increase without
roiling the financial markets in the process. Or did she?
Well, she indeed didn't roil the markets, however, the question would be, is the market heeding her warning? Listening to the pundits, I'd say no. Traders, in my view, took Ms. Yellen's tone---not necessarily her words---to heart and took a September (if not a 2015 entirely) rate hike off the table. And I'm not so sure that she in any way intended to move the radar off of September.
"Data dependent", that's the key! Hence---given present market myopia---I maintain my position that
really good economic news remains, for now, not so good stock market news. Longer-term, however, a good economy and, therefore, higher corporate earnings growth, is what'll keep the bull market alive---
and, thus, the bears from coming home---beyond whatever correction may or may not occur as the Fed achieves liftoff.
Last week I suggested that Greece would not be the market's main focus while the world awaited the Fed's commentary. While that was indeed the case Wednesday and Thursday, the other days' action appeared to be driven by that great game of chicken being played by, let's say, the driver of a tiny Volkswagen Beatle (Greece)---with an outstanding loan against it (a hundred times greater than the value of the car) financed no less by the manufacturer---and the driver of a Mercedes-made semi truck (The IMF, ECB, EC, Germany). At first blush you might think a collision would amount to little more than the semi driver stopping to have a look, assessing what little damage there is to his own vehicle, then motoring on as if nothing ever happened.
Upon deeper thought you realize that, should the Volkswagen driver not survive, the semi driver would be tried for murder. Or, should the Volkswagen driver somehow make it out alive, then fully recover, others like him (let's say Portugal, Ireland, Spain and Italy)---thinking that the main road is just too treacherous these days---may believe that they can survive the detour out of the Euro themselves and, therefore, take the off ramp (potentially doing harm to the merchants assembled along the road). Or, should the semi driver pull completely out of the way and allow his opponent to continue screaming down the road in a car that's hopelessly upside down in debt, other like-drivers---no longer respecting the big truck drivers---may once again step on the gas and run wild, inspiring safer drivers (investors) to take detours of their own, thus doing great harm to the merchants assembled along the road.
Bottom line folks: Both sides are bluffing their way to what they hope will be their best possible respective outcomes. As I type, they're running out of Autobahn and both are about to flinch. The thing is, if they flinch in the same direction they crash.
While the stock and bond markets appear to be mildly worried that a collision will occur, the currency markets of late seem to be pricing in virtually no worries. My guess is that the currency markets have it right---that neither driver has the political will to risk a crash---and, therefore, there'll be an 11th-hour compromise. Not, mind you, that that would be the best longer-term outcome. I think a better plan---immediate panic/pain notwithstanding---might be for Greece to default on its debt, leave the Euro, go back to the drachma (its old currency) and suffer through the tough reforms it would take to get its economy on sustainable footing (while shrewd global capitalists swoop in and buy up the pieces). I'll keep you posted...
The Stock Markets:
Non-US markets---Europe (due primarily to Greece) and Emerging Markets (due largely to fear over higher U.S. interest rates) in particular---have given back a noticeable portion of their earlier gains. Although the broad EAFE (Europe, Australia and the Far East) continues to measurably outperform the Dow and the S&P. The NASDAQ, fueled largely of late by biotechs, continues to show an impressive year-to-date gain.
Given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I see more attractive opportunities outside the U.S. in the intermediate term---despite recent weakness. 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 Morningstar) for the major U.S. indices. And (according to ETFdb.com) the results for non-U.S. indices and U.S. sectors—using index ETFs as our non-U.S. and sector proxies:
Dow Jones Industrials: +2.27 %
S&P 500: +3.48 %
NASDAQ Comp: +8.63 %
EFA (Europe, Australia and Far East): +8.58 %
FEZ (Eurozone): +3.67%
VWO (Emerging Markets): +3.80 %
Sector ETFs:
Here’s a look at the year-to-date results for a number of U.S. sector ETFs:
IYH (HEATHCARE): +12.35%
XHB (HOMEBUILDERS): +8.09%
XLY (DISCRETIONARY): +7.70%
XLB (MATERIALS): +3.74%
XLK (TECH): +3.29%
XLF (FINANCIALS): +0.40%
XLP (CONS STAPLES): -0.96%
XLI (INDUSTRIALS): -1.07%
XLE (ENERGY): -3.46%
IYT (TRANSP): -7.62%
XLU (UTILITIES): -8.67%
The Bond Market:
As I type, the yield on the 10-year treasury bond sits at 2.26%. Which is 13 basis points lower than where it was when I penned last week’s update. We can chalk up last week's rally in bond prices (prices and yields move inversely to one another) primarily to concerns over Greece.
TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price rise 0.96% last week (down 4.46% year-to-date). 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:
JUNE 15, 2015
THE EMPIRE STATE MANUFACTURING SURVEY shows New York manufacturers feeling relatively glum about their go-forward prospects. Shipments were good, but their dismal outlook suggests they won't stay good for long. Employment remains a positive, which begs the comment that employers generally don't hire when they're decidedly glum about the future... I.e., the positive employment outlook suggests that the outlook isn't as soft as the other components portend...
INDUSTRIAL PRODUCTION FOR MAY came in surprisingly weak (-.2%), except for two key areas---autos (+1.7%) and capital goods (+.2%). This report jibes with the Empire State Survey's weak reading... Manufacturing, in the aggregate, doesn't appear to be picking up much steam of late...
THE NAHB HOUSING MARKET INDEX sprung higher to 59, which was well above the consensus estimate. This speaks to my optimism over housing going forward. The future sales component scored a high 69, with present sales scoring an also high 65. Traffic lags, at 44, but that's up 5 points for the month.
TREASURY INTERNATIONAL CAPITAL FOR APRIL showed foreigners buying a net $1.2 billion of US long-term securities while Americans were net sellers of $12.8 billion of foreign long-term securities. That brings net long-term inflow to a $53.9 billion. March saw $25.6 billion net inflow. Thank the strong U.S. dollar!
Breaking it down: Foreign investors bought lots of agency and treasury bonds, but barely any U.S. stocks. Americans were heavy buyers of foreign equities and net sellers of foreign bonds...
JUNE 16, 2015
HOUSING STARTS IN MAY declined 11% from April's reading. However, April was one of highest readings on record. The 1.036 million starts in May is a good number. Permits in May absolutely surged! Up 11.8% to 1.275 million. Permits are a leading indicator and point to strong growth going forward.
