After bombarding you with four audio and three written commentaries on Greece over the past week, I’m thinking there’s not much left to offer. Therefore, given that right now it’s all about Greece, I’ll keep this week’s message brief.
So now we wait and see how the Greeks vote on Sunday. I haven’t personally read the referendum, but, from what I gather, voters may have a tough time understanding just what they’re voting for/against. The dueling demonstrations in Athens suggest that, in essence, it’s about whether or not to bow to their creditors watered-down demands. More dramatically, perhaps, it’s about whether or not to transact in Euros going forward.
The mere fact that the polls suggest that it’s virtually a dead-heat tells me that half of the Greek people—who’ve exhibited, forgive me, a low pain threshold—do not understand what will happen should they attempt to resurrect a currency that would only represent claims against what little their country has to offer to the rest of the world (at this juncture, and under their current structure, that is).
As insane as it seems, there’s a legitimate case to be made that enduring the extreme short-term pain that such an outcome would deliver would ultimately deliver the country to a respectable and sustainable fiscal standing far sooner than they’d otherwise achieve by staying in the Euro.
The reason the likelihood of a Greek exit, in my view, is remote is that it goes against human nature (no one wants to endure extreme short-term pain). And, without question, it flies smack in the face of political nature! No sitting politician’s career could withstand such an event. Therefore, even a “no” vote does not necessary land the country back on the drachma (their old currency).
Not everyone, by the way, shares my view. The highly-regarded former PIMCO CEO Mohamed El-Erian places 85% odds on Greece leaving the Euro. He may very well be right. Which, again, may ultimately be the best thing.
We’ll know soon enough…
As for the extent to which you and I should stress over Sunday’s outcome, look at it this way: During the course of your investment time horizon, can you envision Germans drinking Pepsis and syncing iPhones? Will Mercedeses, Beamers and VWs traverse your hometown roadways as they have for years? Will you dream of that 3-week vacation in Italy, or on Santorini even? Etc, etc, etc…
That’s right, while things may get ugly in the short-run, Greece exiting the Euro would not be a global game-changer in the long-run.
The Stock Market:
Non-US markets—even after their recent pummeling—have outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Don’t be surprised if that remains the story throughout most of the year—given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks. That said, there are a number of potential international hot buttons (as we’re presently experiencing) that could easily delay the narrowing of the gap between the valuations of U.S. and non-U.S. securities. That’s why we think long-term and stay diversified!
Here’s a look at the year-to-date price changes (according to CNBC) for the major U.S. indices—and for non-U.S. indices and U.S. sectors—using index ETFs as our non-U.S. and sector proxies:
Dow Jones Industrials: -0.52%
S&P 500: +0.87%
NASDAQ Comp: +5.85%
EFA (Europe, Australia and Far East): +4.36%
FEZ (Eurozone): +1.55%
VWO (Emerging Markets): +2.15%
Sector ETFs:
Here’s a look at the year-to-date results for a number of U.S. sector ETFs:
IYH (HEATHCARE): +10.12%
XHB (HOMEBUILDERS): +7.56%
XLY (DISCRETIONARY): +7.00%
XLK (TECH): +0.94%
XLF (FINANCIALS): +0.08%
XLB (MATERIALS): -0.14%
XLP (CONS STAPLES): -0.66%
XLI (INDUSTRIALS): -4.15%
XLE (ENERGY): -6.27%
IYT (TRANSP): -11.32%
XLU (UTILITIES): -11.67%
The Bond Market:
As I type, the yield on the 10-year treasury bond sits at 2.38%. Which is 9 basis points lower than where it was when I penned last week’s update.
TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price decline a 0.46% over the past 5 trading days (down 7.88% year-to-date). As I keep repeating, I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk.
Once again, here’s the reminder on volatility I posted earlier in the year:
In last weekend’s commentary I attempted to put a rough January into proper perspective by urging you to view the stock market as an “antifragile” (benefits from stress) entity. Again, periodic market downturns are an essential aspect of the long-term investing process. As I stated in our year-end letter, and several commentaries since, I expect financial markets in 2015 to exhibit the kind of volatility that will challenge the resolve of many a short-term investor. Good thing you and I think long-term!
One additional note on volatility: The past couple of weeks I’ve shared with you the very short-term results for markets and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). As you may have noticed, my beginning of the year optimism over non-US and the housing sector (to name two), and pessimism over utilities, appears to be justified by recent results. I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced these few short weeks into 2015. My optimism or concerns are based on factors such as valuations, trends, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along the way.
Here are last week’s U.S. economic highlights:
JUNE 29, 2015
PENDING HOME SALES FOR MAY are another data point that justifies the optimism I’ve had over housing since late last year. The index came in at its highest level since 2006, 112.6. The month-over-month increase was .9%.
