Weekly Commentary: Sound Money Anyone?

April 10, 2012


With good first quarter gains behind it, the market is now assessing the outlook for the rest of the year. This is producing some near-term trepidation.  Friday’s less-than-expected employment gains [120k actual, 200k estimated] capped a week of disconcerting news:  ISM Services [56.0 actual, 56.7 estimated], Spanish debt yields [higher than hoped] and the release of the latest FOMC minutes.

The FOMC March policy meeting minutes talked about forward policy guidance being conditional on economic developments.  This implies that dates for policy change [when will the excess money printing end?] are subject to revision.  Revisions might be in response to faster than expected GDP growth, higher than expected inflation or perhaps exchange-rate market/bond market rebellion.

The Fed is often considered to be the market’s Rosetta Stone, and Tuesday was no exception.  The markets responded immediately by trading the dollar higher [fewer dollars in circulation], dropping commodities [they are priced in dollars] and strengthening treasuries [lower risk of inflation].

Some market observers argued that the Fed’s mindset should not have been a surprise, since the Fed is always updating its forecasts and policy based on the best [and most recent] data.  There are also some who argue that the effectiveness of additional easy money [at least for this economic cycle] is minimal.  It is obvious that the end to limitless easy money was not built into quarter-end prices, and that the transition to sound money is/will be challenging.  Stay tuned.

“Government is a trust, and the officers of the government are trustees; and both the trust and the trustees are created for the benefit of the people”

Henry Clay

Weekly Commentary: Basketball & Stocks

April 3, 2012


The U.S. stock market ended the first quarter of 2012 with its strongest start since 1998*. The DJIA was up 8.1% and the S&P 500 was up 12%. Investors’ concerns eased as European debt issues have been pushed back, at least temporarily, with Greece’s successful debt restructuring. Also the U.S. jobs picture has been gradually improving with new jobs being created at over 200,000 jobs per month for several months (see chart). Look for more of the same this Friday as estimates call for 210,000 new jobs created in March.

Although the unemployment rate has been holding steady above 8% that is more a function of additional people coming back into the workforce as the economy continues to gradually improve.

April is the start of the earnings reporting season for the first quarter of 2012. Look for a substantial slowdown in the rate of earnings growth reported by S&P 500 companies. Current estimates are for only a 0.9% earnings go ahead. Analysts look for earnings growth to pick up as the year goes along but comparisons will be tough as operating margins are already at or near historic highs.


*April 3, 1998 – The Dow Jones Industrial Average climbed above 9,000 for the first time vs. yesterday’s closing price of 13,264
Last night Kentucky won the NCAA Men’s Basketball Championship which they last accomplished in 1998.

“Courage is the discovery that you may not win, and trying when you know you can lose.”
Tom Krause


Weekly Commentary: Quiescent Behavior

March 27, 2012


We have a number of reports this week to look forward to that will provide insight on the health of our domestic economy.  First to bat are two housing reports-home sales and home prices.  We expect them to be sluggish much like they have been for five years.  Then we have two consumer confidence reports on Tuesday and then Friday.  They should confirm gradually improving sentiment here at home.  Then we have two major reports Wednesday on durable goods. These are highly volatile numbers because of variations in airplane orders.  Without plane orders the report should be positive.  Friday we learn the monthly report on personal income and spending.  Income growth has been modest and could pick up this month, as we expect spending to be strong (see chart below).  One of the all-time best economic indicators is stock market behavior.  With the Dow up 125 points as we write, a continuation of better economic data seems likely.

One of the great mysteries to us is the relatively quiescent behavior of the monthly inflation reports.  They have been running at an annual rate of 2-2 ½ percent.  We recently received an e-mail comparing January 2009 and today’s prices.  Here are some of the percentage changes- gasoline up 84%, corn up 78%, soybeans up 42%, raw sugar cane up 165%.  Yet the real median income is down 0.7% and the number of long-term unemployed and those on food stamps has skyrocketed.  So far Mr. Bernanke and the Fed seem comfortable with the current situation. We must stay alert for any signal changes by the Fed that they are more concerned with inflation and less so with the slow job growth we have seen in this recovery.  Stay tuned.

