Your Weekly Update

The good news on oil is that its price is up nearly 20% off the January 29 bottom. The bad news on oil is that its price is up nearly 20% off the January 29 bottom (I really like $2.something gas). When we hear, as we have lots lately, that the stock market is up due to the bounce in oil prices, the underlying suggestion has to be that oil is cheap because the economy's in trouble and, therefore, a spike in its price denotes good news for growth going forward. Well, if we're talking the U.S. economy, clearly, it ain't in trouble. Europe? Yeah, definitely some weak spots there. Asia? Depends on where you're looking. Bottom line, if you just landed on earth after a seven-month tour of deep space to find oil prices 60% cheaper than they were when you took off, you'd almost have to conclude that we're in the midst of a great global recession. And you'd be wrong. So, no, higher oil prices---given present dynamics---are not good news for the stock market. Unless, that is, a rally in oil sector stocks inspires the broader market to follow. Perhaps, but no...

As I've been reporting, the drop in oil is not about weak global demand, it's about huge global supply. And while rig counts in the U.S. are declining rapidly (as producers, for now, abandon their least profitable assets), global production continues to outpace global demand---although I expect that to change in the coming months. Plus, crude inventories are at a multi-decade high.

So what explains the dramatic jump in the price over the past few days? Well, while oil is indeed a commodity with much transparency in terms of the fundamentals, in the short-run its price is dictated by traders playing the headlines, covering shorts, and/or anticipating future market conditions. In the long-run it's all about the latter (which is predicated on the fundamentals). And, yes, ultimately, we should assume that the current glut will subside and the price will move sustainably higher---perhaps during the latter half of this year. Given the gluttyness of the current glut, however, I can't help but wonder if the recent spike isn't a bit of a head fake. We'll see...

Current themes:

Central Banks:

As I've reported, outside the U.S. it seems that central bank officials are in the mood these days to make friends with their people. I mean everybody likes an easy-(as in easy credit conditions)-going soul. Last week Australia's central bank cut interest rates a quarter of a percent and China's lowered bank reserve requirements (creates more money for lending). This makes for optimism over their respective stock markets and, if not optimism, complacency over their bonds. When it comes to investing, complacency, by the way, can be a very dangerous thing.

Oil: see above

The Consumer:

Friday's jobs number confirms that the U.S. consumer indeed has reason to feel good. The really striking consumer-related statistic of last week, however, was the huge jump in revolving credit---up $5.8 billion in December alone. American consumers increased their revolving debt by a whopping $30 billion in 2014, versus $10 billion in 2013. Yeah, I know, from a you-and-me standpoint, that doesn't sound so good---I've been counseling folks for years to pay off those damn credit cards every month. But as an indicator of how the consumer at large feels about his/her prospects going forward, this is huge.

When we drill down into the employment number, we find that retail and construction took the top two spots in job gains. Which speaks to what I've been reporting on the consumer and the housing market of late.

Average hourly earnings are up 2.2% over the past year. While that doesn't sound like much, it beat the rate of inflation by a good 30%. Look for wages to trend higher as the labor market continues to tighten. And look for signals from the Fed that they're fixin to raise interest rates, albeit ever so slightly, in the not too distant future.

Europe:

The new Greek government's struggle to hold its fragile economy together, which will require a serious reneging on its campaign promises, will be no small contributor to the headlines in the weeks to come. As those headlines hit, expect those sounding optimistic to result in a rising Euro and rallying stock markets, and those sounding pessimistic to provoke the opposite.

Germany's Merkel and France's Hollande reported to have had a constructive dialogue with Russia's Putin while paying him a visit last week. While recent evidence suggests that Putin is nowhere near conceding on the Ukraine, a legitimate deal, resulting in a ceasefire and a lifting of sanctions, would be huge for the Eurozone---not to mention Russia itself. And it would surely spark, at least for a moment or two, a global rally in stocks.

While heavy skepticism is warranted, the three parties are at work this weekend formatting an agreement that could, they say, ultimately resolve the conflict.

As for the day-to-day in the Eurozone, some things are beginning to look up for the major economies. Last week's Eurozone Manufacturing Purchasing Managers Index (PMI) (a survey of manufacturing executives) came in at 51 (above 50 denotes expansion), with Spain registering an impressive 54.7 and Germany hovering just above the expansion line, at 50.9---while Italy and France remain in contraction mode, at 49.9 and 49.2 respectively. As for the services sector, the Services PMI for the zone came in at 52.7, with Spain, Italy and Germany all showing expansion (56.7, 51.2 and 54 respectively) and France lagging at 49.4. And, lastly, Germany's factory orders rose 4.2% in December, against expectations of 1.5% and a decline of 2.4% in November.

While in no way should we break out the bubbly on Europe just yet, sentiment, at least, appears to be improving.

Q4 Earnings:

Of the 323 of the S&P 500 companies having thus far reported, an impressive 77.7% have bested analysts' expectations. On the revenue side, 55.9% did better than expected. The rate of growth however has been nothing to write home about, 5.6% and 1.1% respectively. Of course the energy sector, seeing declines of 19% and 17% in earnings and revenue respectively, is no small influence on the overall numbers.

The Stock Market:

Last week saw the best performance in U.S. stocks in quite some time. According to CNBC, the Dow was up 3.84%, the S&P 500 rose 3.03% and the NASDAQ Composite gained 2.35% on the week. Using ETFs as our proxies, non-US markets did fine as well: EFA (tracks the Morgan Stanley Europe, Australia and Far East Index) was up 2.09% on the week, while FEZ (tracks the Euro Stoxx 50 Index) gained 1.25%. VWO (tracks the FTSE Emerging Markets Index) was up 1.95%.  (The non-US data is in U.S. dollar terms)

Here's a look at each of the above on a year-to-date basis:

Dow Jones Industrials:  +0.01%

S&P 500:  -.07%

NASDAQ Comp:  +0.18%

EFA:  +2.73%

FEZ:  +1.33%

VWO:  +1.75% 

Sector by sector:

Energy, as you might expect (given the spike in oil prices), saw the biggest gains last week. XLE (tracks the S&P Energy Sector Index) rallied 5.65%. XLF (tracks the S&P Financial Sector Index)---on the back of a rise in interest rates---came in a close second at 4.9%. XLB (tracks the S&P Materials Sector Index) came in 3rd with a 4.68% gain.

Other sectors worth noting: Consumer Discretionary, based on the performance of XLY (tracks the S&P Consumer Discretionary Index), jumped 4.21%, while IYH (tracks the Dow Jones U.S. Healthcare Index) came in flat on the week, at +0.46%. The big loser---on the back of a rise in interest rates---was utilities, with XLU (tracks the S&P Utilities Sector ETF) posting a 3.64% decline.

Here's a look at those sector ETFs, and a few others, on a year-to-date basis (according to CNBC):

XLE (ENERGY):  +0.83%

XLF (FINANCIALS):  -2.39%

XLB (MATERIALS):  +2.76%

XLY (DISCRETIONARY):  +1.09%

IYH (HEATHCARE):  +2.26%

XLU (UTILITIES):  -1.40%

XLI (INDUSTRIALS):  -0.67%

XLP (CONS STAPLES):  +1.20%

XLK (TECH):  -0.60%

IYT (TRANSP):  -2.27%

XHB (HOMEBUILDERS):  +3.90%

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!

