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