Advancing on a Wall of Worry

August 25, 2014

The stock market advanced ~1.6% last week, extending the advance that began August 7th.

Janet Yellen’s speech at the Fed’s annual conference asserted that the healthy drop in the unemployment rate was misleadingly positive [factoring in underemployment and the low participation rate]. It is true that motor vehicle production trends are temporarily depressing the number by ~15,000, but the big picture is that the Fed is still targeting mid-2015 for the first Fed Funds rate hike [internal dissention notwithstanding]. The markets did not significantly react to the speech [futures markets still expect an initial hike to 0.25% next June followed by 0.5% in Sept and ~0.75% by 12/15] , suggesting that the steady-as-she-goes stance is already built into the market.

 

On another front, the St. Louis Fed released its study on the experience of performance-chasing fund investors. As expected, following past returns result in asset-class purchases at their highs. This cost these fickle investors ~200 basis points over the first 12 years of the century. Buy-and-hold achieved a 5.6% return [thru 2012] while the return chasers could only get a 3.6% return.

Patience is its own reward.

 

 

Geopolitical Unrest … The New Normal?

August 18, 2014

Another volatile week as tensions between Ukraine and Russia rattled investors’ nerves.  Iraqi extremists and ongoing issues between Israel and Hamas didn’t help the situation.  Is the current state of geopolitical unrest the new normal?  It certainly seems so, but perhaps it has always been this way.  Regardless, the unrest certainly has economic and market consequences.  Since 25% of S&P 500 companies receive over 50% or more of the earnings outside the U.S., it is indeed worthwhile to understand the political and economic dynamics of today’s geopolitical unrest.  An already fragile Europe (see GDP results below) can hardly afford more biting sanctions against Russia.

Yet the markets found a way to go higher last week.  For the week, the Dow Jones Industrial Average finished at 16,662.91 to close the week higher by 0.66%.  The broader-based S&P 500 closed at 1,955.06 for an increase of 1.22% for the week.  The Nasdaq Composite advanced by 2.15% to close the week at 4,464.93.  International markets finished higher than the broad U.S. market as the Dow Jones Global (ex US) Index advanced 1.90% for the week.   After last week’s gains, market averages are higher for the year-to-date period with the Dow Jones Industrial Average up 0.5% and the NASDAQ ahead by 6.9%.  The S&P 500 is showing higher year-to-date gains as it is up 5.8%.  The 10-year Treasury was rallied to close the week at a yield of 2.345% … down from last week’s 2.42% yield (a flight-to-safety into U.S. treasuries).

Economic news released last week was mixed – weaker retail sales in the U.S. were offset by 2nd quarter earnings that were better-than-expected at 10% year-over-year growth.  News out of Europe was disappointing as Germany’s 2nd quarter GDP saw a 0.2% decline while France’s GDP was an anemic 0.1%.  Euro-zone industrial production also missed the mark.  In a weird kind of way, markets rallied last week in hopes that ECB President Mario Draghi would implement another round of quantitative easing in Europe.

The week ahead is sure to provide investors with a bit of excitement and anxiety (what’s new?).  As always, we urge investors not to pay attention to the noise in the markets.  Instead, focus on long-term goals, and enjoy the last month of summer.

“We are all born for love. It is the principle of existence, and its only end.”

–          Benjamin Disraeli

Domestic News Good-International?

August 11, 2014

First let’s look at the news on the home front since it makes more pleasant reading.  We are coming to the end of second quarter earnings season and the results are substantially better than expected.  S&P 500 sales growth is running at 4.1% led by Health Care, Technology, Consumer Discretionary and Energy.  More impressive is the earnings results.  Non-Financial go ahead is 12.3% versus expectations of 5-7%.  Productivity in the quarter advanced 2.5% and the unemployment data is trending positively.  We read recently that some unemployed who weren’t looking for jobs are returning to the workforce!

The situations around the globe seem to require almost daily tracking.  In Iraq we see that the Kurds have had some progress, aided by our humanitarian air drops and our strikes on Isis.  The political situation in Baghdad is not good since Maliki is consolidating his military support in the city.  The Ukraine situation is encouraging on the surface as Ukraine forces advance, but we all fear what Putin will do as they advance further.  And finally there is Gaza and Israel.  We are thankful for the cease fire but fearful of what comes next.  One bright spot internationally is China.  Their market is up 7% year to date and exports have hit a 15 month high.  There is speculation of positive reforms for state owned enterprises.

We would summarize by saying to focus on the improved U.S. economic data, but to be vigilant on developments around the globe.

Slow Improvement

August 4, 2014

Last week equity markets pulled back with the DJIA declining 2.8% for the week and the S&P 500 dropping 2.7% over investor concerns about Argentina and when the Fed might start raise interest rates.  This was the largest weekly drop for the S&P500 since June 2012.  Bond prices also declined, particularly for high yield bonds where prices declined 1.8% for the week and funds continued to flow out of the sector.  Is this the start of a larger correction?  Possibly but economic news continues to show improvement from the first quarter.