THE JOHNSON REDBOOK RETAIL REPORT continues to show readings inconsistent with what other indicators suggest. Here's Econoday:
Retail sales have been swinging strongly to the plus side but no one would ever know based on Redbook whose year-on-year rates are deeply depressed. Redbook's year-on-year same-store sales rate, which typically trends in the 3 percent area, is at a very pathetic plus 1.1 percent in the June 13 week. The commentary focuses on Father's Day and related disappointment over men's apparel sales.
JUNE 17, 2015
MORTGAGE PURCHASE APPS declined 4% last week. This comes after a surge the prior week and may reflect last week's upward spike in mortgage rates. More sensitive refinance apps declined 7%.
CRUDE OIL INVENTORIES declined again last week, by 2.7 million barrels. Refineries remain active, at 93.1% of capacity. However, GASOLINE INVENTORIES rose by .5 mbs and DISTILLATES by .5 mbs and .1 mbs respectively.
THE JUNE FOMC MEETING ended with no move on rates and commentary confirming a likely hike this year shrouded in very dovish language nonetheless.
JUNE 18, 2015
THE CPI FOR MAY came in a tenth under April's reading (for core), at 1.7%. Month-on-month, the core reading moved a mere .1%. Add in food and energy and year-over-year didn't budge, at 0%, while the month-on-month headline reading came in up .4%. Energy prices jumped last month, which explains to high .4% headline reading. These results support the argument that the Fed can be patient with raising the Fed funds rate.
WEEKLY JOBLESS CLAIMS continue to show real strength in the labor market, coming in at 267k (readings below 300k are bullish). The 4-week average sat at 276k. Continuing claims were down 50k to 2.222 million. The 4-week average for continuing claims was 2.231 million. The unemployment rate for insured workers remained at a very low 1.7%.
THE TRADE DEFICIT for Q1 came in at $113.3 billion, which was on the low-end of expectations. Goods saw a $189 billion deficit, while services saw a $59.7 billion surplus.
THE BLOOMBERG CONSUMER COMFORT INDEX, as I suggested last week that it might, showed gains following 9 weeks of declines. The components tracking economic outlook the buying climate improved. Here's the release:
Consumer Comfort in U.S. Climbs After Falling Record Nine Weeks
By Erin Roman
(Bloomberg) -- Consumer confidence stabilized after falling a record nine straight weeks as Americans became less downbeat about the economy.
The Bloomberg Consumer Comfort Index increased to 40.9 in the period ended June 14 from 40.1 the prior week. A monthly measure tracking the economic outlook rose to 47.5 in June from 44 in May.
The recent decrease in weekly sentiment that extended back to early April coincided with rising fuel costs even as households benefited from improving labor and real estate markets. Persistent gains in gasoline prices, which have climbed this week to the highest since November, could thwart further advances in confidence.
“If that continues, this week’s pause in the index’s downward trajectory may not hold,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement. “At the same time, other indicators may help; this week’s thaw is buttressed by strengthening reports on jobs and the housing market.”
The share of households who said the economy is getting worse fell to 33 percent in June from 39 a month earlier, the biggest improvement since October, according to the monthly expectations gauge.
Two of three components of the weekly index increased in the latest report. A measure of consumers’ views on the state of the national economy increased to 33.7 this week from 32.1.
The buying climate gauge, which measures whether now is a good time to purchase goods and services, improved to 34.2 from 33.5 the week prior. The gauge of personal finances was little changed at 54.8 from 54.7.
Gasoline Prices
Higher prices at the pump have weighed on consumers’ views of buying conditions. The cost of a gallon of regular gasoline has averaged $2.80 this week, up from a January low of $2.03, according to auto group AAA.
Thursday’s comfort data showed better job prospects are brightening moods of those looking for work. Sentiment among respondents who were unemployed rose to a five-week high. Employers added 280,000 jobs in May, the most in five months, according to the Labor Department.
Wealthier Americans were also more upbeat last week, likely a reflection of the gains in stock prices this year. Comfort among those making more than $100,000 a year climbed to a five-week high.
THE PHILADEPHIA FED BUSINESS OUTLOOK SURVEY FOR JUNE flew strongly in the face of Monday's weak Empire State survey, coming in way better than the consensus expectation. Here's Econoday:
In the first notable indication of strength of any kind in the manufacturing sector, the Philly Fed index has absolutely surged in the June report, way beyond Econoday's high-end estimate to 15.2 for the strongest reading since December. The gain is confirmed by an identical 15.2 surge for new orders which is the highest reading since November.
Other readings are also positive including an increase for unfilled orders and a big increase in this month's shipments. Another positive is slowing in delivery times consistent with high levels of shipping activity. On inflation, prices paid shows a big jump likely tied to energy costs, though prices received shows only marginal pressure. Showing only a marginal gain this month is employment, yet this may increase in the coming months given the other readings in this report including a nearly 6 point jump in the 6-month outlook to a very positive 39.7 which is the best reading since January.
But is this report an outlier? It certainly isn't confirmed by Monday's Empire State report which lurched into the negative column to minus 1.98. Today's report will focus attention on other Fed manufacturing reports to come including the Richmond report on Tuesday and the Kansas City report on Thursday. Both of these reports, and especially the Dallas report, have been very weak so far this year.
THE CONFERENCE BOARD'S INDEX OF LEADING ECONOMIC INDICATORS showed continued strength in May. Confirming my optimism for the U.S. economy going forward. Here's the release:
The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.7 percent in May to 123.1 (2010 = 100), following a 0.7 percent increase in April, and a 0.4 percent increase in March.
“The U.S. LEI increased sharply again in May, confirming the outlook for more economic expansion in the second half of the year after what looks to be a much weaker first half,” said Ataman Ozyildirim, Director, Business Cycles and Growth Research, at The Conference Board. “While residential construction and consumer expectations support the more positive outlook, industrial production and new orders in manufacturing are painting a somewhat more mixed picture.”
The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.1 percent in May to 112.1 (2010 = 100), following a 0.2 percent increase in April, and no change in March.
The Conference Board Lagging Economic Index® (LAG) for the U.S. increased 0.2 percent in May to 117.0 (2010 = 100), following a 0.2 percent increase in April, and a 0.5 percent increase in March.
About The Conference Board Leading Economic Index® (LEI) for the U.S.
The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The leading, coincident, and lagging economic indexes are essentially composite averages of several individual leading, coincident, or lagging indicators. They are constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component – primarily because they smooth out some of the volatility of individual components.
The ten components of The Conference Board Leading Economic Index® for the U.S. include:
Average weekly hours, manufacturing
Average weekly initial claims for unemployment insurance
Manufacturers’ new orders, consumer goods and materials
ISM® Index of New Orders
Manufacturers' new orders, nondefense capital goods excluding aircraft orders
Building permits, new private housing units
Stock prices, 500 common stocks
Leading Credit Index™
Interest rate spread, 10-year Treasury bonds less federal funds
Average consumer expectations for business conditions
NATURAL GAS INVENTORIES rose again last week, by 89 bcf...
