Daily Bullets…..for July 30, 2014

·         GDP now a “concern”…..Commerce Dept this morning reported 2Q real GDP grew 4.0% which was stronger than expected. Consumer spending grew 2.5%, also ahead of expectations. Excluding inventory changes, GDP grew 2.3% vs. -0.9% in Q1. Core prices grew 2.0% vs. 1.2% in Q1. Domestic demand rose 2.8%, the strongest pace since 3Q-11 and up from 0.7% in Q1.

What’s the point? A stronger-than-expected GDP report today is causing consternation among investors that it may induce the Fed to raise interest rates sooner than expected. The “big guessing game” continues. The yield on the 10-yr. Treasury jumped 3% to 2.55%. No question, the report does reflect an improving economy. However, when excluding inventory changes that can be volatile from quarter to quarter, core growth was about 2.3%....OK, but certainly not booming. Employment growth in July, also reported this morning, was considerably below that of June. So is the economy on a new “boom path” for growth? We doubt it. Does it mean the Fed will dramatically accelerate its plans for raising interest rates? We doubt it. We think it portrays more of what we expected: continued gradual improvement in economic growth with moderate inflation. We doubt this will change the Fed’s longer-term view on its interest rate strategy, which we believe is more dependent on wage inflation and employment data. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140730&id=17816646

·         Importance of a financial plan….Good article in link below discusses mistakes many people make in long-term term retirement planning. A key point in the article is the importance of working with a financial planning and/or tax advisor to optimally position assets for retirement as well as post-mortem transfer.

What’s the point? The article, while short, provides a good summary of key mistakes people make in managing retirement assets: not having a disciplined savings plan, not properly managing/consolidating multiple retirement accounts, “raiding” retirement accounts to fund current expenses, and lack of estate planning. For many, if not most people, getting proper retirement and estate planning advice is critical. Good advice can significantly improve the likelihood of achieving one’s financial and life goals. Many people try to “go it alone” because they do not know that the benefits of financial planning can far outweigh the costs. Financial planning is a more complex process than people realize. Working with a competent advisor can pay for itself many times over in higher asset growth, fewer retirement planning mistakes, higher retirement income, and a larger estate, not to mention greater peace of mind and a more enjoyable retirement. Link: http://finance.yahoo.com/news/retirement-regrets--costly-mistakes-to-avoid-152725945.html

 

Daily Bullets …..For July 29, 2014

·         Slowing home prices a good thing……S&P Case Shiller 20-city home price index increased by “only” 9.3% in May, a slowdown from prior 4-5 months and considered worrisome by some.

What’s the point? There is a lot of news in the market today about the home price index. A 9% increase y/y is considered a “concern” because it’s a “slowdown”. Put in perspective, a 9% y/y increase is about 3x the long-term average for house price increases, which have run pretty close to inflation over the long term.  It should be no surprise why the housing recovery has been uneven: this economic recovery has been slower than any recovery in post WW2 era; wage growth has been restrained; and a younger demographic (millennials) has not been enamored with or financially able to buy a home.  A slowing in house price gains should be considered a good thing because it should help to improve housing affordability. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140729&id=17814629

 

·         Consumer confidence highest in seven y ears….Conference Board consumer confidence index rose again to a pretty strong 90.9 in July vs 86 in June. This is the third consecutive increase in the index.

What’s the point? Rising consumer confidence is a good leading and coincident indicator for the U.S. economy. We believe it reflects acceleration in job growth. This is further support for our belief that economic growth should accelerate and places the U.S. economy on a path for continued growth. This also has positive implications for many sectors of the economy and earnings for companies in those sectors. As corporate earnings are the primary driver of stock prices, this has further positive implications for stock prices. Despite the numerous technical indicators that are flashing warning signs, underlying economic fundamentals, at least in the U.S., continue to remain positive for stocks. One key risk would be a potential for economic growth to accelerate too fast, causing an unexpected rise in interest rates. The 10-year Treasury bill yield of 2.47% is still telling us that investors believe excessive growth and inflation are not yet a problem. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140729&id=17814365\

 

 

 

Daily Bullets….For July 28, 2014

·         “Cook Cumulative Tick” Flashing Red….A proprietary indicator invented and used by a highly successful investor, Mark Cook, is flashing a bear market signal for the stock market. This indicator, dubbed the “cumulative tick”, provided advance warnings prior to the 1987, 2000, and 2007 market declines.  It also helped indicate the beginning of the bull market in April 2009.

