Daily Bullets….for June 30, 2014

·         Longest quarterly streak since 1998…With today’s modest rise in the S&P500 index, the market has achieved its longest streak of quarterly gains in 16 years.

What’s the point? The stock market is being driven up by a number of factors including prospects for accelerating economic and earnings growth, continued accommodative Federal Reserve policies, moderate inflation, and dismal return prospects in alternative assets, particularly bonds. While the market will probably continue to grind higher in the near term, there a number of signs that have us more concerned about the sustainability of the advance in the near term. These factors include: high level of investor complacency/confidence; growing consensus thinking that stocks are the “only game in town”; extended condition of certain technical indicators; potential for an “inflation scare”. Bottom line:  while we believe the stock market remains in a long term bull trend, the risks of a correction in the near term appear to be increasing. Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140630&id=17740390

·         New Fed study sees potential for rising inflation……A new study by the Federal Reserve concludes that as long as long-term unemployed are able to participate in the recovery in jobs, inflation will remain below 2% this year and next. If the long-term unemployed are not able to find work, labor market tightness for more “employable” workers will increase, driving up wage rates and inflation.

What’s the point? The idea that long-term unemployed could actually cause a rise in inflation potential seems counterintuitive, however, as these workers lose skills, they become less employable, placing greater tightness on available pool of skilled labor. There is a variance of opinion among economists about this potentiality. While it remains to be seen how this plays out, if we had to bet one way, we’d lean more towards the side of rising inflationary potential, however, there are a number of factors that we believe will continue to restrain inflation including: demographics (aging of baby boomers), technology advancements (substitution of capital for labor), and a new era of low monetary velocity which reduces the growth or inflation potential of increased money supply. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140630&ID=17741367&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

 

 

 

 

 

 

Daily Bullets…..for June 27, 2014

·         May consumer data sluggish……Consumer spending in May, reported today, grew at a fairly sluggish rate of 0.2%. This follows no gain in April and a 0.8% jump in March.

What’s the point? This economic recovery has been the most sluggish of any recovery since WW2. A couple of the key reasons for this are over-leveraged consumer balance sheets, tight credit, and slower growth in federal spending due to sequestration. This has manifested itself in slow pace of job creation and consumer spending well below previous economic recoveries. We believe consumer spending will improve modestly as job growth improves, however, given the still significant structural issues facing the U.S. economy, we expect consumer spending will remain below long-term trend growth for a considerable period. This has implications for stock valuations but as long as consumer spending remains positive, we don’t believe it would have an overly negative effect on stocks. Link: http://finance.yahoo.com/news/consumer-spending-may-disappointingly-weak-134551664--finance.html

·         Consumer confidence improving….U.S. consumer confidence rose slightly in May and has remained steady over the past six months in spite of weak first quarter GDP growth. Improving job prospects were cited as the reason for the higher confidence reading.

What’s the point? Recent data indicate that the U.S. consumer is feeling a little better about the economy but remains generally cautious about finances, jobs, and spending. Confidence seems to be grudgingly improving in a parallel with the job market. There remains a severe leverage overhang in the consumer sector, which is acting as a drag on the consumer spending recovery. We are of the belief that as the job market continues to improve, consumer spending should also improve but not to the extent of prior economic recoveries. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140627&id=17737035

 

Daily Bullets……for June 25, 2014

·         CAPE index high…..Robert Shiller, famed Yale prof who invented the “Shiller CAPE” index, is stating he is concerned about the current “high level” of the index, which in his mind indicates the stock market is very expensive and vulnerable to a pullback.

