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Weekly Review - March 16, 2015

Weekly Review - March 16, 2015

Guest Post - Monday, March 16, 2015

Summary

  • Economic reports of the week were highlighted by retail sales, which disappointed, perhaps with weather effects; consumer and business sentiment was a bit weaker upon a recent trend of higher gasoline prices; and import prices and inflation remained contained.
  • Markets were generally off around the globe. As interest rates fell during the week, bonds generally gained ground in the U.S. with mixed foreign results due to the headwind of a stronger dollar. Commodities fell back for the same reason, led by oil, which experienced inventory supply concerns.

Economic Notes

(-) Retail sales for February came in weaker than expected, falling -0.6% relative to consensus estimates of a +0.3% gain. Removing more cyclical components from the headline number, 'core/control' sales were flat, relative to expectations of a +0.4% gain. In looking at the differences of underlying index components, unfortunately, several categories showed weakness over the month, including general merchandise/miscellaneous, electronics, and health/personal care, each of which was down at least a percent. However, non-store retail (aka online) sales rose over +2%, which could allude to poor weather playing a role in tempered consumer activity for the non-online portion. This possibility was also reflected in weaker sales in building materials, autos and restaurants, which tend to be weather-dependent activities.

(-) Import prices in February rose +0.4%, which was twice the +0.2% gain forecast. Petroleum rising +8% represented the key contribution to this increase, in a reversal from recent trends towards the end of 2014. Removing fuel costs, however, pushed the remaining 'core' portion of the import index into a drop of -0.3% for the month, as capital goods and auto prices fell, offset a bit by a small increase in consumer goods prices. Year-over-year, the lack of inflation is apparent as the headline import price index (including fuel) fell by -9% while the ex-fuel 'core' fell by just over -1%.

(-) Factory orders for January came in a bit worse than expected, falling -0.2% relative to an expected +0.2% increase; at the same time, core capital goods shipments were revised up by almost a half-percent into positive territory. Nondurable goods orders appeared to be a key culprit, as these fell -3%, and manufacturing inventories dropped off by a half-percent. Interestingly, energy sector machinery orders rose +2.5% despite the negative headlines surrounding expected oil firm capex cuts; as oil prices have stabilized somewhat, perhaps some momentum downward here has been contained, but time will tell.

(-) Business inventories as a whole for January came in flat, contrary to expectations for a slight increase of a tenth of a percent. Wholesale inventories for January rose +0.3%, which bucked expectations of a small decline. Petroleum inventories fell just over a percent, despite price declines, while durable goods inventories rose just over a half-percent.

(0) The producer price index for February fell by -0.5% on both a headline and core level. Much of this appears to be due to the newer 'trade services' category, which fell by -1.5% during the month, and included things like gasoline station margins, which contracted by -13% and were affected largely by the time spread of selling prices and spot unleaded gasoline prices, which have reverted sharply higher this year. Other inputs, such as air fares, fell, as did food (esp. exported foodstuffs due to West Coast port slowdown issues). Year-over-year, PPI fell -0.6% on a headline level, yet rose +1.0% on a core level, which reflects the volatility downward of energy prices but remains in tempered territory regardless.

(-) The NFIB small business conditions index didn't change much for February, up a +0.1 tick to 98.0, but falling below consensus expectations of 98.9. Current job openings and plans to increase inventories both improved by several points, while plans to increase employment fell a bit. This measure remains near its post-recession high point, albeit weaker than in prior months.

(-) The preliminary Univ. of Michigan consumer sentiment survey for March fell a bit, from 95.4 to 91.2, which disappointed relative to expectations calling for 95.5. Consumer assessments of current conditions and future expectations both worsened, primarily for lower- to middle-income consumers, which implies a usual culprit—higher gasoline prices over the past few months. Inflation expectations for the coming 1 year- and 5-10 year-ahead periods moved up a bit to the 2.8-3.0% range, so right about the long-term average. These haven't changed by much more than a few ticks in either direction for some time, which might reflect a perception from consumers that inflation is 'stickier' these days, yet also the realization that it's been running consistently lower than its multi-decade history.

(0) The JOLTS jobs openings report came in at 4,998k for January, although it fell below forecast of 5,050k. (Over the past twelve months, openings have grown by 28%, which is a strong showing.) The hiring rate for the month fell by -0.2% to 3.5%, and the quit rate rose by a tenth to 2.0%. Interestingly, the proportion of job openings that are 'hard to fill' climbed to just under 30%, the strongest such reading in nine years.

