Daily Bullets……for May 28, 2014

·        Surprise in bonds !........Big story of 2014: bond yields are hitting new lows for the year with 10-year Treasury yield now at 2.44%, a decline in yield of about 20% since the beginning of the year.

What’s the point? The decline in bond yields has surprised investors this year many of whom believed interest rates would rise and were positioned for that. It is important because bonds are a major asset class and bond yields are important determining valuations for financial assets. The reasons for recent the decline in yield include: 1) slow growth in Europe, 2) belief that growth in China is slowing, and 3) increasing belief the ECB will lower interest rates next week. Investors are reacting to the recent news pertaining to global growth and grappling with fully understanding the implications of sustained slower growth. Link: http://money.msn.com/top-stocks/post--treasury-yields-dip-to-new-2014-lows

·        More “limbo”…trading activity reflects economy……Stock and bond market volatility and interest rates are unusually low. This is a reflection of the economic backdrop and is resulting in lower trading profits for investment banks.

What’s the point? As a fundamental shop, we would normally not be all that interested in day-to-day trading activity. What is interesting currently though, is the fact that “fundamentals” are having a noticeable impact on trading volume and volatility primarily because traders are confused about the direction of interest rates and the economy, both of which affect valuation and earnings, the two primary drivers of stock prices. Is this a problem? Sort of, but more importantly, it may be reflecting confusion in the  market over Fed policy, interest rates, the direction of the global economy and inflation, all of which has important implications for the markets and investment strategy. It may also be indicative of what may be lower secular returns on financial assets. Link: http://www.bloomberg.com/news/2014-05-28/goldman-s-cohn-says-inactive-trading-environment-is-abnormal-.html

 

 

 

 

 

Daily Bullets……For May 23, 2014

·         New home sales rise……New home sales rose a healthy 6.4% in April, reflecting normal seasonal improvement but also some snapback from the impact of the very severe winter weather in most of the U.S. Given the recent softness in the housing market, sales of both new and existing homes are down 6.8% from a year ago.

What’s the point?  This is another in a series of recent positive readings for the housing market and has positive implications for the economy. It appears the housing market is beginning to accelerate, some of this, of course, is seasonal. We believe there is pent-up demand for housing based on new household formation; however, tight credit and structural changes in the labor markets have held back the recovery. We believe as employment continues to improve, the housing market should also gradually improve. We also believe there is improving likelihood of changes in bank regulations that could help to improve the housing market over the next year. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140523&id=17646348

·         Food inflation accelerating…..The USDA reported today that severe drought in California could have a lasting impact on fruit, dairy and egg prices, and that inflation in meat prices appears poised to continue.

What’s the point? Long-term weather patterns, namely drought conditions, appear to be having an increased effect on food inflation. This is somewhat of a concern because it could spark a move to higher inflation generally. While we believe the likelihood that food price inflation will result in significantly higher general inflation is low, we note there have been periods in our history where sectoral inflation stoked a rise in general inflation, partly due to change in “inflation psychology”. We believe the probability that food price inflation would spark higher general inflation in the near term is low for a variety of reasons including demographics trends, structural issues with the labor force, and excess global capacity. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140523&id=17646363

 

 

Daily Bullets……For May 22, 2014

·         Leading indicator up again…..The Conference Board’s index of leading economic indicators rose again in April, up 0.4%, and was revised up to 1% gain for March. Sectors contributing to the improvement were housing and the financial sector.

What’s the point? The economy appears to be accelerating from its severe weather-induced slowdown in Q1. There is increasing evidence that the housing market is improving. The strength of the stock market also benefits the economy through the “wealth effect” and generally improved consumer and business psychology. Overall, the rise in leading indicators is consistent with our view that the U.S. economy should continue to strengthen this year, which is positive for corporate profits and, hence, stock prices. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140522&id=17643157

 

·         Existing home sales up…..National Association of Realtors reports this morning that existing home sales rose a solid 1.3% in April with most of the strength coming from the condo market. The supply of homes for sale also rose to 5.9 months from 5.2 months.