The Bond Market:

As I suggested above, complacency can be a very dangerous thing. In my view U.S. bond investors have been the definition of complacent for a very long time. And who can blame them when the U.S. economy, until recently, has delivered probably the most sluggish expansion in its history and the rest of the developed world is sporting interest rates near zero, or below. I.e., there's been little risk of inflation here at home, and the U.S. treasury has offered the most attractive yields among the world's safest debt issuers. Not to mention how the strengthening dollar has enticed foreign investors into the U.S. bond market.

So what might alter the debt investor's paradigm and inspire him to give up his treasury bonds? Well, it could be a number of things. Not the least of which would be signs that the U.S. economy is gaining momentum and that the Fed will have to begin raising interest rates sooner than later. Bond prices took it in the chin last week as the yield on the 10-year treasury jumped from 1.66% to 1.95% (that's a 17% increase). Another excuse would be a sudden decline in the dollar (I know, that contradicts the present economic backdrop and the prospects for higher interest rates. But the consensus lives in that camp, and the consensus is very often wrong). Should, let's say, the Eurozone begin to show real signs of life and, thus, the Euro begin to gain against the dollar, we could see money fly out of treasuries in a big way as those carry-traders (they borrow in low-yielding, declining currencies and invest in higher yielding, strengthening currencies) rush to exit their positions: A reversal in the currency exchange trend can be a killer (say you borrowed 1 Euro and lent it in the U.S. at a $1.12 exchange rate. If the dollar moves to $1.20/Euro, you no longer have enough dollars to pay back your Euro loan).

Suffice it to say that the bond market (as well as other interest-rate-sensitive sectors [think utilities]) is in a precarious position these days. Short-term rates at zero while the economy is gaining momentum is an utterly unsustainable scenario.

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

FEBRUARY 2, 2015

THE GALLUP CONSUMER SPENDING MEASURE shows daily spending dropping to $81 in January, from $98 in December. January, however, generally sees a big drop, given the holidays. This January's estimate is stronger than those from January 2009 to January 2012.

MARKIT'S MANUFACTURING PMI shows steadiness when compared to December's reading (53.9 vs 53.9). The strong readings came from output and employment. Softer readings came from exports and new business growth. Oil and gas prices were cited as a factor holding down new business.

PERSONAL INCOME AND OUTLAYS for December paints a relatively positive picture of the consumer and inflation. Here's Econoday's commentary:

The consumer sector has been volatile on a monthly basis for spending while income growth has been steadier. Meanwhile, inflation has been weak. Personal income grew 0.3 percent in December after advancing 0.3 percent in November. Market expectations were for a 0.3 percent rise. December matched expectations. The wages & salaries component increased a modest 0.1 percent, but followed a jump of 0.6 percent the prior month.

Personal spending decreased 0.3 percent, following a boost of 0.5 percent in November. Analysts projected a dip of 0.2 percent for December.

Durables fell 1.2 percent on a swing in auto sales, following a rise of 1.8 percent in November. Nondurables, tugged down by gasoline prices, decreased 1.3 percent after decreasing 0.3 percent the prior month. Services edged up 0.1 percent, following a 0.5 percent spike in November.

PCE inflation remained weak-largely due to lower energy costs. Headline inflation decreased 0.2 percent on a monthly basis, following a drop of 0.2 percent in November. Forecasts were for a 0.3 percent drop. Core PCE inflation was flat in both December and November. December matched expectations.

On a year-ago basis, headline PCE inflation decelerated to 0.7 percent in December from 1.2 percent the prior month. Year-ago core inflation posted at 1.3 percent in December compared to 1.4 percent in November. Both series remain below the Fed goal of 2 percent year-ago inflation.

Overall, the consumer sector on average remains moderately healthy. The next key number for the consumer sector is Tuesday's data on motor vehicle sales. Meanwhile, the Fed can be comfortable with remaining loose with inflation so low.

 THE ISM MANUFACTURING INDEX confirms what other surveys have been reporting of late, which is a slower pace of growth in the sector. January came in at 53.5 vs December's 55.5. Still, readings above 50 denote expansion. It'll be interesting to see how the sector reports, with the optimistic consumption backdrop, in the months ahead.

CONSTRUCTION SPENDING in December rebounded .4%, after declining .2% in November. Year over year shows a 2.2% increase. The private residential component rose .3% after rising .1% in November. If I'm right in my optimism over the housing market going forward, this component will show continued strength in the months to come.

FEBRUARY 3, 2015

MOTOR VEHICLE SALES came in in line with estimates, at 16.7 million. This was .2 million down from December's reading.

THE JOHNSON REDBOOD RETAIL SALES result shows the  year over year increase back in expansionary mode (above 3.5%) at 3.8%... I anticipate better readings on this one going forward (on balance)...

US FACTORY ORDERS came in weak at -3.4%. Ex-ing out defense goods and civilian aircraft (2 volatile components), durable goods orders actually rose .1%, which is the first positive reading in 4. Non-durable goods were lower for the 6th straight month; of course oil would be the major influencer here.

FEBRUARY 4, 2015

MBA PURCHASE APPLICATIONS last week slipped for the third week in a row, down 2.0%. Year over year, however, they're up a modest 3%. Refinances were up 3% last week, after dropping 5% the week prior. My optimism over housing suggests that we'll see purchase apps pickup in the months to come.

THE ADP EMPLOYMENT REPORT shows yet another 200k+ reading (213k) for January. While this is off the 220k consensus estimate, this is healthy job growth. December's number was revised up to 253k, from 241k.

THE GALLUP U.S. JOB CREATION INDEX for January came in at 28, up from December's 27, and just below last September's seven-year high reading of 30.  U.S. workers' perception of hiring at their places of employment are the most positive for any January since Gallup began this survey back in 2008. Also, the consumer's confidence regarding the U.S. economy is up noticeably from December...

THE EIA PETROLEUM STATUS REPORT shows a crude oil build of 6.3 million barrels. I have been skeptical of the recent jump in oil prices, citing short-covering and reactions to the rumor over fighting in Kirkuk, Iraq. Despite the falling U.S. rig count, global oil production continues to exceed demand, although the two are getting closer. There's no doubt that reducing capacity, all things being equal/or demand picking up, will lead to a bottoming of the price. But given present production and inventories, it doesn't make sense that oil will rebound significantly in the very near future. Oil prices are down a whopping 7.6% today. Gasoline and distillate inventories are also higher, 2.3m and 1.8m respectively.  This is good news for the consumer of course...

MARKIT'S SEVICES SECTOR PMI is showing strength, at 54.2 vs 53.3 in December. Employment remains a very positive component.

THE ISM NON-MANUFACTURING (I.E. SERVICES) INDEX is holding solid at 56.7, was 56.2 in December. New orders came in at a strong 59.5. Interestingly, employment dropped a noticeable 4.1 points to 51.6. That's inconsistent with most other surveys.

FEBRUARY 5, 2015

THE CHALLENGER JOB CUT REPORT registered a big increase in December. 40% of the $53,041 announced layoffs came from the energy sector, and 12% from retail (coming off of the holidays).

THE GALLUP US PAYROLL TO POPULATION RATE stayed virtually steady in January, 44.1%. It is, however, the highest January since 2010...

THE US TRADE DEFICIT widened to 46.6 billion in December, from 39.0 billion the prior month. This tells us that demand is healthy in the U.S... It should, however, serve to lower the Q4 GDP estimate... It also, I'm sure, speaks to the increasing value of the U.S. dollar.

