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