“Inflation is like sin; every government denounces it and every government practices it.”
– Frederick Leith-Ross


Weekly Commentary: Stress Relief

March 19, 2012


Solid U.S. economic data and results of the Fed’s bank stress tests pushed the markets to new yearly highs.  For the week, both the Dow Jones Industrial Average and the S&P 500 moved higher by just over 2%.  For the year-to-date period, the Dow is ahead 8.3% while the S&P is higher by 11.7%.  Oil was slightly lower last week by 0.34% to close at $107.06 per barrel while gold dropped 3.24% to close at $1,655.50 per troy ounce.  Bonds sold-off last week as the 10-year Treasury yield hit a five month high of 2.30%.

Banks rallied over 5% last week after the Fed released results from their stress tests on the 19 largest banks in the U.S.  Most banks fared well, and the markets cheered the news along with increased (or reinstated) dividends and share buybacks.  Of course, a steepening yield curve will help banks as well. Below is a chart of XLF, a financial sector focused exchange traded fund which is up ~ 20% year to date.

Manufacturing news last week was quite positive as both the Empire State and Philly Fed surveys showed better results along with January’s industrial production.  News on the inflation front was fairly tame as the Producer Price Index and the Consumer Price Index were marginally better-than-expected (seems strange given the rising costs at the pump and the grocery store, but the numbers don’t lie – do they?).

The news out of Europe was better, but we suspect that the next shoe will drop over the next few months.  Economic growth in Portugal, Italy, Greece and Spain remains quite constrained.  Debt servicing will, no doubt, choke-off growth and keep unemployment rates uncomfortably high.  Of course, geopolitical tensions in Iran and Syria will continue to add to investor nervousness.

We suspect that the markets have gone up too much and that a respite is in order; however, momentum remains positive.  We do not intend to fight the Fed, but we remain vigilant for a directional change in short-term momentum.

Buona Festa Di San Giuseppe!

“Many of the “abuses” of today were the “reforms” of yesterday.”
-Thomas Sowell


Weekly Commentary: $4 Gasoline

March 13, 2012


Last week stock markets were mixed again with the DJIA declining -0.43% and the S&P 500 up 0.9%.

The big news items last week were the U.S. jobs report for February and the Greek debt restructuring. February was the third straight month with over 200,000 jobs created with 227,000 new jobs created. The unemployment rate held steady at 8.37%. This is further evidence that the U.S. economy is still on a gradual recovery path.

This week look for the Consumer Price Index number on Friday, estimated to be up 0.4%, as the result of higher gasoline prices.  If gasoline prices rise to $4 per gallon and stay at that level for a significant time period it would be a drag on the economic recovery. The chart below shows the national average for gas prices over the last 3 months.

Greece successfully completed its debt restructuring which should buy the European Union time to address debt issues in Spain and Portugal. However, it is probably only a matter of time until contagion spreads to these countries.

“All life is an experiment. The more experiments you make the better.”
– Ralph Waldo Emerson

Weekly Commentary: Personal Savings Rate

March 5, 2012


US stocks were mixed last week as the S&P 500 posted a 0.3% gain and the Russell 2000 (smaller companies) posted a -3% loss. Oil posted a loss for the week at -2.4%.

GDP for the 4th quarter of 2011 was revised higher from 2.8% to 3% mostly due to inventory growth. Motor vehicle sales continue to recover and spending remains constrained at the state and local government level.

Personal income growth slowed from 0.5% in December to 0.3% in January. Meanwhile consumer spending increased from no change in December to 0.2% in January. How can spending increase while incomes are moderating? The answer is consumers are sacrificing their savings to satisfy their spending. The personal savings rate peaked during the last recession and has been declining since to January’s rate of 4.6%.

Consumers are also beginning to feel more comfortable about debt. This week we will get an update on January’s consumer credit outstanding. The chart below shows that revolving debt (such as credit cards) and non-revolving debt (such as auto loans) are on the upswing. Low and falling savings and growing debt are providing a short term boost to US GDP growth but will be a drag longer term.

The last few months have shown improving trends for US employment.  Rising employment is necessary to keep the consumer alive. We’ll keep our eye on this Friday’s Employment Situation update.

“Problems can become opportunities when the right people come together.”
Robert South


Weekly Commentary: Energy Prices

February 28, 2012


Gasoline prices have closed in on $4, with expectations of $5 or higher by the summer driving season. This increase is causing more than a little discomfort for consumers, and a determined search for scapegoats by politicians and population alike.