WEEKLY JOBLESS CLAIMS came in at a very positive 278k last week. The prior week's very good 265k number was somewhat attributed to the four-day workweek. Last week's low number, however, represented a full 5 days. The four-week average dropped to 292,750. This represents a reversal of trend, as prior to the 265k week, the number had been trending higher.

Continuing claims, reported with a 1-week lag, rose 6,000 to 2.4 million, with a 4-week average of 2.421 million. The unemployment rate for insured workers remains at 1.8%, a recovery low.

NONFARM PRODUCTIVITY declined at an annualized 1.8% in Q4 vs a .2% estimate and a 2.3% rise in Q3... Output increased by 3.2% against a huge 5.1% gain in hours worked (the biggest since Q4 1998). Productivity was flat over  the past year with output and hours worked both increasing 3.1%. UNIT LABOR COSTS increased 2.7% (.9% increase in hourly compensation plus the 1.8% decline in productivity). Unit labor costs increased 1.9% over the past year.

The manufacturing sector's productivity increased 1.3% in Q4, as output increased 5.7% against an increase in hours worked of 4.3%. For the past year manufacturing productivity grew 2.8%, as output increased 4.8% and hours worked increased 1.9%. UNIT LABOR COSTS in manufacturing increased .2% in Q4.

THE BLOOMBERG CONSUMER COMFORT INDEX edged lower last week, at 45.5 vs 47.3 the previous week. Despite the decline, 45.5 is still a very healthy read---the second best since July 2007. It's been my observation over the years that consumer sentiment surveys are influenced by the state of the stock market. January marked the worst month in a year for the S&P 500. According to the survey, the stock market reflected most in the attitudes of top wage earners. Of the various income groups tracked, just one, $50-75k, showed an increase in optimism.

NAT GAS INVENTORIES fell 115 billion cubic feet last week to 2,428 bcf.

THE FED BALANCE SHEET grew .3 billion to $4.5 trillion last week.

M2 MONEY SUPPLY grew by $67.5 billion last week.

FEBRUARY 6, 2015

THE BLS JOBS REPORT (THE EMPLOYMENT SITUATION SUMMARY) showed an increase in payrolls of 257k in January.  November and December were revised substantially higher, +70k to 423k in November and +77k to 329k in December. Unemployment ticked up slightly to 5.7% from 5.6%, which reflects an increase in the labor force participation rate of .2%: I.e., an economically positive increase in the unemployment rate. Retail and Construction offered the two biggest contributions, which speaks to recent consumer optimism and a positive outlook for housing...

Clearly, labor market slack is beginning to wane, although the number of part-time employed who would prefer  full-time work remained essentially unchanged. Among the marginally attached to the workforce, the number of discouraged workers (those who aren't currently looking for work because they believe no jobs are available to them) dropped by 155k from a year ago.

Average hourly earnings are up 2.2% over the past year.

CONSUMER CREDIT jumped $14.8 billion in December which speaks to the optimism of today's consumer. Revolving credit soared by $5.8 billion, that's a big jump for this component. The rise in revolving credit speaks volumes about the consumer's present level of of optimism.

The Antifragile Stock Market --- AND --- Your Weekly Updatei

You are in the post office about to send a gift, a package full of champagne glasses, to a cousin in Central Siberia. As the package can be damaged during transportation, you would stamp "fragile", "breakable", or "handle with care" on it (in red). Now what is the exact opposite of such a situation, the exact opposite of "fragile"?

Almost all people answer that the opposite of "fragile" is "robust", "resilient", "solid", or something of the sort. But the resilient, robust (and company) are items that neither break nor improve, so you would not need to write anything on them---have you ever seen a package with "robust" in thick green letters stamped on it? Logically, the exact opposite of a "fragile" parcel would be a package on which one has written "please mishandle" or "please handle carelessly". Its contents would not just be unbreakable, but would benefit from shocks and a wide array of trauma. The fragile is the package that would be at best unharmed, the robust would be at best and at worst unharmed.

We gave the appellation "antifragile" to such a package: a neologism was necessary as there is no simple, noncompound word in the Oxford English Dictionary that expresses the point of reverse fragility. For the idea of antifragility is not part of our consciousness---but, luckily, it is part of our ancestral behavior, or biological apparatus, and a ubiquitous property of every system that has survived.

Nassim Taleb, in his latest book, Antifragile, Things That Gain from Disorder, from which the above was taken, writes about the things that get better when they experience stress. We're talking muscles, brains, emotions, economies and, yes, stock markets.

You may understand intellectually the importance of stock market corrections, bear markets even. You've heard yourself acknowledge that the market can't go up forever, that it's healthy for it to take a breather every now and again. Same for the economy, you understand that it simply can't expand forever, and when it advances for too long and has been intervened upon too much, bubbles form, then pop. You, in essence, know of this "ubiquitous property of every system that has survived". Ah, but when the developments you say are healthy begin to develop, when gloom hits the headlines, when your portfolio contracts, you become worried, you see darkness in your financial future, you fear that the market may never recover, or that you may not live long enough to experience the "good" times again. Amid a declining stock market, you abandon your wisdom.

But---despite your anxiety---you were right to begin with, corrections and bear markets are indeed antifragile. Balance sheets get clean, poorly run companies fail (if they're not, alas, bailed out that is), profligates get frugal, stuff gets cheap and crooks get caught. Yes, the market gets better when its numbers get worse.

This is me splashing cold water on your face, slapping you back into reality---just in case you're beginning to fret over recent volatility.

According to Bloomberg, in January the Dow dropped 3.69%, the S&P 500 was off 3.10% and the NASDAQ declined 2.13%. Some sectors did better than those major averages, some worse. Non-US (save for commodity dependent countries), for the most part, finished the month ever so slightly in the green. So, frankly, we ain't even close to a legitimate correction (<10-20%>) at this point. I'm guessing (just guessing) that I'll have more opportunities to evoke your wisdom in the weeks and months to come.

This week I'll update last week's themes, and add one more, earnings.

Central Banks:

Last weekend I reported on the amazing symphony of central banks---the worldwide (save for the U.S.) easing of monetary policy. As for this past week, it was all about the U.S. central bank. The Fed held its two-day policy meeting and unanimously voted to leave interest rates as is, at zero. The post-meeting statement reiterated the members' patience, yet acknowledged the momentum in the labor market. I believe the Fed's optimism over employment spooked the stock market. I.e., while the incredible crash in oil prices is influencing the rate of inflation, it's presumed transitoryness makes for a heightened risk of inflation should oil begin to bounce as wages begin to rise.

I know, you're hearing pundits complain about the lack of wage growth. Well, believe me, they're either politically motivated, or don't understand economics. In terms of the latter: first there's the taking up of the labor market's slack, then, as the pool of qualified workers contracts, wages begin to rise. I believe, despite international weakness, despite the strong dollar, and despite the bulging bond market and skittish stock market, the Fed is very likely to push rates a bit higher in 2015. Which very well could put pressure on the stock market. And wouldn't that be wonderful, given the market's antifragility!

Oil:

Last weekend I reported on the huge 10 million barrel build in crude oil inventories. Well, last week saw another huge build, 8.9 million barrels. While, as I reported, oil rigs are shutting down by the minute, U.S. producers haven't yet begun to let up on their most productive wells. Plus, and this is an important plus, refineries have slowed production (resulting in a piling up of crude inventories) as there exists a large wholesale supply of gasoline and distillates. This is unambiguously good for the U.S. consumer, as it puts further downward pressure on prices. But make no mistake, it can't last forever. Although it's likely to persist awhile with total inventories at, no kidding, an 80-year high.