What’s the point? This is another in a string of reports recently that indicate the housing market is beginning to recover from the effects of the severe winter. We think there is meaningful pent up demand for housing because of severe under-building over the past five years relative to household formation. The improvement in the housing market, some of which is of course seasonal, is another factor that should add to acceleration in the U.S. economy as we progress through the year. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140522&id=17643110

 

 

Daily Bullets…………..For May 21, 2014

·         Low inflation for 4 more years??......Minneapolis Fed President Narayana Kocherlakota in a speech this morning suggested implementation of price level targeting by the Fed because he believes inflation could remain below 2% until 2018. It is suggested that under price level targeting, the Fed would allow inflation to run in excess of the 2% target level for several years in order to offset the effects of low inflation experienced over the past several  years.

What’s the point? We think this is part of the reason why the stock market is up today. Kocherlakota comments have several important implications: 1) provides some insight into Federal Reserve thinking that they may believe inflation will remain low for an extended period; and 2) it suggests Federal Reserve policy could remain very accommodative for much longer than many now believe. This would have positive implications for financial assets, such as stocks and bond. One other factor we believe may be at work: the Federal Reserve may be learning they do not understand inflation (and its causes) as well as they or many others believe. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140521&ID=17640000&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

·         Fed minutes reflect low inflation....In April FOMC meeting minutes released today, the Fed stated continued monetary stimulus did not risk causing higher inflation. Their reasoning: continued  high structural unemployment and low capacity utilization.

What’s the point? This is another in a continuing stream of data that 1) points to continued low inflation; 2) highly accommodative Fed policy does not appear to be changing; 3) any rate increases by the Fed are still expected to be gradual. This is positive for financial assets but does raise some concern about the underlying strength of the U.S. economy. Because global economies are much more inter-dependent, we think the weakness in Europe and slowing in China is probably having and will continue to have more impact on the U.S. economy than many now expect. The implications for investment policy are: continued balance between equity and fixed income and equity preference toward larger quality companies that have healthy free cash flow and can raise dividends. Link: http://www.bloomberg.com/news/2014-05-21/fed-sees-no-inflation-risk-in-stimulus-to-push-down-unemployment.html

 

 

 

 

 

Daily Bullets……For May 20, 2014

·         Plosser juxtaposition…….Philly Fed President Plosser stated in a speech this morning that the Federal Reserve may be late in anticipating a pickup in inflation and is at risk of “being behind the curve” in controlling inflation.
What’s the point? Plosser’s comments are quite a contrast to recent comments from both current Fed chief Janet Yellen and former Fed chief Ben Bernanke. They have both stated recently that they expect accommodative monetary policy to remain for quite a while due to high structural unemployment and excess capacity. Plosser has been known to be an inflation hawk and has been singing this tune for several years. Who is correct? At this point, we still see a lot of slack in the U.S. economy. In addition, there are other exogenous deflationary forces, particularly weak overseas growth. We think an significant acceleration in inflation is still a ways off. The signal for increased inflation risk we think will be a much tighter labor market. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140520&ID=17635698&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

·         Many still “underwater”……In a report out today by Zillow, there continue to be a large number of homeowners whose house is worth less than their mortgage, otherwise known as being “underwater”. The good news is the ratio of underwater homeowners has dropped to about 19%  from 25% a year ago.

What’s the point? The “underwater” factor is a lingering vestige of the housing bubble and has multiple ramifications: reduces available housing inventory and thereby housing turnover/sales; maintains a negative for consumer psychology (lower “wealth effect”), that may be affecting consumer spending, which has grown in this recovery at about half the rate of post-WW2 average. We believe the underwater factor will continue to gradually improve along with healing in overall housing market and consumer spending. It may also have the effect of prolonging the current economic recovery. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140520&id=17635723

 

 

 

Daily Bullets….For May 19, 2014

·        Continued slow emerging markets growth……A new analysis from Schroders Asset Management (U.K.) argues that U.S. recovery will remain healthy, but due to several factors, growth in emerging market economies could be weaker than most now expect. Also, due to excess global capacity, they argue for continuation of global deflationary pressures.

