Current Themes:
The Fed:
Janet Yellen gave a speech on Friday. While most of the expert commentary I listened to scored the presentation as a confirmation of the Fed’s patience with regard to raising interest rates, personally, I got the impression that she’s signaling to the market that they’ll indeed be raising their key rate in the not too distant future. Perhaps, in the experts eyes, patience means September—as opposed to June.
Recent economic news has been nothing to write home about (save for a few strong data points, like new home sales, mortgage apps, sentiment and jobless claims), which some believe explains last week’s sell off in stocks. The problem with that view is that if stocks sold off on economic concerns, bonds—the place you go when the economy’s weak—should have rallied. But they didn’t. In fact, the yield on the 10-year treasury note finished last week 3 basis points higher than where it began (i.e., the price dropped).
While I don’t pretend to know precisely what inspires buyers and sellers on a weekly basis, my best guess is that last week was about traders anticipating a disappointing Q1 earnings reporting season, which—falling stock prices notwithstanding—will not deter the Fed. And why wouldn’t falling stock prices deter the Fed, particularly when—as I suggested last week—the Fed is fixated on the wealth effect of monetary policy? Because Q1’s economic weakness was largely due to really bad weather and, to a lesser degree, a spiking dollar. And as the weather warms, and the dollar cools (or at least stabilizes)*, it’s a pretty good bet that the economy will pick up some noticeable steam during the last three quarters of the year. Meaning the market should ultimately shake off its Q1 blues and the Fed can move forward with, albeit gingerly, raising interest rates. Which—as I’ve been suggesting for months—will be the test for the market.
*Note: per my comment under “The U.S. Dollar” below, the dollar—despite popular opinion—doesn’t have to cool for the economy to grow. Any strong-dollar-induced economic loss of traction is more about the rapid pace at which the dollar has advanced, as opposed to the ultimate effects.
Oil:
At one point last week a barrel of West Texas Crude (WTI) saw $51.60, which was way above where it sat ($46.15) as I typed last week’s update. So is this it? Is this what certain have-to-be-frustrated hedge fund managers—who’ve been billing the decimation of oil stocks as a generational buying opportunity—have been promising? Not so fast! Crude inventories grew by another 8 million barrels last week, which is anything but a reason to call a bottom. The main oil event last week was Saudi Arabia and company’s bombing of rebels in Yemen, which sparked the price spike. As of this moment, WTI has settled back to $48.87.
The Consumer:
Last week I shared my observation that sentiment surveys and the stock market correlate strongly to one another. And that, if so, last week’s Bloomberg Consumer Comfort Index could see a bounce—given the previous week’s nice rally in stocks. Sure enough, last week’s number matched the second highest since 2007. Here’s from the release:
Among the three components of the Bloomberg comfort index, the gauge of Americans’ views on the state of the economy rose to 37.7 last week from 37.2. An index of the buying climate, showing whether this is a good time to purchase goods and services, increased by 1.5 points to 39.8, matching the second-highest reading since April 2007. A measure of personal finances climbed to 58.9 from 57.1.
While retail sales could be better, the trend has been positive for the past few weeks. Up 2.8% year-over-year, and up a strong 1.1% week-over-week—per the Johnson Redbook report.
As for housing, existing home sales for February rose moderately, while new home sales—despite the weather—blew away expectations. Here’s from last week’s economic log:
NEW HOME SALES surged in February to 539K. The consensus estimate was 462k. And, to top it off, January was revised up to 500k, from 481k. These are the first 500K+ readings since early 2008. Again, I like housing right now and this pickup supports the notion that what I’m seeing under the surface may blossom into a robust expansion in the sector—potential hiccups due to rising rates notwithstanding.
Europe:
Last week I suggested that the Eurozone economy is picking up. Here’s what I’m talking about (click to enlarge):
Eurozone Consumer Confidence:
Eurozone Retail Sales:
Eurozone Composite Purchasing Managers Index (PMI):
The U.S. Dollar:
The Euro/US Dollar pair hung around between $1.08 and $1.10 all of last week—after touching $1.04 the week prior. As I’ve been reporting, it’s hard to find an expert these days who isn’t predicting at least parity at some point in the very near future. And that has traders very much on edge. For a higher dollar means higher-priced U.S. exports and lower translated earnings (money made in the Eurozone, in my example, translates to fewer dollars when the dollar’s on the rise). And this will be the topic du jour come earnings reporting season.
