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