You may be hearing the experts talk about how cheap energy stocks have become and how, therefore, they present a huge buying opportunity. And while I can't help but agree that, long-term, folks buying now will likely do well, the idea that oil stocks have gotten cheap, if cheap means low valuations, is simply wrong. Cheapness when it comes to stocks has virtually nothing to do with share prices by themselves, it has to do with the level of per share earnings in relation to the price per share. For example, I recently researched one the world's biggest and best oil services companies. My first look at the company, several weeks ago, showed me a price to earnings (p/e) ratio of 16, with a p/e to earnings growth (peg) ratio of a little above 1 (that's attractive). Since then the stock dropped about 12% in price and then rebounded almost back to the price it was when I took that first look, which was still like 30% below where it peaked before oil took the plunge. But the thing is---despite the share price remaining way off its high---it's not nearly as cheap as it was a few weeks ago. Due to legitimately reduced earnings expectations it now trades at a 20 p/e and 1.5+ peg ratio. So, no, energy stocks aren't as cheap as some would have you believe. Although they could very well bounce in a big way when oil looks like it's finding a bottom (or before in anticipation).

The consumer:

As you'll notice in this week's economic highlights the consumer remains very optimistic about his/her future. Which showed up in the consumer spending reading in last week's GDP report as well as in the big December jump in new homes sales, 11.6%. However, interestingly, retail sales have been nothing to get excited about. That'll change if this optimism, and recent momentum in the jobs numbers, holds.

Briefly on Europe:

Despite deflation, Russia and Greece, the Euro Zone stock markets (save for Greece's), when compared to the U.S., held up pretty well in January. Euro QE's biggest detractor, Germany, saw its latest CPI number turn red (deflation), which makes ECB president Mario Draghi look all the more correct in his convincing his board members to go all in on massive bond buying (QE)---which led to the area's January outperformance.

As for Russia, Putin is not, these days, supporting my theory that he's become too much the global player to keep the Ukraine situation alive for long. I've read recent reports where he's giving his super-wealthy supporters the cold shoulder, as they've upped their pleas for him to find an end to the conflict. Clearly, the Russian oligarchs get it, but the man who counts, whose popularity, they say, remains high with his citizens, doesn't. Not, it seems, as long as he has billions in reserves with which to pay the bills. Should Putin wake up and find a face-saving way to save his economy, I believe Russian and Euro Zone stocks would give him quite the rising ovation. We'll see...

As for Greece:

In Friday's audio commentary I told you about a news flash that said Greece was essentially done with reform and wasn't interested in receiving any additional bailout money. I said that I didn't believe that to be a sustainable position, and even questioned the validity of the headline. Well, as it turned out Greece's new finance minister made a statement in Greek that was misinterpreted by a reporter. Newly-elected Prime Minister Tsipras was quick to quell the rumor. He told Bloomberg:

"The deliberation with our European partners has just begun," he said.

"Despite the fact that there are differences in perspective, I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole."

Cockiness, and a willingness to promise whatever it takes, can win you an election when your people are desperate to hear what they want to hear. But when you take the reins of a country whose debt is 175% of its GDP you really don't have a lot to work with. And you can go from rock star to goat in a hurry when the people catch on that all those promises were literally unkeepable. Just ask the once popular French president Francois Hollande:

A Harris Interactive poll published on Monday found that 92 percent of respondents said they were not satisfied with Hollande's track record, with 96 percent saying he had not held to his campaign promises made before coming to power in 2012.

Q4 earnings:

According to Bloomberg, the percent of S&P 500 companies that have thus far exceeded analysts' earnings expectations (226 having reported) is a whopping 78.32. But the thing is, the bar (expectations) had been lowered measurably. Still---lowered bar notwithstanding---you'd think the market would be rallying on such news. But it's not what companies earned yesterday that counts, it's what the expectations are for tomorrow's earnings that drives share prices. And being that big companies, the components in the major averages, do a substantial share of their business abroad, they're concerned about the impact of the strong U.S. dollar, as I explained last week.

That---voiced concerns over the strong dollar---has been no small contributor to recent volatility.

Having devoted much of last week's commentary to this topic, I'll leave it here for now.

As I've been promising, the global dynamics going forward could make for a very volatile 2015. If you're prone to worry, you might bookmark this one and refer back to the opening paragraphs if or when you feel that anxiety coming on. And if you're our client there's absolutely no reason to wait for our next review meeting if you'd like to get together and confirm that your allocation matches your temperament and time horizon. In fact, if you're ever feeling anxious, I strongly encourage it. So please don't hesitate to give us a call.

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

JANUAR 26, 2015

THE DALLAS FED MANUFACTURING SURVEY shows factory output essentially unchanged in December, .7 (zero is breakeven). Other components showed sluggishness during the month. Capacity utilization, shipments and new orders all moved noticeably lower on the month. While the labor market components showed continued employment increases, sentiment about future business activity fell measurably. I suspect Texas's exposure to the energy sector is influencing sentiment in the state.

JANUARY 27, 2015

DURABLE GOODS ORDERS unexpectedly dropped 3.4% in December, versus a consensus estimate of 0.7% increase. Nondefense aircraft, plunging 55.5%, and defense aircraft down 19.9% acounted for much of the decline. Outside of transportation (autos rose 2.7% btw), fabricated metals and electrical equipment posted gains while primary metals, machinery,  and computers and electronics declined. The rapidly rising dollar clearly isn't helping the durable goods number.

THE JOHNSON REDBOOK RETAIL REPORT shows same store sales running at a relatively slow 3.2% pace. The report cites weather as a factor. Recent consumer sentiment indicators and improved jobs numbers would suggest this reading will improve over the coming months.

THE CASE-SHILLER HOME PRICE INDEX shows signs of life, rising .7% for the composite-20 city index. I remain optimistic on the housing market going forward.

MARKIT'S FLASH SERVICES PMI shows the service sector growing slightly, at 54 in January, versus December's 53.6 reading. Despite the relatively slow growth, respondents continue to add to payrolls, although at a relatively slow pace. This would be another indicator that we'll likely see improvements going forward, given recent reads on the consumer.

NEW HOME SALES jumped an impressive 11.6% in December to an annual rate of 481,000, which is substantially higher than the consensus estimate. Another positive for the housing sector was the 2.2% monthly increase in the median price of a home ($298,100). The year over year price increase is a solid 8.2%. The sales gain brought inventories down to 5.5 months, from 6.0 months in December, which is a negative for January sales, but motivation for builders to pick up the pace. Again, I like the sector going forward.

THE CONFERENCE BOARD CONSUMER CONFIDENCE INDEX for January confirmed that the U.S. consumer is in a very good mood these days. The 102.9 reading topped the consensus estimate (96). This is the index's best reading of the recovery.  Here's Econoday's commentary:

Consumer confidence is up very sharply this month, to a January reading and recovery best of 102.9 that is outside the Econoday forecast range (93.5 to 100.0). Gains sweep most readings including a 12.7 point surge in the present situation component to 112.6. Here, the jobs-hard-to-get subcomponent shows special strength in the jobs market, down 1.6 percentage points to 25.7 percent in a reading that is a positive indication for the monthly employment report.

The expectations component also shows strength, up 7.9 points to 96.4 with the income subcomponent up sharply. Strength in expectations for future income points to a combination of strength in the jobs market, the stock market, and also the positive effect of lower gasoline prices. Inflation expectations, reflecting lower gas prices, are steady at 5.0 percent which is very low for this reading.