Of course a strong currency isn’t all bad. In fact, it’s very good! I know I’ve made this point multiple times of late, but it’s worth repeating: A strong dollar is wonderful if you’re a U.S. consumer, international traveler or importer of foreign goods. And being that the U.S. economy is two-thirds consumer spending and only 13% exports, I’m thinking the good of a strong dollar has been getting a bad rap of late.
The Stock Market:
Last week was a rough one for stocks, particularly U.S. stocks. As you’ll see, the Dow and the S&P 500 are back at square one on the year.
Here’s a look at the year-to-date results for the major U.S. indices, and non-US indices using index ETFs as our proxies (according to Bloomberg):
Dow Jones Industrials: -0.05%
S&P 500: +0.61%
NASDAQ Comp: +3.64%
EFA (Europe, Australia and Far East): +7.07%
FEZ (Eurozone): +6.58%
VWO (Emerging Markets): +0.33%
Sector ETFs:
Here’s a look at the year-to-date results for a number of sector ETFs:
IYH (HEATHCARE): +7.81%
XHB (HOMEBUILDERS): +6.22%
XLY (DISCRETIONARY): +4.17%
XLP (CONS STAPLES): +1.06%
XLK (TECH): +0.46%
XLB (MATERIALS): +0.44%
XLI (INDUSTRIALS): -1.37%
XLE (ENERGY): -2.84%
XLF (FINANCIALS): -2.88%
IYT (TRANSP): -4.63%
XLU (UTILITIES): -6.35%
Once again, here’s my latest reminder on volatility:
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.
The Bond Market:
As I type, the yield on the 10-year treasury bond sits at 1.95%, up .02% from last week at this time. As I suggested above, were last week’s sell off in stocks all about a weaker U.S. economy, we would’ve seen bond yields drop as traders bid prices up. If, as I suspect it might, the economy accelerates into the rest of the year and, as I suspect it might, potential inflation becomes a more serious conversation, I see the risk/return trade-off not working for the bond market going forward. Not that bonds won’t deliver positive returns in 2015—I suspect they will if stocks don’t—but what little they’ll likely deliver does not compensate, in my view, for the risk that current price levels present.
Here are last week’s U.S. economic highlights:
MARCH 23, 2015
THE CHICAGO FED NATIONAL ACTIVITY INDEX for February tells of an economy that is growing slightly below its historical trend. The three-month moving average reading of -0.08 is well above the recessionary level of -0.70 (following a period of expansion)… and well below the +0.70 that denotes a period of sustained increasing inflation. The diffusion index came in neutral, with 48 of the 85 individuals making positive contributions.
EXISTING HOME SALES rose moderately in February. Here’s NAR’s chief economist on the challenges posed by lack of inventory and rising home prices:
“Insufficient supply appears to be hampering prospective buyers in several areas of the country and is hiking prices to near unsuitable levels,” he said. “Stronger price growth is a boon for homeowners looking to build additional equity, but it continues to be an obstacle for current buyers looking to close before rates rise.”
And on the weather:
“Severe below-freezing winter weather likely had an impact on sales as more moderate activity was observed in the Northeast and Midwest compared to other regions of the country.”
My view is that rising prices are the cure for lack of inventory, as it inspires builders and homeowners to bring inventory to market. I remain bullish on housing going forward, however, I do expect a knee-jerk negative reaction when a Fed rate hike becomes a certainty.
MARCH 24, 2015
CPI for February showed prices rising slightly above estimates. The core (ex-food and energy) number came in at .2% month-on-month and 1.7% year-on-year… Factoring in food and energy: .2% month-on-month and 0% year on year. While the world seems very relaxed about U.S. inflation, I’m thinking that a pickup in wages (which is virtually inevitable in the coming months in my view) and a bottoming in oil (not likely till much later in the year, if not in 2016) is going to show up measurably in future inflation readings.
CHAIN STORE SALES grew last week at an annual 3.0% pace, which is an improvement over what we’ve seen so far this year…
THE JOHNSON REDBOOK RETAIL REPORT continues to show growth in retail sales. Up 2.8% annualized, versus 2.7% the previous week. On a week-over-week basis, retail sales were up a solid 1.1%.
THE FHFA HOUSE PRICE INDEX shows prices continuing to climb—up .3% in January… However, the consensus had prices rising faster, at a .5% clip.
