Your Weekly Update

"If you can come back two months ago your results would be much better!" That's been my quip of late as I project a portfolio's year-to-date results onto the screen during client review meetings. Yep, as recently as mid-May, the Dow was up 3.48%, the S&P up 3.89%, developed non-U.S. markets were up 12.46% and emerging markets were flirting with double-digit gains, up 9.94. My what a difference a few weeks can make!

As I type, the Dow has slid into the red, the S&P is barely in the black, developed markets have given back more than half of their gains and emerging markets are firmly lower on the year.

It's utterly disheartening to see gains, particularly in our non-U.S. allocations (an area I've been bullish on---and adding to in most portfolios), dry up in a matter of weeks! Isn't it? Well, isn't it?

I'm guessing you answered "YES!". Of course I just bated you into my segue into why when you've asked me what to do with the money you'll for sure be spending within the next few weeks/months to, say, 3 years, I answer "maybe the mattress". I.e., unless you tell me you'll be spending that money in Vegas, I refuse to touch other people's short-term money. A Greece, for example, can elect a populace-pleasing politician (who promises free patsas in every pot) whose actions, within months, lead to a calling into question the viability of the world's second-most traded currency---and, thus, send global markets into a tizzy.

Ah, but the long-term money---that---of course, I'll do. History virtually makes it a no-brainer: If you are to achieve an above-inflation long-term rate of growth, you need to own stuff in your portfolio. Which means taking on the risk that---particularly in the short-term---the stuff you own may lose its attractiveness to potential buyers, and, thus, decline in price. Which requires that regardless of whether or not Greece ever gets its act together, or etcetera, etcetera, you remain committed to the notion that 5-years from now you'll be texting your kids on your iPhone 11---or, for sure, they'll be texting you on theirs.

Moving on:

Commodities, they say, are getting crushed largely because of a slowdown in China's economy. I think "they" may be onto something. China's Manufacturing PMI for July came in last week at 48.2. Below 50 denotes contraction. Clearly, China isn't making stuff these days like it has in the past.

But wait a minute! Starbucks reported its numbers last week (record earnings for the quarter by the way) and guess where, far and away, it saw its best results:

 Q3 Fiscal 2015 Highlights:

• 
  

  Global comparable store sales increased 7%, driven by a 4% increase in traffic

  
  


• 
  

  Americas comp sales increased 8%, driven by a 4% increase in traffic

  
  


• 
  

  China/Asia Pacific comp sales increased 11%, driven by a 10% increase in traffic

  
  


• 
  

  EMEA comp sales increased 3%, driven by a 2% increase in traffic

  
  

Hmm??

And speaking of iPhones:

Apple's biggest market is fast becoming China, and while the last two quarters have showed 75 percent year-over-year growth, Apple more than doubled its China revenue in this most recent quarter, compared to the same quarter a year ago. Apple isn’t just growing in China, its growth is accelerating.

Hmm???

You see folks, China, while capable of doing profoundly stupid (in my view) things (like directly intervening into a crashing stock market), is smartly attempting to move away from an export-driven economy and toward a consumer-driven service economy. And while I expect the Chinese government will effort mightily to stimulate manufacturing production going forward ($3.8 trillion in foreign reserves says they can!), clearly, their consumers are feeling empowered---which is precisely what the government's after.

As for the U.S. consumer, sentiment's been up and down of late. But surveys be damned, the actor responsible for 2/3rds of the nation's economy is indeed acting---as evidenced by last week's earnings results:

VISA

The largest credit card company by market share posted adjusted fiscal third-quarter earnings of 74 cents per share on revenue that rose to $3.52 billion from $3.16 billion a year ago. 

Wall Street had expected the company to deliver quarterly earnings per share of 59 cents on $3.36 billion in revenue, according to consensus estimates from Thomson Reuters.

STARBUCKS

Starbucks posted fiscal third-quarter earnings of 42 cents per share on $4.88 billion in revenue. Analysts forecast Starbucks would report earnings of 41 cents a share on $4.86 billion in revenue, according to a consensus estimate from Thomson Reuters.

AMAZON

The company posted second-quarter profit of 19 cents per share on $23.18 billion in revenue. Its sales rose 20 percent from the year-earlier period and were more than $300 million better than the highest of 36 estimates from analysts polled by Thomson Reuters.

Wall Street expected Amazon.com to report a quarterly loss of 14 cents a share on $22.39 billion in revenue, according to consensus estimates from Thomson Reuters. The shares were up as much as 18 percent in extended trading after the results and were tracking well above their all-time high of about $493.

Whether crushing commodities is all about weak global demand or a strengthening U.S. dollar, let's not get too depressed over the fact that input costs (whether into your gas tank or into the construction project down the street) are on the decline. Besides, if, say, you're an investor in commodities, it won't last forever.

Speaking of global demand, while virtually every pundit I listened to last week sees the commodities' rout continuing (and they could very well be right), I'm seeing something very interesting in an index that tracks the costs of shipping raw materials over the waters of the world.    click chart to enlarge...



If global demand remains so weak, how is it that the shipping industry is fetching higher fees for moving building materials, etc., around the world? Indeed, the opposite should be the case. Time will tell...

As you've gathered, I'm not, at this point, worried about the economy. Nor is the Fed. In fact, I expect that before the sun sets on 2015, we'll see at least one Fed funds rate hike. Which, particularly if inflation justifies it, means we shouldn't be all that optimistic about the prospects for U.S. stocks over the next few months. I.e., in the absence of accelerating across-the-board earnings, valuations become a bit stretched when we factor in a higher inflation rate.

That said, history suggests that in the absence of a U.S. recession, we shouldn't lose any sleep over the prospects for a 2008-style bear market (although anything can happen in the short-term). And while I continue to see better value in foreign markets, I do believe that, sector by sector (consumer discretionary, housing, financials, transportation, for example) there are pockets of value within the U.S. market. Whether or not that value leads to outsized gains over the next 6 months is anyone's guess. Which is another reason why we never "invest" with only 6 months in mind.