The major economic report last week was the monthly jobs report which showed the U.S. added 209,000 jobs.  While this was lower than expectations of 230,000 jobs it was the 6th consecutive month of over 200,000 new jobs.  Also, average hourly earnings rose by only one cent indicating that wage inflation is still not an issue for the Fed. In addition 2nd quarter earnings, with approximately 3/4 of S&P 500 companies reporting, are on track to increase by 7.7% which is the fastest since the 4th quarter of 2013.  These earnings are being supported by improving revenues.  Revenues are projected to increase by 4.3% from the previous year which is a sign that consumers are starting to spend.

As The World Turns

July 29, 2014

The market changed direction several times during the past week as multiple overseas developments fed the Bears while domestic earnings and economic reports provided sustenance for the Bulls. By the close on Friday, the S&P was exactly flat for the week [up 7.0% for the year], while the small-cap Russell 2000 fell 0.6% [now down 1.6% for the year!].

Israel’s ground assault on Hamas and its terrorist Gaza border tunnels dragged the market lower, with only fleeting respite from Secretary Kerry’s truce efforts [the MH17 black box discovery also helped]. Quarterly earnings reports were on balance positive. For example, Chipotle’s 11.8% advance more than offset McDonald’s 1.3% decline. In addition, positive Chinese and Eurozone manufacturing reports provided further support.

Financial markets are essential to the effective functioning of the worldwide economy, but they do not immediately respond to or measure all of the significant events of the week. A recent example sadly occurred on Thursday, when a radical band of Sunni insurgents [self-described as “The Islamic State”] destroyed the centuries-old Nabi Younes Mosque, which housed the tomb of Jonah [of swallowed-by-a-whale fame]. This is one of more than two dozen Mosul shrines destroyed by this al Qaeda spinoff since they seized Mosul [in northern Iraq] on June 10th. The world is culturally poorer as a result.

“The most certain test by which we judge whether a country is really free is the amount of security enjoyed by minorities.
John E. E. Dalberg

Too Much Fighting & Too Much Pain

July 21, 2014

A difficult week as the world mourns those lost on Malaysia Airlines Flight MH-17.  We offer our thoughts and prayers to all those who lost loved ones – may they rest in peace.   Increased fighting between Israel and Hamas along with ongoing battles in Ukraine, Syria and Iraq point to a world seemingly on edge.

Geopolitical tensions were not enough to bring down worldwide markets … at least not yet.  For the week, the Dow Jones Industrial Average finished at 17,100.18 to close the week higher by 0.92%.  The broader-based S&P 500 closed at 1,978.22 for an increase of 0.54% for the week.  The Nasdaq Composite advanced by 0.38% to close the week at 4,432.15.  International markets finished higher, but slightly trailed U.S. market gains as the Dow Jones Global (ex US) Index advanced 0.39% for the week.   After last week’s gains, market averages are higher for the year-to-date period with the Dow Jones Industrial Average up 3.2% and the NASDAQ ahead by 6.1%.  The S&P 500 is showing higher year-to-date gains as it is up 7.0%.  The 10-year Treasury was rallied to close the week at a yield of 2.47% … down from last week’s 2.52% yield (a flight-to-safety into U.S. treasuries).

Economic news released last week was mixed – weaker retail sales, business inventories, industrial production and housing starts were offset by stronger-than-expected Philly and Empire State surveys, NAHB housing index, and GDP news out of China.  Earnings were mostly positive, and M & A activity continued to impress with the latest news being Fox’s $76 billion bid for Time Warner.

The week ahead has a fair amount of earnings and economic releases, but the focus will most likely be on the heightened geopolitical picture.   Particular attention will be paid to the EU and how it moves forward with sanctions against Russia.  More sanctions will inevitably lead to slower growth in the EU … not a good situation for anybody.  Barring any major geopolitical events, we expect trading volumes to be rather anemic this week as summertime activities draw investors away from the noise of Wall Street.

Summer is here … don’t forget to get out enjoy the beautiful weather. 

“You ache with it all; and the more mysterious it is, the more you ache.”
― Fyodor Dostoyevsky, Notes from Underground

Summer Swoon

July 14, 2014

Last week equity markets reversed course, posting the biggest weekly loss in the S&P 500 (-17.93/-0.9%) since April 2014 while the DJIA shed 124.45 (-0.72%).  The NASDAQ finished the week at 4415.49, down 70.43 (-1.6%) while smaller stocks were the hardest hit with the Russell 2000 down -4.0%.  International markets also retreated with the Dow Jones Global Ex-US down 1.94% due to a number of rising geo-political concerns with rising tensions in Ukraine, Iraq, and Israel.  Not all was bad for those with a diversified portfolio, bonds rallied as interest rates moved lower with the 10 Year Treasury rate moving from 2.639% to 2.520%.