MARKIT’S FLASH MANUFACTURING PMI shows the manufacturing sector finally picking up the pace after a weaker-trending January and February. The following commentary by Markit’s Chief Economist mirrors my own recent commentaries on Q1 growth, the headwind posed by the stronger dollar, and its countervailing benefits.
“Manufacturing regained further momentum from the slowdown seen at the turn of the year, with output, new orders and employment growth all accelerating in March. “While economic growth looks set to disappoint again in the first quarter, with GDP set to rise by a rate perhaps slightly below the 2.2% expansion seen in the fourth quarter of last year, the upturn in order books in particular gives some reassurance that the pace of economic growth is likely to pick up as we move towards the summer.
“However, the rate of expansion in manufacturing clearly remains well below the peaks seen last year, which is largely the result of exporters struggling in the face of a strong dollar. The March survey showed exports dropping for the first since November.
“But the appreciation of the dollar is not all bad news. The greenback’s strength is lowering import prices, which in turned helped drive down manufacturing costs at one of the fastest rates since mid-2012. Lower inflationary pressures should help keep interest rates low for longer.”
NEW HOME SALES surged in February to 539K. The consensus estimate was 462k. And, to top it off, January was revised up to 500k, from 481k. These are the first 500K+ readings since early 2008. Again, I like housing right now and this pickup supports the notion that what I’m seeing under the surface may blossom into a robust expansion in the sector—potential hiccups due to rising rates notwithstanding.
THE RICHMOND FED MANUFACTURING SURVEY did not confirm Markit’s positive PMI for March. Coming in at -8, versus a consensus estimate of +2. However, per the excerpt from the report below, manufacturers in the fifth district are quite optimistic o their prospects going forward. Note, also, their expectations for a pickup in input prices:
Expectations
Manufacturers’ optimism strengthened in March regarding business conditions during the next six months. The expectations index for shipments climbed seven points from the previous month, finishing at 37 in March. The outlook for the volume of new orders increased 11 points to 35, and the indicator for backlogs of orders added five points to February’s expectation for a reading of 16.
Furthermore, survey respondents looked for rising capital expenditures over the next six months. The index moved up to 32 from February’s reading of 27. Vendor lead-time expectations were little changed from a month ago. That index gained one point to end at a reading of 5. The indicator for capacity utilization dropped only a point, to settle at 24.
Producers planned significant hiring in the next six months; the expectations index for the number of employees rose to 23, compared to last month’s reading of 12. Additionally, the gauge for expected average manufacturing wages jumped eight points in March to 31. The index for the average workweek shed two points from the February outlook to end at 8.
Prices
Prices of raw materials continued to rise only slightly, at an annualized rate of 0.62 percent in March, compared to February’s 0.32 percent rate. Prices of finished goods grew nearly on pace with a month ago, at an annualized 0.10 percent rate. In February, finished goods prices rose at 0.09 percent, annualized.
Survey respondents expected input prices would pick up in the next six months, to a 1.53 percent pace. A month ago, expectations were for 0.91 percent annualized future price growth. Prices of finished goods were expected to rise at a 1.09 percent pace over the next six months, according to the March survey. A month ago, the outlook was for 0.48 percent annualized price growth in finished goods prices.
THE RICHMOND FED SERVICE SECTOR INDEX, while positive, showed slower growth than in February, 12 versus 18. However, like manufacturers in the district, service sector employers are optimistic about the future.
MARCH 25, 2015
MORTGAGE PURCHASE APPS jumped 5% last week, posting its best reading since Feb 4th. Refinances surged 12.0%.
THE FEBRUARY DURABLE GOODS REPORT had virtually nothing good going for it. New orders were down 1.4% on the month… Ex-transportation, they were down 0.4%. I suspect the strong dollar will catch the blame…
THE EIA PETROLEUM STATUS REPORT shows yet another monster build in crude oil, 8.2 million barrels. While gasoline inventories declined by 2 mbs and distillates remained the same. Despite the build, oil prices have spiked the past few days. But that has everything to do with Saudi Arabia’s military strikes against rebels in Yemen.
MARCH 26, 2015
WEEKLY JOBLESS CLAIMS declined by 9,000 to 282,000. The 4-week average dropped to 297,000. Continuing claims were down 6,000 to 2.416 million. Clearly, the employment picture is strong.