What’s the point? We are not a “technical shop”, but rather make our investment decisions for clients based on fundamentals, so we normally would not pay a lot of attention to a technical indicator, such as “cumulative tick”. The reason we mention this is because a) it is interesting, and b) it jibes with our recent decision to reduce U.S. equity exposure due to valuation that we believe has become “moderately high”. We have also become concerned about increased investor confidence and complacency which are a reflection of market conditions via sentiment. Another concern is the fact that the market has not had a true “correction” in almost three years, over two times the average interval between corrections. That said, we think the earnings and economic fundamentals remain positive, and as the article notes, there is no way to call the “timing” of the next correction. Our investment strategy is focused on diversification across multiple asset classes and is intended to reduce portfolio volatility and provide protection against declines in any one market, such as stocks. Link: http://www.marketwatch.com/story/stock-trader-who-called-three-crashes-sees-20-collapse-2014-07-28/print?guid=A7AFE6E4-1366-11E4-A7DB-00212803FAD6

 

·         5,844 M&A transactions valued at $1.04 trillion YTD…...Wow! M&A activity has been picking up significantly. The year-to-date total of $1.04 trillion marks the first time this activity has exceeded $1 trillion since 2007.

What’s the point? We have been forecasting for some time that the high M&A activity environment would continue this year, and recent data confirms this. This is similar to what happened in the late 1970s and early 1980s and is being driven by the same factors: low cash flow valuations and companies seeking to improve shareholder return through acquiring businesses that are undervalued based on cash flow. The article notes increasing M&A activity could be a “problem” because of low economic growth however, we don’t see it that way. We see it more as a result of institutional investors remaining cautious, which is contributing to the undervaluation of many companies based on sustainable cash flow and low interest rates. We believe the high M&A activity will continue as long as interest rates remain low. Link: http://www.marketwatch.com/story/what-the-ma-surge-says-about-the-stock-market-2014-07-27?dist=countdown

 

 

Daily Bullets…..For July 25, 2014

·         IMF forecast has interesting implications…In a new report issued earlier this week, the International Monetary Fund reduced its full year forecast for U.S. GDP growth to 1.7%, but maintained its forecast for a significant pickup in growth in 2H-14. It also forecasts that there is a high probability that the Federal Reserve will keep the Fed funds rate at zero beyond the middle of 2015.

What’s the point? First off, realize that the forecasting record of “high powered” economists (include the IMF) is pretty dismal. That said, if the IMF is correct in its long-term forecast for well below average U.S. economic growth and low interest rates, this has important implications for investment strategy, at least in the near term. The yield on the 10-year Treasury bill at under 2.5% is sending the signal that investors do not expect much in the way of significant acceleration in U.S. economic growth. We believe this implies more of the same with respect to stocks: more money coming out of bonds into stocks, and primarily into companies that generate high free cash flow. In this scenario, we believe the market could very well bid valuations for these kinds of stocks higher than they are currently, which would support a rising U.S. market over the next year or two. Aside from an exogenous shock, what could change this scenario might be a surprise spike in inflation or dramatic acceleration or deceleration of global economic growth. Right now, we think the odds of any of these occurring are fairly low. Link: http://www.reuters.com/article/2014/07/23/us-imf-usa-idUSKBN0FS1P520140723

·         Good report on June capital goods …….This morning, the Commerce Department reported July capital goods orders and shipments. Good news: “core” capital goods orders rose 1.4% following a 1.2% gain in June. Core capital goods shipments declined for the third month in a row.

What’s the point? The industrial sector is now a key driver for the U.S. economy. The fact that core capital goods orders are growing again after a soft (weather impacted) first quarter, is good news for the economy and future growth. Economists are concerned that core capital goods shipments are down for three months in a row. Offsetting this is rising backlog, which has positive implications for future shipments. We think the concern over shipments is misplaced and could very well reflect temporary perturbations in production due to ramping additional capacity, potential shortages of skilled labor in certain sectors, and some hesitancy on part of manufacturers to ramp capacity too fast. Overall, we’d view this as a positive report, supporting our view that U.S. economic growth should accelerate in 2H-14. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140725&id=17806424

 

Daily Bullets……for July 22, 2014

·         Dividend stocks aren’t boring……The author of this article points out that low dividends (or low dividend payouts) don’t necessarily lead to higher dividends at a later time, and that strong companies that pay a high dividend (dividend payout) are more disciplined in their capital decisions, which leads to higher returns.

What’s the point: This is a timely article for a number of reasons. First, it appears that the outperformance of small cap stocks is giving way to large caps and dividend stocks. We believe there are several reasons for this. One is investor anticipation of the Fed raising interest rates in 2015 This would theoretically reduce financial system liquidity which is a negative for small caps. Also, we believe investors have embraced the idea of a sustained “slow growth” environment (GDP growth of 2-3%), with low inflationary pressures and low wage growth. The yield on the 10-year Treasury bond at 2.47% is one manifestation of this view.  In this environment, we believe a paramount factor for investors is free cash flow, ability to grow free cash flow, and convert this into dividends ( and/or rising dividends). This is one of the reasons why we continue to favor large cap stocks and recently reduced our exposure to developing (smaller cap) equities. It is also a factor that is driving the current high level of M&A activity, which is another form of support for equities. An increase in interest rates by the Federal Reserve will have little if any impact on all this, in our opinion, as long as economic growth and inflation remain moderate, which we expect.  Link: http://seekingalpha.com/article/2327925-why-dividend-payers-arent-boring?ifp=0

 

·         Existing Home Sales Accelerating…..U.S. home resales in June rose to their highest pace in eight months, up 2.6% and above analysts’ expectation.