THE FED BALANCE SHEET rose last week by $19.8 billion, to $4.487 trillion. RESERVE BANK CREDIT increased by $23.1 billion.
JUNE 19, 2015
ATLANTA FED BUSINESS INFLATION EXPECTATIONS IN JUNE remained at the relatively tame May reading at 1.9%.
Monday, June 15, 2015
Market Commentary/Weekly Update (audio)
[video mp4="http://www.betweenthelines.us/wp-content/uploads/20150615-072608-1.mp4"][/video]
Sunday, June 14, 2015
Your Weekly Update
Last week saw the U.S. stock market spring higher at the start, through Wednesday, with the Dow finding a perch 100 points above 18,000. Only to see it descend a couple-hundred points by Friday's close---leaving it with a paltry plus for the week. The S&P 500 chart looks virtually identical, while the Nasdaq Comp finished the week slightly in the red.
The Monday-Wednesday price action either completely discredits my position that, these days, good economic news is, in the short-run, bad stock market news, or there was something else afoot. I.e., the Monday-Wednesday U.S. economic news (particularly employment-related) came in pretty darn good, which---if traders see a 2015 Fed rate hike as bad for equity prices---should've been greeted like an emergency visit to the dentist. But, as I mentioned, the market rallied hard through Wednesday.
I might say that the Thursday/Friday sell-off validated my case---in that the U.S. economic news only got better---but I won't. Because there was indeed something else afoot. Europe! Yes, Greece is a big deal, at least in the near-term, for global markets. So big that, in a week with little Fed-speak, it trumps even the fear over higher interest rates.
The Dow rallied 200+ points on Wednesday following the release of this blurb:
The Dow tanked nearly 200 pts (closing down 140) on Friday following this release:
Next week, however, should be a different story. Short of Greece suddenly defaulting and leaving the Eurozone, traders won't be looking across the Atlantic for guidance on their moment-to-moment trading decisions (be thankful you're not a trader!). Nope, they'll be focused on Wedensday's announcement, and subsequent press conference, regarding the goings on at the corner of 20th Street and Constitution Avenue in Washington D.C. That would be the address of the Marriner S. Eccles Federal Reserve Board Building (the "Eccles Building" for short)---which is the meeting place of the Federal Open Market Committee (the arbiter of U.S. interest rate policy), chaired by Janet Yellen.
Early in the year, June was on the radar as a possible date for a Fed rate hike. That, I'd bet big money (if I were a better with big money), has virtually zero chance of happening. The financial market shock---something, I assure you, the Fed is deathly afraid of---that would result from what would now be a surprise June rate-hike makes one virtually impossible. Ah, but I do think next week's Fed commentary could move markets nonetheless (not everyone agrees).
As I've been reporting, the economy is moving along in firmly positive fashion. Which---despite relatively tame inflation readings---gives the Fed the green light to move its benchmark rate off of the zero lower bound as early as this September. And, again, wanting that first rate-hike to exact as little pain as possible, the Fed has to prepare the markets. Kinda like scheduling a root canal and getting emotionally-prepared, as opposed to cancelling your picnic plans and rushing to the dentist because out of the blue your tooth is killing you.
The question is, how's the market going to initially feel as its would-be dentist bends her brow and says, "you know, it looks like we're probably going to have to do a little work come later this year. But, I promise, it won't hurt too bad"? Will it (traders) believe the "won't hurt too bad part"? We'll see...
Last week I promised I'd touch on the prospects for the non-U.S. portion of your portfolio, so here goes:
Can you imagine limiting your investment options to an economy that houses merely 4% of the world's human capital? Or one that encompasses only 36% of the world's market capitalization? Let's hope not, for that would be a most restrictive way of viewing the business of growing your personal wealth. Well, that's the bottom line for those who stick all of their portfolios in, say, an S&P 500 index fund. Other than investing in U.S. companies that do business in other economies (which is no small deal, btw), they miss out on the growth potential of economies with favorable demographics and the need (and desire!) for modern infrastructure---and they forego the ownership of companies that will without question shape the future landscape of this interdependent world we live in.
Thus, the long-term odds are very much in favor of those willing to brave the inherent ups and downs of international financial markets.
As for the near-term, well, that's anybody's guess. But I will say that if a given country's central bank policy eases and tightens based on where its economy rests on the business cycle, many (if not most) other markets look to presently sport greater growth potential than does the U.S.'s. I.e., much of the rest of the world has some economic catching up to do, and as much as over-intervention concerns me (wrote a book on it even), their policymakers are hell-bent on goosing their respective financial markets to help their economies along.
From the beginning of March to current, the world saw 25 interest rate cuts (from [among others] the likes of China, India, South Korea, Australia, New Zealand and Sweden) and only 11 hikes (Brazil three times, Trinidad twice, and Ukraine, Angola, Georgia, Moldova, Kenya and Iceland once each). The European Central Bank, like the U.S., is already as low as it can go, but, unlike the U.S., it is in the early stages of a massive quantitative easing (printing Euros and buying assets) program that's scheduled to run through September 2016.
As for valuations, I update the P/Es and PEG ratios (factors in 5-year earnings growth estimates) for 22 countries/regions on a weekly basis. And as of last Wednesday---based on this year's earnings---I count 19 with lower P/Es and 18 with lower PEGs than the S&P 500. Based on 2016 estimated earnings, all but 2 sport lower P/Es than the S&P.
All that optimism aside, in the near-term, non-U.S. markets---particularly the emerging markets---will have to contend with a soon-to-be-higher U.S. Fed funds rate. Clearly, the recent pullback in emerging markets tells us that traders are nervous about a repeat of the fallout that occurred back in early 2013---when Ben Bernanke merely mentioned that the U.S.'s quantitative easing program would have to be "tapered" at some point in the then foreseeable future. That utterance sent emerging market equities (and currencies) reeling as arbitragers exited their higher-yielding, stronger-currency foreign positions and rushed back to a U.S. dollar that they figured would have to rally, amid higher interest rates, going forward. And while I can see some pain a coming (if emerging market equity prices haven't already priced in a Fed hike), the dynamics are vastly different this go round.
You see, the dollar has already rallied big time, so I'm not so sure that the Fed's normalizing of interest rates will send it further toward the moon. In fact, I could argue that while the interest rate differential (the U.S.'s higher than others') does make the stronger-dollar case, if a Fed hike is viewed as an economic cooler we could see a flight out of the dollar and into the currencies of countries with greater growth potential.
