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Weekly Review - November 3, 2014

Weekly Review - November 3, 2014

Guest Post - Monday, November 03, 2014


  • It was a headline week, but not necessarily dramatic, as the conclusion of the FOMC meeting resulted in the taper ending as planned, and results of 3rd quarter GDP showed that economic growth was a bit better than expected. Confidence improved, while housing was again mixed.
  • Markets ended October by experiencing another solid week, with global equities gained sharply, while traditional bonds fell back a bit due to the 'risk-on' sentiment.

Economic Notes

(0) We discussed the outcome of the FOMC meeting in a separate note, but the taper ended (although reinvestments of maturing debt will continue for the near future). The commentary from the committee was a bit more upbeat than previous meetings, in an acknowledgment by members of steadily improving economic and employment conditions in the U.S., notably in 'gradually diminishing' labor underutilization. However, Minneapolis Fed President Kocherlakota dissented, wanting to keep QE and rates low until certain forward-looking inflation targets were hit. The keeping rates low for a 'considerable time' language was kept, but seemed a bit less stringent than before and pointed to perhaps more of a balance in committee views. Regardless, consensus views for Fed Funds rate increases remain in the Q2-Q3 2015 timeframe. As always, but perhaps even more so now, the pace of rate normalization remains data-dependent, particularly on the labor front.

(+) The first estimate for 3rd quarter GDP came in at +3.5%, which was a half-percent above median expectations. Of course, this is subject to change in coming months with better data. Government spending was behind a bulk of the excess (adding +0.8% to total GDP—the most in several years, during much of the time it detracted from growth), as defense spending rose by +16%. In other areas, fixed business investment gained +6%, consumer spending gained +2% (about average relative to recent quarters), but residential investment only moved +2% higher (in keeping with tempered trends). Inventories declined somewhat, taking a fraction of a percent from the total figure, while net exports added +1.3% to total GDP (despite the strength of the dollar). Even with the decent news, the response was somewhat mixed as market participants have certainly enjoyed QE and such strength may put the timeframe for accommodatingly low rates at risk. Expectations for Q4 are in the 2-3% range, based on how much of the inventories and strong defense results for Q3 are re-adjusted for the coming quarter (there can be a regression to the mean effect when any segment performs far better or worse than expected in the prior quarter).

(0) Personal income for September rose +0.2%, which was just a tick below expected, while personal spending fell by an equivalent -0.2% (in contrast to an expected small increase; the difference brought the implied savings rate up two-tenths to 5.6%). The biggest impact appeared to be a -5% drop in auto/auto parts spending. On the cost side, the PCE headline and core price indexes rose +0.1% on par with expectations. For the 3rd quarter, the employment cost index rose +0.7%, two-tenths above forecast, as wages/salaries rose a bit more than benefit costs—the year-over-year increases in compensation and wages/salaries were +2.3% and +2.1%, respectively, so a bit higher than CPI but not by an extraordinary amount. For a more obscure economic release, this wage growth is being more closely watched these days for signs of inflation flow-through.

(+) The Chicago PMI for October jumped almost 6 points to 66.2, the highest level in a year, relative to expectations of 60.0. In the underlying data, a double-digit gain in new orders was the most dramatic segment, while production and employment also improved and order backlogs also expanded; however, inventories fell from high levels and supplier deliveries declined somewhat. Overall, a solid report.

(-) Durable goods orders for September fell -1.3%, which was weaker than the +0.5% expected. Removing transports brought the total to -0.2%, which was a bit better but still underperformed the +0.5% consensus guess. The drag was caused by a -16% drop in non-defense aircraft (Boeing), a series that's volatile month-to-month due to the long-cycle nature of such orders, but communications equipment and computer parts also fell back on the month fairly dramatically. Shipments for core capital goods also fell by -0.2% relative to estimates calling for a +0.7% increase.

(-) The S&P/Case-Shiller 20-city home price index for August dropped -0.1% on a seasonally-adjusted basis, which underwhelmed forecasts calling for a +0.2% increase. Prices fell in 12 of the 20 cities, led by Chicago, which dropped a percent. The national version of this index, which reaches beyond the 20 large urban areas to capture a broader scope of smaller towns, performed slightly better with a gain of +0.4%. The 20-city year-over-year increase came in at +5.6%, which, again, like the FHFA index the prior week, is disappointing relative to recent fickle expectations for housing but higher than trend in the long-term context.

