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Weekly Update 12-13-13

Scott Maxwell - Wednesday, December 18, 2013

OK, we're a couple days late with us, but the folks who like the numbers probably won't quibble about a day here or there! So for all you 'numbers' folks here they are, not quite hot off the press but here nonetheless. As usual the symbols indicate positive developments, negative ones or those that are merely indifferent.

Economic Notes

(+) Retail sales for November came in stronger than expected, gaining +0.7% for the month versus an expected +0.6%.  More specifically, the ‘core’ number, that excludes volatile results from autos and gasoline, rose +0.5% relative to the expected +0.3%, and October’s numbers were also revised higher by three-tenths and Sept.’s by a tenth.  The difference between the headline and core came from a solid month in auto sales, albeit through a flurry of holiday discounts.  In the core portion, sales were led by the ‘non-store retailers’ group (essentially meaning online sales) which rose +2.2%, as well as furniture and electronics, which both gained 1%—all of which on a seasonally-adjusted basis, which takes the year-end flurry into account.  (For many retailers, the Christmas season represents almost half of all annual sales, which no doubt skews some of these readings from one month to the next—hence, the required seasonal adjustment.  This happens in many industries, but is especially pronounced for apparel, electronics, and others, as you might expect.)  Cyber Monday fell in December this year, which also plays a role in the monthly figures.

(0/+) Wholesale inventories rose 1.4% for October, which was larger than the expected +0.3%.  Most of this was due to an increase in non-durable goods (notably farm products and drugs—preferably, not related). 

(0) Import prices fell -0.6%, which was just below the expected drop of -0.7%.  Of this, energy import prices fell -3.5%; while consumer and capital goods prices rose a tick or two.  Over the trailing year, import prices overall have fallen -1.5%, which continues to show little to no ‘imported’ inflation from outside the U.S.

(0) The Producer Price Index fell -0.1% for November, compared to an expected no change.  The core PPI portion, excluding food and energy, rose +0.05% versus a consensus +0.1%.  During the month, energy prices fell -0.4%, food prices were flat and some medical components rose a bit.  For the year-over-year period, the headline finished goods and core finished goods indexes have increased +0.7% and +1.3%, respectively.  Per other measures, inflation continues to be well-contained and below the Fed’s targets.

(0) The NFIB small business optimism index rose a point from October to November, ending at 92.5, which was just a tenth below the result expected.  Company plans to increase employment rose by 4 percentage points to +9%, which was similar to perceptions of this being a good time to expand.  Similarly, job openings and cap-ex plans also improved; however, the net number of respondents expecting further economic improvement declined.  Small business owners continue to list government red tape, taxes and low demand as primary business challenges in the recovery period.

(+) The JOLTS job openings rose to 3,925k for October, which surpassed the 3,898k expected and represents a 7.6% gain on a year-over-year basis.  Within the report, the hiring rate fell a tenth from 3.4% to 3.3%—remaining in a relatively low range.  The overall separations rate fell by two-tenths to 3.1%, which included a similar-sized drop to 1.1% for the layoff/discharge rate, while the quit rate was unchanged.

(-) Initial jobless claims for the Dec. 7 ending week rose to 368k from an upwardly-revised 300k the prior week—a bit of a disappointment compared to the 320k expected.  In all fairness, the Labor Department describes the post-Thanksgiving/pre-Christmas period as a challenging one from a seasonal adjustment perspective, with results showing higher than normal volatility, so perhaps some slack is due.  Continuing claims for the Nov. 30 week came in higher also, at 2,791k, above both consensus expectations of 2,743k and 2,751k the prior week.  

The Volker Rule in its final form was finally approved by five government regulators:  the FDIC, Federal Reserve, SEC, Commodity Futures Trading Commission (CFTC) and Comptroller of the Currency.  It was originally proposed by former Fed Chair Paul Volker (sometimes a controversial figure) for inclusion into the broader Dodd-Frank Wall Street Reform and Consumer Protection Act.  What it represents is a ban on proprietary trading by banks solely for their own gain as well as broader portfolio ‘hedging’ of broad/non-specified groups of assets.  However, hedging against specific identifiable risks would continue to be allowed.  This final rule—slated to go into full effect in mid-2015 for large banks, 2016 for others—is a bit tougher than originally anticipated.  Of course, there is still some gray area sometimes between ‘market making’ and ‘proprietary trading’ activities, so that is something that may require additional clarification.  Lawmakers and banks who raised objections to the rule argued that such limitations would put American institutions at a disadvantage relative to foreign firms unencumbered by such restrictions.  As it stands, London and New York have already been battling for the crown of global financial capital (with Hong Kong, Singapore and Tokyo coming in just behind).  London seems to be in the lead these days, so rules like this may not help, but, at the same time, banks have noted that proprietary trading doesn’t play a huge role in their profit figures anyway.