 

The Stock Market:

Non-US developed markets—even after their recent pummeling—have outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I remain constructive on non-U.S.. That said, there are a number of potential international hot buttons (as we've recently experienced) 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:  -1.43%%

S&P 500:  +1.01%

NASDAQ Comp:  +7.44%

EFA (Europe, Australia and Far East):  +4.12%

FEZ (Eurozone):  +4.99%

VWO (Emerging Markets):  -4.07%

Sector ETFs:

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

IYH (HEATHCARE):  +10.62%

XLY (DISCRETIONARY):  +9.29%

XHB (HOMEBUILDERS):  +6.83%

XLP (CONS STAPLES):  +2.45%

XLK (TECH):  +2.44%

XLF (FINANCIALS):  +1.58%

XLI (INDUSTRIALS):  -6.50%

XLB (MATERIALS):  -7.20%

XLU (UTILITIES):  -10.36%

IYT (TRANSP):  -11.85%

XLE (ENERGY):  -12.49%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.29%. Which is 9 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 rise  2.25%  over the past 5 trading days (down 3.60% 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:

JULY 21, 2015

THE JOHNSON REDBOOK RETAIL REPORT continues to paint a relatively bleak picture of the consumer's spending pattern, rising merely 1.2% year over year.

THE ICSC RETAIL REPORT picked up notably last week, rising 2.5% year on year. Still not robust, but makes more sense than Redbook's recent numbers given other consumer-related indicators.

JULY 22, 2015

MORTGAGE PURCHASE APPS rose 1.0% last week, while refis declined 1.0%. Purchase apps, non-seasonally adjusted, are up 18% year over year. The average 30-year rate for conforming loans stayed at 4.23%.

THE FHFA HOUSE PRICE INDEX is up 5.7% year over year. The best rate since April of last year.

EXISTING HOME SALES, rounding off today's positive news on housing, surged 3.2% in June to an annual rate of 5.49 million. Year over year sales are up a very strong 9.6%. The inventory, in terms of how many months of sales it would take to exhaust existing homes for sales, dropped to a low 5.0 months.

Today's housing numbers support the optimism I've had over housing since late last year!

CRUDE OIL INVENTORIES rose 2.5 million barrels last week, despite refiners running at 95.5% capacity. GASOLINE INVENTORIES, despite all the refining, declined by 1.7 million barrels... there appears to be huge demand for gas these days. DISTILLATES dropped by .2 million barrels.

JULY 23, 2015

WEEKLY JOBLESS CLAIMS came in at an amazing 42-year low last week. While that sounds phenomenal, and speaks to the recent strength in the jobs market, July is precarious as auto companies retool their factories---the timing of temporarily layoffs can play havoc with the number.

THE CHICAGO FED NATIONAL ACTIVITY INDEX surprised economists, who expected -.05, with a .08 reading in June. Showing June to be economically stronger than predicted.

THE BLOOMBERG CONSUMER COMFORT INDEX declined again last week (3rd straight) to 42.4 from the previous week's 43.2. 4 weeks ago the index produced a long-term high... Other indicators, recent consumer-focused corporate earnings in particular, tell me the consumer has been feeling fine and I suspect will continue to over the coming months.

THE INDEX OF LEADING ECONOMIC INDICATORS FOR JUNE beat the consensus estimate, coming in at 0.6% vs 0.2% est. Housing permits, for the second month in a row, was a major influence.

NATURAL GAS INVENTORIES keep right on building, up 61 billion cubic feet last week... Bearish for the price... Great for the consumer...

THE KANSAS CITY FED MANUFACTURING INDEX continues to show weakness, at -7 after a -9 in June. Weakness in export orders, thanks to the strong dollar, would be a major culprit...

THE FED BALANCE SHEET grew by 11.7 billion last week to $4.544 trillion. RESERVE BANK CREDIT increased $12 billion...

M2 MONEY SUPPLY has been growing for weeks, and last week was no exception, up $5.9 billion. Suggesting the consumer's cash pile is growing, which could be a positive sign for the economy, as well as inflation...

 

JULY 24, 2015

MARKIT'S FLASH PMI held steady in July at 53.8... Here's Econoday:

The manufacturing PMI is holding steady, coming in at a composite 53.8 in the July flash and right in line with the 54.0 final reading for June and June's 53.4 flash. Though respectable, these are soft rates of growth for this report which runs hot relative to other manufacturing data and where the long-run average is 54.3.

New orders and production are both accelerating this month though hiring is holding down the composite. The report cites reduced capital spending in the energy sector as a negative for the sample, and it says some firms are focusing their efforts on domestic markets given weakness in export markets.

Other details include a fall-off in input buying due in part to excess inventories. Price readings remain subdued.

This report is pointing to little change for the manufacturing sector this month, a sector that has been struggling this year and looks to continue to struggle through the second half.

NEW HOME SALES FOR JUNE came in way below expectations (down 6.8%). While these numbers are noisy, this---given recent strength in most other housing indicators---was a big surprise. Much needed supply, however, surged in June, which is very good news, given the inventory constraints that have challenged the new home market this year. I expect we'll see a noticeable pick up in July. Year-over-year, new home sales are up a whopping 18%!

Market Commentary (audio)

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Market Commentary (audio)

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How to Begin A Research Theme

He contains options for further growth and has developed the organization..

Seeing 33 is dated by Kris Jenner -year-old partner Corey Gamble has many supporters of the 59-year-old star questioning where their connection might cause this weekend and enthusiastic. Bruce, and hi Corey, Kris appears to be saying. There is possibly media that with divorce from Bruce being finished right before Holiday, the "Keeping Up with the Kardashians" matriarch may be considering transforming her last name while in the near future.

Your Weekly Update And Where (in the world) is the Money Going?

As promised, this week we'll touch on "the global flow of capital". But first I'd like to challenge a little conventional market-thought on commodities prices and their historic relationship to the economy.

It's common thought that the recent collapse in commodities' prices reflects concern over weakness in the global economy, particularly in China. And that that could very well spell bad news for global equities going forward. Make sense? Well of course!

But here's the thing, as the chart below displays, lower commodities prices---while surely reflecting light demand relative to supply (and, btw, a very strong U.S. dollar)---aren't generally harbingers of recessions, quite the contrary in fact. As you can see, it's typically a prolonged rise in commodities prices that precedes recessions---declines tend to presage expansions. Which flies in the face of much of today's commentary. But it makes perfect sense: Higher input prices, whether it's gas in your car or copper wire in your house, can eventually choke consumption and investment. Lower input prices, on the other hand, ultimately mean more capital left over with which to spend if you're a consumer or to ultimately invest if you're a producer, leading ultimately to a growing global economy.

