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Weekly Review - November 17, 2014

Weekly Review - November 17, 2014

Guest Post - Monday, November 17, 2014

Summary

  • Economic figures last week were a bit better than expected, highlighted by a slight positive surprise in retail sales and decent sentiment surveys, which continued to post readings at high levels.
  • Equity markets were just slightly higher on the week in one of the less volatile set of sessions in several weeks. Domestic bonds were little changed. Oil prices continued to fall—affecting commodities markets and raising questions about eventual impacts in other areas.

Economic Notes

(+) Retail sales for October came in at a slightly better level than expected, rising +0.3%, which was a tick above the forecasted +0.2%. Additionally, positive revisions for a few prior months had an additive effect. Gas station sales fell -1.5% in line with lower prices, while auto sales and building materials gained a half-percent. Core/control sales, as a component of this that removes the most volatile components of food, energy, autos, etc., gained a better-than-expected +0.5%, and is the piece included in the government's GDP report. The best component for the month was 'non-store retail sales' (basically, online), which gained +2%, as well as was revised upward for the prior month along with electronics (perhaps with impact from the iPhone 6, the specific mention of which from analysts is something we always find interesting as these releases imply a significant economic impact).

(+) The import price index fell -1.3% in October, which a few tenths less negative than forecast. Unsurprisingly, imported oil prices dropped -7% (4th consecutive monthly drop), while everything else declined by a barely-noticeable tenth of a percent. Over the trailing 12 months, import prices overall have fallen by -1.8%, the bulk of which has been due to petroleum, as the ex-energy component rose by +0.5%. We've discussed this trend before, but if there is deflation to be had, it's probably better for it to come from lower imported input costs like oil, as opposed to weakening internal conditions.

(0/+) Wholesale inventories for September rose +0.3%, a tick higher than expectations and higher than initial estimates (this only matters, as it's a 3rd quarter GDP input, so can affect revisions). Contributors included computers and autos, which gained +3% and +1%, respectively; petroleum inventories fell by -5% based on lower sales prices.

(+) The NFIB small business optimism survey for October moved up +0.8 of a point to 96.1, which was a tick above forecast and +0.8 higher than September. Under the hood, the net percent of respondents expecting higher sales rose by several percent, as did the number planning to outlay capital (up to a quarter of all surveyed). The underlying survey has been trending upward, but remains below levels from prior cycles.

(+) The preliminary University of Michigan consumer sentiment survey for November was stronger than expected, reaching 89.4—surpassing a forecasted 87.5 and achieving a new recovery high. The highlights resulted from consumer assessments of the current situation, which gained several points, as did forward-looking expectations by a lesser amount. From the anecdotal information shared along with the survey, it appeared that gasoline prices and improved job prospects helped boost the mood. Inflation expectations for the upcoming 5-10 years fell a bit to 2.6%, which could be related to energy, but fickle on a month-to-month basis.

(-) The government JOLTS report for September showed a -118k drop in job openings to 4,735k (compared to the 4,800k expected). Openings in education and health services rose, while construction declined. The hiring rate and quit rate each rose +0.2% on the month, to 3.6% and 2.0%, respectively, while the layoff/discharge rate remained unchanged at 1.2%. Despite the headline JOLTS drop, some of the peripheral data (some of which is on the Fed's labor dashboard) has shown continued improvement.

(-) Initial jobless claims for the Nov. 8 ending week rose by +12k to 290k, about +10k above consensus. Continuing claims for the Nov. 1 week rose to 2,392k, a gain of +36k from the prior week and higher than expectations of 2,346k. No special factors appeared to influence the results.

Market Notes

Period ending 11/14/2014

1 Week (%)

YTD (%)

DJIA

0.44

8.58

S&P 500

0.4

12.35

Russell 2000

0.08

1.99

MSCI-EAFE

0.87

-2.95

MSCI-EM

.32

-1.19

BarCap U.S. Aggregate

-0.01

5.19

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2013

0.07

0.38

1.75

3.04

3.96

11/7/2014

0.03

0.51

1.60

2.32

3.04

11/14/2014

0.02

0.54

1.62

2.32

3.04

Several markets were flattish to slightly higher on the week. In U.S. large cap equities, technology and consumer discretionary stocks led with larger gains, partially related to positive comments from Wal-Mart regarding lower oil prices helping consumer spending power, while utilities and energy lagged in the negative.

Developed international stocks fared a bit better, led by Japan with almost 2% gains, upon reports of a likely delay in the second phase of a planned sales tax increase from 8% to 10%, while Europe ended up with index-like gains and the U.K. lost a bit of ground. The U.S. dollar index was flat, so did not play into things for the first time in a while.

Chinese stocks gained several percent on the week as excitement began to build around the new Shanghai-Hong Kong 'express' stock exchange that opened this week, featuring a limited subset of the previously very limited access A shares for about 600 companies to foreign participants (up until now, generally the 180 companies listed in Hong Kong as 'H shares' have been the only available vehicle). The key benefit is additional legitimacy from a regulatory standpoint, as the current Chinese market is lacking a few of these formalities and has a bit of a speculative element to it (much like the U.S. market did prior to the securities reforms of the 1930's). China would also like the renminbi used by a wider audience and such transparency could help. Even so, this trading will feature foreign ownership caps as well as 10% volatility bands, in order to keep things from getting too out of hand. On the other end of the sentiment spectrum, Brazil experienced one of the worst weeks, due a corruption scandal involving one of the country's largest oil companies/index members, as well as continued uncertainty about the re-elected president's upcoming policies.

Bonds experienced one of their flattest weeks in some time with interest rates barely moving across the curve, which caused little price change for government and corporate investment-grade debt. High yield lost some ground on the week with widening spreads. Foreign debt, notably that in peripheral Europe, gained several percent on the week again with pressure on rates moving lower.

Real estate returns were strongly led by 5%+ gains in Japan, a sector which has benefited from continued promises of cash inflows from the government's stimulus package across a variety of asset classes. European REITs also fared well, while U.S. names pared back a bit, led by weakness in office/industrial and retail.

Commodity indexes were down a few percent on average, due to their composition, but individually, were all over the board last week. Agricultural commodities, such as sugar and grains gained several percent due to weather; and precious metals gained after reports of foreign buying. Energy fell again with West Texas crude falling from $78 to $76/barrel, and natural gas also corrected after a large prior gain. It's important to remember the 'overshoot' qualities of any market, but especially asset classes such as commodities, that have the tendency to move in trend patterns. Prices often get carried away beyond what fundamentals warrant, and snapbacks are notably frequent (often occur as headlines predict a 'new' paradigm).

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 November 10, 2014.

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