Daily Bullets …………..For April 30, 2014

·         1Q GDP surprisingly weak……First quarter real GDP growth came in at an anemic 0.1%. This was primarily a reflection of severe weather which affected many areas of the economy. Consumer spending was relatively healthy at 3%. What’s the point?  1Q GDP is not a reflection of the economy’s future growth potential. Most of the recent economic indicators for March and April are reflecting an acceleration in economic activity. We expect this to continue, which has positive implications for corporate earnings. Link: http://www.cnbc.com/id/101627906

 

·         April job growth strong……More recent indicators of economy are strong, reflected in today’s April private sector new jobs report, which at 220,000 was stronger than expected. What’s the point? With March’s private sector jobs number revised up to 209,000, it appears the economy is accelerating, as we have anticipated. We think the stock market is already discounting to some degree, an acceleration in the economy. The positive case we see going forward is improvement in GDP growth to a moderate, sustainable pace, with moderate inflation, which is a positive scenario for stocks. Link: http://www.cnbc.com/id/101627638

 

·         Fed expected to further cut stimulus…The Federal Reserve is holding its FOMC meeting today and is again expected to continue the tapering of its quantitative easing (QE) program. What’s the point? This move will come as no surprise to the market, particularly given the recent spate of stronger economic data. One major concern for investors is that reduced QE could negatively impact stock prices due to lower liquidity sloshing around the financial system. It is a risk,  however, with an improving outlook for the economy, and continued strong corporate earnings and cash flow, we believe over time, the positive fundamentals and improving valuations can offset the gradual reduction on QE. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140430&id=17570511

 

·         Economists see improving outlook……Economists are expecting an acceleration in growth in the U.S. economy driven by improvement in business investment and job growth as the year progresses. What’s the point?  While we realize economists do not always have the best “crystal ball”, the current economist survey does support the work we do and outlook as we see it, that there is pent-up growth potential in the economy which will be driven by more people working and a gradual improvement in Europe. One potential "fly in the ointment" for global outlook: China. We are watching the slowdown in China, which does add an element of risk to global growth outlook. We think emerging market economies are more exposed to this risk, not so much the U.S. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140430&id=17570462

 

 

Daily Bullets......For April 29, 2014

·         PIMCO changing its tune on “new normal”……..We note that PIMCO, a large bond fund manager is now claiming the end of the “new normal”. Since 2009, PIMCO has been a loud proponent of the “new normal” thesis (meaning a period of sustained very low growth). PIMCO is now calling for a “new destination” economy, which means moving from sub-2% real GDP growth to above-2% growth. What’s the point? It was pretty clear months ago that conditions were coming together for an acceleration in the economy in 2014. Improving economic growth potential has positive implications for corporate earnings and also implies rising interest rates, which we expect. Link: http://www.bloomberg.com/news/2014-04-25/pimco-s-mather-sees-clear-departure-from-new-normal-economy.html

 

·         Low wage job growth still problematic….The article in link below points up one of the problems with the current economic recovery: a majority of the new jobs created in this recovery have been of the temporary and lower wage variety. What’s the point? The fact that much of the job creation in this recovery is lower wage has been a meaningful factor contributing to this unusually slow economic recovery. It is has contributed to below average consumer spending and low inflation so far in this recovery. Link: http://www.cnbc.com/id/101620663

 

·         Expansionary economy supports further market gains……In an interesting analysis out today, and an RBC strategist makes the case that the stock market should not see a serious correction until we enter a recession. What’s the point? We agree that 1) U.S. economy still has considerable room for further growth, perhaps several more years, and 2) there is further room for expansion in both earnings and stock valuations. We believe economic and earnings fundamentals support higher equity prices over the longer term. We would not be surprised to see the stock market up 10% both this year and next. Link: http://blogs.marketwatch.com/thetell/2014/04/28/bull-market-wont-die-until-a-recession-hits-rbc/

 

·         Sanctions not having much impact……The E.U. today followed the U.S. in imposing further sanctions on Russian officials and companies following recent Russian incursions into Ukraine. What’s the point? With the market up about 90 points today, investors do not seem to be overly concerned with either the new sanctions or their potential economic impact. It appears investors believe Ukraine is a fairly small factor in overall global economy and if Putin actually moved to annex Ukraine with force, there would not be significant longer-term economic fallout. Link: http://www.bloomberg.com/news/2014-04-28/u-s-aims-at-putin-s-inner-circle-with-latest-sanctions.html

 

 

 

Daily Bullets……….For April 28, 2014

·         Pending home sales turning………The rise in March pending homes sales is another indication the economy is improving following its winter-induced slowdown. Housing has also been impacted by higher mortgage rates and low inventory.