What’s the point? The media loves to focus on the CAPE index. The CAPE index stands for “cyclically adjusted price-to-earnings” ratio. It is essentially a trailing 10-year P/E ratio. We are a little amused at all the focus the media places on the index because we believe, as do others, that the index is flawed. Why is it flawed? 1) It does not normalize earnings for extreme cyclical swings (which can distort P/E valuation); 2) it does not normalize for interest rates (which are extremely low now); and 3) it is totally backward looking, i.e. the information captured in the CAPE index is already pretty fully discounted by the market which is forward-looking, not backward looking. While the media likes to make a big deal about the CAPE index, we believe its usefulness as a valuation tool is fairly limited and certainly cannot be looked at in a vacuum. That said, we are not insensitive to current market valuations which we believe are moderately high, but most likely have room to move somewhat higher over the next couple of years. Link: http://finance.yahoo.com/blogs/daily-ticker/-it-looks-like-a-peak---robert-shiller-s-cape-is-waving-the-caution-flag-004753218.html

·         Durable goods orders positive… “Headline” durable goods orders dropped 1% in May, which appear large. But excluding volatile defense orders, the index rose a solid 0.6% and “core” capital goods (excluding both aircraft and defense) orders rose a healthy 0.7% after declining 1.1% in April.

        What’s the point? The healthy growth of core capital goods in May is another in a string of recent data that point to an acceleration in economic growth in the U.S. The strength in “core” orders was especially notable in steel, metals, autos and computers, which reflects fairly broad-based growth within the industrial sector. The data lends further support to acceleration in U.S. economic growth and growth of corporate earnings which is a key fundamental driver of the stock market. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140625&id=17729161

 

 

Daily Bullets …….for June 24, 2014

·         Economic growth accelerating…….Philly Fed President Charles Plosser today stated that the U.S. economic growth is accelerating faster than expected and that current economic strength is broad-based.

What’s the point? There has been considerable debate about the pace of U.S. economic growth both for the short and long term. Plosser’s comments support our view that the pace of U.S. economic growth should accelerate this year which, in turn, should be positive for corporate profits. Corporate profits are the primary driver of stock prices over the long term. We think the stock market at its current all-time high levels is already discounting, at least in part, the expected improvement in corporate profits in 2H-14. We have seen forecasts calling for growth in corporate profits of as much as 10% in 2H-14. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140624&id=17724994

·         Plosser: Additional important commentary.....In his speech today, Fed President Plosser also stated that the due to faster economic growth, the Fed may have to accelerate its plan to increase interest rates and that the Fed should move to a “rules based” policy system.

What’s the point? Plosser’s comments today are giving investors greater insight into the current thinking at the Fed regarding interest rate and monetary policy. The comments are very important because of the extreme policy by the Fed over the past five years.  Plosser’s comments reveal the extent of divided thinking at the Fed: the Yellen (highly accommodative) position vs. the Plosser camp that inflation is more of a risk. Additionally, the fact that Plosser would address the topic of a “rules based” policy regime for the Fed reflects a further evolution in thinking at the Fed about  not only policy but also about communicating that policy clearly to the financial markets and thereby reducing  policy uncertainty and confusion among investors, which we believe has historically added to market volatility. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140624&id=17724994

Daily Bullets for………June 23, 2014

·         Housing data stronger……..National Association of Realtors reported this morning that existing home sales rose 4.9% in May to their highest level in nearly three years, better than expected, and suggesting the pace of the housing market may be picking up.

What’s the point? Housing is an important driver in the U.S. economy and an acceleration in housing sales and construction would be a significant positive in sustaining the current economic recovery. Housing, like job growth, has been in a “slow motion” recovery in this economic recovery for a variety of reasons. We think housing should continue to improve albeit a gradual improvement, with the potential for some modest acceleration as job growth and mortgage lending improves. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140623&id=17722196

·         China manufacturing index better than expected…….The HSBC China PMI rose to a better than expected 50.8 in June, and grew for the first time this year.