Interest in implementing the rule started strong after the financial crisis, but waned a bit until recently, where trading issues such as JPMorgan’s infamous ‘London Whale’ incident brought interest in more regulation back to the forefront (although almost every major Wall Street firm has either been subject to a trading error and associated loss, or under scrutiny for other trading practices, it seems).  In some ways, this is a throwback to the 1930’s, in an attempt to re-regulate firms that have become more difficult to monitor due to a interconnectedness and complexity of activities, such as commercial banking, investment banking and securities trading (and, today, asset management).  Ultimately, the ‘too big to fail’ argument is thrown in here as well, since trading losses from a systemically important financial institution could potentially result in an impact on taxpayers.

A congressional budget deal is up for vote, one which essentially trades the broad spending cuts mandated by sequestration with more targeted cuts and revenue increases.  In fact, some commentators have called this the best deal in years, if for no other reason than it being the only deal in a few years—albeit not a long-term fix to anything.  For the sake of space and focus, we won’t delve into the political end of things, aside from the potential impact on the economy and markets.  On that end, greater or at least some recovered government spending is a potential boost to GDP growth since the government represents an important consumer of goods and services, which translates to company earnings, etc. (per the one page model of the economy we shared in last week’s Monthly Advisor Meeting—in case you missed it, that’s a plug to tune in next time).  Also, from a sentiment standpoint, averting another legislative fiasco in the form of another government shutdown is also a positive.  There are some other interesting components:  it doesn’t appear that emergency government unemployment benefits will be extended, which has been newsworthy and will undoubtedly affect a still-significant part of the population.

Lastly, now that we have the Fed chair decision out of the way, Stanley Fischer looks to be in the lead as nominee for Vice Chair.  He’s not necessarily a household name, but has academic credentials; he also served as a governor for the Bank of Israel, chief economist for the World Bank and second-in-command at the IMF.  Like his close peers/protégés Ben Bernanke and Janet Yellen, he is considered a ‘Keynesian’ economist—meaning he subscribes to the theories of John Maynard Keynes in that government should play an integral role in stimulating economic demand when the private sector isn’t able to do so.  In fact, he’s a role in the academic development of what’s called ‘New Keynesian’ economics, a refined version of the original, with broader fundamental underpinnings and a specific focus on where markets fail.  In fact, he was Bernanke’s dissertation advisor in graduate school to demonstrate how closely-knit this club is.  (Quantitative easing is a modern and more extreme offshoot of the Keynesian concept.  For comparisons sake, economists on the other side of the table, such as Milton Friedman, argue that the free market should dictate and the government should largely stay out of the way.)  While a fan of QE, as is Yellen, he is apparently not as enamored with the ‘forward guidance’ concept (essentially, the Fed laying out views of planned future actions) under the rationale that it takes away flexibility as conditions change.  The dichotomy between his and Yellen’s more positive views on the topic should be interesting.

Market Notes

Stocks fell on the week as the congressional budget agreement lessened political strife and raised fears of potential tapering.  Otherwise, volumes were fairly light.  All sectors lost ground, with materials and consumer discretionary falling less than a percent, while health care and utilities were down over -2% each.  Smaller caps also suffered more than large caps on the week, in a bit of a beta effect and perhaps some profit-taking from recent strong performance in that segment.

Shares in foreign markets were down as well, and emerging markets lost a bit less than developed markets.  Japan modestly outperformed the U.K. on a stronger Yen, which modestly outperformed Europe as a whole.  Specifically, Russian stocks fared best with the smallest losses, while both Chinese and Indian stocks lost several percentage points.  China was affected by rumors of the government cutting its 2014 GDP growth target from 7.5% to 7.0% and possible winding down of some fiscal stimulus measures.

Bonds generally fared positively in the risk-off week, gaining a few basis points.  Investment-grade credit fared best, followed by long Treasuries.  Emerging market bonds gained a half-percent, while developed market government bonds were mostly flat—as the dollar itself was relatively flat for the most part on the week, the impacts were spread-related. 

In real estate, mortgage REITs gained several percent along with most fixed income, while most other groups lost ground in line with broader equities.  Asian REITs fared best, while European and U.S. industrial/office fared the worst.

Commodity markets were led by a big rebound in coffee (the price for which the author pays special attention to), a reversal of a generally downward trend of the last three years.  Natural gas also rose almost 10% on cold weather and snowstorms slated for late in the week (you can almost watch the weather segment on the news to see where natural gas prices are headed, if they were only that predictable).  Both industrial and precious metals were up 1-2% each, while crude oil indexes fell about a percent.  Bringing up the rear, tin and sugar lost a few percentage points each

Sources:  FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, Direxion Funds, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, 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.

 

 

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