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Weekly Review - October 20, 2014

Weekly Review - October 20, 2014

Guest Post - Monday, October 20, 2014


  • The important economic releases of the week were largely lackluster, with retail sales, and several regional fed surveys underwhelming, but not terrible. Perhaps more importantly, input from Europe and the Far East was more of a concern to world markets.
  • Equity markets experienced several of the most volatile days in several years, with +/- 1%-2% swings and reversals common. On net, the U.S. large cap market was among the worst performing globally, while smaller caps and emerging market equities held up much better. Bonds gained on interest rates dipping to multi-year lows before recovering a bit.

Economic Notes

(-) Retail sales for September fell -0.3% for the month, which disappointed compared to the tempered expectations of a -0.1% decline. Removing the usual more volatile components, the core/control figure showed a just slightly better -0.2% drop, but a worse disappointment as a gain of +0.4% was expected. Non-store/online retail fell just over -1%, as did apparel, furniture stores and building supply outlets; although electronics gained over +3% (there was hope that the iPhone 6/6+ release would act positively on the monthly figure, but results seem to be a little inconclusive, since phones are sold by stores in multiple categories). Auto sales also fell by almost a percent, as did gasoline, but the latter was expected due to lower petroleum prices.

(-) The Empire state manufacturing survey fell from a very strong +27.5 reading last month to +6.2 for October, disappointing consensus that hoped for +20.3. New orders and shipments fell dramatically; however, employment rose by 7 points for some positive offset.

(+) The Philly Fed manufacturing index fell just a bit from a prior +22.5 reading down to +20.7 for October, slightly outperforming consensus by about a point. Contrary to the Empire state index, new orders gained by a few points, while employment and shipments fell and plans for corporate spending weakened.

(+) Industrial production for September gained +1.0%, which was an improvement on the expected +0.4% increase. Manufacturing as a component of this gained a half-percent, although auto output declined by just over a percent; the primary gains were led by the non-manufacturing segments of electric utilities and mining. Capacity utilization came in about three-tenths of a percent higher than expected, at 79.3%. This has steadily risen since a trough in the upper 60's in mid-2009, and remains in an improving trend, but still lies far from previous cycle highs that have tended to be in the mid-80's over the last several decades.

(0) On a headline level, the producer price index for September fell by -0.1%, contrary to expectations for a slight +0.1% gain. The core PPI number, sans food and energy, was flat; the difference being accounted for by both food and energy inputs declining by -0.7% for the month. Over the trailing year, headline and core PPI rose at a rate of +1.8% and +1.7%, respectively. This is very much in line with other measures showing muted price inflation and lie below Federal Reserve targets. We discuss the dollar in a bit more detail below, but dollar strength could serve as a source of lower imported inflation costs to a minor extent.

(0) Housing starts for September came in a bit better than expected, rising +6.3% to 1,017k compared to a forecast of +5.4%. The always-volatile multi-family group gained +17% in a reversal from the prior month, while the typically more stable single-family starts rose just over +1%. Conversely, building permits rose +1.5%, which underperformed expectations of a +2.7% gain.

(-) The NAHB housing market index for October fell to 54, which lagged the consensus expecting no change from last month's 59. All components in the index—present sales, future sales expectations and prospective buyer traffic—all declined several points similarly, so the weaker showing was broad and bodes negatively for upcoming housing start reports.

(0) The periodic Fed beige book, created for the October FOMC meeting, didn't offer any radical surprises over the previous edition, describing overall conditions in a growth pace of 'modest to moderate.' In fact, 11 of the Fed districts reported this outcome, while Boston was the negative outlier, describing a 'mixed' picture. For the two hot-button issues as of late, housing activity on the residential side was also generally 'mixed,' while showing some growth, and inflation pressures were 'modest.' This tempered rate also applied to wage pressures generally, with the exception of a few higher-skill and/or cyclical positions in tech, manufacturing and construction, where there were some shortages for qualified people.

(+) The Univ. of Michigan sentiment survey for October rose to 86.4, beating the forecast of 84.0. Assessments of current conditions were unchanged, but expectations for the future drove the survey results upward. Interestingly, current issues of Ebola, stock market swings and weaker global growth did not appear to largely affect sentiment, but lower gasoline prices may have helped. Inflation expectations for the 1- and 3-5-year forward-looking periods remain just under the long-term 3% average.

(0) The NFIB small business optimism survey remained at a high level for the recovery, but ticked down a bit from 96.1 to 95.3 for September, underperforming expectations by a half-point. The largest changes were deteriorations in capital spending plans and current job openings, while, at the same time, sentiment for business expansion planning ticked up several points. Wage-related responses, such as actual increases and plans to increase, were largely unchanged.