MARKIT’S FLASH SERVICES PMI supports my recent commentary that the service sector is gaining momentum despite the manufacturing sector decelerating against a higher-dollar headwind. However, optimism about the business outlook moderated in March, which would question my view, somewhat, that the service sector will accelerate at an even faster pace over the remainder of 2015. Here’s Markit’s chief economist on the results:
“The US economy is showing signs of regaining momentum after the slowdown seen at the turn of the year. The flash PMI surveys are registering faster growth of both service sector and factory activity at the end of the first quarter, as well as ongoing strong hiring.
“While the surveys signal that economic growth will have slowed in the first quarter from an already-modest 2.2% pace seen in the final quarter of last year, the upturn in the surveys in March provides a clear advance indication that stronger economic growth will return in the second quarter.
“While weak economic data for the first quarter will keep Fed rate hikes at bay in coming months, ruling out a June hike, the upturn in second quarter GDP signaled by the recent PMI data ups the odds of interest rates starting to rise at the September FOMC meeting.”
BLOOMBERG’S WEEKLY CONSUMER COMFORT INDEX climbed last week to the second-highest reading since July 2007. I suggested last week that this number might improve based on my observation of the correlation between stock market action and respondents’ attitudes (last week saw a big rally in stock prices). Of course there’s more to it than just stock prices, per the release:
Consumer Comfort in U.S. Matches Second-Highest Level Since 2007
By Shobhana Chandra
(Bloomberg) — Consumer confidence climbed last week to match the second-highest level since July 2007, propelled in part by gains among lower-income earners and job seekers as the labor market improves.
The Bloomberg Consumer Comfort Index rose to 45.5 in the period ended March 22 from 44.2 the prior week. Measures of the economy, buying climate and households’ financial well-being all improved.
Spirits brightened for those making less than $50,000 a year in wake of bigger February job gains in services that include the retail and restaurant industries. More confidence about finances signals consumers may be inclined to step up purchases and drive the economy after a projected slowdown in the first quarter.
The index was “bolstered by improved ratings of personal finances, gains among women and improvement among lower- and lower-middle income Americans that may signal a widening recovery,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement.
A strengthening labor market and still-cheap gasoline are also delivering a boost to household spending, which accounts for about 70 percent of the economy.
Fewer Americans than forecast filed applications for unemployment benefits last week, a Labor Department report showed Thursday. Jobless claims dropped by 9,000 to 282,000 in the period ended March 21, the lowest level since mid-February.
Among the three components of the Bloomberg comfort index, the gauge of Americans’ views on the state of the economy rose to 37.7 last week from 37.2. An index of the buying climate, showing whether this is a good time to purchase goods and services, increased by 1.5 points to 39.8, matching the second-highest reading since April 2007. A measure of personal finances climbed to 58.9 from 57.1.
Income Groups
Confidence improved for three of four groups of wage earners making less than $50,000 a year. Sentiment among Americans making $25,000 to $40,000 was the strongest since February 2007.
Women were more optimistic than at any time since July 2007, while confidence among seniors, the unemployed and renters was the highest since the start of the last recession. The comfort index for Democratic voters was the highest in 14 years.
NAT GAS INVENTORIES rose last week by 12 billion cubic feet, to 1,479 bcf.
THE KANSAS CITY FED MANUFACTURING INDEX declined in March to -4 versus 1 in February. Respondents complained about snow, oil prices, port disruptions, the strong dollar, and higher health insurance costs. Here’s the first paragraph of the summary:
Tenth District manufacturing activity declined in March, and producers’ expectations moderated somewhat but remained slightly positive. Most price indexes continued to decrease, with several reaching their lowest level since 2009. In a special question about the West Coast port disruptions, 32 percent of firms said it had affected them negatively.
THE FED BALANCE SHEET declined by $15.3 billion to a total of $4.481 trillion. Reserve bank credit declined $7.9 billion after gaining $10.7 billion the week before…
M2 MONEY SUPPLY grew by $9.3 billion the week of March 16.
MARCH 27, 2015
THE FINAL GDP number for Q4 remained unchanged at an annual rate of 2.2%. However, the makeup changed: consumption was revised higher, while corporate profits were revised lower.
THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX rebounded in March to 93.0. A strong report that showed gains in the current conditions and future expectations components.