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Weekly Review - April 27, 2015

Weekly Review - April 27, 2015

Guest Post - Monday, April 27, 2015

Summary

  • In a light week for economic releases, durable goods came in somewhat better than expected, led by aircraft orders, while housing also showed some mixed signs of life. Housing has been sporadic over the last few years, which has concerned economists, although the spring season will no doubt bring more information and clarity.
  • Equity markets worldwide gained on the week, with earnings coming in a bit better than expected. Interest rates also rose, which ended up being a negative for government bonds; corporate and emerging market debt fared better. Commodities rose with help from a weaker dollar and higher oil prices.

Economic Notes

(+) Durable goods orders for March came in a bit stronger than expected, rising +4.0% compared to a forecasted gain of +0.6%. The headline number included strong results in civilian and defense aircraft orders; removal of this transport component resulted in a slight decline, and, even more targeted, core orders fell -0.5% (vs. expectations of a +0.3% rise). Core shipments also fell by -0.5% or so, contrary to an expected gain of roughly a half-percent. Machinery orders/shipments have especially been hard hit as of late, down -12% on a year-over-year basis, which reflects a paring back on oil & gas industry activity.

(+) The FHFA house price index for February came in a bit stronger than expected, rising +0.7%, beating a forecasted +0.5% gain. From a regional standpoint, the South Atlantic area (D.C. South to Fla.) posted gains of near +2%, leading the way, while the Mountain West segment also gained a percent. In fact, all areas were positive to some degree, except for the Ky./Tenn./Ala./Miss. area, which lost a percent. Year-over-year, the index rose +5.4%. To differentiate this from the Case-Shiller index, which is focused on 20 key U.S. cities, the FHFA looks at broader census areas, but is restricted to properties where mortgages have been purchased or securitized by Fannie Mae or Freddie Mac.

(+) Existing home sales for March rose more than expected, gaining +6.1% compared to consensus forecasts of +3.1% (rising to a 5.2 mil. seasonally-adjusted annualized rate). Single-family sales gained +5.5% (+10% year-over-year), while condos/co-ops rose +11%. Fundamentals continue to improve, and are moving in the direction of 'normalization'-meaning more owner-occupier activity as opposed to investor/rental transactions. This is noted by a 'distressed' sales falling from 15% a year ago to a current 10% and 'investor' (non-occupier) purchasers falling a few percent further to 14%, compared to last year. Similarly, the proportion of 'all-cash' buyers to total buyers has fallen from 33% to 24% over the past year, in another sign of higher levels of mortgage financing activity.

(-) New home sales for March came in as a -11.4% decline to an annualized 481k rate, more severe than the expected -4.5% decrease (to 515k), although figures were revised up for a few prior months. Sales in the East fell by over -30%, 'normalizing' the huge gain from February, the South fell by -16%, the West by -3%, while the Midwest was up +6%. To make this more convoluted, much of this overall decline appeared to be the result of seasonal adjustment activity; with this removed, a gain of +45k was led by stronger absolute results in the Western U.S.-in fact one of the better absolute months in years. Inventories and 'homes not started' increased severalfold to the highest levels since 2008.

If this sounds convoluted, it is. Done in a variety of economic series, seasonal adjustments are done to even out the bumps caused by weather and other cyclical activity; then, they're typically annualized to allow better standardization in seeing multi-year trends (in a similar way that showing average annualized returns do for performance reports, as opposed to just showing 'cumulative') . In housing, most of the activity occurs in the spring through fall, with winter falling off dramatically-so this has to be adjusted for in order for respective monthly numbers to have any meaning whatsoever in longer-term scheme of things. However, only so much adjustment can be done, as extreme results (as we've seen from the last several winters, with low temperatures and high snowfall in certain regions) can still skew these 'adjusted' results a little or a lot.

Seasonally-Adusted Annual Equivalent Units

Non-Seasonally Adusted Actual Units

(-) Initial jobless claims for the Apr. 18 ending week came in at 295k, which was slightly higher than the expected 287k. Continuing claims for the Apr. 11 week also rose to 2,325k, an increase of +50k from the prior week and +35k higher than expectations. No special factors appeared to be involved.