Recessions are outlined in red, the oil price is dark yellow, and the mountain is the JOC-ECRI Industrial Price Index:   click charts to enlarge...



THE GLOBAL FLOW OF CAPITAL

I here confess, I am a free trade freak! Long-time readers have been inundated with why I believe ("know" in fact) that free trade is the absolute worthiest of pursuits if the world is to continue to grow more prosperous (across all nations), and more peaceful in the years ahead. If you're new to the blog, and interested, shoot me an email and I'll effort mightily to convert you to my way of thinking. Although, being that I'm guessing that all recent subscribers are Americans, I should expect that they're already free trade fanatics. Right? I mean "freedom" and America are synonymous! Right?

Have you ever noticed what typically happens to a stock when it's discovered that Warren Buffet is pouring money into it? That's right, it typically rises in price, often dramatically. As it should, for Mr. Buffet is renowned as a savvy, patient, very long-term investor.  

As an allocator of globally-diversified portfolios, I am keenly interested in what goes on throughout the world. In terms of investment destinations, among other things, I want to know to what extent capital is flowing to, or away from, the targets of my attention. I.e., I want to know to what extent---and to where---the world's big money is making big investments beyond its own borders---for perhaps we should consider following its lead.

The Bank for International Settlements (BIS) is considered the central bank of central banks, and is the best source of information when it comes to cross-border money flow. Sadly, however, the data is reported with a six-month lag.

For today we'll focus on emerging markets.

Here's a look at cross border claims on emerging countries during the course of 2014:



As you can see, in the aggregate, there was a souring of sentiment toward emerging markets during the second half of last year. As you might guess, given Russia/Ukraine and Greece, emerging Europe was not on big money's list of attractive destinations.

Here's a look at Russia, Poland and Ukraine:



Of course we can't have a discussion about emerging markets without featuring China, which, as you can see, saw a tapering of cross border flow late in the year---but nothing like what we saw in emerging Europe.



So where in the major emerging economies, if anywhere, did capital flow actually increase late last year? Well, for one, there was India, which is where we'll focus from here:



India is undergoing major, and truly landmark, market reforms:

India's Prime Minister Narendra Modi's goal

...to lift India to glory by cleaning up the country, clearing the way for business and preparing its young citizens to be the work force of an aging world.

According to the IMF:

Within the next 15 years, India will have the largest, and among the youngest, workforces in the world, and will need to create jobs for the roughly one hundred million young Indians who will enter the job market in the coming decade.

While it appears that most countries are what you'd call demand constrained (as suggested by low commodities prices), India is clearly supply constrained. With per capita income of only $1,600 annually, any increase in income will translate immediately into consumption, and production will have to catch up in a hurry!

Here's from Bloomberg last Wednesday:

Prime Minister Narendra Modi has loosened government purse strings, swelling cash piles at Indian banks and driving short-term borrowing costs for local companies to a five-year low.

One-year commercial-paper rates fell to 8.54% last week, the lowest level since October 2010, and the overnight interbank rate has averaged the least in four years this month. Lenders, which borrowed an averageRs.1,80,000 crore daily from the Reserve Bank of India last quarter to meet fund shortages, are now parking money with the central bank.

Modi has pledged to build roads, ports and airports as he seeks to reverse an investment slowdown in Asia’s third-largest economy saddled with bad loans and stalled projects. The so- called plan spending in April-May, including that on infrastructure, was 13.4% of the amount budgeted for the year ending March 2016, compared with 10.4% in the same period last year.

While there's much to report in terms of reforms that are currently underway---as well as those that are yet to get off the ground---suffice it to say that the world has taken notice (as we see in cross border flow) and that India will be an interesting (and of course volatile) investment proposition for the patient long-term investor.

Dear Clients,

Over the next few days we'll be reviewing each of your portfolios' emerging markets exposure and, consistent with your asset allocation strategy and your risk tolerance, we'll be looking for opportunities to add a little, or increase your, exposure to India. For those of you who've given us discretionary authority we'll proceed with making the adjustments, if any, as we deem fit (unless we hear from you otherwise). For the few of you whom we need to chat with first, we'll reach out to you if we believe any adjustments would fit with your personal strategy.

The Stock Market:

Non-US developed markets—even after their recent pummeling—have outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I remain constructive on non-U.S.. That said, there are a number of potential international hot buttons (as we’re presently experiencing) 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:  +1.67%

S&P 500:  +3.18%

NASDAQ Comp:  +9.02%

EFA (Europe, Australia and Far East):  +7.50%

FEZ (Eurozone):  +4.99%

VWO (Emerging Markets):  +0.10%

Sector ETFs:

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

IYH (HEATHCARE):  +13.95%

XLY (DISCRETIONARY):  +9.90%

XHB (HOMEBUILDERS):  +8.29%

XLK (TECH):  +3.46%

XLP (CONS STAPLES):  +3.32%

XLF (FINANCIALS):  +2.95%

XLB (MATERIALS):  -1.21%

XLI (INDUSTRIALS):  -2.90%

XLE (ENERGY):  -7.49%

XLU (UTILITIES):  -8.64%

IYT (TRANSP):  -10.14%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.35%. Which is 5 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 rise  2.30%  over the past 5 trading days (down 6.20% 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:

JULY 16, 2015

WEEKLY JOBLESS CLAIMS fell 15k last week to 281k. Remaining below the 300k mark for yet another week. The 4-week average rose 3.25k to 282.5k. Continuing claims, which report with a one-week lag, plunged 112k to 2.215 million, the 4-week average dropped 3k to 2.264 million.

THE BLOOMBERG CONSUMER COMFORT INDEX came in barely changed, down .3, over the prior week. Mixed to negative results are reported in Bloomberg's release below:

U.S. Consumer Comfort Little Changed as Financial Optimism Fades

By Erin Roman

(Bloomberg) -- Consumer confidence in the U.S. was little changed last week as Americans’ views about their finances retreated for the first time since May.

The Bloomberg Consumer Comfort Index cooled to 43.2 in the period ended July 12 from 43.5 in the prior week. A monthly measure tracking the economic outlook declined in July for fourth time in the past five months.