The consensus is clearly in the stronger dollar camp for now. Which, again, from a short-term trading perspective, poses a headwind for emerging market equities. Time will tell...
The Stock Market:
Non-US markets have measurably outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Don’t, as I suggest above, 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 Morningstar) for the major U.S. indices. And (according to ETFdb.com) the results for non-U.S. indices and U.S. sectors---using index ETFs as our non-U.S. and sector proxies:
Dow Jones Industrials: +1.60%
S&P 500: +2.68%
NASDAQ Comp: +7.23%
EFA (Europe, Australia and Far East): +8.81%
FEZ (Eurozone): +6.55%
VWO (Emerging Markets): +4.00%
Sector ETFs:
Here’s a look at the year-to-date results for a number of U.S. sector ETFs:
IYH (HEATHCARE): +9.92%
XHB (HOMEBUILDERS): +7.03%
XLY (DISCRETIONARY): +6.51%
XLB (MATERIALS): +3.72%
XLK (TECH): +3.61%
XLF (FINANCIALS): +1.62%
XLE (ENERGY): -2.13%
XLI (INDUSTRIALS): -0.61%
XLP (CONS STAPLES): -0.28%
IYT (TRANSP): -7.53%
XLU (UTILITIES): -9.21%
The Bond Market:
As I type, the yield on the 10-year treasury bond sits at 2.39%. Which is 2 basis points lower than where it was when I penned last week's update.
TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price rise 0.30% last week (down 6.33% year-to-date). 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:
Here are last week’s U.S. economic highlights:
JUNE 8, 2015
THE CHICAGO BOARD'S EMPLOYMENT TREND INDEX ticked up in May. Here's from the release:
THE FED'S LABOR MARKET CONDITIONS INDEX rose 1.3 points in May, after declining the two previous months. Although those previous declines were revised upward, to -1 from -1.8 and from to -0.5 from -1.9 respectively. This speaks volumes about the improving labor market and will put added pressure on the Fed to raise rates sooner than later.
JUNE 9, 2015
THE JOHNSON REDBOOK RETAIL REPORT continues to surprise me to the downside. Coming in at 1.2% year-over-year vs 1.7% last week. The calendar shift for Father's Day from the 3rd week of the month to the 4th week may have an effect, but, nonetheless, this index doesn't jibe with other indicators. Forecasters will be more focused on this Thursday's retail sales report for May, which is expected to come in strong...
THE NFIB SMALL BUSINESS OPTIMISM INDEX shows small business owners feeling a bit better about their prospects. Registering its best reading of the year, 98.3. Here are the highlights of key areas in the report:
THE JOB OPENING AND LABOR TURNOVER (JOLTS) REPORT shows job openings surging to 5.376 million. That's the best reading in the history of this report, which dates back to 2000. Openings, year-over-year, exploded by 22%. More evidence that the jobs market and, therefore, the economy is clearly picking up: Here's Econoday:
WHOLESALE INVENTORIES rose .4% in April, while sales surged 1.6%. This brings the inventory to sales ratio down to 1.29 from 1.30. This is good news in terms of production going forward.
JUNE 10, 2015
MORTGAGE PURCHASE APPLICATIONS surged 10% last week. Factors tied to the Memorial Day weekend get the credit. Refinancings were up 7%. The average thirty-year rate is up to 4.17%. The rise in rates will surely hit refinances going forward. It'll be interesting to see how purchase apps do going forward---as the housing market is clearly looking good.
CRUDE OIL INVENTORIES declined by 6.8 million barrels last week as refineries are very actively operating, at 94.6% of capacity. GASOLINE inventories dropped 2.9 million barrels and DISTILLATES declined by .9 million barrels.
JUNE 11, 2015
WEEKLY JOBLESS CLAIMS have been consistently signaling strength in the labor market. Under 300,000 is considered a robust read, and we've been therefore weeks. Last week 279k, the 4-week average came in at 278.75k. Continuing claims were at 2.265 with the 4-week average at 2.23 million---these are low numbers! The unemployment rate for insured workers ticked up a tenth to a still very low 1.7%.
THE BUREAU OF CENSUS RETAIL SALES REPORT showed consumers in a buying mood in May, up 1.2%. With gains posted in "nearly all components". Here's Econoday (note the strength in building materials and garden equipment [per my optimism over housing]):
IMPORT AND EXPORT PRICES both increased in May. Here's Econoday's summary:
THE BLOOMBERG CONSUMER COMFORT INDEX --- while better than last year's average --- does not jibe with what I'm seeing below the surface. I expect the attitudes among respondents will improve as the next few weeks/months unfold. Here's the release:
BUSINESS INVENTORIES for April show the inventory build during a weak Q1 reversing. While inventories rose .4% in April, sales came in at almost .6%, leaving the inventory to sales ratio at 1.36, which is slightly below a post-recession high. As sales increase going forward---assuming the economy continues to gain traction---we should see the ratio come down further, which is a good thing, as too-high inventories lead to less production going forward.
NATURAL GAS INVENTORIES rose once again last week, by 111 billion cubic feet.
THE FED BALANCE SHEET grew by $2.7 billion last week, to $4.468 trillion. RESERVE BANK CREDIT rose $1.7 billion.
M2 MONEY SUPPLY declined by $15.0 billion last week.
JUNE 12, 2015
THE UN IVERSITY OF MICHIGAN'S CONSUMER SENTIMENT INDEX's preliminary reading for June makes sense to me --- showing what we should expect given recent jobs and some recent spending data, and the generally positive sentiment coming from key producer surveys. Bloomberg's commentary gives the rundown:
THE PRODUCER PRICE INDEX-FINAL DEMAND, on balance, came in benign for May. Here's Econoday:
The Monday-Wednesday price action either completely discredits my position that, these days, good economic news is, in the short-run, bad stock market news, or there was something else afoot. I.e., the Monday-Wednesday U.S. economic news (particularly employment-related) came in pretty darn good, which---if traders see a 2015 Fed rate hike as bad for equity prices---should've been greeted like an emergency visit to the dentist. But, as I mentioned, the market rallied hard through Wednesday.
I might say that the Thursday/Friday sell-off validated my case---in that the U.S. economic news only got better---but I won't. Because there was indeed something else afoot. Europe! Yes, Greece is a big deal, at least in the near-term, for global markets. So big that, in a week with little Fed-speak, it trumps even the fear over higher interest rates.