Another positive in the report is a jump in vehicle buying plans in yet another indication of consumer confidence. Nevertheless, readings on consumer spirits, including this report, have been far outstripping actual gains in underlying consumer spending, at least so far.

THE RICHMOND FED MANUFACTURING INDEX, like most of other recent surveys, points to slowing in the manufacturing sector, with a reading of 6 versus last month's 7.  Like the Dallas Fed Index, however, employment continues to expand, but at a slower pace of late.

THE STATE STREET CONSUMER CONFIDENCE INDEX shows institutional investor confidence easing a bit, 106.7 versus December's 112.1. While the European component comes in at a strong 113.9, it nonetheless represents a 6 point drop from last month. The report blames political concerns in Europe and global deflation for January's dip.

JANUARY 28, 2015

MBA PURCHASE APPLICATIONS were flat last week, off .1%. Refinances dropped 5%.  This one will be interesting to watch going forward as, clearly, the housing market is showing signs of life...

THE EIA PETROLEUM STATUS REPORT continues to show huge builds of crude inventory, another 8.9 million barrels last week. At 406.7 million barrels, crude inventory is at its highest level in 80 years! Gasoline and distillate inventories, however, declined, by 2.6 m and 3.9 m barrels respectively. What we're seeing are high wholesale supplies of gas and distillates which is causing refineries to cut back on production, which exacerbates the rise in crude inventories. This does not offer much hope for a bounce in the price of oil anytime soon. Good news for consumers!

THE FOMC ANNOUNCEMENT following its 2-day policy meeting said that the Fed remains patient with regard to raising interest rates. The market sold off heavily on the day, and I suspect the Fed's commentary regarding the improving labor market had something to do with it. The Fed has previously cited slack in the labor market as a primary excuse for keeping rates at record lows. I believe the market sees an improving labor market as a potential impetus for getting the Fed off of zero.

JANUARY 29, 2015

WEEKLY JOBLESS CLAIMS plunged 43,000 to 265,000. This was way below the consensus estimate of 300k. This has been a most volatile indicator of late. Surely, the MLK holiday played its part. But of course last weekend wasn't the only 3-day weekend since April 2000, which was the last time we saw a reading this low.

THE BLOOMBERG CONSUMER COMFORT INDEX climbed yet again last week to a 47.3 reading versus 44.7 the week prior. This is the strongest weekly advance since March 2010. The optimism-on-the-economy gauge is showing its strongest reading in almost 8 years. The recent consumer reads are extremely bullish for the U.S. economy going forward, despite the recent weakness in manufacturing.

THE PENDING HOME SALES INDEX FOR DECEMBER completely bucked the recent uptrend in the housing indicators. The consensus estimate was for a .9% increase, and the number came in at -3.7%. Final sales of existing homes did rise last week, but the trend remains relatively flat. This one doesn't at all jibe with other recent indicators. Hmm...

NAT GAS INVENTORIES fell 94 bcf last week, to 2,543 bcf.

THE FED BALANCE SHEET dropped $12.9 billion, to $4.50 trillion.

M2 MONEY SUPPLY (currency, checking accounts, savings accounts, small time deposits and retail money market mutual funds) grew by $6.9 billion last week.

JANUARY 30, 2015

Q4 GDP (advance estimate) came in below expectations, at 2.6%. The number was weighed down a bit by an increase in imports, a decrease in government spending and---the only true negative in my opinion---decelerating nonresidential fixed investments. Personal consumption was a major positive, up 4%.  Here's from the BEA report:

Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 2.6 percent in the fourth quarter of 2014, according to the "advance" estimate released by the Bureau of Economic Analysis.  In the third quarter, real GDP increased 5.0 percent.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4 and "Comparisons of Revisions to GDP" on page 5).  The "second" estimate for the fourth quarter, based on more complete data, will be released on February 27, 2015.

The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment that were partly offset by a negative contribution from federal government spending.  Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the fourth quarter primarily reflected an upturn in imports, a downturn in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by an upturn in private inventory investment and an acceleration in PCE.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 0.3 percent in the fourth quarter, in contrast to an increase of 1.4 percent in the third. Excluding food and energy prices, the price index for gross domestic purchases increased 0.7 percent, compared with an increase of 1.6 percent.

THE Q4 EMPLOYMENT COST INDEX increased at a 2.2% over the past year. This reading, which includes wages, salaries and benefits is noticeable higher than the 1.7% hourly earnings increase noted in the December employment report. Clearly, the average worker is doing better than some would have us believe. I believe we will see wages improve going forward as slack in the labor market appears to be abating.

THE CHICAGO PMI, which covers both manufacturing and services, paints a much better picture than other PMIs of late, coming in at 59.4. Here's Econoday's commentary:

Growth in the Chicago economy is strong and picking up steam, based on the Chicago PMI which rose to a January reading of 59.4 vs a revised 58.8 in December. Growth in new orders and growth in production both turned higher while, in a convincing sign of strength, businesses in the area picked up hiring to the highest rate since November 2013. Price data show the lowest level of pressure in 4-1/2 years. This report covers both the manufacturing and non-manufacturing sectors and typically runs hot relative to other data.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX confirms that, per virtually every other survey of late, the U.S. consumer is feeling very good these days.... The reading for January is 98.1, with the current conditions component coming in at 109.3. The expectations component came in at 91.0.

Market Commentary (audio)

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Weekly Update (audio summary)

Before clicking the play button, please read the closing paragraph from the written version of this week's update:

I’ll leave you here with a reminder that sane stock market investing is all about seeing the forest through the trees; in believing that, in the long-run, ingenuity and innovation will make major success stories out of smartly-run, globally-focused companies. As for the near-term, my optimistic tone on some sectors/areas notwithstanding, I expect 2015 to bring us a level of volatility that will challenge the resolve of many a short-term investor. Present valuations in U.S. stocks, while not extreme in my view (considering present inflation), virtually have to make for a jittery market as the Fed looks to “normalize” interest rates, as other central banks look to ease their economies’ to prosperity (could inspire upward volatility), and as any number of unforeseen events unfold in the year to come.  And, of course, like every year, how the markets ultimately fare in 2015 is anybody’s guess—which is why long-term investors do not gauge their success in single-year increments…

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Your Weekly Update

Doing true justice to the past week in world finance and economics would mean occupying more space herein than I can in good conscience ask you to take in. I appreciate that while you (who are our clients) have matched my commitment to not bombard your inbox (with written material anyway)---to the extent I have in the past---with your commitment to spending a few minutes each weekend taking in my updates (right?), you, nevertheless, have other stuff going on, I'm assuming.

Therefore, in the following I'll simply touch on what's mattered most of late. Which would be the recent actions of the world's central banks, particularly the European Central Bank, the action in oil and the state of the U.S. consumer.

Starting with central banks:

Over the course of the past few days the European Central Bank (ECB), the Bank of Japan (BOJ), the People's Bank of China (PBOC), the Reserve Bank of India (RBI), the Swiss National Bank (SNB), the Danish Central Bank (DCB) and the Bank of Canada (BOC) all engaged in either introducing a bazooka of a quantitative easing program (ECB), reducing benchmark interest rates (RBI, SNB, DCB, BOC) or expanding the scale and access to various liquidity programs (BOJ, PBOC). In essence, the whole outside world, virtually, is engaging in major monetary stimulus while here at home the Fed is gauging the when, the how and even the why of getting interest rates off of the zero lower bound.