The comfort measure “stood pat this week, stuck on pause after only a partial recovery from its springtime slowdown,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement. In June, the gauge recouped half of its 7.8 point decline from April’s eight-year high.

Stable sentiment coincides with little change in the prices consumers are paying at the gas pump. At the same time, volatility in the stock market on the heels of the Greek financial crisis may have led to dimmer views of personal finances and less optimism among upper-income earners.

A smaller share of households said the economy was getting better and more indicated it was worsening, leaving the monthly expectations index at 45.5, down from 47.5 in June.

Among the three components of the weekly report, the index of personal finances declined to 58 from 59.3 the prior week. The buying climate gauge, which measures whether now is a good time to purchase goods and services, improved to 38.2 from 37.7.

The weekly measure of consumers’ current views of the national economy was little changed at 33.3 after 33.4.

Retail Sales

Less ebullient attitudes were reflected in a report earlier this week showing an unexpected decline in June retail sales. Purchases fell 0.3 percent after a 1 percent May advance, according to the Commerce Department.

Sentiment waned in four of the seven major income groups last week. Confidence among those making more than $50,000 a year reached a one-month low, while the measure for those earning less rose to a two-month high, probably buoyed by more employment opportunities and lower prices at the gas pump.

Employers added 223,000 jobs in June after a 254,000 increase in May, the strongest two months since January/December, while the jobless rate fell to a seven-year low of 5.3 percent.

The nationwide average price of a gallon of gasoline has been holding below $2.80 since mid-June, based on data from the auto group AAA.

By region, comfort declined to a one-month low in the South and rose in the West to a nine-week high.

JULY 13, 2015

THE TREASURY BUDGET came in at a surplus of $51.8 billion in June. Now, nine months into the government's fiscal year, the budget deficit stands at $313.4 billion. Which is 14.3% below this time last year. Total receipts are up 8.3%, with tax receipts up a very strong 11.6% for individuals and 8.7% for corporations. Which speaks volumes about the improving U.S. economy. Spending, however, is up 5.1% with Medicare up 8% and defense down 1.7%.

JULY 14, 2105

THE NFIB SMALL BUSINESS OPTIMISM INDEX retreated notably in June, down 4.2 points to 94.1. While the survey results don't point to recession, they are nonetheless dismal, with the exception of credit demand. This is in sharp contrasts to May's optimistic report. It'll be interesting to see the trend for the remainder of the year. On balance, I'm seeing a reasonably good economy and I, therefore, expect this survey to read more optimistically as the second half unfolds. Here's the release's opening paragraph:

The Small Business Optimism Index fell 4.2 points to 94.1, likely in response to five months of lousy growth. The 42 year Index average is 98.0, while the pre-recession average is 99.5 (1974-2007). This leaves the current reading 4 points below the overall average, a deficiency of 40 net positive percentage point responses to the Index’s 10 component questions. While this is not a recession signal, it is a clear sign that economic growth on Main Street is not set for a strong second half. Nine of the 10 Index components fell and 1 was unchanged from last month. Declines in spending plans accounted for 30 percent of the Index decline, and weaker expectations for real sales and business conditions another 20 percent. The deterioration in earnings trends accounted for about a quarter of the decline.

RETAIL SALES ACCORDING TO THE CENSUS BUREAU were weak in June. Gasoline stations were the one bright spot as gas prices rose during the month. Electronic and appliance stores also showed good growth, up 1%. Here's Econoday:

The second-quarter suddenly doesn't look very strong as retail sales for June, showing broad weakness, came in way below expectations, at minus 0.3 percent. Motor vehicles were part of the reason, excluding which sales came in at only minus 0.1 percent. But excluding both autos and gasoline, core sales fell 0.2 percent. 

The bounce back for gasoline prices has given gas station sales a lift the last couple of months, up 0.8 percent in June following May's 3.7 percent surge. And there's also two strong gains for the key general merchandise category which is up 0.7 percent and 1.4 percent the last two months. Electronic & appliance stores also show a solid gain, up 1.0 percent in June.

But that's where the good news stops. Auto sales, though still at strong levels, fell 1.1 percent against an unusually strong May. Furniture sales fell 1.6 percent, apparel fell 1.5 percent, building materials fell 1.3 percent, and restaurants fell 0.2 percent.

The fall in restaurant sales doesn't speak to the strong levels of consumer confidence that are being reported, readings that the Fed has been pointing to as a future indicator of strength for consumer spending. A look at year-on-year sales underscores the complete lack of consumer punch, at only plus 1.4 percent for total retail sales and only plus 2.7 percent for the core. This is a very disappointing report that will cut second-quarter GDP estimates and that will likely push back the outlook for the Fed's rate hike from September to December, at least for now.

IMPORT AND EXPORT PRICES are in no way suggesting the Fed has inflation to worry about anytime soon, down .2% month-on-month and down 5.7% year-on-year. In terms of imports, this would speak volumes about the higher dollar. In terms of export prices, their decline points to a lack of any global price pressure.

THE JOHNSON REDBOOK RETAIL REPORT for last week jibes with this morning's CB retail results for June, up only 1.4% year-on-year.

BUSINESS INVENTORIES were up .3% in May, which is okay given that sales were up .4%. The inventory to sales ratio sits at 1.36%. While inventory builds are positive in terms of the GDP calculation, better to have stable to reducing inventories from a forward production standpoint

JULY 15, 2015

NEW PURCHASE MORTGAGE APPS tanked 8.0% last week, after surging 7.0% the week prior. Refinances rose 4.0% after rising 3.0% the week prior. While the weekly numbers are noisy, the housing market is showing solid results of late. The 30-year fixed rate averaged 4.23% last week.

PRODUCER PRICES FOR JUNE contradicted the import/export price readings. Up .4% after rising .5% in May. Here's Econoday:

Producer prices showed slightly more pressure than expected, at plus 0.4 percent in June vs Econoday expectations for plus 0.3 percent. Ex-food and energy, producer prices rose 0.3 percent vs expectations for plus 0.1 percent with the core rate for this series, which excludes food, energy as well as services, also up 0.3 percent vs expectations for plus 0.1 percent.