The Dow rallied 200+ points on Wednesday following the release of this blurb:
Chancellor Angela Merkel’s government may be satisfied with Greece committing to at least one economic reform sought by creditors to open the door to bailout funds, according to two people familiar with Germany’s position.
The Dow tanked nearly 200 pts (closing down 140) on Friday following this release:
The back and forth between Greece and its lenders remains unresolved after the IMF announced that its delegation had left negotiations in Brussels and flown home because of "major differences" with Athens over how to save the country from bankruptcy.
Next week, however, should be a different story. Short of Greece suddenly defaulting and leaving the Eurozone, traders won't be looking across the Atlantic for guidance on their moment-to-moment trading decisions (be thankful you're not a trader!). Nope, they'll be focused on Wedensday's announcement, and subsequent press conference, regarding the goings on at the corner of 20th Street and Constitution Avenue in Washington D.C. That would be the address of the Marriner S. Eccles Federal Reserve Board Building (the "Eccles Building" for short)---which is the meeting place of the Federal Open Market Committee (the arbiter of U.S. interest rate policy), chaired by Janet Yellen.
Early in the year, June was on the radar as a possible date for a Fed rate hike. That, I'd bet big money (if I were a better with big money), has virtually zero chance of happening. The financial market shock---something, I assure you, the Fed is deathly afraid of---that would result from what would now be a surprise June rate-hike makes one virtually impossible. Ah, but I do think next week's Fed commentary could move markets nonetheless (not everyone agrees).
As I've been reporting, the economy is moving along in firmly positive fashion. Which---despite relatively tame inflation readings---gives the Fed the green light to move its benchmark rate off of the zero lower bound as early as this September. And, again, wanting that first rate-hike to exact as little pain as possible, the Fed has to prepare the markets. Kinda like scheduling a root canal and getting emotionally-prepared, as opposed to cancelling your picnic plans and rushing to the dentist because out of the blue your tooth is killing you.
The question is, how's the market going to initially feel as its would-be dentist bends her brow and says, "you know, it looks like we're probably going to have to do a little work come later this year. But, I promise, it won't hurt too bad"? Will it (traders) believe the "won't hurt too bad part"? We'll see...
Last week I promised I'd touch on the prospects for the non-U.S. portion of your portfolio, so here goes:
Can you imagine limiting your investment options to an economy that houses merely 4% of the world's human capital? Or one that encompasses only 36% of the world's market capitalization? Let's hope not, for that would be a most restrictive way of viewing the business of growing your personal wealth. Well, that's the bottom line for those who stick all of their portfolios in, say, an S&P 500 index fund. Other than investing in U.S. companies that do business in other economies (which is no small deal, btw), they miss out on the growth potential of economies with favorable demographics and the need (and desire!) for modern infrastructure---and they forego the ownership of companies that will without question shape the future landscape of this interdependent world we live in.
Thus, the long-term odds are very much in favor of those willing to brave the inherent ups and downs of international financial markets.
As for the near-term, well, that's anybody's guess. But I will say that if a given country's central bank policy eases and tightens based on where its economy rests on the business cycle, many (if not most) other markets look to presently sport greater growth potential than does the U.S.'s. I.e., much of the rest of the world has some economic catching up to do, and as much as over-intervention concerns me (wrote a book on it even), their policymakers are hell-bent on goosing their respective financial markets to help their economies along.
From the beginning of March to current, the world saw 25 interest rate cuts (from [among others] the likes of China, India, South Korea, Australia, New Zealand and Sweden) and only 11 hikes (Brazil three times, Trinidad twice, and Ukraine, Angola, Georgia, Moldova, Kenya and Iceland once each). The European Central Bank, like the U.S., is already as low as it can go, but, unlike the U.S., it is in the early stages of a massive quantitative easing (printing Euros and buying assets) program that's scheduled to run through September 2016.
As for valuations, I update the P/Es and PEG ratios (factors in 5-year earnings growth estimates) for 22 countries/regions on a weekly basis. And as of last Wednesday---based on this year's earnings---I count 19 with lower P/Es and 18 with lower PEGs than the S&P 500. Based on 2016 estimated earnings, all but 2 sport lower P/Es than the S&P.
All that optimism aside, in the near-term, non-U.S. markets---particularly the emerging markets---will have to contend with a soon-to-be-higher U.S. Fed funds rate. Clearly, the recent pullback in emerging markets tells us that traders are nervous about a repeat of the fallout that occurred back in early 2013---when Ben Bernanke merely mentioned that the U.S.'s quantitative easing program would have to be "tapered" at some point in the then foreseeable future. That utterance sent emerging market equities (and currencies) reeling as arbitragers exited their higher-yielding, stronger-currency foreign positions and rushed back to a U.S. dollar that they figured would have to rally, amid higher interest rates, going forward. And while I can see some pain a coming (if emerging market equity prices haven't already priced in a Fed hike), the dynamics are vastly different this go round.
You see, the dollar has already rallied big time, so I'm not so sure that the Fed's normalizing of interest rates will send it further toward the moon. In fact, I could argue that while the interest rate differential (the U.S.'s higher than others') does make the stronger-dollar case, if a Fed hike is viewed as an economic cooler we could see a flight out of the dollar and into the currencies of countries with greater growth potential.
The consensus is clearly in the stronger dollar camp for now. Which, again, from a short-term trading perspective, poses a headwind for emerging market equities. Time will tell...
The Stock Market:
Non-US markets have measurably outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Don’t, as I suggest above, 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 Morningstar) for the major U.S. indices. And (according to ETFdb.com) the results for non-U.S. indices and U.S. sectors---using index ETFs as our non-U.S. and sector proxies:
Dow Jones Industrials: +1.60%
S&P 500: +2.68%
NASDAQ Comp: +7.23%
EFA (Europe, Australia and Far East): +8.81%
FEZ (Eurozone): +6.55%
VWO (Emerging Markets): +4.00%
Sector ETFs:
Here’s a look at the year-to-date results for a number of U.S. sector ETFs:
IYH (HEATHCARE): +9.92%
XHB (HOMEBUILDERS): +7.03%
XLY (DISCRETIONARY): +6.51%
XLB (MATERIALS): +3.72%
XLK (TECH): +3.61%
XLF (FINANCIALS): +1.62%
XLE (ENERGY): -2.13%
XLI (INDUSTRIALS): -0.61%
XLP (CONS STAPLES): -0.28%
IYT (TRANSP): -7.53%
XLU (UTILITIES): -9.21%
The Bond Market:
As I type, the yield on the 10-year treasury bond sits at 2.39%. Which is 2 basis points lower than where it was when I penned last week's update.
TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price rise 0.30% last week (down 6.33% year-to-date). 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:
JUNE 8, 2015
THE CHICAGO BOARD'S EMPLOYMENT TREND INDEX ticked up in May. Here's from the release:
The Conference Board Employment Trends Index™ (ETI) increased in May. The index now stands at 128.60, up from 128.10 (a downward revision) in April. The change represents a 5.1 percent gain in the ETI compared to a year ago.
“In the past six months, the Employment Trends Index has been growing at a 3.5 percent annual rate, which is solid, but slower than the rates of the past two years. We therefore expect employment to grow by about 200,000 new jobs per month, rather than the spectacular 250,000-300,000 we experienced in 2014,” said Gad Levanon, Managing Director of Macroeconomic and Labor Market Research at The Conference Board. “Given that the labor force is barely expanding, job growth of about 200,000 per month will be sufficient to continue rapidly lowering the unemployment rate.”
May’s increase in the ETI was driven by positive contributions from six 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, Industrial Production, Real Manufacturing and Trade Sales, Number of Employees Hired by the Temporary-Help Industry, Initial Claims for Unemployment Insurance, and Job Openings.
THE FED'S LABOR MARKET CONDITIONS INDEX rose 1.3 points in May, after declining the two previous months. Although those previous declines were revised upward, to -1 from -1.8 and from to -0.5 from -1.9 respectively. This speaks volumes about the improving labor market and will put added pressure on the Fed to raise rates sooner than later.
JUNE 9, 2015
THE JOHNSON REDBOOK RETAIL REPORT continues to surprise me to the downside. Coming in at 1.2% year-over-year vs 1.7% last week. The calendar shift for Father's Day from the 3rd week of the month to the 4th week may have an effect, but, nonetheless, this index doesn't jibe with other indicators. Forecasters will be more focused on this Thursday's retail sales report for May, which is expected to come in strong...
THE NFIB SMALL BUSINESS OPTIMISM INDEX shows small business owners feeling a bit better about their prospects. Registering its best reading of the year, 98.3. Here are the highlights of key areas in the report:
LABOR MARKETS
Small businesses posted another decent month of job creation in May, a string of 5 solid months of job creation. On balance, owners added a net 0.13 workers per firm over the past few months. Fourteen percent reported raising employment an average of 2.7 workers per firm while 12 percent reported reducing employment an average of 3 workers per firm. Fifty-five percent reported hiring or trying to hire (up 2 points), but 47 percent, reported few or no qualified applicants for the positions they were trying to fill. Thirteen percent reported using temporary workers. Twenty-nine percent of all owners reported job openings they could not fill in the current period, up 2 points, revisiting the February reading, and the highest reading since April 2006.INVENTORIES AND SALES
The seasonally adjusted net percent of all owners reporting higher nominal sales in the past 3 months compared to the prior 3 months rose a stunning 11 points to a net 7 percent. Eleven percent cited weak sales as their top business problem (unchanged). Expected real sales volumes posted a 3 point decline, falling to a net 7 percent of owners expecting gains, after a 5 point decline in January and February, a 2 point decline in March and a 3 point decline in April. Overall, expectations are not showing a lot of strength.
The net percent of owners reporting inventory increases fell 4 points to a net negative 5 percent (seasonally adjusted). The net percent of owners viewing current inventory stocks as “too low” improved 1 point to a net 0 percent. The reductions were apparently a result of unexpectedly strong improvement in sales trends, and left balance in the assessment of current stocks. The net percent of owners planning to add to inventory was unchanged at a net 4 percent, in sympathy with the more widespread reduction in stocks. Inventory investment might have been even stronger in light of the liquidation had expectations for real sales gains improved rather than softened.CAPITAL SPENDING
Fifty-four percent reported outlays, down a surprising 6 points. Of those making expenditures, 39 percent reported spending on new equipment (up 4 points), 21 percent acquired vehicles (down 4 points), and 13 percent improved or expanded facilities (unchanged). Six percent acquired new buildings or land for expansion and 12 percent spent money for new fixtures and furniture, both figures up 1 point. These numbers suggest, overall, a back-tracking of investment spending. The percent of owners planning capital outlays in the next 3 to 6 months fell 1 point to 25 percent, not a strong reading historically but among the best in expansion.EARNINGS AND WAGES
Earnings trends posted an unexpected 9 point gain, posting a reading of a net negative 7 percent reporting higher earnings, on top of a 6 point improvement in April. is the best reading since October 2005. The main factor improving the earnings trend was the decline in the percent reporting lower earnings quarter on quarter.
Reports of increased labor compensation rose a point to a net 25 percent of all owners. Reports of gains frequent occurred in December 2014 and January of year, but those are the highest readings since January 2008 when employment last peaked before the recession. Labor costs continue to put pressure on the bottom line, but fuel prices are down a lot and sales trends much stronger. should begin to show up in wage growth, although rising benefits offset potential increases in take-home pay. A seasonally adjusted net 14 percent plan to raise compensation in the coming months (unchanged). The reported gains in compensation are still in the range typical of an economy with reasonable growth.
THE JOB OPENING AND LABOR TURNOVER (JOLTS) REPORT shows job openings surging to 5.376 million. That's the best reading in the history of this report, which dates back to 2000. Openings, year-over-year, exploded by 22%. More evidence that the jobs market and, therefore, the economy is clearly picking up: Here's Econoday:
The hawks have something to talk about with the April JOLTS report where job openings surged to 5.376 million, far above the Econoday consensus for 5.038 million and the high estimate at 5.050 million. This is the highest reading in the history of the series going back to 2000. Year-on-year, openings are up an eye-popping 22 percent! And the report includes a big upward revision for March, to 5.019 million vs an initial 4.994 million. April's job openings rate rose to 3.7 percent from 3.5 percent. This report will boost talk among the hawks that slack in the labor market is evaporating and that employers will have to raise wages to fill positions. Other readings include a tick lower for the quits rate, to 1.9 percent, and a tick lower for the separations rate, to 3.5 percent from 3.6 percent. Recent History Of This Indicator
JOLTS data had been very strong until the March report which was very weak. But a big gain is expected for April, one that would underscore last week's very strong employment report for May. Job openings are seen at 5.038 million vs March's 4.994 million.
WHOLESALE INVENTORIES rose .4% in April, while sales surged 1.6%. This brings the inventory to sales ratio down to 1.29 from 1.30. This is good news in terms of production going forward.
JUNE 10, 2015
MORTGAGE PURCHASE APPLICATIONS surged 10% last week. Factors tied to the Memorial Day weekend get the credit. Refinancings were up 7%. The average thirty-year rate is up to 4.17%. The rise in rates will surely hit refinances going forward. It'll be interesting to see how purchase apps do going forward---as the housing market is clearly looking good.