What’s the point? We think the slowdown in the U.S. housing market has probably bottomed and we expect housing sales and building activity should accelerate along with the overall economy. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140428&id=17543650

·         Asian Exports Slowing…….Wall Street Journal this morning offers an interesting analysis of export volumes out of Asian countries such as China, Japan, Korea and Taiwan. These volumes have slowed significantly over the past several years. The reasons? Sluggish global economic recovery, rising wages in these countries resulting in rising production costs. 

What’s the point? This trend has implications for secular growth for export-dependent Asian countries and further supports our concerns over growth in emerging market economies. We see the U.S. as fairly insulated from this due to the size and diversity of its economy and note that U.S. is experiencing a resurgence in domestic manufacturing. (no link)

·         Capital arbitrage rolls on……Barron’s magazine this weekend ran an interesting analysis of capital arbitrage that is still having significant impact on financial markets. What is this “arbitrage”? Low interest rates of the past several years have provided corporations and investors a low cost source of funding to make acquisitions, share buybacks and dividend increases; it is using debt to enhance shareholder returns (ROI).

       What’s the point?  Corporations believe they can achieve a better return for shareholders through capital arbitrage than through capital spending. We note that a similar “capital arbitrage” process occurred in the 1978-1985 period, which laid the foundation for a major secular bull market that began in 1982. We believe the similarities of today vs. 1978-85 are important and have positive implications for the stock market going forward. (no link)

 

Daily Bullets …………..For April 25, 2014

·         Ukraine pain……Market today took the situation in Ukraine a little more seriously following John Kerry’s more forceful comments and talk of increased sanctions placed on Russia by G7. So far, the market has taken the Ukraine situation pretty much in stride.

What’s the point?……..Geopolitical events have an impact on investor confidence and sentiment. Given the very mild impact reflected in today’s 0.8% decline, investors still generally believe the situation in Ukraine will not result in a more serious conflagration. We agree with this view. Link: http://www.bloomberg.com/news/2014-04-25/g-7-may-act-quickly-against-russia-as-accord-falters.html

 

·         Consumer expectations Improve….U.S. consumer sentiment data measured by the Thomson/Reuters-U.Michigan survey came in better than expected in March. The current conditions index rose to its highest level so far in this recovery, a very good sign for the economy. We have seen a pattern over the past several years in which these readings start strong then fade as the year progresses.

What’s the point?.......We think if employment growth remains good, the more positive sentiment should hold up. This should be positive for consumer discretionary stocks. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140425&id=17557688

  

·         U.S. manufacturers more competitive……In another encouraging sign for the U.S. economy, a new report shows U.S. manufacturers are continuing to become more competitive. This trend has been underway for some time but the BCG study of further confirmation is positive.

What’s the point?........Manufacturing is increasingly important for the long-term health of the U.S. economy especially when consumer spending may be restrained on a secular basis. Increased competitiveness of the U.S. manufacturing base means the companies will benefit from growth of both U.S. and foreign economies. This should translate into stronger earnings for these companies, and adds another buttress for U.S. economy and financial markets. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140425&id=17556412

 

 

Daily Bullets…….For April 24, 2014

·         Tech Bubble Redux…….Some pundits in the financial media are calling for another “tech bubble”. It makes for great copy and catches peoples’ attention. We’ve stated before that we think there are pockets of froth in areas like social media, but certainly not in “legacy” technology (i.e. storage, semiconductors, application software, etc).

What’s the Point? We do not believe there is a bubble in legacy technology. Our investments in technology are diversified quality holdings that we believe continue to offer value to our clients based on valuation and growth potential.

Link: http://finance.yahoo.com/blogs/breakout/david-einhorn-cries-tech-bubble-but-the-end-may-not-be-near-145245734.html

·         More positives for economy…….March durable goods orders were stronger than expected and well ahead of economists’ forecasts. “Core” capital goods orders (excluding defense and commercial aircraft orders) increased a robust 2.2% reflecting further broad-based expansion of the manufacturing sector following the weather-impacted Q1.