What’s the point? There has been growing concern in the investment community about the pace of growth of China’ economy. A significant slowing in the Chinese economy would have significant repercussions for global growth. Today’s China PMI data offers support that recent measures taken by China to encourage growth may be having some positive effects. While the Chinese economy is slowing, we believe the Chinese government has significant financial resources and policy flexibility to apply in supporting growth. That said, a significant risk for the Chinese economy remains a very high level of debt leverage built over the past five years primarily to support a real estate boom. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140623&ID=17722476&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

 

 

Daily Bullets……For June 13, 2014

·         China housing market slowing further…..AP has a report out today discussing further slowing, if not significant weakness, in the housing market in China. China reports that housing sales declined 8% in the first quarter and unsold housing inventory rose to a five-year high.

What’s the point? The slowdown in the Chinese economy has been a concern for investors for over a year now. Interestingly, it this has not deterred a rise in the U.S. stock market but it remains a lingering concern because of China’s growing global economic clout. The current consensus thinking on China’s GDP growth is now slowing to a 6%-7% sustainable rate, much lower than several years ago. The Chinese government is attempting to slow the economy and credit expansion to avoid the risk of a bubble and subsequent implosion of the economy. It remains to be seen if this can be accomplished without inducing outright recession in China and this is what concerns many investors today. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140613&id=17698427

·         PPI flat ex food and energy……Labor Department today reports producer price index  for May declined 0.2%, lower than expected, and down from 0.6% rise in April. Excluding food and energy, the PPI was flat in May, after a 0.3% rise in April.

What’s the point? There is still a mixed consensus on the outlook for inflation. Some economists believe inflation will accelerate as economic growth strengthens this year. So far, inflation data still remains tame and we believe will remain fairly tame in the near term. The reasons? Low wage pressures, risk of deflation in Europe, continued substitution of capital for labor, subdued credit growth, continue low monetary velocity, slower growth in China, and demographic factors affecting both baby boomers and millenials. While we believe there will be increased food price inflation in the U.S., we don’t believe that would result in systemic high (over 3-4%) inflation due to these offsetting factors. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140613&ID=17699025&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

 

 

Daily Bullets…..for June 11, 2014

·         World Bank reduces global growth forecast……The World Bank reduced its global growth forecast for 2014 to 2.8% real growth from 3.2% growth. The reasons: slower U.S. growth in Q1 and lingering geopolitical tensions such as the Ukraine crisis.

What’s the point? The World Bank’s economic forecast reduction is driven primarily by events that have already occurred and they pointed out that they expect growth to accelerate moving forward. Given recent economic data, particularly employment data, we agree with the forecast for accelerating growth, particularly in the U.S. This has positive implications for corporate earnings growth, which is a key driver of stock prices. Link: http://www.reuters.com/article/2014/06/10/us-worldbank-economy-idUSKBN0EL2JX20140610

 

·         Secretary Lew sees stronger growth ahead….In addition to World Bank’s outlook, Treasury Secretary Lew stated today that he too expects U.S. economic growth to accelerate moving forward in 2014. He expects recovery from the difficult first quarter.

What’s the point? Lew’s comments appear positive and support our view on the economy,  however Lew did state that he believes more has to be done to support employment growth and encourage capital investment in the U.S., both of which would strengthen the recovery. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140611&id=17692202

 

 

Daily Bullets…..For June 10, 2014

·        Small business confidence up…..U.S. small business confidence hit its highest level in 6-1/2 years, as reported by National Federation of Independent Business today, and forward prospects appear to be brightening considerably.

What’s the point? During this economic cycle, the small business sector has struggled behind the larger companies in the pace of its recovery. The fact the small business optimism is improving is a very good indicator, both coincident as well as prospective indicator, for the economy. It also lends further credence to 1) the fact the U.S. economy should accelerate somewhat and b) the thesis that this economic recovery has more legs to it, and could last several more years before entering the next recession. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140610&ID=17687785&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

·        Job advertising accelerating……U.S. businesses have significantly ramped up job advertisements to its highest level in 6-1/2 years.