CRUDE OIL INVENTORIES declined by 6.8 million barrels last week as refineries are very actively operating, at 94.6% of capacity. GASOLINE inventories dropped 2.9 million barrels and DISTILLATES declined by .9 million barrels.
JUNE 11, 2015
WEEKLY JOBLESS CLAIMS have been consistently signaling strength in the labor market. Under 300,000 is considered a robust read, and we've been therefore weeks. Last week 279k, the 4-week average came in at 278.75k. Continuing claims were at 2.265 with the 4-week average at 2.23 million---these are low numbers! The unemployment rate for insured workers ticked up a tenth to a still very low 1.7%.
THE BUREAU OF CENSUS RETAIL SALES REPORT showed consumers in a buying mood in May, up 1.2%. With gains posted in "nearly all components". Here's Econoday (note the strength in building materials and garden equipment [per my optimism over housing]):
The consumer showed a lot of life in May, driving up retail sales 1.2 percent with gains sweeping nearly all components. A leading component in the month was motor vehicle sales which jumped 2.0 percent, excluding which retail sales still rose a very strong 1.0 percent. Another component showing special strength was gasoline sales which got a boost from higher prices. Still, excluding both of these components, retail sales ex-auto ex-gas gained a very solid 0.7 percent. These results offset weakness in April, when total sales rose only 0.2 percent (upward revised from no change).
In contrast to weakness through most of the April report, there's only one component showing contraction in May and that's the usually solid health & personal care stores at minus 0.3 percent. Standouts on the plus side, apart from vehicles and gasoline, are building materials & garden equipment stores, up 2.1 percent, clothing & accessories stores, up 1.5 percent, and nonstore retailers, up 1.4 percent. Department stores, which sank a steep 2.9 percent in April, rebounded with a 0.8 percent gain.
The long awaited rebound from the soft first quarter is finally here. Today's results will have forecasters upping their estimates for second-quarter GDP. These results will also be a key point of discussion, especially in arguments by the hawks, at next week's FOMC meeting.
IMPORT AND EXPORT PRICES both increased in May. Here's Econoday's summary:
May import prices advanced a monthly 1.3 percent in May, after slipping 0.2 percent in April. The May increase was the first monthly rise since the index advanced 0.3 percent in June 2014 and the largest one month increase since the index rose 1.4 percent in March 2012. However, on the year, import prices dropped 9.6 percent and have not recorded a 12-month rise since the index advanced 0.9 percent between July 2013 and July 2014. Excluding fuel, import prices were unchanged after declining 0.3 percent in April.
Prices for import fuel jumped 11.8 percent in May following a 1.3 percent advance in April and the largest monthly advance since the index increased 16.0 percent in June 2009. A 12.7-percent jump in petroleum prices in May led the advance in overall fuel prices.
May export prices were up 0.6 percent after declining 0.7 percent in April. The May advance was the largest rise for the index since a 0.9-percent increase in March 2014. In May, rising nonagricultural prices more than offset lower agricultural prices. On the year, export prices declined 5.9 percent.
Agricultural export prices were down 1.0 percent, continuing the downward trend over the past 12 months. In May, falling wheat and corn prices more than offset higher prices for fruit and nuts. Excluding agriculture, export prices were up 0.7 percent, led by higher prices for nonagricultural industrial supplies and materials and automotive vehicles which more than offset lower prices for capital goods and consumer goods. Nonagricultural export prices fell 4.6 percent for the year ended in May.
THE BLOOMBERG CONSUMER COMFORT INDEX --- while better than last year's average --- does not jibe with what I'm seeing below the surface. I expect the attitudes among respondents will improve as the next few weeks/months unfold. Here's the release:
Consumer Comfort in U.S. Falls for a Record Ninth Straight Week
By Michelle Jamrisko
(Bloomberg) -- Consumer confidence dropped for a record ninth straight week as Americans’ views of the buying climate deteriorated to a seven-month low.
The Bloomberg Consumer Comfort Index decreased to 40.1 in the period ended June 7, the weakest since November, from 40.5 the prior week. The gauge has fallen about 8 points since reaching an almost eight-year high in mid-April.
Waning sentiment over the past two months coincides with a pickup in the price of a gallon of gasoline since the end of March. While attitudes about spending soured for the eighth week in nine, wage gains and higher stock prices helped households feel better about their finances, the report showed.
“This has been more like an unusually long, slow leak,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement. “Sharply rising gas prices customarily correlate with declining consumer confidence.”
The average cost of a gallon of regular gasoline was $2.75 as of June 9, up about 35 cents since the end of March, according to auto group AAA.
The string of declines from April’s high marks the longest run since the survey began in 1985. Nonetheless, the measure is still higher than last year’s average of 36.7 that was the best since 2007.
Two of three components in the weekly index dropped in the latest report. The comfort index’s buying climate gauge, which measures whether now is a good time to purchase goods and services, fell to 33.5, also the lowest since November, from 34.2 in the prior period.
Economy Views
A measure of consumers’ views on the state of the national economy decreased to 32.1, the weakest since December, from 32.9. The gauge of personal finances rose to 54.7 from a three-month low of 54.4 in the prior period.
Sentiment among men declined for the first time in five weeks, while among women it fell for a fifth week.
Confidence among homeowners was particularly depressed, with that measure falling to a more than seven-month low of 41.6 from 41.8 in the previous period. That helped narrow the gap between owners and renters to 3.4 points, compared with a historical average of 10.3 points, Langer said.
Five of seven income groups showed a decrease in sentiment. Those making at least $25,000 but less than $40,000 a year were the least upbeat since October. While confidence climbed among those making more than $100,000, the index was the second-lowest since September.
By Region
Two of four U.S. regions showed a drop, with sentiment in the Northeast falling to its lowest since October. The Midwest region’s gauge also decreased, while confidence rose in the South and the West.
The data are the latest to indicate that a plunge in energy costs in the second half of last year produced a $150 billion windfall for U.S. consumers with little to show for it.
Persistent job gains might keep Americans’ confidence from an even bigger retreat. Employers added 280,000 jobs in May, the most in five months, after a 221,000 April advance.
Wage growth also has begun to show signs of life. Average pay for all civilian workers climbed 4.2 percent in the first quarter from the same period in 2014, Labor Department figures showed Wednesday. That compares with a 4 percent year-over-year gain in the fourth quarter and is the strongest since July-September 2006.