What’s the point? Manufacturing has been a key driver of the economic recovery. Given what we expect will be further restrained consumer spending, we believe growth of manufacturing will be important to sustaining the economic recovery.  Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140424&id=17548330

·         Economy at “inflection point”?…...One economist is stating today that the economy may be on verge of accelerating. He bases his opinion on recent strong earnings reports and outlooks provided by several large manufacturing companies. We agree that these earnings reports have positive implications for acceleration in the economy.

What’s the point? This information supports our earlier belief that the economy would continue to improve and, in fact, accelerate as we move through 2014. This also has positive fundamental implications for stocks, as it should help to sustain healthy earnings growth. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140424&id=17554648

 

·         Small investor returning to market?.......We noticed an article today that provided some data that small investors are stepping up their investment in stocks, or at least their activity in stocks. The article attributes this to increased confidence in the market on the part of retail investors.

What’s the point? Euphoria and high confidence levels on the part of small investors is generally viewed as a negative sign for contrarian investors. We don’t see this as a big problem now, however, it bears watching. Link: http://www.cnbc.com/id/101611794

Daily Bullets…….For April 23, 2014

·         Earnings beats…….We are in the heart of Q1 earnings reporting season and we note many large companies are reporting “better-than-expected” results. In most cases, companies are astute at playing the “earnings game” by guiding conservatively, then delivering upside results. Forward guidance therefore becomes more critical for investors and guidance remains conservative. The point? Earnings reports, while important, are not materially moving the market; it will be increased confidence in earnings expectations and economic data that we think will be more important in driving the market further upward, which by the way, we expect.

 

·         More Home Sales Data………New single family home sales dropped 15% in March, below economists expectations. Extreme winter weather had a significant effect on the housing market in Q1, which is  normally a seasonally softer quarter to begin with. We expect housing activity and data to improve moving into the spring. The point? All sectors of the economy ebb and flow in a recovery. We continue expect housing will be a significant driver of economic growth over the next several years. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140423&id=17548330

 

·         More China weakness…….An HSBC survey out earlier today indicates more weakness in the China manufacturing sector, reflecting both order and employment weakness. The point? We have been concerned about further slowing in the China economy. China has major global market significance. The hope is for an engineered “soft landing” in China. We believe China can achieve this but falling short of this would have negative repercussions for global financial markets. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140423&id=17546559

 

·         Europe strengthening……. A Markit PMI survey out this morning is showing business activity in the Eurozone running at a three-year high. This is encouraging and obviously a positive for the troubled Eurozone economy and has positive implications for U.S. export companies. The problem is the recovery continues to be very anemic and deflation continues to be a concern for Europe. The point? This should cause the ECB to continue its very accommodative monetary policy which could also limit a potential rise in interest rates globally. Accommodative monetary policy is generally positive for financial assets such as bonds and dividend-paying stocks. Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140423&id=17546793

 

Daily Bullets……For April 22, 2014

·         Housing Bottoming………This morning, March existing home sales came in better than economists’ expectations. The housing market is beginning to accelerate following slowdown from the severe winter impact. The point? There has been too much made over the slowdown in housing which we view as temporary. We expect housing to be an important contributor to economic growth over the next several years. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140422&id=17543650

 

·         Housing in danger of “overheating”……Zillow’s economist is out this morning claiming the housing market is in danger of “overheating” in selected markets. There are pockets of excessive strength in certain metropolitan areas in which the economy has shown above average strength. The point? While there will be disparities among local markets, we don’t see these disparities curtailing the recovery in housing. Link: http://finance.yahoo.com/blogs/talking-numbers/why-ubs-predicts-a-spring-fling-for-the-housing-market-214030586.html

 

·         Investors still fearful of stocks…….Bankrate.com is out with a new study today showing about 75% of 1,010 people surveyed say they are no more likely to invest in stocks than they were one year ago or two years ago. Is it a bullish sign? Yes because it indicates individual investor sentiment is nowhere near the bullish extremes associated with secular market tops. The point? We think the current bull market has further to run; there will always be periodic corrections.  Link: http://www.cnbc.com/id/101599140