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