What’s the point? The latest data on jobs posting is further evidence that the labor market is heating up. This has positive implications for the overall economy and further supports our view that economic growth should accelerate as we move through 20214. We believe improvement in jobs growth and labor component of the recovery is critical to sustaining growth of the economy. Up to now this recovery has been a “slow motion” recovery, with fits and starts growth in many sectors of the economy. More sustained and strong jobs growth would likely go a long way to improving both the strength and durability of this recovery. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140610&id=17689157

 

 

Daily Bullets……For June 6, 2014

·         Employment looking stronger…….Labor Department reporting today that job growth accelerated in May to 217,000, and marked fourth straight month of job gains. Economists believe strengthening employment data indicates Q1 softness was an anomaly and U.S. economy is positioned for stronger growth.

What’s the point? Improving job growth is important for sustaining the economic recovery and, because of its size and diversity, the U.S. economy is in a relatively stronger position to sustain economic growth particularly compared to Europe. Over the past few weeks there has been some increased sentiment that global economic growth would slow and several economists have reduced their U.S. GDP forecasts. The general consensus, however, continues to call for acceleration in U.S. GDP growth rate as we move through 2014. This is positive for sustained growth of U.S. corporate profits which, in turn, should be positive for U.S. equities. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140606&id=17680783

·         IMF chides China on debt…..The World Bank and International Monetary Fund is out today urging China to curb excessive credit growth in order reduce the risk of bubble-type excesses in certain sectors of its economy, particularly real estate.

What’s the point? We think this is “old news”. We have been hearing for many months now that China’s excess credit growth, particularly its so-called “shadow lending”, may be contributing to rising financial risk for China’s economy. Our sense is the Chinese authorities understand this and are taking measures to reign in credit as they attempt to pilot their economy to slower but more sustainable cruise speed. While it is now understood that China’s economy is slowing, the fact that China is taking more concrete actions to control credit is positive because it reduces the risk of bubble or financial excesses, and improves the likelihood that China can sustain growth on a more “organic” basis and not artificially induced growth through excess credit. We believe this would be a positive for global financial markets. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140606&id=17677201

 

 

Daily Bullets………June 5, 2014

·         ECB moves as expected….European Central Bank took a page from Fed’s handbook and followed through today on what many had predicted: it reduced all its main interest rates to record lows, including negative overnight deposit rates, and took measures to increase available liquidity to banks.
        What’s the point? The moves today by the ECB do smack a bit of “desperation”. With the European economy extremely week, the risk of deflation in Europe is increasing. This reflects the ugly aftermath effect of excessive leverage on a group of small, fragmented economies. It also may presage further economic problems in Europe and implies that economic growth in Europe will likely be very slow for a very long time. We doubt these moves will do much for the European economy in the short term. The U.S. economy should be OK because of its size and diversity, but continued economic weakness in Europe has negative implications for global economic growth. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140605&id=17677717

·         Low volatility creating a stir…Stock market volatility has been extremely low for the past couple of years, which is unusual and is actually raising concerns among traders.
What’s the point? Traders need volatility to make a living, so that group would obviously be most concerned. That said, we think there are some fundamental factors that may be contributing to low volatility including a growing concensus around 1) global economic growth, 2) general (market) environmental risk, and 3) investment strategy. As investors (as opposed to traders), we view this as neither “good” nor “bad”. As investors, we need to have an understanding of the macro environment. If, in fact, global growth is slower than expected (which is negative for earnings), this could be offset by continued demand for financial assets that can provide strong or growing cash flow, such as high quality dividend-paying stocks. Continued demand for these types of stocks could potentially offset the risk of lower valuation due to economic concerns. Link: http://money.msn.com/top-stocks/post--why-is-a-calm-market-so-scary

·         179k is more of the same………ADP private payroll growth in May came in at 179k, well below economists’ expectations of 210k. The May number is about in line with the average of the past few years.