So what's it all mean? It means the outside world is worried about inflation, the lack thereof that is, while the U.S. economy is sitting pretty, relatively speaking that is. What's it all do? Well, for starters, it makes the dollar the king of currencies. I.e., international investors/traders buy the currency that they believe will appreciate the most against their own (and, today, given a growing economy and higher relative interest rates, the dollar would be the one to buy). For example, trade 1 euro for a $1.20, then watch the euro's price drop to, say, $1.12 and viola!, you've just made a cool 7% on your money (as your $1.20 would then buy you 1.07 euros)---not counting any interest, dividends or capital gains you may have made on whatever you stuck that $1.20 into.

So why would a country allow a practice that would likely serve to make its currency worth less in the global marketplace? Well, to help its exporters. Think about it. If yesterday it cost $1.20 to buy 1 euro's worth of goods and today the euro dropped in value to $1.12, then that $1.20 buys you more stuff from Euro Zone exporters. Which you'll indeed do. Then, in theory, the exporting economy benefits as profits rise and companies hire and citizens become happy, and spend. Sounds awesome, doesn't it? Well, sure, except when we consider what it does to the international buying power of said citizens. While---in a rising dollar environment---the U.S. consumer enjoys an increase of affordable goods from abroad, the foreign consumer experiences the opposite. I.e., in my example 1 euro bought him/her $1.20 worth of U.S. stuff yesterday, while today it only buys $1.12 worth. And, thus, the U.S. exporter is none too happy about the rising dollar.

Without getting too involved in the pros and cons of money debasing, the question is, as investors, should we own shares of Euro Zone exporters in this environment? Well, yes, I believe we should (albeit in modest quantity). But we have to initially temper our expectations a bit to compensate for the negative effect of the rising dollar. Remember, per my example, $1.20 invested yesterday, is worth only $1.12 today. Meaning the growth in the price of the Euro Zone stocks we buy have to go up more than the decline in the dollar value of the euro to book a profit. Which explains why, Friday, when Euro Zone markets rallied, the share price of many U.S.-traded Euro Zone focused exchange traded funds (ETFs) actually declined.

Now look further down the road. If greater liquidity, easier lending standards and increasing exports lead to an improving economy, or if for whatever reason(s) the Euro Zone economy begins to brighten, the Euro will find a bottom and---in this optimistic (but not guaranteed) scenario---you get the best of both worlds: a bump in the currency exchange rate along with a bull market in your Euro Zone stocks. Which are, by the way, presently priced noticeably cheaper relative to earnings than are U.S. stocks---in the aggregate in both cases that is.

If you doubt the Euro Zone's potential as a profitable long-term investment destination---given structural issues that desperately need attention---you have good reason, and you're not alone. Which, by the way, is the reason the area's equities are trading at a relative discount (and keep in mind, to trade at a discount to U.S. equities in terms of price to earnings ratios means the companies in question have earnings [attractively so when compared to their share prices], despite the structural issues). If everyone saw an opportunity, well, there'd be no opportunity. Things are never cheap when everyone's after them.

I can't leave the Euro Zone topic without offering a word or two about this Sunday's election in Greece. The far-left Syriza party looks to have the election in the bag. The question is, will they receive enough votes to form a majority of their own or will they have to form a coalition government? In any case, they'll win---to whatever extent---because they've promised to end the pain of reforms that came as the strings attached to Greece's bailout. The next question is, will the Troika (the European Commission, the International Monetary Fund and the European Central Bank) be willing to renegotiate the terms and continue pumping in the money? And what happens if they don't? Even though a Syriza victory is widely anticipated, I wouldn't be at all surprised to see markets sell off on the news. More on this to come...

Oil

The Saudi King's passing on Friday saw oil prices spike momentarily, only to resume their decline and finish the day in the red. His successor said there'd be no change in strategy going forward. Per my weekly economic highlights at the bottom, last week saw the biggest build in crude oil inventories in 14 years. Clearly, the forces that have forced oil to present levels have yet to run their course. Make no mistake, however, oil will ultimately find its bottom as the present price per barrel will do a number on production. In fact, oil rigs in the U.S. are already dropping like flies. Here's from Friday's Bloomberg article "Oil Rigs in U.S. at 2-Year Low as Bakken Drillers Bail".

Oil rigs have dropped by an unprecedented 258 in seven weeks, threatening to end the surge in domestic oil production that has turned the U.S. into the world’s largest fuel exporter. The booming production, out of shale formations across the country, has OPEC and other foreign suppliers fighting to preserve their market share. Eight hundred rigs may be pulled out of U.S. fields during the first half of 2015, Penn West Petroleum Ltd. (PWT) Chief Executive OfficerDavid Roberts said at a conference Thursday.

The U.S. Consumer

According to the surveys, it's a good time to be a U.S. consumer. Along with an improving employment picture, the low cost of fueling an automobile is---as you'll see in the highlights below---fueling confidence among the populace. I do like consumer discretionary stocks these days.

As you've read of late, I particularly like home builders, and related companies. While I've received a little pushback on this from folks who are concerned with the negative impact the present oil situation is having on producing states, namely Texas (whose total oil and gas jobs account for less than 3% of the state's employment by the way), the fact that 98.6% of the nation's gas-guzzling workers work outside the gas industry suggests that, absolutely, low gas prices are an unambiguous plus for the U.S. economy.

Here's yet another spiel on why I like housing-related companies (albeit, as with everything else in a well balanced portfolio, in modest quantity) going forward.

I keep track of a number of key macro indicators that assist me in making specific sector recommendations. Here are my most recent notes on housing inventories:

Inventory of new single family homes: 214,000 as of 11/20/14. Up 70k from 2012, but much lower than the long-term average--and way off the 570,000 peak in June 2006. This is bullish for home-builders and related companies. Housing starts are currently running at a 1.089 million annual pace; the latest reading on household formations (folks making homes for themselves) was 809,000. The number of teardowns per 1 million starts is typically 200,000. Therefore, current housing starts are running right with household formations. Which, by itself, suggests no build up or draw down of inventories in the near future. Should the recent consumer optimism result in more household formations we should, all things being equal, see inventories come in and production ramp up, which would be another bullish signal for home builders and related companies.

Total existing homes for sale: 2.09 million. Which is right at the long-term normal reading. The number peaked at 4+ million in July 2007. Along with the low new home inventory and potential for a pickup in household formations, this is bullish for all things housing.

I’ll leave you here with a reminder that sane stock market investing is all about seeing the forest through the trees; in believing that, in the long-run, ingenuity and innovation will make major success stories out of smartly-run, globally-focused companies. As for the near-term, my optimistic tone on some sectors/areas notwithstanding, I expect 2015 to bring us a level of volatility that will challenge the resolve of many a short-term investor. Present valuations in U.S. stocks, while not extreme in my view (considering present inflation), virtually have to make for a jittery market as the Fed looks to “normalize” interest rates, as other central banks look to ease their economies’ to prosperity (could inspire upward volatility), and as any number of unforeseen events unfold in the year to come.  And, of course, like every year, how the markets ultimately fare in 2015 is anybody's guess---which is why long-term investors do not gauge their success in single-year increments...

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

JANUARY 20, 2015

THE NAHB HOUSING MARKET INDEX continues to show real optimism among home builders. From Econoday's commentary:

Home builders continue to report solid conditions with the housing market index at 57 in January vs an upwardly revised 58 in December. January is the 7th plus-50 score in a row. January's strength is led by the most heavily weighted component, present sales, which held steady at 62. But the second most heavily weighted component, traffic, remains weak, down 2 points to 44 and reflecting a significant lack of first-time buyers in the new home market. The final component, future sales, did fall 4 points but remains very solid at 60. A look at regions shows the West well ahead at 65 with the South, which is by far the largest region for new home sales and roughly double the size of the West, at 55. The two smallest regions, the Midwest and Northeast, are at 60 and 43.