This week, there will be number of earnings releases, most notably Citigroup, J.P. Morgan Chase, Bank of America, eBay Inc., General Electric and Google to name a few.  In addition to earnings, the Producer Price Index will be released on Wednesday which could provide insight ahead of next week’s CPI Index release and retail sales are scheduled for Tuesday.

Be on the watch for our 2nd quarter newsletter – The Emperor Has New Clothes (?).

“But he hasn’t got anything on,” a little child said.

 “Did you ever see such innocent prattle?” said its father.  One person whispered to another what the child had said, “He hasn’t anything on.  A child says he hasn’t anything on.”

 “But he hasn’t got anything on!” the whole town cried out at last.

 The Emperor shivered, for he suspected they were right.  But he thought, “This procession has got to go on.” So he walked more proudly than ever, as his noblemen held high the train that wasn’t there at all.

– Hans Christian Andersen, “The Emperor’s New Clothes”

Earnings Season Begins

July 7, 2014

Last week equity markets continued to move higher.  The DJIA was up 1.28% for the week closing above 17,000 and the S&P500 advanced 1.25%.  Also, international markets were up across the board with the DJ Global ex U.S. index increasing 1.46%.  The major economic news last week was the monthly jobs report for June which reported that 288,000 jobs were added for the month and the unemployment rate dropped to 6.1% the lowest level since September 2008.  As a result, interest rates edged up the 10 year Treasury rate ended the week at 2.639% vs 2.525% the prior week.

This week starts 2nd quarter earnings season with Alcoa reporting on Tuesday and Wells Fargo on Friday. Forecasters look for an increase of 4.9% in earnings for S&P 500 companies with even further gains for the balance of the year.  Continued good economic news would be a welcome support for the equity markets.

“We must become the change we want to see.”
Mahatma Gandhi  (Indian Philosopher)

Summer has arrived, yet the Market Continues to Soldier On

July 1, 2014

The markets turned in another lackluster performance last week, with the DJII and the S&P declining slightly, while the NASDAQ advanced by 0.7%.  The Middle East concerns have temporarily eased, as ISIS territory gains in Iraq stalled.  Economic reports on 1Q GDP growth and May consumer spending were less-than-expected, but these disappointments only depressed the markets temporarily.

The third estimate for 1Q GDP was lowered to -2.9% from the previous -1.0%E [-1.8% expected].  We knew that the winter weather [and inventory volatility] was bad, but now the distress can be quantified. Also, it must be acknowledged that without a strong consumer [real final sales of -1.3%], GDP growth will not sustain an above-average rate. This 1Q decline can be compared to the 4Q 2013 GDP of +2.6%.

These “top-down” statistics have set the stage for concern about earnings, which will be reported starting next week [AA officially starts the earnings reporting season on the 8th].  S&P earnings are still officially expected to grow 4.8% [sales +2.8%E] during the just-completed quarter.  This compares with first quarter earnings growth of 2.3% [sales of +0.9%].

The market continues to advance using the “three yards and a cloud of dust” offense.  It may not be pretty, but it has been effective [the S&P is up 6.1% YTD].  Consequently, while we’re prepared for a summer swoon, we’re staying the course.

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
– Winston Churchill

Don’t Forget the Fed

June 23, 2014

The old expression – Don’t Fight the Fed – seems to be alive and well.  Dovish comments from Fed Chair Janet Yellen sent most markets to all-time highs last week.

For the week, the Dow Jones Industrial Average finished at 16,947.08 to close the week higher by 1.02%.  The broader-based S&P 500 closed at 1,962.87 for an increase of 1.38% for the week.  The Nasdaq Composite jumped 1.33% to close the week at 4,368.04 (still 15% off its April 2000 high).  International markets finished higher, but slightly trailed U.S. market gains as the Dow Jones Global (ex US) Index advanced 0.62% for the week.   After last week’s gains, market averages are higher for the year-to-date period with the Dow Jones Industrial Average up 2.2% and the NASDAQ ahead by 4.6%.  The S&P 500 is showing higher year-to-date gains as it is up 6.2%.  The 10-year Treasury was relatively flat to close the week at a yield of 2.63% … up a bit from last week’s 2.60% yield.

Economic news released last week was reasonably upbeat – stronger-than-expected Industrial Production, Capacity Utilization, NAHB housing index, and Philly Fed and Empire State manufacturing series.  On the softer-side were May Housing Starts and Permits (a bit worrisome).  M & A activity got the market excited as Medtronic announced a $42.9 billion buyout of Covidien.  Other M & A activity included Level Three / Time Warner, SanDisk / Fusion IO and Williams / Access Midstream Partners.

We expect gasoline prices to move higher in the weeks ahead given the mounting tensions in the Middle East. A gradual move higher could be absorbed by consumers and businesses, but a spike in prices would be a negative for the ongoing economic recovery.   Markets have been fairly calm lately, but don’t be surprised by an occasional downward swoon in the markets … we are way overdue.

Summer has started … don’t forget to get out enjoy the beautiful weather.

Go USA!