What’s the point? We believe the Schroders analysis argues for continuation of U.S. financial assets, primarily quality, dividend stocks, continuing to remain attractive to investors, and also implies increased valuations for these kinds of stocks. With very weak growth in Eurozone and slowing growth in China, we have been hearing the “D" (deflation) a lot more lately in financial media. The concern over deflation is not new. Key points for investment strategy: a) inflation still does not seem to be a significant threat and b) financial assets, such as dividend stocks and bonds, both of which can provide cash flow and/or a growing income stream will remain assets of choice. Link: http://finance.yahoo.com/news/4-reasons-us-recovering-leaving-084953322.html

·        Bernanke's influential comments……Former Federal Reserve chief Ben Bernanke is now on the speaker circuit providing his views at pricy, private investor meetings. In a speech given last Friday, Bernanke is purported to have stated a couple of very important things: 1) easy money policies and below normal interest rates are here to stay for  long time, and 2) Fed will move only very slowly in raising interest rates and will only do so much later than many now expect.

What’s the point? This is a rare glimpse into the “inside thinking” at the Fed and is significant. We think new Fed chief Janet Yellen is following a policy that is a continuation of the Bernanke policy. Important implications for the financial markets include: 1) the easy money, low interest rate environment we have experienced for five years will most likely continue; and 2) continues to be supportive of financial assets, particularly quality dividend-paying stocks. Link: http://finance.yahoo.com/news/big-ticket-dinners-blunt-bernanke-200233561.html

·         Contract worker nation?.......A recent Federal Reserve study shows that contract workers are growing as a percent of overall labor force, currently accounting for 2.3% of the labor force, compared with about 1% in the 1980s. And economists predict this percentage will grow in the years ahead.

What’s the point? While the percent of contract workers may seem small, the growth of this type of worker has economic implications. Some of those implications include: 1) potential for some secular downshift growth of consumer spending which, in fact, we’ve seen in this recovery, 2) secular slowing in household formation, which has implications for durable consumer goods; 3) potential for making recessions more severe. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140519&id=17629059

Daily Bullets……..for May 16, 2014

·        Economists lifting growth forecasts…According to Philadelphia Fed’s quarterly economist survey issued today, consensus growth estimate for Q2 is raised to 3.3%, up from 3.0% and growth in 2H-14 is also increased.  

What’s the point? Recent consensus has been that the economy should accelerate in 2014. We think that is still the case, primarily reflected in recent stronger employment growth data. However, over the past week, we have seen increased investor concerns that economic growth will be less robust than earlier expected. The reasons for this are weak Eurozone economic data (0.2% growth in Q1) and increased concerns over slower growth in China. As a result, there has been some movement into bonds and out of stocks. If growth is in fact slower than expected, we think stock market downside is probably limited due to valuation, which remains reasonable, and continued investor demand for quality dividend-paying stocks. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140516&id=17626488

·       Bullard sees inflation picking up…..In a speech today, St. Louis Fed President James Bullard stated that in his view, U.S. economy will accelerate and grow at “a robust pace” for rest of year, and that inflation should move closer to Fed policy goal of 2%.

What’s the point? It is encouraging that a Fed regional president has a more optimistic view towards the economy. The Fed does extensive and thorough economic research. Given the very slow pace of the global economic recovery, for inflation to move towards the Fed’s policy goal of 2% is probably a good thing because it reflects a strengthening economy. Despite Bullard’s comments, we believe the economy is still quite a ways from “worrisome” inflation. Europe is still dealing with significant risk of deflation and there remains a lot of capacity and labor slack in the U.S. economy. As of now, we still do not see a significant risk or probability of “high” inflation. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140516&ID=17627118&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

 

 

Daily Bullets…..For May 15, 2014

·         Volatility is normal…..We note stock market is under pressure this morning, down about 1.1%. The cause for the decline? Weak earnings from Wal-mart, continued weakness in small cap stocks, and inflation numbers that came in higher than expected.