(+) Initial jobless claims for the Oct. 11 ending week fell, again, to 264k, which was -23k lower than the prior week and -26k lower than expectations. Continuing claims for the Oct. 4 week came in at 2,389k, which was +9k over consensus. No special factors or adjustments were mentioned in the release that would cast a shadow on the data, which has improved on a consistent basis over the past several months and, lately, been a bright spot in otherwise lackluster few weeks.

Read the "Question for the Week" for October 20, 2014:

How does a stronger dollar affect us?

Market Notes

Period ending 10/17/2014

1 Week (%)

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. stock markets experienced their most volatile week in some time, with extreme day-to-day volatility—most of which was on the downside. The October trend continues. Markets started the week lower on Monday, which at first seemed largely the result of global growth concerns which are now a persistent backdrop in recent weeks, but also due to rumors of a quarantined flight into Boston with sick passengers sent things downhill. The uncertainty of Ebola and apparent vulnerability are certainly a headline wildcard—the sentiment changes from such headlines are sometimes difficult to quantify, but don't appear to be panicky at this point. But, it appeared to be a combination of several other factors other than global growth and pandemic, including an upcoming ECB review of bank asset quality at the end of this month, a minor flash crash in Treasuries Wed. morning, as well as self-fulfilling formulaic trading that can cause a downturn to feed on itself (echoes of October 1987, although to a far less severe degree).

From a sector standpoint, industrials and materials outperformed, while healthcare and staples lagged most dramatically—perhaps due to a reversal of oversold conditions. Interestingly, small caps experienced a positive week, as some bottomfishers looked for bargains after the asset class reached a technical -10% correction territory. From an earnings standpoint, ¾ of S&P firms have topped their reduced earnings estimates, but revisions for future quarters have been moving lower.

Considering this week's effects, U.S. large caps have moved from around fair value down to a bit inexpensive again, while small caps have moved from more richly price to moderately rich. International equities were not as impacted this week, and values moved slightly lower, with emerging markets remaining very inexpensive (in light of poor sentiment and risks abundant).

In foreign equities, some of the non-BRIC emerging market nations led on the week, with strong showings from equity markets in Indonesia, Turkey and South Africa. Interestingly, Germany, Scandinavia and Russia also ended up with positive weeks, mostly due to Friday and aided by a weaker dollar. Perhaps this could be a sign of things to come—as economic results and central bank policies around the world begin to diverge from each other, we would expect cross-country correlations to decrease also. Peripheral Europe, Brazil and India generally lost in line with U.S. equities (among the worst nations of the week).

Bonds gained sharply on the flight to quality away from risky assets, demonstrated by the yield on the bellwether 10-Year Treasury falling from 2.3% to just under 2.0%—its lowest level since May 2013—before rebounding a bit higher on Friday. St. Louis Fed president Bullard's comments about delaying the phase-out of QE if lackluster conditions continue (albeit unlikely), implied an extension in stimulus and raised hopes, and also may have acted in a downward way on rates. The best performing bonds were U.S. high yield (now priced a bit lower), and all types of foreign debt gained strongly as the dollar index dropped by a percent and ECB purchase programs were set to begin, but most all segments of fixed income were in the positive.

Real estate overall was positive, but led by the U.S. industrial/office group, although residential and health care REITs also gained. Europe was positive to a slightly lesser degree, while Asia lost ground.

Commodities were helped by a decline of about a percent in the dollar, and were led by a reversal in grains, including corn, wheat and soybeans. Precious metals also gained a percent, no doubt aided by general volatility and risk-avoidance on the week. Crude oil fell as much as -5% again on the week, to just over $80/barrel, but regained some ground towards the end of the week.

Low oil prices, while a positive for U.S. consumers, have naturally been a negative for energy companies as well as for oil exporting countries. While the per-barrel breakeven price needed to balance fiscal budgets in these nations varies, it tends to be around $100 for several key nations (Saudi Arabia and Russia). It's lower for those with stronger resources to absorb these types of shocks (Kuwait and UAE) and higher for countries with little buffer (such as Venezuela and Nigeria). Interestingly, recent research by Deutsche Bank shows that crude prices would need to fall to the $50-60 level in order to become re-aligned with long-term trend 'fair value,' in real terms and relative to incomes. Of course, as budgets hang in the balance, it is unlikely OPEC nations would stand for such decline without action. In the meantime, at least in the U.S., a rule of thumb demonstrates that a $10/barrel fall in prices translates to a corresponding 0.2% gain in GDP growth in the following year

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, October 13, 2014.

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