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Weekly Review - March 9, 2015

Weekly Review - March 9, 2015

Guest Post - Monday, March 09, 2015


  • Economic data last week was mixed, as ISM manufacturing and non-manufacturing reports showed expansion, albeit at a lessened rate than expected. Employment data was strong on Friday, in both payrolls and a lower unemployment rate, despite lower participation as a contributing element.
  • Equity markets took a turn for the negative later in the week, as that same stronger employment data heightened fears of sooner Fed rate hike action. Interest rates responded by rising as well, which hurt bond prices. Commodity prices fell upon a stronger dollar and larger crude oil inventories.

Economic Notes

(-/0) The ISM manufacturing index fell by just over half a point in February, to 52.9 (just a tick under expectations of 53). Underlying components were also weaker, as production, employment and new orders all fell by a point or more; on the other hand, inventories and supplier deliveries rose. Prices paid remained lower, reflecting depressed commodity values. Other commentary noted West Coast port disruptions, which in recent weeks likely carried through to several industrial reports due to breakdowns in the supply chain.

(0) The ISM non-manufacturing index rose a bit in February, by +0.2 pts., to 56.9, slightly outperforming consensus expectations calling for 56.5. New orders and business activity both fell in the survey, but employment moved higher by several points. The anecdotal part of the report noted a mixed bag in response to oil price declines—some weakening in oil industry capital spending (as expected) was tempered by stronger spending elsewhere (also as expected). The latter spending effect tends to come with a lag, though, so this effect may take time to filter in.

(-) 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.

(-) Construction spending for January declined -1.1%, which ran in contrast to an expected gain of +0.3%. Private residential building rose +0.6% through single- and multi-family as well as home improvements. However, private non-residential construction fell -1.6%, with weakness across the board, but especially in commercial building which fell -6%. Public construction also fell by nearly -3%.

(0) Personal income for January rose +0.3%, which was just a tick below forecast; wages gained at about twice this rate, but the overall number was tempered by other segments, such as proprietor income and interest/dividends. Personal spending declined -0.2%, which was a tick beyond the expected -0.1% drop, with some impact due to higher utility bills with Jan. being a colder month than Dec. Combined, these brought the savings rate up +0.5% to 5.5%, which is a high point for the past several years. The PCE price index on a headline level fell -0.5% in January, while the core rose just a fraction under +0.1%, both in keeping with expectations and lower energy prices. Year-over-year, these inflation measures rose +0.2% and +1.3% on a headline and core level, respectively. These tempered readings are very similar to other official inflation measures from recent weeks, and reflect oil and commodity price weakness.

(0) The second estimate for nonfarm productivity for Q4 was revised downward by almost a half-percent to -2.2%, while unit labor costs were pushed almost +1.5% higher to +4.1%. This brought year-over-year productivity into the negative, at -0.1%. Combined, unit labor costs for the quarter rose at a +1.9% rate. Despite the increases, these remain below norms of history.

(+) The January trade balance narrowed from a deficit of -$45.6 bil. to -$41.8 bil. It appears that labor disputes/disruptions at the West Coast ports may have played a role, as general activity on both the import and export sides were down over -4% from the prior month. Petroleum imports were down over -20% in keeping with price declines.

(0) The ADP employment report for February generally fell in line with consensus, with +212k jobs, which just lagged the +219k expected. At the same time, January figures were revised up to +250k, closer to the government's report (such revisions and results have been the trend in recent months). Construction jobs gained strongly, at +31k, while job growth in trade/retail and professional/business services jobs was tempered from the prior month.

(-) Initial jobless claims for the Feb. 28 ending week featured a surprise increase, of +7k to 320k, which surpassed the expected 295k level. Continuing claims for the Feb. 21 week were also higher than expected, at 2,421k, a bit above the forecasted 2,395k. No special factors were noted by the DOL to account for the increase, but weather conditions have been challenging, which may explain a bit of this.

(+) The big February employment situation report came in better than expected. Nonfarm payrolls rose +295k, which bested the consensus forecast of +235k. Construction and leisure/hospitality employment saw sharp gains, which bucked expectations of severe weather dampening these particular sectors (weather on the West Coast has been unseasonably warm, however, which perhaps buffeted some of that impact). The leisure/hospitality group saw +66k jobs, with trade/transports/utilities +62k and professional/business services +51k. The losing group was mining, which declined -8k, and refinery issues removed -6k. The energy infrastructure impact was expected, but the nominal figures weren't large in the broader context of the report. January's result was revised downward by -18k to +239k; when it was all said and done, the moving average for the last 12 months inched higher to +268k, which is the highest such figure since early 1998.

The unemployment rate fell by -0.2% to a rounded 5.5%, which was a tenth better than the expected 5.6%, but the labor force participation rate fell by a tenth to 62.8%, which accounted for some of the change. The U-6 'underemployment' measure fell -0.3% to 11.0%. Additionally, the share of the unemployed in 'long-term' status fell from 31.5% to 31.1%.

Average hourly earnings rose +0.1% for the month, which was about half the pace expected, bringing the year-over-year rate to +2.0%. Average weekly hours worked was unchanged at 34.6. These figures remain tempered, and cast a bit of a damper on inflationary pressures.