What’s the point? The stock market has been in a fairly steady uptrend for over 2.5 years, incurring only modest pullbacks and no “corrections”. That is a long run without a correction (defined as a decline of 10-20%) and well above the long-term average of about 18 months between corrections. Occasional corrections should be viewed as normal and healthy to mitigate trading or sentiment excesses. One sector that likely needed some adjustment was small cap stocks, particularly biotech, social media and IPOs. We don’t believe a correction of sentiment and overvaluation in the small cap sector should derail the positive underlying fundamentals for other sectors, such as large caps and value stocks, or the overall market. Our investment model is diversified with respect to asset class, which inherently helps to mitigate volatility of client portfolios. Link: http://finance.yahoo.com/news/stock-futures-little-changed-ahead-114727141.html

·         Inflation improving to “lowflation”…….Two economic reports this morning are both positive, one being April CPI, the other being initial unemployment claims. April “core” CPI came in at 0.2% m/m and is up 1.8% y/y (described by one economist as “lowflation”). Initial unemployment claims came declined to 297,000, their lowest level since March 2007. 

What’s the point? These are both healthy readings for the economy and support our view that the economy should strengthen as we move through the year. Some investors may view these as potentially negative because 1) it may appear inflation is accelerating and 2) it could force the Federal Reserve to speed up its monetary tightening process. 1.8% inflation is not high by historical standards, and we believe the probability of either of these occurring in the near term is low. Why? While food price inflation is real and will continue, we do not see inflation in one sector of the economy translating into economy-wide inflation because other conditions for broad-scale inflation, such as capacity shortages and wage hyper-inflation, are presently absent. Second, we continue to believe there remain deflationary forces still at work globally, particularly in Europe and now China, and continued de-leveraging, that we expect will act to keep a damper on inflation, at least for the next 6-12 months. We believe today’s market decline is, at least in part, due to nervous traders looking for an excuse to sell. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140515&id=17622092

 

 

Daily Bullets …………….For May 12, 2014

·         Hedgie’s positive outlook……Hedge fund manager Dan Arbess commented last Friday that he believes that financial conditions are still positive for the stock market. One of the factors he cites is rising M&A activity, which is running at the highest levels since 2007.

What’s the point? We have noted previously that financial conditions, primarily very low interest rates, are supportive of merger & acquisition activity. Companies can utilize low cost debt to finance acquisitions that will generate a return above the blended cost of capital. This is similar to what happened in the late 1970s/early 1980s and was a precursor to one of the most significant bull markets in history (1982-2000). We think this “financial engineering” activity can continue as long as interest rates remain low. Link: http://www.cnbc.com/id/101658711

·         Unprepared labor force…….In a sobering speech, Philadelphia Federal Reserve President Charles Plosser, stated today that the U.S. companies are having trouble finding employees with skills in engineering, technology, and science backgrounds, thus creating a skills “mismatch” in the economy.

What’s the point? The skills mismatch is a problem for the U.S. economy and has multiple ramifications: 1) it has the potential for making U.S. corporate sector less competitive with other countries; 2) it can add to structural unemployment; 3) it can result in slower secular growth for the economy. So far, U.S. companies have been able to cope with this problem by hiring workers from overseas (under green card visa programs), and through investments in technology. To the extent the skills mismatch slows secular growth, it could mean Federal Reserve policies remain accommodative for longer than many expect and valuations for quality dividend stocks continue to rise because of the perceived benefit of rising income streams in what could become an increasingly income constrained economy. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140512&ID=17609916&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

 

·         Slower growth in China acknowledged………In a fairly startling statement, China’s president Xi Jinping over the weekend issued a statement that the Chinese people should expect slower growth, even invoking the phrase “new normal”, a now oft-used euphemism for sustained slower growth. Xi also implied that China will take “necessary countermeasures” to maintain growth at/near its target of 7.5%.

What’s the point? This statement is actually positive because while it acknowledges that China is undergoing a slowdown, government officials are clearly pronouncing they will be taking actions to support its economy and sustain healthy jobs growth, including monetary stimulus. This has positive implications for global economic growth and, we believe, icontributed to the strength of the market today. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140511&id=17607297

 

 

Daily Bullets……For May 9, 2014

·       China inflation eases…….China reported a slowing in its inflation rate in April to 1.8%.