JANUARY 21, 2015

MORTGAGE APPLICATIONS are showing wild week to week readings. After jumping 24% last week, new purchase apps declined 3% while refinances increased by another 22%. On a year over year basis new purchase apps are up 3%, which is an improvement but nothing to write home about. I believe the best for the current expansion is yet to come for housing.

HOUSING STARTS exceeded expectations, coming in at 1.089 million versus the 1.041 consensus estimate and nicely above the 1.028 prior month reading. Starts are up 5.3% on year over year basis. Offsetting the good news, however, was decline in building permits: coming in at 1.032 million versus 1.06 estimate and 1.035 prior. The trend, therefore looks basically flat (although the decline in permits was concentrated in the multi-family space). Thus, the shift toward the single-family home component can be taken as a positive going forward. Here's Bloomberg on the subject:

Builders broke ground in December on the most single-family homes in almost seven years, propelling an unexpectedly large gain in U.S. housing starts that signals construction will contribute more to economic growth in 2015.

Work began on 728,000 houses at an annual rate, a 7.2 percent increase from November and the most since March 2008, a Commerce Department report showed Wednesday in Washington. Total housing starts, which include apartments, climbed 4.4 percent to a 1.09 million pace.

The improvement in single-family construction at year-end signals the industry is beginning to focus on the biggest part of the market, perhaps encouraged by gains in employment and consumer confidence that make Americans more likely to marry and have children. Historically low borrowing costs and more access to credit would raise the odds that a household will decide to buy a property rather than rent.

“The strength is where you’d like to see it, in single-family housing,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who had forecast starts would rise to 1.07 million. “It bodes well for residential real estate. It’s another thing going in the right direction for the economy.”

Permits, a proxy for future construction, declined 1.9 percent in December to a 1.03 million pace. They were depressed by a setback in multifamily projects, which can be volatile from month to month. Applications for single-family homes increased to a seven-year high.

Builders began work on 1.01 million homes in 2014, the most since 2007. The construction boom peaked at a three-decade high of 2.07 million in 2005, before plunging to a record-low 554,000 in 2009.

The rebound in residential real-estate since the recession has been mainly driven by gains in multifamily projects, including apartment buildings, as Americans soured on homeownership and opted to rent instead. A more solid recovery in construction of single-family homes would signal the industry is on sounder footing.

Single-Family Share

Single-family houses accounted for 64 percent of all housing starts in 2014, the least since 1985.

“Looking out to 2015, we think that a stronger labor market may support a pickup in household formation, which in turn may underpin further gains in housing construction,” John Ryding, chief economist at RDQ Economics in New York, said in a research note. “We also think that with housing still relatively affordable and with households increasingly employed and feeling that economic conditions are more normal, that single-family housing will carry more of the gains in housing construction in 2015.”

Sentiment in the industry is hovering close to a nine-year high. While the National Association of Home Builders/Wells Fargo builder sentiment gauge fell to 57 in January from 58 the prior month, readings greater than 50 mean more respondents report market conditions are good, according to figures from the Washington-based group on Tuesday.

THE JOHNSON REDBOOK RETAIL REPORT came in at a disappointing 3% year over year rate. Versus a 3.8% last week. Since 3.5% plus is your typical pace during economic expansions, this one bears close monitoring going forward. That said, January is typically a volatile month for department stores as they unwind and clean out winter inventories in preparation for the spring. I expect better readings beyond January given other consumer-related data.

JANUARY 22, 2015

WEEKLY JOBLESS CLAIMS dropped 10k last week. But they remain north of 300k, at 307k. The current 4-week average sits at 306,500, which is up 6,500 from the prior week's reading. Continuing claims, which are reported with a one week lag, rose 15,000 to 2.443 million, with the 4-week average up 9,000 to 2.427 million. The unemployment rate for insured workers remained at 1.8%. While the week over week number improved, and the present level should not spark recession worries (300k is a historically average number), the trend of late bears close monitoring. My best guess, given robust sentiment reads of late, that the trend will reverse going forward and that the recent uptick will be blamed on seasonal factors. We'll see...

 THE FHFA HOUSE PRICE INDEX points to improvement in the housing sector (as I've been expecting of late). Home prices gained .8% in November, after a .4% October increase, while the consensus estimate was for a .3% increase. Year over year prices are up 5.3% from a 4.4% gain in Ocober.

THE BLOOMBERG CONSUMER COMFORT INDEX continues to tell of a very optimistic U.S. consumer. Which, given that consumption is two-thirds of GDP, speaks positively about the U.S. economy going forward. Here's Bloomberg's press release:

American Consumers Most Optimistic About Economy in Four Years

By Michelle Jamrisko

(Bloomberg) -- Americans’ expectations for the economy improved in January to reach the highest level in four years as the cost of gasoline continued to fall and the job market strengthened.

A measure tracking the economic outlook rose by 2 points to 53, the strongest since January 2011, data from the Bloomberg Consumer Comfort Index showed Thursday. Thirty-six percent said the economy is getting better, up from 32 last month and the second-largest share since 2002. The weekly sentiment index eased to 44.7 in the period ended Jan. 18 from 45.4.

Gasoline prices approaching a nationwide average of $2 a gallon and the lowest unemployment rate since mid-2008 are making households more upbeat about the expansion. Stronger wage growth would help to further propel sentiment and spark bigger gains in consumer spending.

The weekly comfort measure “has rallied impressively, improving at least numerically in all but three of the past 12 weeks,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement.

More Americans than forecast filed applications for unemployment benefits last week, a sign of lingering holiday turnover, another report showed. Jobless claims decreased by 10,000 to 307,000 in the week ended Jan. 17, the Labor Department said. The median forecast in a Bloomberg survey called for 300,000 claims.

Stocks Advance

Stocks climbed as European Central Bank president Mario Draghi announced an expanded asset-purchase program to spur growth and counter deflationary pressures. The Standard & Poor’s 500 Index advanced 0.4 percent to 2,039.92 at 9:34 a.m. in New York.

The brighter outlook for the world’s largest economy was paced by gains among women, full-time workers, 18- to 34-year-olds, residents in the West and Democrats. Married adults and those with at least some college education also registered advances.

While the weekly measure of confidence dropped, it was the second-strongest in seven years. The comfort index averaged 44.8 in 2007, the last year of the past expansion.

All three sub-indexes cooled last week. A gauge on the current state of the national economy decreased to 38.9 from 39.1. A measure of personal finances fell to 56.6 from 57.4, and the buying climate index declined to 38.5 from 39.9.

Gasoline Prices

Lower energy prices and job gains are underpinning sentiment. The cost of a gallon of regular gasoline fell to $2.04 as of yesterday, the lowest since April 2009, according to figures from AAA, the largest U.S. auto organization. About 3 million more Americans found work in 2014, the most in 15 years, and unemployment in December dropped to 5.6 percent, Labor Department data showed.

Comfort gauges for almost every income group showed a decrease last week, with confidence among those making less than $15,000 a year at its lowest in five weeks. Sentiment among Americans earning $100,000 or more advanced from the prior period.