(-) Pending home sales for September came in a bit weaker than hoped, rising +0.3% compared to a consensus estimate of +1.0%. The South and Northeast regions gained by just over a percentage point, while the Midwest and West fell by about the same amount. On net, the index is +1% higher than a year ago, and has flattened out over the last several months. Naturally, economists and the Fed would prefer to see this a bit stronger than it is. Inventories are lower, which have kept supply overshoots in check, but there is also the waning influence of non-owner-occupiers (aka investor/all-cash buyers) and tighter loan conditions (Ben Bernanke was rumored to have been turned down for a refinance), which have served to depress activity.

(+) The Conference Board's consumer confidence survey rose over 8 points to 94.5 for October (beating consensus calling for little change to 87.0)—despite the apparent lack of overall exuberance, this is over +20 points higher than a year ago and the highest level in seven years. The component of forward-looking expectations rose +9 points and explained much of the gain, while assessments of current conditions were also a bit higher. Lower gasoline prices seem to have certainly helped. The labor differential, which measures jobs being plentiful vs. hard to get, improved as well.

(+) The final Univ. of Michigan consumer sentiment index for October rose a half-point from the preliminary estimate to 86.9, its highest level in seven years, and +2.3 points higher than Sept. (expectations were for a lesser change to 86.4). Opinions of current conditions fell a bit, while future expectations improved, and inflation expectations were generally little changed and hovered just under 3%. It seems lower fuel prices, better job prospects and the recovery in stocks were responsible for the more upbeat attitude.

(+) Initial jobless claims for the Oct. 25 ending week rose by +3k to 287k, which was a minor +2k above expected. Continuing claims for the Oct. 18 week rose a bit to 2,384k, +29k higher than the week before, and +32k above consensus. Sub-300k claims continue to be a positive trend, and likely played a role in the Fed's acknowledgment of an improving labor market.

Market Notes

Period ending 10/31/2014

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YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















U.S. stocks experienced a positive week, with GDP better then expected and corporate earnings coming in without any major disappointments, taking the S&P now up over +11% from it's mid-Oct. lows. Small-caps continued their recovery vs. large-caps and again look a bit more expensive (they never seemed to get cheap). From a sector standpoint, technology and financials (telecom technically won the week with a +4% gain, but that's only a handful of companies) led the way, while materials lagged with only a minimal gain as the mining segment sold off.

Japan outperformed all markets on the week, gaining +7% as, on Friday, the Bank of Japan announced another round of stimulus (although through a close 5-4 vote), raising the 60-70 yen program to 80 yen (about $725 bil.), in efforts to head off deflationary impulses—this spurred another round of late-week euphoria. The purchases are set to take place in bonds, REITs and ETF holdings.

Emerging markets fared a bit better than developed, as Brazil bounced back a bit from the prior week's election-based disappointment, and China also fared well, after the creation of new free trade zones and improved access to local securities markets being proposed. On the other hand, oil-based Scandinavia fell, and Greek stocks suffered in the aftermath of the bank stress test noted earlier.

Bonds were a bit weaker, in keeping with the risk-on sentiment back into equities, with most of the damage occurring in the middle part of the yield curve. Floating-rate held up better than most traditional areas. From their depths a few weeks ago, 10-year Treasury yields have almost recovered by about 0.50%. Aside from the currency impact of a stronger dollar, European peripheral debt and emerging market bonds ended up with positive returns as ECB bond-buying buoyed hopes and spreads for risky assets contracted, while foreign debt in local terms lagged.

Real estate assets were led by Japan, which gained +8% upon BOJ quant easing which involves real estate. U.S. REITs were also positive, in line with equities, led by lodging, regional malls and residential, while retail and industrial/office have lagged. All domestic segments are up 25-35% year-to-date, although valuations remain near fair value levels.

Diversified commodity indexes were generally higher, despite the stronger dollar. Leading were several industrial metals as well as grains, which may have been oversold somewhat and could be at risk with potential Australian drought conditions. Crude oil prices moved within a tight range on the week, but ended close to where they started at $81. Goldman Sachs dropped their 2014 forecast to $75, which may have eroded sentiment somewhat. Gold was a particularly poor performer, losing several percent, as a risk-on element in equity markets and the ending of U.S. quantitative easing removed some fears. Why? More QE adds to an already high U.S. debt load, so policies that temper the addition of more debt added to the upcoming thoughts of higher interest rates are seen as a round-about positive—gold doesn't react well to positive things happening in the world.

Have a good week.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, CFA Institute, 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, Stratfor, 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 October 27, 2014.

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