What’s the point? The easing of the inflation rate theoretically gives China more leeway to reduce interest rates to stimulate its slowing economy. We note that the European Central Bank stated yesterday that it would likely cut interest rates in order to combat low inflation. So “the point” is that we remain in an environment in which deflationary forces and inflationary forces are still fairly balanced. This tension between these countervailing forces is another reason why we expect inflation to remain subdued this year. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140508&id=17603865

·        Low volatility bond market…….Bond trading these days has become a pretty boring activity. Volatility is low, trading volume is low, and bond prices are pretty stable.

What’s the point? To the surprise of many, bond yields have actually declined in 2014. The 10-year Treasury yield has declined 13% so far this year. There are several reasons for this: 1) ultra low rate policy on part of the Federal Reserve; 2) uncertainty over rate of global economic growth. We believe interest rates most likely bottomed in July 2012 and we expect to see rates increase gradually as economic growth strengthens. This has implications for bond investments. We have reduced duration of our bond holdings and continue to believe this is the appropriate strategy with respect to bond investments. The time to extend duration would most likely be in anticipation of a recession, which we currently do not expect perhaps for several more years. Link: http://www.bloomberg.com/news/2014-05-09/wake-up-bond-traders-market-is-a-volatility-free-bore.html

 

 

 

 

 

Daily Bullets……For May 8, 2014

·         Fed bond holdings to remain high for extended period……In further Congressional testimony today, Fed chief Janet Yellen stated that its bond holdings (held under its QE program) would remain elevated for up to 8 years even after the Fed begins to raise interest rates.

What’s the point? The Fed is not only being very open and transparent about its strategy, but also is stressing heavily that it expects to maintain a very high degree of monetary accommodation for a very extended period. For the most part, this is positive for financial assets, but there are drawbacks: 1) monetary theory states that high money supply growth via easy Fed policy can stoke inflation; and 2) the Fed’s policy may reflect deeper concerns about the underlying strength of the economy. Both factors enter into the “balancing act” the Fed has been playing now for over five years to seek and deliver an appropriate level of policy accommodation. With respect to the highly unusual policy, we are in uncharted waters, which does create an element of risk. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140508&id=17601855

 

·         Unemployment apps fall………Unemployment applications dropped this week and the 4-week moving average is now about 7% below all of last year.

What’s the point? This is another in a continuing series of data which shows the U.S. economy is improving. One continuing problem has been the very slow pace of this economic recovery, now in its fifth year. We expect some acceleration in the rate of economic growth in 2H-14 but we note economists’ forecasts are all over the lot, some as low as 2% with some as high as 4%. It is still difficult to get a solid read into the potential for the economic growth rate or to feel confident about a projection. We think faster employment growth is one of the most important factors supporting our expectation for higher economic growth in 2H-14, which we expect could improve to the range of 2.5%-3.0%. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140508&id=17600346

Daily Bullets ………..For May 7, 2014

·         Fed to maintain “high level of accommodation”…….In highly watched and analyzed Congressional testimony today, Federal Reserve Chief Janet Yellen stated that a high level of monetary accommodation remains necessary to support growth in the economy and job creation. Yellen believes the economy remains far from satisfactory and still needs considerable help.

What’s the point? The Fed is not changing its tune relative to its current monetary policy, which remains highly accommodative. The implications for financial assets, particularly stocks, remains unchanged: the  Fed’s ultra low interest rate policy has been an important factor in supporting valuations of financial assets (stocks and bonds) for the past several years. With returns on bonds extremely low, quality dividend-paying stocks continue to remain attractive and we expect there will be continued flow of capital from bonds to quality dividend stocks, which we expect should support higher valuations for quality dividend-paying stocks. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140507&id=17596054

·         Russia sanctions a double-edged sword…….There is growing evidence that sanctions put in place on Russia may be having unintended consequences of also crimping other European economies. Germany today reported that factory orders unexpectedly plunged in March led by a large decline in orders from European nations. Some economists attribute this to concerns over the Ukraine situation.