When President Bush encountered intractable gasoline, he fanaticized about switchgrass.  President Obama recently promoted algae, his own version of biofuel.  Unfortunately, algae’s transportation future is not likely to be any rosier than was switchgrass’s.  The only question is how much more taxpayer dollars will be “invested” before this reality is conceded.

The most powerful near-term factor affecting energy prices is the turmoil in the Middle East.  The “Arab Spring” seems to be ending badly, the question of Iran and its acquisition of Nukes promises more instability in the months ahead and the Afghan transition is in trouble.

We do have some options [ignoring political impediments]:  Approval of the Keystone XL pipeline from Canada to Louisiana, which would also provide jobs and contribute to our national security.  Reestablish an efficient licensing procedure for the Gulf of Mexico [why are we allowing the Cubans to drill 90 miles from our shores without responding?]  would also be a big help.

And, what should be done?  In a nutshell, the solution for higher prices is higher [free market] prices.  Higher prices restrain demand and, in the fullness of time, produce supplies that will overcome claimed “shortages”.  Volatility will continue, but supplies will remain sufficient [1974 gasoline shortages will not return].

Ps:  this note was inspired by a recent WSJ editorial page commentary.  The entire piece is available at:  http://online.wsj.com/article/SB10001424052970203960804577243221763257612.html.


“If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand”
– Milton Friedman

Weekly Commentary: Volatility-less

February 21, 2012


One of our favorite business writers Mark Hulbert seems to consistently come up with interesting and useful information about the markets’ behavior.  He titled a recent piece “Don’t sell a dull market short”.  In it he dissects a measure of volatility “vix” which receives much attention. A low number for the vix means there is less volatility, a higher number more.
This year volatility has been quite low as measured by vix, less than the median of 20.  The number of days in which intraday Dow movement has been more than 200 points has been just one.  Hulbert has reviewed the data and concluded that this is a good thing and cites the numbers to prove it.  So don’t feel that a lull is necessarily a bad thing.

Speaking of good things, the news regarding the Greece bailout is upbeat.  Agreement on a 130 billion euro bailout came down today.  It would be nice if this were the last bailout, but at least it takes the immediate pressure off.  In addition there is agreement that private bondholders will accept a 53% haircut on their bonds.  Austerity measures for the country will not be well received.

Finally we note with some amazement that Apple Inc. has accumulated some $100 billion in cash reserves. Some suggest a special dividend or a major stock buyback.  How about a bailout of Greece?  Apple could take the Parthenon as collateral!!

Enjoy the spring weather.

“Never spend your money before you have earned it.”
-Thomas Jefferson

Weekly Commentary: Going Slow

February 14, 2012


Last week saw a pause in the rally in the equity markets as the S&P 500 dropped 2.26 points or 0.17%. The markets continue to watch negotiations with Greece and this week Moody’s downgraded six European nations including Italy, Spain and Portugal. In addition, the firm warned that the U.K.’s rating could also be at risk.  Any slowdown in Euro zone economies will be a drag on the earnings of many large U.S. companies.

Positive earnings surprises for 4Q 2011 continue to lag prior quarters and profit margin improvements are stalling out. In the 4th quarter productivity, as measured by output per hour was up just 0.5% from the prior year.

2012 may be a challenging year for corporate profit growth.

“I shall make the most of all that comes: And the least of all that goes”
– Sara Teasdale


Weekly Commentary: High Winds

February 7, 2012


Last week was another positive week for stocks as equity markets posted decent gains. Greece/Europe and the Middle East are concerning. However, U.S. economic data continues to be resilient. Most notable data point was last Friday’s employment report which highlighted an impressive gain of 243,000 jobs and another drop in the unemployment rate from 8.5% in December to 8.3% in January.

A Greece resolution may finally be in the works nevertheless Europe is not out of the woods. The European Central Bank has restored liquidity to the area via a program called LTRO (Long Term Refinancing Operation) which is similar to our Federal Reserve’s policies of quantitative easing and accommodative interest rates. Their policies have been effective in the short term however we are not ready to say the coast is clear.

This week we will keep our eyes to the east as things continue to develop abroad. Back in the U.S. we are wrapping up another decent round of corporate earnings reports and a fairly quiet week of economic data.

“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”

Aristotle Onassis