What’s the point? Investors have been looking for an acceleration in the U.S. economy. However, private sector employment growth of 179k is not very supportive of “acceleration” and may indicate employers will remain cautious in their hiring. What is becoming more apparent is that while growth in U.S. GDP should accelerate, it may not be as robust as previously expected and we note several investment firms reduced their forecasts for 2014 GDP.  We do not see this reading as having much impact on investment strategy, in which we continue to favor large-cap value and dividend-paying stocks both in U.S. and international, and maintaining lower durations in our bond holdings. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140604&id=17674304

 

 

Daily Bullets…….For June 3, 2014

·        Market predictions wrong….This interesting article (link below) discusses the fact that so many market pundits who have been repeatedly calling for a massive stock market correction have, at least so far, been consistently wrong. In fact, some have been wrong for years. Marc Faber and Noriel Roubini come to mind on this latter point.

What’s the point? Forecasting the stock market is pretty much a futile if not impossible exercise. There is no one we are aware of who has been able to forecast the market on a consistent basis. The stock  market is driven primarily by the direction and strength of corporate earnings. The rise in the stock market over the past five years primarily reflects the rise in corporate profits and the low interest rate, low inflation environment. The key point for wealth management is not so much trying to predict the direction of the market, but rather 1) having a properly diversified portfolio which helps to mitigate market volatility, 2)having a sound fundamental basis for one’s investments and investment strategy, 3) sticking with a disciplined plan that obviates the need or temptation to time the market. Over the long term, a properly diversified portfolio should deliver superior risk-adjusted return, which is a paramount objective in wealth management. Link: http://money.msn.com/investing/why-all-the-correction-calls-have-been-wrong

·        Factory sector orders healthy….April factory orders again rose, making the third straight month of increased factory orders, and exceeded economist forecasts. Both new orders and order backlog rose for the third straight month. New orders ex-defense and aircraft declined 1.2%.

What’s the point? It is positive that overall factory orders rose again in April. It is a further indication that factory activity is recovering from the recent severe winter impact. The continued improvement in factory activity reflected in new orders is positive for the economy and supports our belief the pace of economic growth should accelerate this year. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140603&id=17671005

 

 

Daily Bullets……for June 2, 2014

·         “It’s different this time”……..The talk of Wall Street right now is the perplexing performance of bonds.   So far in 2014, bond prices have climbed and along with that, bond yields have declined fairly significantly. Now it appears that the Federal Reserve is modifying the models it uses to analyze the effects of interest rates and monetary policy. The change is due to the unprecedented monetary policy of the past five years that has apparently rendered historic models less useful (see article in link).

What’s the point?  We think there are some fairly obvious reasons for why bonds are behaving as they are: 1) a growing perception that global growth may be slower than many had expected, and 2) increased global geopolitical tensions that is drawing money to “safe haven” U.S. Treasuries. What is more interesting is the Federal Reserve altering its models to adjust to a new interest rate paradigm. It implies that the models used for the past 60 years may not be working and that we may be in an extended “new paradigm” for the economy, that of slower secular growth. It also implies that the Fed may have to further re-think its monetary policy and the mechanisms its uses to transmit that policy into the economy. Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140602&id=17666410

·         Fed not abandoning rate range….There is increasing belief among investors that the Federal Reserve may continue to target a range for Fed funds when it begins to raise rates, as opposed to targeting a single point rate for Fed funds as it has in the past. This point was made recently by San Francisco Fed President John Williams.

What’s the point? Crossing the transition to actually raising rates after such an unprecedented period of policy accommodation will be a tricky and delicate process for the Fed. The Fed’s continuing to target a “range” for interest rates theoretically provides them greater flexibility for both analysis and actual policy implementation. We expect the process will be supported by both the Fed’s monetary/economic analysis as well as “feedback” it receives from the market. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140530&id=17661808

·         Slower housing recovery…….A Reuters news poll shows that analysts believe the pace of housing price increases will slow somewhat due to lower wage growth and continued difficulties for first time buyers.

What’s the point? With mortgage rates declining, housing affordability is improving, which is good. It is also good that credit standards are stricter as this should help reduce the risk of another housing bubble. We believe as employment continues to improve, housing will continue its gradual improvement and become a greater contributor to the overall economic recovery. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140530&id=17662617