What’s the point? Our expectation is the Ukraine crisis will probably not inflate to a major geopolitical crisis. To the extent the crisis continues to be a high-visibility issue or escalates further, we expect this would continue to be a negative factor interjecting volatility into the financial markets. That said, we note that there are always geopolitical forces and event affecting the financial markets. Ultimately, we believe positive financial and economic fundamentals, particularly in the U.S., should lend support for U.S. stocks. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140507&id=17594186

 

 

Daily Bullets…….For May 6, 2014

·         Narrower trade deficit……U.S. trade deficit narrowed 3.6% in March vs. February. However, the number was lower than economists forecast.

What’s the point? A lower trade deficit is positive but the problem with today’s number is that, coming in below previous forecasts, it could detract from GDP growth in the first quarter. From our perspective we would view this as more of a neutral issue as the U.S. has run a trade deficit for decades and our economy has grown. Furthermore, we see the U.S. returning to a more export-driven economy, which should help to reduce the trade deficit over time. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140506&id=17590122

·         OECD cuts global forecast……OECD today cut its global growth forecast including lower growth for both U.S. and China. U.S. now forecast to grow real GDP at 2.6% in 2014, down from 2.9%; while China is now forecast to grow 7.4%, down from previous estimate of 8.2%.

What’s the point? This news may have partially contributed to today’s market weakness. Over the years, the OECD has been more of a trend follower and late on their forecast changes regarding the economy. We think the U.S. economy could probably exceed 2.6% growth, particularly in 2H-14. We do have some concern about slower growth in China and the OECD report provides some credence to that concern. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140506&id=17588989

 

Daily Bullets……….For May 5, 2014

·         Solid job growth through summer…..Conference Board’s employment survey was positive, ticking up to 118 and up 5.5% vs. a year ago. Conference Board cited job growth as “robust”.

What’s the point?  More indication that U.S. economy is accelerating. Stronger job growth has multiple implications: stronger consumer spending, stronger housing, market, stronger manufacturing activity. So we are moving to a “positive feedback” environment in which multiple sectors of the economy help to support and reinforce growth, hence improving the strength and sustainability of economic growth. Link: http://money.msn.com/business-news/article.aspx?feed=PR&Date=20140505&ID=17586128&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

·         ISM data also quite positive………U.S. service sector activity accelerated in April, according to ISM survey. Both business activity and new orders surged and were well ahead of expections.

What’s the point? The fact that service sector activity is accelerating reflects breadth of improvement of the economy, i.e., that the recovery is broadening and therefore strengthening. After several years of very sub-par growth, the data now seem to be indicating the economy is stepping up to stronger pace. While this is positive for corporate earnings, it raises the risk that wage inflation could accelerate. This would raise concerns among investors that inflation could also accelerate. Our belief is we are still quite a ways from a significant increase in wage inflation. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140505&ID=17586234&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

 

·         Economists further increase growth expectations to 4s range……Based on recent economic data a number of economists have raised their estimates for real GDP growth to the 4s range, meaning in excess of 4% growth. Economists cited as reasons significant improvement in corporate capital spending and rebound in housing market.

What’s the point? U.S. economy could well be accelerating into a stronger growth pace that would support higher capital spending. We believe corporate capital spending, including technology-related spending, and housing will be among the stronger sectors of the economy. While consumer spending should rebound somewhat, we still believe consumer spending will remain subdued relative to previous recoveries over the past 40-50 years. Link: http://www.cnbc.com/id/101642225?__source=msn|money|headline|headline|story|&par=msn&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

·       Factory activity in China slowing further…..We note that factory activity in China slowed again in April, reflecting sluggish manufacturing and slower export activity.