What’s the point? This is another positive for the economy. Housing is a major element of the economy with a significant multiplier effect. While housing data can be “choppy” from month to month, we think the trends in the data point to gradual improvement in the housing sector. This has positive implications for sustaining economic growth and corporate earnings, which is the key driver for stocks. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140722&id=17795033

 

 

 

Daily Bullets……for July 21, 2014

·         Fed wage gauge impacted by demographics….New Bloomberg News article makes the case that shifts in demographics are rendering traditional wage growth analysis less useful as an indicator of inflation or labor market pressures.

What’s the point? The Federal Reserve has historically closely followed wage growth as an early indicator of inflation. The article makes the case that the combination of more baby boomers working for lower pay and millennials working for entry-level pay is keeping wage pressures contained. It is an interesting analysis, but the ultimate reality is not changed: wage growth (for a variety of reasons) appears to remain subdued. Is it still a valid indicator for the Fed? We’d say yes.  This also has long-term implications for growth in consumer discretionary spending, which we believe will remain below previous cycles. The analysis also supports thesis that pockets of labor shortages in specialized areas could exert some inflationary impact over time. However, as of now there appear to be too many offsetting factors for this to turn into sustained, broad based inflation. Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140721&id=17790854

·         NABE Survey looking strong….National Association of Business Economist July survey results indicate improving sales outlook, steady employment outlook, and strong Q3 outlook.

What’s the point? Strength of the July NABE survey is good leading indicator for business and earnings looking into the third quarter. It supports our view that the pace of economic growth should accelerate in 2H-14, and along with that, corporate earnings. This is also another factor that should support higher stock prices, although we remain concerned about market sentiment and certain technical indicators that we believe have increased the risk of a market correction. We remain positive on the longer-term outlook for stocks. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140721&id=17789487

 

 

 

Daily Bullets……….For July 16, 2014

·         Factory output accelerating…..Federal Reserve out this morning providing June data on factory production which accelerated at its fastest rate in more than two years. Economists see this data as further evidence that U.S. manufacturing sector is strengthening and will drive economic growth in Q3.

What’s the point? Manufacturing sector, export growth, and housing are now among the three most important drivers of the U.S. economy. Reports in recent months indicate that manufacturing is leading the economic recovery, and business capital investment is expected to grow at over twice the rate of the overall economy. There are investment implications for this which implies a greater weighting in portfolios towards industrial and technology sectors, and somewhat lower emphasis on consumer discretionary, at least over the next year or so. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&Date=20140716&ID=17779446&topic=TOPIC_ECONOMIC_INDICATORS&isub=3

·         Homebuilder confidence surges….NAHB homebuilder confidence index increased substantially in June, reflecting increased confidence by homebuilders in the outlook for home purchases and construction, and that the housing sector may be regaining its footing and economists see significant pent-up demand for housing.

What’s the point? Housing is an important driver of the overall economy. The slowdown in housing over the past 18 months was due to combination of factors, including weather, job growth and higher mortgage rates, that held back the recovery. The fact that housing may now be poised to re-accelerate has positive implications for the overall economy. Economists predict the housing sector should grow at 2-3 times the rate of the overall economy in next two years. This adds further support to our continued belief that economic growth should accelerate in 2H-14 to a “moderate” pace of 2.5-3%. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140716&id=17780172

 

·         Fed policy to remain accommodative….In its bi-annual Senate Banking Committee hearings, Federal Reserve Chairwoman Janet Yellen provided insight into the Fed’s current thinking about the economy and interest rates. The comments reflect no significant change in either tapering of quantitative easing or ultra low interest rate regime. Yellen stated that while the economy is improving, there are still significant headwinds and areas of continuing problems that she believes warrant continued accomodative monetary policy.
What’s the point? Yellen’s comments were pretty much in line with expectations. Her comments regarding the economy continue to reflect the concerns the Fed has over long-term unemployment, consumer confidence, and the housing sector. Yellen intimated that the Fed would continue to be transparent about its policies and its views towards how changes in the economy will affect policy. This is more open than the Fed has even been, and we believe it is good thing as it helps to reduce market speculation and confusion over Fed policy, which can increase market volatility. So, it looks like “more of the same” of, in a word, “moderate”: moderate economic growth, moderate inflation, moderation in Fed policy, and continued gradual money flows out of bonds into stocks seeking higher return. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140715&id=17776187

 

·         June retail sales reflect improvement……Commerce Department reported that retail sales for June looked solid again, with “core” sales (ex autos) rising a solid 0.4% after  increasing by the same amount in May.

What’s the point? The June retail sales report reflects a consumer spending environment that is OK, certainly not booming. It does support the Fed’s view that the economy is improving albeit at a moderate pace. In her testimony today, Fed Chair Janet Yellen stressed that one of the Fed’s larger concerns is the low level of consumer confidence pertaining to job prospects and wage growth. Despite this, it appears consumer spending growth should remain “moderate” (2-2.5%) and should contribute to what we expect will be further moderate economic growth (2.5-3% range). Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140715&id=17775352