THE DALLAS FED MANUFACTURING SURVEY fell again in June, but the pace of the decline moderated. The General Activity Index came in at -7.0 vs -20.8 in May. The June reading was better than the consensus estimate. Weakness in exports (the strong dollar) and weakness in energy equipment (the low price of oil) continue to drag on the sector.
JUNE 30, 2015
THE JOHNSON REDBOOK RETAIL REPORT continues to not support the notion that the consumer is feeling good and getting out of the house. Up 1.7% year-over-year, and down a whopping 1.5% week-over-week.
THE ICSC CHAIN STORE SALES REPORT makes more sense given what I’m seeing among consumer-related indicators, up 2.7% year-over-year.
THE CASE-SHILLER HOME PRICE INDEX didn’t come in at a rate that jibes with recent housing stats. Up 4.9% year-over-year. The commentary within yesterday’s pending homes report suggests prices are rising at a rate that would crimp first-timers ability to enter the market. That makes more sense to me.
THE CHICAGO PMI continues to show the Chicago economy lagging. Coming in at a contractionary 49.4 (50+ denotes expansion). Although it was an improvement over May’s 46.2. Unlike most other surveys, this one’s employment component is the lowest since 11/09. The one bright spot is respondents cautious optimism over new orders in the coming quarter.
THE CONFERENCE BOARD’S CONSUMER CONFIDENCE INDEX FOR JUNE suggests that the consumer is feeling good about his/her prospects. Coming in at its second-highest reading in 8 years, 101.4. Here’s from Bloomberg’s commentary:
Spending Outlook Brightens as Jobs Lift Americans’ Spirits (1)
By Erin Roman
(Bloomberg) — The pickup in hiring is doing wonders for Americans’ economic mood.
The Conference Board’s consumer confidence index advanced to 101.4 in June, matching the second-highest level in almost eight years, the New York-based private research group said Tuesday. The reading exceeded all forecasts in a Bloomberg survey of 75 economists.
Households are feeling upbeat about employment prospects as more respondents than at any time since early 2008 said jobs were plentiful, raising the odds that the pickup in spending that began in May can be sustained. That would probably be enough to power the world’s largest economy past any global disruptions caused by a meltdown in Greece.
“This is very encouraging because we very much need a strong consumer to carry this economy,” said Aneta Markowska, chief U.S. economist at Societe Generale in New York, who projected the index would climb to 100. “We need a strong consumer to offset some of these drags emanating from abroad.”
The confidence gauge matched the March reading as the second-highest since August 2007. The measure averaged 96.9 during the last expansion and 53.7 during the recession that ended June 2009.
THE STATE STREET INVESTOR CONFIDENCE INDEX rose nicely to 127. Econoday’s summary speaks to my position that bad economic news (in the US) is good short-term stock market news, given its impact on Fed decision-making:
Led by unusually strong North American appetite for risk, the investor confidence index for June is up 5.6 points to 127.0. The North American component is up 11.7 points to 142.9 with Europe lagging at 102.5 and Asia below breakeven 100 at 87.6. The report attributes North American confidence to a dovish Fed which at mid-month lowered its 2015 economic forecasts and seemed in no hurry to raise rates. On Greece, the report notes little effect on European confidence which it warns could be misplaced if related contagion develops.
JULY 1, 2015
JUNE AUTO SALES came in at 17.2 million. Which is off of May’s 17.8 m, but that was a 10 year high. The 17.2 m is a very good number.
MORTGAGE PURCHASE APPLICATIONS declined by 4% last week as rates rose to 4.26%. The year-over-year results, however, are an impressive 14% increase. Refis declined by 5%—they’re definitely more interest rate sensitive.
THE CHALLENGER JOB-CUT REPORT shows layoff announcements in June totalling 44,842, up 3,800 from May. Interestingly, 2015 job cuts during the first half exceeded 2014’s first half by 17%. The energy sector is the primary culprit, having cut 60,500 jobs so far this year compared to last year’s first half’s 3,908. However, the retail sector was the biggest cutter in June. The report foresees the 2nd half improving for retail employment in light of recent stats on consumer spending.
THE ADP EMPLOYMENT REPORT for June came in above estimates at 237,000 and noticeably above May’s 201,000. A strong report!
MARKIT’S MANUFACTURING PMI FOR JUNE remained in expansionary mode, at 53.6. However, at a slower pace than May’s 54.0. Slow export demand (via the strong dollar) from Europe is a notable negative. Declining capital investment from the energy sector is also a negative. New orders accelerated slightly. Backlogs rose. The employment component was at its strongest since 9/14.
THE ISM MANUFACTURING INDEX FOR JUNE came in at an expansionary 53.5, which bested May’s 52.8. New orders were strong at 56. The employment component came in very strong as well at 55.5. New orders, however, were weak, coming in at 49.5, the strong dollar gets the blame.