NAT GAS INVENTORIES declined another 216 bcf last week. Despite the reduced inventory, the price has come off of its December high of 3.23, at 2.90 as I type (up 2.1% from yesterday however)...

CRUDE INVENTORIES jumped by a huge 10 million barrels last week. That's the biggest weekly build in 14 years. Prices of course dropped on the news. In response to big wholesale supplies of gasoline and distillates, refineries have cut production, which limits gas and distillates inventories (up .6 m and down 3.3 m respectively). The present low prices will absolutely lead to reduced production over time and, hence, higher prices. The question is, over what period of time?

THE KANSAS CITY FED MANUFACTURING INDEX for January softened month over month, while producers' expectations for future activity in the 10th district remained at elevated levels. The weakest activity occurred in Oklahoma, an energy-dependent state.

 THE FED BALANCE SHEET dropped by $3.1 billion last week, after increasing $16.6 billion the week before. Total assets sit at $4.513 trillion.

JANUARY 23, 2015

EXISTING HOME SALES IN DECEMBER jumped 2.4% to an annual rate of 5.04 million. The gain, as reported in Wednesday's housing starts number, was led by single-family homes. The full-year results, however, were negative. Here's Bloomberg on the numbers and the prospects going forward:

Home-Sales Fall in 2014 Has U.S. Waiting for This Year: Economy

By Shobhana Chandra

(Bloomberg) -- A three-year winning streak for sales of previously owned homes in the U.S. ended in 2014 as some investors stepped out of the market and first-time buyers failed to fill the void.

Purchases totaled 4.93 million last year, down 3.1 percent from the 5.09 million houses sold in 2013, figures from the National Association of Realtors showed Friday in Washington.

The share of American homebuyers making their first purchase dropped in 2014 to its lowest level in almost three decades, according to the Realtors group. At the same time, employment gains, growing consumer confidence, mortgage rates at historically low levels and government efforts to lower purchasing costs probably will help bolster demand in 2015.

“Demand has been pretty sideways,” said Jay Feldman, an economist at Credit Suisse in New York. “There are various positives and I don’t see any big negatives for housing. The improving labor market and low mortgage rates will support the housing recovery.”

Stocks dropped after a four-day rally as weaker-than-forecast results at companies from United Parcel Service Inc. to Kimberly-Clark Corp. offset confidence that central banks will support global growth. The Standard & Poor’s 500 Index fell 0.2 percent to 2,058.85 at 1:20 p.m. in New York. The S&P Homebuilding Supercomposite Index declined 0.7 percent.

Survey Results

Purchases climbed a less-than-forecast 2.4 percent in December from the prior month to a 5.04 million annual rate, the report showed.

The median forecast of 76 economists in a Bloomberg survey called for sales of previously owned homes to rise to a 5.08 million pace in December. Estimates ranged from 4.93 million to 5.25 million. The November reading was revised down to 4.92 million from a previously reported 4.93 million.

First-time buyers accounted for 29 percent of all purchases in December, down from 31 percent a month earlier, the report showed. A separate survey from the group showed they made up 33 percent for all of 2014, the fewest since 1987.

“First-time buyers are still missing in action,” Lawrence Yun, NAR chief economist, said at a news conference today as the figures were released. The market in 2014 was “mildly disappointing.”

Falling interest rates, more jobs and higher levels of confidence indicate “pent-up demand continues to build,” he said. “2015 should be a better year.”

Supply, Prices

A lack of supply and rising prices are probably among reasons younger and first-time buyers have yet to enter the market. Those issues are also driving out investors, who led the early stages of the recovery.

The median price of an existing home advanced 6 percent in December from the same period a year earlier, to $209,500, the Realtors’ report showed. In 2014, it was the highest in seven years.

The number of previously owned homes on the market fell to 1.85 million, the second-smallest reading for any December since 1999.

Investors made up 17 percent of all buyers in December, down from 21 percent in the same month in 2013.

Another report Friday showed prospects for economic growth were improving. The Conference Board’s index of leading indicators, a gauge of the outlook for the next three to six months, increased 0.5 percent in December, after a revised 0.4 percent gain in November, the New York-based group said.

An improving job market and plunging gasoline prices continue to support consumer spending that makes up almost 70 percent of the economy. A strong domestic market is buffering the U.S. against global weakness as Federal Reserve policy makers prepare to meet next week to discuss if and when to raise interest rates.

Rosier Outlook

It’s “more or less consistent with our expectation for continued expansion as we turn the corner here into 2015,” said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who’s among the top LEI forecasters over the past two years, according to data compiled by Bloomberg. “If there’s something that has shifted over the last year or so, it’s that the consumer spending outlook is a little bit brighter.”

More jobs and a drop in mortgage rates will help. The labor market is coming off its best year since 1999, with almost 3 million jobs added and an unemployment rate of 5.6 percent, a more than six-year low.

The average rate on a 30-year fixed mortgage was 3.63 percent in the week ended Jan. 22, according to data from Freddie Mac in McLean, Virginia. It reached a low of 3.31 percent in November 2012.

Easier Credit

Credit conditions continue to ease. The proportion of banks reporting loosening standards for prime mortgages in the past two quarters was the highest since the Fed began record-keeping in 2007, according to the central bank’s October survey of senior loan officers.

The federal government is also trying to make it cheaper to buy. President Barack Obama unveiled a plan earlier this month aimed at boosting homeownership for borrowers with lower credit scores by reducing the premiums they pay on Federal Housing Administration mortgages. The agency’s loans are meant for lower-income borrowers, who have been largely shut out of the housing recovery. The move, which will go into effect on Jan. 26, would help the typical first-time homebuyer save about $900 in their annual loan payment, according to the FHA.

Minneapolis-based U.S. Bancorp, the nation’s largest regional lender, is among companies encouraged by the recovery in housing. Chief Executive Officer Richard Davis said the outlook for the mortgage business is “really nice,” in part because Americans are putting money into home improvements.

Home Improvements

“People who have houses now feel that they’re no longer under water and they’re willing to invest in them,” he said during an earnings call on Jan. 21. “People who have houses that are now above water are willing to use it as collateral for something else, like a small business, and housing prices slowly but surely are recovering.”

While increasing property values hurt affordability for some prospective buyers, they give homeowners the ability to sell their dwellings, which will help boost supply.

MARKIT'S FLASH MANUFACTURING PMI INDEX came in at 53.7. While in expansionary range (above 50) this index has trended down to its lowest readings in a year. The slowing in oil and gas activity and lower exports get the blame. However, those lower oil prices are a big plus in terms of input costs, which this report shows declining for the first time in 2 1/2 years.

THE CHICAGO FED NATIONAL ACTIVITY INDEX showed December as being a weak month for the U.S. economy, at minus .05. The three month average, however, remains in the green, at plus .39. The production and consumption, and housing components came in at minus .12. The employment remains nicely positive , at .16.

THE INDEX OF LEADING ECONOMIC INDICATORS shows strength in the U.S. economy. Let's say the result was good, but not great, as Econoday points out below:

The index of leading economic indicators rose a solid 0.5 percent in December in what, however, is a somewhat shallow gain reflecting the Fed's zero interest-rate policy, a policy that looks to be shifting higher, and the report's credit index that has long been signaling strength in lending activity that has yet to be confirmed by other data.

Otherwise, the month's strength is mostly negligible though a decline in unemployment claims is the third largest factor, but here too claims so far this month have been on the rise. A clear negative reading in the report is a decline in building permits.

This report is ambitious by its definition and, in December's case at least, unconvincing