Market Notes

Period ending 4/24/2015

1 Week (%)

YTD (%)

DJIA

1.45

2.13

S&P 500

1.77

3.47

Russell 2000

-1.26

5.59

MSCI-EAFE

2.03

9.84

MSCI-EM

1.71

10.90

BarCap U.S. Aggregate

-0.24

1.85

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2014

0.04

0.67

1.65

2.17

2.75

4/17/2015

0.01

0.51

1.31

1.87

2.51

4/24/2015

0.03

0.54

1.34

1.93

2.62

U.S. stocks gained ground, with large-caps outperforming small-caps. Technology was the most successful sector, gaining +4%, followed by telecom and consumer cyclicals, while energy and consumer staples gained minimally. Tech leaders Google and Microsoft were in the spotlight, while retailing was especially strong on the week, led by Amazon's strong revenue growth from their web services unit—closely watched due to its cloud-based potentially disruptive-to-traditional-business-model activities. These new paradigms are scary to traditional business models, and while success in profitability terms is yet to be consistently proven in some of these areas, business model life cycles are moving at a faster and faster pace.

Earnings for the first quarter have come in for almost half the firms in the S&P 500, and 3/4 of these have been above their mean estimate—amazingly, on target with the average proportion over the past five years. Just under 1/2 of firms have reported positive surprises for revenues, which is also in keeping with recent trends but below the five-year average of just under 60%. However, expectations for the next several quarter continue to be reduced in keeping with dollar strength and slow growth—with carryover from low energy pricing for energy firms leading the way. Earnings cycles have become generally predictable, due to the lowering/raising of earnings estimates far in advance of actual releases.

Internationally, developed markets outperformed emerging generally. The problem children of Greece and Brazil experienced the strongest equity gains, as did Russia, which was helped by stronger oil pricing. In Greece, a government decree requiring state bodies to deposit their available cash at the central bank pushed off fears of an early May default for the time being, although these negotiations remain in the headlines with little headway made—at least in public. Surveys showing an improvement in Germany's business climate helped sentiment somewhat, although European and Japanese equities gained at roughly the same pace. India was left behind with sharp declines, in a continued 2015 reversal of 2014's strength, as worries over sporadic corporate earnings, taxes on foreign investors and weak government spending have outweighed political hopes and dreams from Prime Minister Modi's election last year.

Chinese stocks, which are a bifurcated sort, due to the unique dynamics of global Hong Kong 'H' vs. locally-dominated Shanghai/Shenzhen 'A' shares, continued to ascend. The prior week, the Chinese lowered central bank reserve rates, and last week announced an injection of over $60 billion into state-run policy banks—the Export-Import Bank and China Development Bank—through loans in order to essentially recapitalize them. These easing moves, expectations for continued targeted easing to prevent the slowdown from becoming too widespread and general domestic euphoria for the relatively new Chinese hobby of speculative stock investing have driven shares dramatically higher. In their domestic market, some classic red flags are beginning to emerge, including rising margin balances, and the fact that 2/3 of new trading accounts this year have been opened by those who never finished secondary school—which traditionally had been a small proportion of the investor pool. This mania is truly becoming a societal phenomenon, and it will be interesting to see the Chinese government's continued work in attempting to police and or prop it. With an embedded focus on societal harmony, avoiding negative outcomes is likely to be a primary goal.

Interestingly, Lipper reported that U.S. equity mutual funds experienced their 12th straight week of redemptions ($1.8 bil. last week alone), while international funds were the continued recipient of inflows. This is no surprise, considering the stronger performance from foreign equities so far this year, which perhaps help explain why phenomena such as the momentum effect continue to persist and help to perpetuate performance trends.

U.S. bond prices were weaker upon risk-on sentiment and associated higher rates—most pronounced in the longer-duration area. European bonds also lost some ground in local terms, some of which was offset in a small decline in the dollar during the week. U.S. high yield, bank loans and emerging market debt ended up with positive returns for the period—bucking the trend of higher-quality debt.

Real estate in the U.S. gained about a percent, falling just short of equities, with residential/apartments returning about twice that. European REITs rose just shy of a percent, while Japanese real estate lost a percent, bucking the Asian trend last week. Typically, real estate has sold off a bit upon higher interest rates, but this proved to be an exception.

Commodities came in higher, as measured by the GSCI, helped by the dollar being weaker by a half-percent or so. Cotton and nickel were big performers as reports of stronger global demand boosted interest in both. WTI crude bounced around in a tight range during over the week, ending just above $57, while Brent crude experienced higher percentage gains than that. Interestingly, in almost half of trading days so far this year, oil prices have moved by +/- 3%, with a mixture of up- and down-days, as opposed to mostly the down variety in latter 2014. Precious metals were the losing segment, as investors were clearly taking advantage of 'risk-on' sentiment, during which gold doesn't generally participate.

Have a good week.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger's, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder's, Standard & Poor's, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.

Additional Reading

Read the previous Weekly Review for April 20, 2015.

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