CONSTRUCTION SPENDING FOR MAY came in at a strong .8% increase. The consensus estimate was .5%. Manufacturing facilities were up a strong 6.2%—good news from a cap-ex standpoint. Residential construction grew at a moderate .3%. But the year-over-year rate of spending on single family homes rose a strong 11.2%.
CRUDE OIL INVENTORIES bucked the recent trend with an increase of 2.4 million barrels last week. GASOLINE inventories shrank by 1.8 mbs and DISTILLATES grew by .4 mbs. Refineries operated at a very high 95% of capacity, which makes the build a bit surprising. I remain bearish on the price of oil through the remainder of the year.
GALLOP’S US JOB CREATION INDEX remained at a high level, 32, in June. Here’s Econoday:
Gallup’s U.S. Job Creation Index remained high in June at plus 32. The index score is based on 43 percent of workers saying their employer is hiring workers and expanding the size of its workforce and 11 percent saying their employer is letting workers go and reducing the size of its workforce and is the same as in May, which is the highest Gallup has found for the index.
The percentage of workers who say their company is expanding its workforce is not only well above the percentage who say their company is letting people go, but since April, it has also exceeded the percentage who report their workforce is not changing. So far in the index’s history, this has only happened a few times.
Regionally, the index score in each region has generally followed the national trend, with a steep decline in 2008 through 2009 and improvement since then, including record highs in recent months. No one region has consistently outperformed the other regions over the last seven years. However, the East continues to slightly lag behind the other regions, as it has since 2013.
JULY 2, 2015
THE BLS JOBS REPORT FOR JUNE came in a bit lighter than expectations at 223k. Still, however, a strong enough number. The unemployment rate dropped to 5.3%. However, that was largely due to a decline in the labor force participation rate to 62.6% from may’s 62.9%. U-6 unemployment fell to 10.5% from 10.8%. The services sector, as we should expect, produced the jobs… Manufacturing and construction jobs were flat… The quarterly trend is positive with 221k jobs created in Q2 vs 195k in Q1. While this was a very decent report, it missed the consensus expectation, and, given that wages were flat on the month, this report does not put pressure on the Fed to raise rates anytime soon.
WEEKLY JOBLESS CLAIMS remained below 300k last week, coming in at 281k. The 4-week average rose 1k to 274.75k. Continuing claims rose 15k to 2.264 million. The unemployment rate for insured workers remains at a very low 1.7%.
THE BLOOMBERG CONSUMER COMFORT INDEX showed another very strong reading last week, at 44 vs 42.6 the week prior.
FACTORY ORDERS, dragged down by aircrafts and energy equipment, came in weak once again in May. -1%. The most disappointing component in my view was capital goods, in that I see business investment going forward as key to reversing the recent trend in productivity—which will be a must, from a valuation perspective, as inflation/interest rates rise going forward. Here’s Econoday:
The factory sector, hit by weak exports, continues to stumble with factory orders down 1.0 percent in May. This compares with Econoday expectations for minus 0.3 percent and is near the low-end estimate for minus 1.2 percent.
The durables component of the report, initially released last week, is now revised lower, to minus 2.2 percent from minus 1.8 percent. Durables in April have also been revised lower to minus 1.7 percent from minus 1.5 percent. The nondurables component, released with today’s report, helped limit the damage but not by much, up 0.2 percent on gains for petroleum and coal following a 0.3 percent gain for April.
But aircraft orders, always volatile, are to blame for much of the durables weakness, falling 49.4 percent in the month. Excluding transportation equipment, which is where aircraft orders are tracked, factory orders were unchanged in May which isn’t great but is much better than the minus 0.6 percent print for April.
Weakness in energy equipment is also a negative factor of the factory sector, down 22.2 percent in May following a 2.1 percent decline in April. Motor vehicle orders are also surprisingly weak, down 1.3 percent in May despite very strong sales. Orders for defense aircraft were also weak, down 6.4 percent.
Capital goods data had been showing some life but not much anymore with nondefense orders excluding aircraft down 0.4 percent following a 0.7 percent decline in April. These are especially disappointing readings. And core shipments of capital goods are dead flat, at minus 0.1 percent following only a 0.2 percent gain in April. These readings will likely pull down second-quarter GDP estimates.
Other disappointments include a steep 0.5 percent decline in total unfilled orders following April’s 0.2 percent decline. Declines in unfilled orders are not a good omen for employment. Total shipments fell 0.1 percent in the month. Inventories at least are stable, unchanged in the month as is the inventory-to-shipments ratio at 1.35.
First there was the unemployment report this morning and now this report, both of which may raise concern among the doves at the Fed that the second-quarter bounce back is not much of a bounce back at all.
NAT GAS INVENTORIES rose by 69bcf last week.
THE FED BALANCE SHEET decreased by $15.9 billion last week, to $4.479 trillion. RESERVE BANK CREDIT decreased $19.3 billion.
M2 MONEY SUPPLY has been in an upward trend of late, rising by $40.9 billion last week.