Average hourly earnings reported with the Labor Department’s monthly jobs figures accelerated in May to show a 2.3 percent year-over-year gain, the fastest since August 2013.
The potential for a Fed rate hike this year has businesses such as Mooresville, North Carolina-based Lowe’s Cos. on guard for the impact on sentiment and spending.
An increase in interest rates has the potential to hurt confidence and consumers’ willingness “to invest in a new home or spend on their existing home,” Chief Financial Officer Robert Hull said at a June 10 conference hosted by financial services firm Piper Jaffray Cos.
BUSINESS INVENTORIES for April show the inventory build during a weak Q1 reversing. While inventories rose .4% in April, sales came in at almost .6%, leaving the inventory to sales ratio at 1.36, which is slightly below a post-recession high. As sales increase going forward---assuming the economy continues to gain traction---we should see the ratio come down further, which is a good thing, as too-high inventories lead to less production going forward.
NATURAL GAS INVENTORIES rose once again last week, by 111 billion cubic feet.
THE FED BALANCE SHEET grew by $2.7 billion last week, to $4.468 trillion. RESERVE BANK CREDIT rose $1.7 billion.
M2 MONEY SUPPLY declined by $15.0 billion last week.
JUNE 12, 2015
THE UN IVERSITY OF MICHIGAN'S CONSUMER SENTIMENT INDEX's preliminary reading for June makes sense to me --- showing what we should expect given recent jobs and some recent spending data, and the generally positive sentiment coming from key producer surveys. Bloomberg's commentary gives the rundown:
American Consumers Getting Mojo Back as Wages Start Rising (1)
(Updates with closing stock prices in fifth paragraph. To receive this economy column daily: SALT ECOCOL <GO>)
By Michelle Jamrisko
(Bloomberg) -- Bigger paychecks are giving American consumers reason to believe again.
The University of Michigan’s preliminary consumer sentiment index for June rose to 94.6, topping all estimates in a Bloomberg survey of economists, from a reading of 90.7 last month, figures showed Friday. Households were the most upbeat about their wage prospects in seven years.
As the ranks of the unemployed shrink, the competition for skilled workers is heating up and forcing employers to boost wages to attract and retain staff. Firming confidence makes it likely the recent pickup in consumer spending, which accounts for almost 70 percent of the economy, will be sustained.
“The labor market continues to improve, and that’s probably the biggest determinant of sentiment,” said Aneta Markowska, chief U.S. economist at Societe Generale in New York, whose forecast for a rise to 93.8 was among the closest in the Bloomberg survey. People “see their employers trying to fill positions and having a difficult time -- that probably gives them a sense of having a little more pricing power.”
Stocks fell, with equities almost erasing the week’s advance, amid growing concern Greece won’t reach a deal with its creditors in time to avoid default. The Standard & Poor’s 500 Index dropped 0.7 percent to 2,094.11 at the close in New York.
Survey Results
The median forecast in the Bloomberg survey of 68 economists projected the sentiment index would climb to 91.2. Estimates ranged from 87.7 to 94. The gauge averaged 84.1 last year.
The Michigan sentiment survey’s index of expectations six months from now increased to 86.8 from 84.2 last month. The gauge of current conditions, which measures Americans’ views of their personal finances, rose to 106.8 in June from 100.8 a month earlier.
“The June data are consistent with a 3 percent annual growth rate in real personal consumption expenditures during 2015,” Richard Curtin, director of the Michigan Survey of Consumers, said in a statement. “The majority of consumers anticipated good times in the economy as a whole during the year ahead.”
A 3 percent gain would make 2015 the strongest year for consumer spending since 2006. It grew 2.5 percent last year.
Payroll Gains
Sustained labor-market progress should help bolster expectations for a pickup in economic activity. Employers added 280,000 jobs in May, the most in five months, after a 221,000 April advance. An increase in the number of people entering the labor force caused the jobless rate to creep up to 5.5 percent from 5.4 percent, which was the lowest since May 2008.
The Michigan survey for June showed consumers projected wages would rise 2.2 percent a year, up from an estimated 1.3 percent last month and the highest since 2008. Households held the most favorable views about the outlook for their finances since 2007.
Average pay for all civilian workers climbed 4.2 percent in the first quarter from the same period in 2014 to $22.88 an hour, Labor Department figures showed this week. That compares with a 4 percent year-over-year gain in the fourth quarter and is the strongest since July-September 2006.
Average hourly earnings reported with the Labor Department’s monthly jobs figures accelerated in May to a 2.3 percent year-over-year pace, the fastest since August 2013.
Another report Friday showed wholesale prices rose in May as the biggest jump in fuel costs in at least five years swamped muted advances in other categories.
The 0.5 percent increase in the producer-price index followed a 0.4 percent decline the prior month, according to data from the Labor Department. Costs dropped 1.1 percent over the past 12 months.
Consumer sentiment measures have been mixed this month. The Bloomberg Consumer Comfort Index decreased to 40.1 in the period ended June 7, marking a record nine weeks of declines and the lowest since November, according to data issued Thursday. Fewer Americans said now was a good time to make purchases, even as views of their personal finances improved.
At the same time, consumer spending is showing signs of life. Retail sales increased 1.2 percent last month following a 0.2 percent advance in April, Commerce Department figures showed Thursday. The May gain was broad-based with 11 of 13 major categories increasing.
Federal Reserve policy makers are counting on a rebound in growth to justify an increase this year in the benchmark interest rate for the first time since 2006. The central bankers next meet June 16-17 in Washington and will release updated economic projections.
THE PRODUCER PRICE INDEX-FINAL DEMAND, on balance, came in benign for May. Here's Econoday:
There are signs of price pressure in the May producer price report where the headline came in on the high end of expectations, at plus 0.5 percent. The year-on-year reading, however, remains well in the negative column at minus 1.1 percent while the core rate looks benign, at only plus 0.1 percent on the month as expected for a year-on-year rate of only plus 0.6 percent.
Both food, up 0.8 percent, and energy, up 5.9 percent, did swing higher in the month following respective April declines of minus 0.9 percent and minus 2.9 percent. On food, fruits and vegetables both show mid-single digit gains on the month while gasoline and home heating oil both show big gains, at plus 17.0 percent and plus 11.5 percent on the month.
Elsewhere, however, inflation is mute with services unchanged on the month for a 0.6 percent year-on-year gain. Excluding food, energy and trade services, prices fell 0.1 percent for a year-on-year gain also at a very benign 0.6 percent.
Despite one-month spikes for food and energy, this report won't be sending any alarms off. Next report on inflation will be the consumer price index which, on Thursday next week, follows Wednesday's FOMC announcement.
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