Showing pressure were electric power, pharmaceuticals and cigarettes. Gasoline and food, specifically eggs, contributed to the overall increase.

The gains in this series will be welcome by Federal Reserve officials who are hoping inflation will move to its 2 percent year-on-year target. But there's a ways to go with the overall year-on-year rate far into the negative column at minus 0.7 percent and the ex-food and energy reading at only plus 0.8 percent with the preferred core that also excludes services at plus 0.7 percent. Watch Friday for the consumer price report.

THE EMPIRE STATE MANUFACTURING SURVEY came in with uninspiring results, at 3.86. Weak exports are clearly doing a number on the manufacturing numbers this year.

INDUSTRIAL PRODUTION, while stronger this month, up .3%, is coming off of two months of contraction.  There's little in this report that would give one optimism with regard to manufacturing in the near future.

CAPACITY UTILIZATION came in at an inflationary-benign 78.4%.

CRUDE OIL INVENTORIES declined by 4.3 million barrels last month, which speaks to very strong refining activity---refiners are running at 95.3% of capacity. Interestingly, the decline did not bolster the price. I remain bearish on the price of oil going forward. GASOLINE stocks rose .1 mbs and DISTILLATES rose 3.8mbs

JULY 16, 2015

THE PHILADELPHIA FED BUSINESS OUTLOOK SURVEY for July shows June's jump to not be the beginning of a robust forward trend. Up 5.7 after rising 15.2 in June.

THE NAHB HOUSING MARKET INDEX for July showed its strongest reading in nearly 10 years! This signals significant strength in the new home market going forward. Supporting the optimistic view I've maintained since late last year. Here's Econoday:

The housing market index, unchanged in July at 60, is signaling substantial strength for the new home market. This is the strongest reading since November 2005.

Future sales, at 71, lead the report with present sales right behind at 66. Still lagging is traffic, down 1 point in the month to 43 and reflecting a lack of first-time buyers in the market.

All regions are showing growth led by the West at a composite 63 followed by the South at 62. The Midwest is at 59 and the Northeast, which had been under 50 for a long run, is now at 52.

The new home market is accelerating and is in place to be the best surprise of the 2015 economy. Housing starts & permit data, which have been volatile but very strong, will be posted tomorrow.

NATURAL GAS INVENTORIES increased for yet another week, up 99 bcf.

THE FED BALANCE SHEET increased $12.3 billion last week to $4.494 trillion. RESERVE BANK CREDIT increased $7 billion.

M2 MONEY SUPPLY rose again last week, by $12.6 billion.

TREASURY INTERNATIONAL CAPITAL shows capital flowing mightily into U.S. treasuries and corporate bonds---that speaks to the strong dollar and I maybe a flight to quality given Greece's turmoil. While foreigners were big buyers of U.S. debt, they were net sellers of U.S equities in May. U.S. accounts did the opposite; bought foreign equities while selling foreign bonds.

We've been buyers of foreign equities all year..

JULY 17, 2015

CPI FOR JUNE came in right at expectations, 0.3%. The core number came in as expected also, 02%, which is up from May's 0.1%. While there have indeed been mixed signals of late, I do believe the Fed has a green light for a September rate increase. Here's Econoday:

Consumer inflation, up an as-expected 0.3 percent in June, isn't soaring but, as Federal Reserve policy makers are predicting, underlying pressures are beginning to inch higher. The core also came in as expected at plus 0.2 percent which is up from 0.1 percent in May and with two-thirds of the gain tied to a 0.4 percent rise for owners' equivalent rent in another indication of rising demand in the housing sector. Looking at year-on-year rates, total consumer inflation is up 0.1 percent which doesn't like much at all but is the first positive reading of the year. The core is up 1.8 percent, on the rise from 1.7 percent in May and closer to the Fed's general 2 percent inflation target.

The gain in the overall rate was driven higher by a 1.7 percent rise for energy within which gasoline rose 3.4 percent in the month. This is exactly what the Fed has been pointing to, that is easing downward pull from energy prices. Food rose 0.3 percent in the month with egg prices a concern, up 18.3 percent in the month. Other gains include airfares at plus 2.0 percent and tobacco at plus 0.8 percent.

Pulling down the CPI was a record decline of 1.1 percent in hospital services that drove the medical care component to minus 0.2 percent in the month. Year-on-year, medical care is still on the high side compared to other prices, at plus 2.5 percent. Other readings on the negative side include apparel, down 0.1 percent in the month for a minus 1.8 percent year-on-year rate.

But the key story in this report is the incremental rise in the core rate with the rise in owners' equivalent rent, the highest since way back in October 2006, a special concern. Today's report is line with expectations for a rate liftoff sometime later this year.

HOUSING STARTS FOR JUNE were huge. Which is yet more support for my continued optimism over the U.S. housing market. As we might expect, given today's tight rental market, multi family construction is soaring, up 29.4%. PERMITS for new construction jumped well above expectations, at 7.4%.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX FOR JULY slipped to 93.3, from June's 96.1. I suspect June's volatile stock market, and general global unrest (Greece in particular) that was so vividly portrayed in the media, helped put a bit of a damper on sentiment. At present, I expect an improvement in next month's reading.

Your Weekly Update And Focusing on the Forest

What truly matters to the long-term investor... (click charts to enlarge)

China's volatile stock market?



Or the rising lifestyles and increasing global market access of China's 1.4 billion consumers?



The threat of Greece (2% of the Eurozone economy) leaving the Euro?



Or the amount of trade the Eurozone transacts with the rest of the world? 

Exports = $190 billion a month!



Imports = $165 billion a month!



The unmanageable short-term volatility of the U.S. stock market?



Or the trend in auto sales?



Oil Prices?



Consumer confidence?



Existing home sales?



Household formations?



Jobs?



Personal Consumption?



Retail Sales?



Household Net Worth?



 

As you may have gathered from the above, when considering the state of the economy through the prism of consumer-related statistics, things don't look so bad. And, thus, point the thoughtful investor to cyclical sectors, such as housing, financial, retail and transportation.

 

As for industrial-related statistics, we consider the above, plus such things as:

Commercial and Industrial (C&I) Loans:



Durable Goods Orders:



Industrial Production:



Unit Labor Costs:



The ISM Manufacturing Survey:



Industrial Materials Prices



Capacity Utilization



 

Suffice it to say that the industrial sector is sending mixed economic signals. A thoughtful investor will track these (and more) indicators to determine which areas to weight/underweight going forward.