All-in-all, this employment report was strong, while some naysayers will point out that the underlying jobs being added may be of a lower wage variety—a topic that has been debated by economists and will no doubt continue to be.

(0/+) The Fed beige book, that tracks anecdotal information around the 12 Fed districts in the U.S., didn't change much from the last edition in January—showing continued economic progress/expansion, improvement in labor markets, and low inflation. Like the prior report, a status of 'moderate' to 'modest' was noted in ¾ of the districts; while Dallas' results were little changed (watched closely due to a high energy industry effect in that region), Richmond showed that activity had decelerated from 'modest' somewhat and Boston faced adjustments from weather-related issues. No doubt the energy sector has taken a hit, which was the general interpretation of the book. Consumer spending was higher in most areas, other than weather impacts in NY and Boston, which also affected construction and real estate sales; otherwise, commercial real estate was 'stable' or improving in most areas. The West Coast port disruptions were mentioned again, and weighed on exports, but manufacturing activity appeared to increase generally. Employment also showed improvement in a variety of areas, with wage pressures moderate, other than the energy production industry, where some layoffs were noted.

Read the "Question for the Week" for March 9, 2015:

Should we fear the Fed? What happens to bonds when interest rates really begin to rise?

Market Notes

Period ending 3/6/2015

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BarCap U.S. Aggregate



U.S. Treasury Yields

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2 Yr.

5 Yr.

10 Yr.

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U.S. stocks ended the week on a weaker note on Friday, ironically, due to a strong jobs report, which raised fears that the Fed could raise rates sooner (June or even before) than later (later in the year). All broad sectors were in the red, with financials and consumer discretionary faring best and losing under -1%, while utilities and energy were the hardest hit.

It was announced that Apple will be replacing AT&T in the Dow Jones Industrial Average, effective March 19. AT&T had been a member of the Dow for 16 years. As it's the largest firm in the U.S. by market cap, the index committee has apparently been wanting to add Apple for quite some time, but it took so long because Apple's high stock price (prior to last year's stock split) would have created some problems for index calculations. But now, DJIA member Visa's upcoming 4-for-1 stock split will allow for an easier transition. The last few sentences read oddly when you think about it, so we don't blame you for scratching your heads. It's important to remember that the DJIA index is price-weighted, a relic from a bygone era when the easiest way to calculate an index value was by pencil-and-paper. Most modern indexes are now market cap-weighted or configured some other way (equal-weighted, dividend-weighted, revenue-weighted, etc.). So, the logic is outdated and infrequent changes in the index are even more arbitrary. No professional managers we know of follow the Dow as anything more than a curiosity and its popularity is no doubt due to the fact that it's well-known through the media, has been around for 100+ years, and companies within it are well-known blue chips that make familiar products in many cases. If more ETF's followed the Dow, it might spur demand for a newly added name, but academic research has tended to find that firms kicked out of indexes often outperform those newly included.

The U.S. dollar was up almost +3% on the week, per the U.S. dollar index against major traded currencies, which resulted in a -1.5% worse loss for the MSCI EAFE in USD terms than in local terms, in which it only experienced a slight decline. Asian stocks led the way, in Japan, India and Thailand—with stronger sentiment from China's choice to trim interest rates. Turkey, Brazil and peripheral Europe were the big losers on the week although European stocks have been the recipient of strong inflows during the past few weeks. Brazilian stocks suffered under their central bank decision to hike rates by a half-percent last week as their currency has also suffered and sentiment is mixed. Chinese stocks also generally declined as their National People's Congress lowered their 2015 growth target from 'around 7.5%' to 'around 7%.' This isn't unexpected, as these higher targets are getting more difficult to reach as the economy matures, but public acknowledgement of this can sometimes be rattling to fans of Asia.

Bonds fared poorly last week, upon rising rates, with all domestic issues losing ground except for floating rate. A heavier supply of corporate issuance also played a role in weaker pricing. As expected, shorter-term debt fared best, with the lowest duration effect, while long bonds, such as 20-30 year Treasuries lost over -4% (so far, we've seen the opposite of last year's trend). Foreign bonds were affected a bit by rates and a bit by the stronger dollar, so largely ended up negative in the longer duration sovereign sectors. Credit fared a bit better generally, with lower duration and higher coupons.

Real estate segments were generally negative on the week, in line with higher interest rates. Developed Asian and Australian REITs fared a bit better, while U.S. health care and lodging were hit hardest on the negative end. Health care REITs have lost some ground this year, perhaps due to valuations and uncertainty about a current Supreme Court case regarding federal Obamacare subsidies, set to be resolved by June.

Most commodities experienced a down week, largely in line with the corresponding strength in the U.S. dollar. Crude oil prices spiked several percent early in the week, but reversed back to just under $50 by Friday as the U.S. Energy Information Administration reported that inventories were much higher than expected. Natural gas prices jumped by an even higher amount with deeper inventory drawdowns than expected, while gasoline prices slipped several percent (albeit still +28% YTD), during refinery outage season.

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 2, 2015.

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