(+/0) Initial jobless claims for the Mar. 7 ending week fell by -36k to 289k, which came in below the expected 305k level. Continuing claims for the Feb. 28 week, however, came in a bit higher than the expected 2,400k, at 2,418k. No special factors appeared to play into the results, according to the DOL.

Market Notes

Period ending 3/13/2015

1 Week (%)

YTD (%)

DJIA

-0.52

0.16

S&P 500

-0.80

0.19

Russell 2000

1.25

2.50

MSCI-EAFE

-1.72

2.70

MSCI-EM

-3.26

-1.75

BarCap U.S. Aggregate

0.54

0.69

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

3/6/2015

0.01

0.73

1.70

2.24

2.83

3/13/2015

0.03

0.68

1.60

2.13

2.70

U.S. large cap stocks lost a bit of ground on the week, upon weaker retail sales, and related worries about a strong dollar affecting corporate profits. Small caps outperformed large companies, giving this segment a year-to-date lead. From a sector standpoint, healthcare and financials led with positive returns—healthcare due to robust M&A activity and financials upon a generally successful round of stress tests—while energy and technology lagged by declining several percent. The upcoming FOMC meeting this week may also add some nervousness to markets, as investors are watching even small tweaks to language hinting at timing of interest rate change policy.

Foreign stocks lost ground on the week, with developing markets faring better than emerging. Japan was one of the best performing regions, gaining about a percent upon recently stronger sentiment surrounding profitability of large multi-nationals, larger European nations were generally flat, and the U.K. brought down the broader EAFE index with losses over -4%—so the story was nuanced. Emerging markets were similarly nuanced with Mexico and China faring quite well on the week, and extreme losses from BRIC nations Russia and Brazil dragging the index down dramatically. Russian sentiment has largely been driven by oil pricing, while Brazilian equities suffered in the midst of more political drama and public demonstrations surrounding the Petrobras corruption probe.

U.S. bonds overall gained with lower interest rates, and long duration Treasuries led the way. Credit lagged, for the most part, as spreads widened a bit. Foreign bonds generally came in higher in local terms, with the kickoff of European QE bond-buying, but when translated back to a stronger dollar (by about 2.5% or so last week), many segments gave up those gains in U.S. investor terms.

U.S. real estate bucked the trend of other equities by gaining several percent, no doubt helped by lower interest rates. Most sectors were generally within a tight range of the overall index, with malls and residential performing best and industrial lagging somewhat. Overseas, most markets ended up in the red, with the exception of Japan, while U.K. and Australia fared worst.

Commodities fell back by over -5%, as measured by the S&P GSCI, as major component crude oil fell backward down to the $45/barrel range. A strong dollar didn't help matters, either. Aside from lean hogs, which no index owns enough of, wheat and copper were the only positive-performing groups. Unleaded gasoline and natural gas also corrected somewhat, albeit to a lesser extent than oil. Much of the news was centered around growing stockpiles at the Cushing, Okla. commercial storage hub—debate continues about whether oil price weakness is due to either slowing overall global growth or stronger supply dynamics, and likely contains elements of both, with perhaps more of a tilt to the supply side as the most pressing concern in recent months. Falling rig counts and other adjustments may have served to stem the dramatic declines, but uncertainty about where that 'perfect' market-clearing price continues. Additionally, gasoline stocks are at 5-year highs, which balances the recent refinery outages somewhat—we watch gasoline particularly due to its near-term impact on consumer sentiment.

We spoke about the dollar a bit during last week's monthly advisor meeting in the context of why foreign assets continue to be important pieces in a broadly diversified portfolio. Like any purchased good (oil, bonds, etc.), a strong valuation of a currency can be stubbornly persistent for a time, but can ultimately sow the seeds of its own destruction. We've seen a bit of this already, as a strong dollar has pressured export activity (as one would expect it would), which in turn raises concerns about revenues earned from abroad (which are, as we know, are not a small part of S&P revenues), which could ultimately pressure earnings downward (estimates have already been lowered). If this became extreme enough, it could carry through to slower economic activity, which would depress economic growth and depress interest rates—arguably two main reasons hoisting the dollar to its current strong position.

Currency comparisons are essentially 'pair trades,' meaning a currency only has value in relative terms to another. If the intense QE exercise in Europe leads to a weaker Euro (it was already weak), this will likely benefit export activity, translating to better earnings and stronger economic growth, and, eventually higher interest rates. In so doing, the Euro would become less weak as prospects in Europe will have fundamentally improved. It's never this easy or clear-cut, mind you, but the self-correcting tendency of currencies is the machine that ensures conditions don't get too far off the rails over time. But, it does take some time.

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 March 9, 2015.

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