 

As for the services sector, we consider the above, the consumer stats in particular, plus things such as:

The ISM Non-Manufacturing Survey (above 50 denotes expansion):



And the NFIB Small Business Optimism Index:



 

While I will forever address for you the events of the day, if we allow our thinking to get bound-up within the trees, bound-up we'll remain. And we'll lose complete sight of what truly matters, the forest!

Successful long-term investing is, I assure you, a top down affair. It's the evolution of the forest we're concerned with---the fires within it will either be extinguished or burn themselves out (better the latter). And, yes, if we're to invest in hopes of achieving a real (above inflation) long-term rate of growth, we will indeed get ourselves singed every now and again.

In other words, events such as Greece and its creditors coming to terms (or not!), China's attempts at market manipulation, Iran nuclear negotiations, Russia/Ukraine, etc., will run their course while folks the world over will continue to transact with one another. When times are good, they'll trade currency for houses, cars and plane tickets. When times are tough, it'll be aspirin and mac n' cheese. And our portfolios will win and wane as we observe the world from the top down and follow the global flow of capital.

Speaking of following the global flow of capital, next week I'll apply that thinking to what I'm thinking in terms of the non-US portion of your portfolio.

The Stock Market:

Last week was the definition of volatility! Starting off deeply in the red on Greece's "no" vote to austerity, only to climb back to essentially unchanged as the Greek government conceded to reality with a promising proposal to the EU powers that be. Non-US developed markets---even after their recent pummeling---have outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Given many foreign markets' cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I remain constructive on non-U.S.. That said, there are a number of potential international hot buttons (as we're presently experiencing) 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: -0.35%

S&P 500: +0.86%

NASDAQ Comp: +5.52%

EFA (Europe, Australia and Far East): +5.69%

FEZ (Eurozone): +4.80%

VWO (Emerging Markets): -0.72%

Sector ETFs:

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

IYH (HEATHCARE): +11.18%

XHB (HOMEBUILDERS): +7.77%

XLY (DISCRETIONARY): +7.65%

XLP (CONS STAPLES): +1.42%

XLK (TECH): +0.22%

XLF (FINANCIALS): -0.36%

XLB (MATERIALS): -1.81%

XLI (INDUSTRIALS): -4.26%

XLE (ENERGY): -7.16%

XLU (UTILITIES): -9.00%

IYT (TRANSP): -10.48%

The Bond Market:

The yield on the 10-year treasury bond presently sits at 2.40%. Which is 2 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 rise 0.04% over the past 5 trading days (down 7.84% 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.

Independence, by definition, is the answer to world peace...

Every now and again---while discussing the importance of global trade---a client will push back with concerns over China and its relationships with other communist nations.

While I often succeed in overcoming the understandable, yet profoundly pernicious, instinct that buying only American somehow helps America* (see below), folks have a tougher time with the notion that reducing trade barriers is the key to making the world safer.  Somehow, despite the fact that China sells us $hundreds of billions worth of goods (and buys over a $hundred billion worth from us) each year, given the opportunity, it would team with other communist nations to do us harm---seems to be the thinking.

Well, no! While I get that there are deeply entrenched ideologies at play, there's nothing more powerful than people in search of better lives. The Chinese consumer is rising, there's no question. And it's international commercial relationships that are making it happen. And, I assure you, there's no turning back.

Here's from a July 2 Bloomberg article:

China is wary of expanding energy investments in Russia because closer ties with the Kremlin could harm its relations with the U.S., according to a former researcher at China’s biggest offshore explorer.The government in Beijing isn’t prepared to jeopardize economic links with the U.S., said Chen Wei Dong, who resigned as chief researcher for China National Offshore Oil Corp.’s Energy Economics Institute in May. The U.S. is viewed as a “global” partner while Russian ties are regional, he said.Russia is turning to Asian markets after President Vladimir Putin’s annexation of Crimea led the U.S. and Europe to impose sanctions, including oil and banking restrictions. Russia’s biggest energy exporters are targeting China, the world’s largest consumer, yet progress on supply deals has stalled after crude and gas prices declined.“If Russia has bad relations with the U.S., this may make it more difficult for China to build better relationships with Russia,” Chen said in an interview in Moscow last week. “China is looking for a balance.”The East Asian nation needs to safeguard its relationship with the U.S. because, while the two don’t trade oil or gas, they are key economic partners. U.S. trade with China reached $590.4 billion last year, according to the U.S. Census Bureau, while Russia-China trade was $95.3 billion, Chinese customs data show.

18th Century economist Frederic Bastiat on the secret to global peace:

Where goods don't cross borders, soldiers will.

*While there are multiple angles from which to disabuse open-minded folks of the faulty notion that a true patriot would only buy American, the light turns on when I ask them to imagine how local service providers would fare should everyone agree to pay substantially more than the global market price for the goods they desire. I.e., it's that discretionary income that affords you the concert and football tickets, the parking pass, the dinners out, the golf club membership, the private schooling and swim lessons for your grandkids, the birthday party bounce houses and pony rides, and on and on and on---all provided by hard-working American business folk.

The fact that buying from abroad pushes U.S. dollars into the outside world that have to find their way back to U.S. exporters---and securities/assets---seems to resonate as well.

Beyond national security and trade, if we are to live true to the founding principles of our great nation, we must demand the freedom, the independence!, to do business with whomever we desire, regardless of their domicile. And we must invite and embrace all who would grace our shores with their passion to build better lives for themselves and their loved ones!

Meriam-Webster on independence:

freedom from outside control or support : the state of being independent

HAPPY INDEPENDENCE DAY!!

Your Weekly Update

After  bombarding you with four audio and three written commentaries on Greece over the past week, I'm thinking there's not much left to offer. Therefore, given that right now it's all about Greece, I'll keep this week's message brief.

So now we wait and see how the Greeks vote on Sunday. I haven't personally read the referendum, but, from what I gather, voters may have a tough time understanding just what they're voting for/against. The dueling demonstrations in Athens suggest that, in essence, it's about whether or not to bow to their creditors watered-down demands. More dramatically, perhaps, it's about whether or not to transact in Euros going forward.