What’s the point? China is now a dominant economic power and the course of its economy is now highly significant for global growth. While we think China will probably be able to “engineer” reported growth in the 7-7.5% range, should its growth slow more significantly, it would likely have negative repercussions for other economies, particularly other emerging market economies. Because of its size and diversity, we believe the U.S. economy would be more insulated to slowing in China’s economy but would feel some impacts nonetheless. Link: http://online.wsj.com/news/articles/SB10001424052702303417104579542641370266378?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303417104579542641370266378.html

 

 

Daily Bullets……For May 2, 2014

·         Retirees increasing exposure to stocks……New data out today showing retirees are putting more of their assets into stocks: 67% of new contributions going to stocks vs. 56% low in March 2009.

What’s the point? Traditional market analysis holds that individual investors tend to be late in reacting to market trends, i.e. selling at the bottom, buying near the top. While the rising contributions data is a bit of a concern, as of now, we don’t believe there is enough “euphoria” among the general public that would signal an end of the bull market or a major cyclical top in the market, although we would not be surprised to see a market correction sometime this year. We advocate diversified portfolios as a way of reducing portfolio volatility. Link: http://money.msn.com/investing/post--retirement-investors-piling-into-stocks

 

·         April jobs growth acceleration……Big news of day today is the larger-than-expected jump in job growth in April, up 288,000 and much higher than expected.

What’s the point? It reinforces our expectation that the U.S. economy is accelerating and supports other recent economic data portraying a strengthening economy. The data has both positive and negative implications for the stock market. From a positive side, stronger employment growth is favorable for U.S. corporate earnings. On the negative side, it could raise investor concerns that the Federal Reserve will have to accelerate its potential tightening of monetary policy, which would probably result in a negative investor reaction. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140502&id=17570509

·         Fed signals still support accommodative policy……Despite today’s better-than-expected April jobs number, certain indicators closely watched by the Fed remain weak enough to support an extended period of continued accommodative monetary policy.

What’s the point?  The Fed’s position on interest rates has not changed with today’s job growth number. However, if the data continues to remain very strong, this position may change. We believe a change in the Fed’s position on short term interest rates would be viewed as a surprise by investors and could result in increased market volatility. Link: http://www.bloomberg.com/news/2014-05-02/yellen-labor-gauges-show-weakness-even-as-jobless-rate-plunges.html

 

 

Daily Bullets.......For May 1, 2014

·         “The homeownership society is clearly over”…. A new report by U.S. Census shows homeownership fell to below 65% for the first time since 1995. It also reports there has been a slight shift in ownership to a larger institutional component.

       What’s the point? Wow, don’t you just love the media’s sweeping generalizations? No question that the aftermath of the real estate bubble has created distortions in the market which are still with us; however, we do not believe the desire for home ownership in the U.S. has changed. With improving job growth, we expect demand for housing and homeownership rates should improve. And a sweeping headline like the one above increases the likelihood homeownership rate is bottoming. Link: http://realestate.msn.com/blogs/post--why-homeownership-is-at-a-19-year-low

 

·         20% correction?..........Yahoo Finance has a front page attention-grabbing article this morning calling for a 20% market correction. The reason? A technical analyst’s opinion that the stock market is tracing a formation similar to the April-May 2011 top.

       What’s the point? We have said many times, market corrections are inevitable, normal and, in many cases, healthy. Should we worry about corrections? As financial planners, we need to understand and be aware of “the market”, but we believe fundamentals are the ultimate driver of stock prices and fundamentals remain generally positive. Furthermore, we advocate diversification as a critical component in wealth management. Diversification helps to reduce portfolio volatility and provide downside protection during market corrections. Link: http://finance.yahoo.com/blogs/talking-numbers/this-chart-says-we-re-in-for-a-20--correction-145953185.html

 

·         Consumer coming through……In another positive for the economy, consumer spending in March accelerated at its fastest pace in 4.5 years, rising at a real rate 0.7%, up from 0.4% in February.

       What’s the point? Consumer spending makes up over two-thirds of the economy. Recent data showing acceleration in consumer spending is positive for the economy and further supports our belief that economic growth should accelerate in 2014. This appears to be occurring and if stronger job growth can be sustained, which we expect, this bodes well for further acceleration in economic growth. This, in turn, is positive for corporate profit growth. One risk? Investor concerns that the Fed may have to accelerate its monetary tightening process, which could be jolt to the market. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140501&id=17570509