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Weekly Review - October 27, 2014

Weekly Review - October 27, 2014

Guest Post - Monday, October 27, 2014

Summary

  • The economic data of the week was focused on housing, which showed existing and new home sales outperforming expectations somewhat. Inflation came in just higher than flat, and tempered on a year-over-year basis, but the index of leading economic indicators was solidly higher.
  • While remaining volatile, markets fared a bit better on the week with U.S. stocks in the positive. Conversely, bonds gave back some of their gains as flows moved back into risk assets.

Economic Notes

(+) The FHFA home price index for August rose +0.5%, which slightly outperformed the expected +0.3% increase. Of the 9 national regions tracked by the index, 7 were positive for the month, led by the Mountain and Pacific regions, while New England and South Atlantic (which is everything from Maryland on south) lagged. Over the full year through August, the national index gained just short of +5%, as those same Western regions outperformed. While somewhat out of date at this point, this shows tempered growth (although a 'lackluster' 5% isn't terrible relative to historical expectations, with CPI inflation at currently low levels, allowing for a real return in the low single digits).

(+) Existing home sales for September rose +2.4% to 5.17 mil. units, which outperformed consensus expectations of a +1.0% increase. Single-family sales rose +2%, while condos/co-ops did a bit better at +5%. The proportion of 'distressed' to 'normal' sales moved up a few percent to 10%, but is about two-thirds of where it was a year ago, so an improvement. Markets continue to point to more owner-occupier activity, which is considered to be a bit 'healthier,' with first-time buyers just under 30%, all cash buyers at roughly a quarter share, and investors a shade below 15%. The bad news is that this is actually a decline of -2% on a seasonally-adjusted year-over-year basis from 2013, but a +13% increase from the trough in March.

(+) New home sales rose +0.2% in September to an annualized 467k units, which is the highest reading in six years (as August's initial 504k pace was revised down to 466k) and sharply outperformed consensus expectations calling for a -6.8% decline. Regionally, sales fell -9% in the West, but rose a strong +12% in the Midwest, with flatter rates of change in the South and Northeast. Compared to a year ago, sales are up +17%. The months' supply figure was unchanged at 5.3 and the median new home price fell -4% to $259k. Overall, while the last few months haven't shown an erosion in growth, they haven't been blockbuster, either.

(0) The consumer price index for September was expected to be unchanged, but edged up +0.1% instead on a headline level. The core figure, removing food/energy, rose a few hundredths higher, but rounded to a similar +0.1%. Despite energy prices falling -0.7%, food rose +0.3%, explaining some of the offset. Shelter rent moved +0.3% higher during the month, as housing metrics tightened—which matters more than others as these components take up almost half the price index. Year-over-year, CPI measures on a headline and core level both rose at a pace of +1.7%, so little changed from recent trend. As seen last month and likely to occur again this month, energy weakness and dollar strength have pushed import prices lower. One would almost think inflation should be even weaker than it already is, with the low energy input price flow-through, but only a quarter of the index is actual goods—the balance being services.

(+) The Conference Board's index of leading economic indicators rose +0.8% for September, led by financial components (such as interest rate spread and credit conditions), jobless claims and the ISM inputs, although 9 of the 10 indicators were higher. The coincident and lagging indicators for the month rose +0.4% and +0.1%, respectively. As demonstrated below, these indicators continue to move higher at a steady pace from their 2009 troughs.

Chart - Conference board Leading Economic Index

(+) Initial jobless claims for the Oct. 18 ending week rose a bit to 283k, which was +2k over expectations. The smoothed four-week moving average of initial claims has now fallen to the lowest level since spring of 2000. Continuing claims for the Oct. 11 week fell a bit more than expected to 2,351k, less than the forecast 2,380k, and a new low for the recovery period. No special factors were noted in the release.

Market Notes

Period ending 10/24/2014

1 Week (%)

YTD (%)

DJIA

2.62

3.26

S&P 500

4.14

8.03

Russell 2000

3.38

-2.87

MSCI-EAFE

2.39

-4.94

MSCI-EM

0.78

-1.83

BarCap U.S. Aggregate

-0.26

5.34

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

10/17/2014

0.02

0.39

1.44

2.22

2.98

10/24/2014

0.01

0.41

1.44

2.29

3.05

Equities experienced continued volatility last week, but it ended on the upward end for the first time in just over a month. All segments ended with positive returns—growth sectors health care and technology outperformed with strong earnings results and guidance, while defensive telecom and consumer staples lagged.

Of the over-200 firms that have reported so far, about three-quarters have beaten earnings expectations, while over half have outperformed on the revenue side. Telecom and healthcare are expected to show the strongest quarterly growth, and utilities a slight decline. Unsurprisingly, energy sector earnings estimates have now fallen -8% for 2015 due to the recent collapse in oil prices—this has accounted for nearly half of all downward revisions. At the same time, this should help other industries, but that hasn't been quantified in the same terms as the impact is more diffuse. All-in-all, it isn't a terrible earnings season, as expectations had already been lowered in advance and are being lowered again for the upcoming quarter.

Based on company reports (and FactSet, who slices and dices these things), of the initial 68 company conference calls, the situation in Europe was mentioned by 2/3 of them (about half of the references were in a negative way), while just over half mentioned the strong U.S. dollar's impact (the vast majority in a negative manner, per what we discussed about currency fluctuations in a previous weeks' review). References to other factors, such as China, Russia and the Middle East were less frequent.

Foreign stocks were also positive on net, led by European peripherals Spain, Italy, Greece and Portugal—all of which are expected to benefit from easing policies including the upcoming possibility of the ECB buying corporate debt. Russian equities weakened on the week as the nation's credit rating was lowered by Moody's from Baa1 to Baa2, just barely investment grade, as lower reserve levels, low growth, Ukraine-related sanctions and recent lower oil prices have created a headwind on several fronts. The only worse-performing market on the week was Brazil, losing nearly -8% in the week as uncertainty about this weekend's elections weighed on sentiment (they're losing even more this morning as the incumbent Dilma Rousseff narrowly pulled out a victory—lowering hopes for reforms). GDP growth in China slowed to 7.3% from 7.5% last quarter, but beat expectations of 7.2%; equities were largely unaffected, however.

U.S. bonds gave back some gains on the week, with flows moving back into risk assets; long debt took a bigger hit with the duration effect embedded. However, high yield and bank loans gained with credit spreads narrowing somewhat. Foreign bonds were little changed, other than the impact of a higher dollar, with the exception of emerging market debt, which tended to perform a bit better with risk-on sentiment.

Real estate around the world was generally higher, led by the U.K. and developed Europe, which benefitted from stimulus talk. In the U.S., lodging, retail and office/industrial all gained in line with domestic equity indexes, while healthcare lagged.

Commodities were flat on average, and again were pummeled by a stronger dollar (which rose by about a half-percent). Economically-sensitive industrial metals, such as copper, recovered a bit on the week as did grains, the large exports for which pinched supplies. Losers were soft commodities coffee and sugar, as well as natural gas. Gold lost slightly on the week, about in line with the dollar's change. Crude oil, the commodity of the day, fell back a few percent again towards the $80/barrel mark—arguably technically important as it's a round number. Apparently, the Saudis are publicly accepting of oil prices maintaining a level this low, but that remains to be seen, as data shows they have already cut production by 5% in the past month. Year-to-date, the energy sector is down -17%, again perpetuating the weak returns of the commodities asset class.

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 October 20, 2014.

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