The mere fact that the polls suggest that it's virtually a dead-heat tells me that half of the Greek people---who've exhibited, forgive me, a low pain threshold---do not understand what will happen should they attempt to resurrect a currency that would only represent claims against what little their country has to offer to the rest of the world (at this juncture, and under their current structure, that is).

As insane as it seems, there's a legitimate case to be made that enduring the extreme short-term pain that such an outcome would deliver would ultimately deliver the country to a respectable and sustainable fiscal standing far sooner than they'd otherwise achieve by staying in the Euro.

The reason the likelihood of a Greek exit, in my view, is remote is that it goes against human nature (no one wants to endure extreme short-term pain). And, without question, it flies smack in the face of political nature! No sitting politician's career could withstand such an event. Therefore, even a "no" vote does not necessary land the country back on the drachma (their old currency).

Not everyone, by the way, shares my view. The highly-regarded former PIMCO CEO Mohamed El-Erian places 85% odds on Greece leaving the Euro. He may very well be right. Which, again, may ultimately be the best thing.

We'll know soon enough...

As for the extent to which you and I should stress over Sunday's outcome, look at it this way: During the course of your investment time horizon, can you envision Germans drinking Pepsis and syncing  iPhones? Will Mercedeses, Beamers and VWs traverse your hometown roadways as they have for years? Will you dream of that 3-week vacation in Italy, or on Santorini even? Etc, etc, etc...

That's right, while things may get ugly in the short-run, Greece exiting the Euro would not be a global game-changer in the long-run.

The Stock Market:

Non-US markets---even after their recent pummeling---have 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 (as we're presently experiencing) 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:  -0.52%

S&P 500:  +0.87%

NASDAQ Comp:  +5.85%

EFA (Europe, Australia and Far East):  +4.36%

FEZ (Eurozone):  +1.55%

VWO (Emerging Markets):  +2.15%

Sector ETFs:

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

IYH (HEATHCARE):  +10.12%

XHB (HOMEBUILDERS):  +7.56%

XLY (DISCRETIONARY):  +7.00%

XLK (TECH):  +0.94%

XLF (FINANCIALS):  +0.08%

XLB (MATERIALS):  -0.14%

XLP (CONS STAPLES):  -0.66%

XLI (INDUSTRIALS):  -4.15%

XLE (ENERGY):  -6.27%

IYT (TRANSP):  -11.32%

XLU (UTILITIES):  -11.67%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.38%. Which is 9 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 decline a 0.46%  over the past 5 trading days (down 7.88% 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 29, 2015

PENDING HOME SALES FOR MAY are another data point that justifies the optimism I've had over housing since late last year. The index came in at its highest level since 2006, 112.6. The month-over-month increase was .9%.

THE DALLAS FED MANUFACTURING SURVEY fell again in June, but the pace of the decline moderated. The General Activity Index came in at -7.0 vs -20.8 in May. The June reading was better than the consensus estimate. Weakness in exports (the strong dollar) and weakness in energy equipment (the low price of oil) continue to drag on the sector.

JUNE 30, 2015

THE JOHNSON REDBOOK RETAIL REPORT continues to not support the notion that the consumer is feeling good and getting out of the house. Up 1.7% year-over-year, and down a whopping 1.5% week-over-week.

THE ICSC CHAIN STORE SALES REPORT makes more sense given what I'm seeing among consumer-related indicators, up 2.7% year-over-year.

THE CASE-SHILLER HOME PRICE INDEX didn't come in at a rate that jibes with recent housing stats. Up 4.9% year-over-year. The commentary within yesterday's pending homes report suggests prices are rising at a rate that would crimp first-timers ability to enter the market. That makes more sense to me.

THE CHICAGO PMI continues to show the Chicago economy lagging. Coming in at a contractionary 49.4 (50+ denotes expansion). Although it was an improvement over May's 46.2. Unlike most other surveys, this one's employment component is the lowest since 11/09. The one bright spot is respondents cautious optimism over new orders in the coming quarter.

THE CONFERENCE BOARD'S CONSUMER CONFIDENCE INDEX FOR JUNE suggests that the consumer is feeling good about his/her prospects. Coming in at its second-highest reading in 8 years, 101.4. Here's from Bloomberg's commentary:

Spending Outlook Brightens as Jobs Lift Americans’ Spirits (1)

By Erin Roman

(Bloomberg) -- The pickup in hiring is doing wonders for Americans’ economic mood.

The Conference Board’s consumer confidence index advanced to 101.4 in June, matching the second-highest level in almost eight years, the New York-based private research group said Tuesday. The reading exceeded all forecasts in a Bloomberg survey of 75 economists.

Households are feeling upbeat about employment prospects as more respondents than at any time since early 2008 said jobs were plentiful, raising the odds that the pickup in spending that began in May can be sustained. That would probably be enough to power the world’s largest economy past any global disruptions caused by a meltdown in Greece.

“This is very encouraging because we very much need a strong consumer to carry this economy,” said Aneta Markowska, chief U.S. economist at Societe Generale in New York, who projected the index would climb to 100. “We need a strong consumer to offset some of these drags emanating from abroad.”

The confidence gauge matched the March reading as the second-highest since August 2007. The measure averaged 96.9 during the last expansion and 53.7 during the recession that ended June 2009.

THE STATE STREET INVESTOR CONFIDENCE INDEX rose nicely to 127. Econoday's summary speaks to my position that bad economic news (in the US) is good short-term stock market news, given its impact on Fed decision-making:

Led by unusually strong North American appetite for risk, the investor confidence index for June is up 5.6 points to 127.0. The North American component is up 11.7 points to 142.9 with Europe lagging at 102.5 and Asia below breakeven 100 at 87.6. The report attributes North American confidence to a dovish Fed which at mid-month lowered its 2015 economic forecasts and seemed in no hurry to raise rates. On Greece, the report notes little effect on European confidence which it warns could be misplaced if related contagion develops.

JULY 1, 2015

JUNE AUTO SALES came in at 17.2 million. Which is off of May's 17.8 m, but that was a 10 year high. The 17.2 m is a very good number.

MORTGAGE PURCHASE APPLICATIONS declined by 4% last week as rates rose to 4.26%. The year-over-year results, however, are an impressive 14% increase. Refis declined by 5%---they're definitely more interest rate sensitive.

THE CHALLENGER JOB-CUT REPORT shows layoff announcements in June totalling 44,842, up 3,800 from May. Interestingly, 2015 job cuts during the first half exceeded 2014's first half by 17%. The energy sector is the primary culprit, having cut 60,500 jobs so far this year compared to last year's first half's 3,908. However, the retail sector was the biggest cutter in June. The report foresees the 2nd half improving for retail employment in light of recent stats on consumer spending.

THE ADP EMPLOYMENT REPORT for June came in above estimates at 237,000 and noticeably above May's 201,000.  A strong report!

MARKIT'S MANUFACTURING PMI FOR JUNE remained in expansionary mode, at 53.6. However, at a slower pace than May's 54.0. Slow export demand (via the strong dollar) from Europe is a notable negative. Declining capital investment from the energy sector is also a negative. New orders accelerated slightly. Backlogs rose. The employment component was at its strongest since 9/14.

THE ISM MANUFACTURING INDEX FOR JUNE came in at an expansionary 53.5, which bested May's 52.8. New orders were strong at 56. The employment component came in very strong as well at 55.5. New orders, however, were weak, coming in at 49.5, the strong dollar gets the blame.

CONSTRUCTION SPENDING FOR MAY came in at a strong .8% increase. The consensus estimate was .5%. Manufacturing facilities were up a strong 6.2%---good news from a cap-ex standpoint. Residential construction grew at a moderate .3%. But the year-over-year rate of spending on single family homes rose a strong 11.2%.

CRUDE OIL INVENTORIES bucked the recent trend with an increase of 2.4 million barrels last week. GASOLINE inventories shrank by 1.8 mbs and DISTILLATES grew by .4 mbs. Refineries operated at a very high 95% of capacity, which makes the build a bit surprising. I remain bearish on the price of oil through the remainder of the year.

GALLOP'S US JOB CREATION INDEX remained at a high level, 32, in June. Here's Econoday:

 

Gallup's U.S. Job Creation Index remained high in June at plus 32. The index score is based on 43 percent of workers saying their employer is hiring workers and expanding the size of its workforce and 11 percent saying their employer is letting workers go and reducing the size of its workforce and is the same as in May, which is the highest Gallup has found for the index.

The percentage of workers who say their company is expanding its workforce is not only well above the percentage who say their company is letting people go, but since April, it has also exceeded the percentage who report their workforce is not changing. So far in the index's history, this has only happened a few times. 

Regionally, the index score in each region has generally followed the national trend, with a steep decline in 2008 through 2009 and improvement since then, including record highs in recent months. No one region has consistently outperformed the other regions over the last seven years. However, the East continues to slightly lag behind the other regions, as it has since 2013.

JULY 2, 2015

THE BLS JOBS REPORT FOR JUNE came in a bit lighter than expectations at 223k. Still, however, a strong enough number. The unemployment rate dropped to 5.3%. However, that was largely due to a decline in the labor force participation rate to 62.6% from may's 62.9%. U-6 unemployment fell to 10.5% from 10.8%. The services sector, as we should expect, produced the jobs... Manufacturing and construction jobs were flat... The quarterly trend is positive with 221k jobs created in Q2 vs 195k in Q1. While this was a very decent report, it missed the consensus expectation, and, given that wages were flat on the month, this report does not put pressure on the Fed to raise rates anytime soon.

WEEKLY JOBLESS CLAIMS remained below 300k last week, coming in at 281k. The 4-week average rose 1k to 274.75k. Continuing claims rose 15k to 2.264 million. The unemployment rate for insured workers remains at a very low 1.7%.

THE BLOOMBERG CONSUMER COMFORT INDEX showed another very strong reading last week, at 44 vs 42.6 the week prior.

FACTORY ORDERS, dragged down by aircrafts and energy equipment, came in weak once again in May. -1%. The most disappointing component in my view was capital goods, in that I see business investment going forward as key to reversing the recent trend in productivity---which will be a must, from a valuation perspective, as inflation/interest rates rise going forward. Here's Econoday:

The factory sector, hit by weak exports, continues to stumble with factory orders down 1.0 percent in May. This compares with Econoday expectations for minus 0.3 percent and is near the low-end estimate for minus 1.2 percent.

The durables component of the report, initially released last week, is now revised lower, to minus 2.2 percent from minus 1.8 percent. Durables in April have also been revised lower to minus 1.7 percent from minus 1.5 percent. The nondurables component, released with today's report, helped limit the damage but not by much, up 0.2 percent on gains for petroleum and coal following a 0.3 percent gain for April.

But aircraft orders, always volatile, are to blame for much of the durables weakness, falling 49.4 percent in the month. Excluding transportation equipment, which is where aircraft orders are tracked, factory orders were unchanged in May which isn't great but is much better than the minus 0.6 percent print for April.

Weakness in energy equipment is also a negative factor of the factory sector, down 22.2 percent in May following a 2.1 percent decline in April. Motor vehicle orders are also surprisingly weak, down 1.3 percent in May despite very strong sales. Orders for defense aircraft were also weak, down 6.4 percent.

Capital goods data had been showing some life but not much anymore with nondefense orders excluding aircraft down 0.4 percent following a 0.7 percent decline in April. These are especially disappointing readings. And core shipments of capital goods are dead flat, at minus 0.1 percent following only a 0.2 percent gain in April. These readings will likely pull down second-quarter GDP estimates.

Other disappointments include a steep 0.5 percent decline in total unfilled orders following April's 0.2 percent decline. Declines in unfilled orders are not a good omen for employment. Total shipments fell 0.1 percent in the month. Inventories at least are stable, unchanged in the month as is the inventory-to-shipments ratio at 1.35.

First there was the unemployment report this morning and now this report, both of which may raise concern among the doves at the Fed that the second-quarter bounce back is not much of a bounce back at all.

NAT GAS INVENTORIES rose by 69bcf last week.

THE FED BALANCE SHEET decreased by $15.9 billion last week, to $4.479 trillion. RESERVE BANK CREDIT decreased $19.3 billion.

M2 MONEY SUPPLY has been in an upward trend of late, rising by $40.9 billion last week.