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Monday, December 16, 2013

Equity Volatility (VIX)

After two down weeks the market opened on a significant up note based on the best PMI in 31 months from the manufacturing sector in Europe. Apparently the market was a bit more worried about Europe than it let on. Meanwhile, the market will continue to fret about tapering until the Fed’s announcement on Wednesday. Is stock selling warranted because the Fed may only be buying $75 billion in bonds a month vs. $85 billion? Probably not, but many investors may not see it that way. We could be in for some volatility as we travel the road back to normal. But the global economy is expanding, corporate earnings are at all-time high levels, and interest rates will remain low for the foreseeable future, so a long-term view is advisable. Please follow the VIX gauge of market volatility on page 30 of the Global Perspectives book.

Friday, December 13, 2013

Inflation - CPI

What has been driving markets lately is speculation as to whether or not the fed will begin tapering at their next meeting on December 18. The economic data is generally supportive of this decision . However, the latest inflation data show that core producer prices fell for the third month in a row. The very mild inflation data gives the Fed a little breathing room to continue buying assets. We expect that in the next week the market will continue to focus on the Fed in the absence of any earnings data and little economic news. Earnings season is complete, and earnings growth for third quarter was 3.5%. Please follow inflation on page 56 of the Global Perspectives book.

Thursday, December 12, 2013

Tectonic Shift — Trade

Most investors can’t remember the last time the U.S. had a trade surplus . It was 12/31/1975. And many investors assume this is just the way it will always be – U.S. consumers buying more from overseas than we sell, creating a drag on GDP. Not so fast. The U.S. has an abundant supply of oil and natural gas that is getting easier and cheaper to access based on new technologies. The U.S. currently restricts exports of oil, but lifting these bans will be a game changer. Today’s WSJ reports that already big oil companies are pressing for this to happen. The energy revolution in the U.S. is one of the Global Perspectives tectonic shifts, one that has the ability to change the trade deficit into a surplus as the U.S. travels the road to energy independence. Meanwhile, today the market is digesting some good news and bad news. Retail sales climbed .7% in November to the highest monthly level ever, led by auto sales, but on the negative side, weekly new unemployment claims spiked higher to 368,000, a two month high. Please follow the trade deficit on page 17 of the Global perspectives book.

Wednesday, December 11, 2013

Developing Markets Drive Growth

Economic growth in sub-Saharan Africa is expected to increase to 6% in 2014; by 2018, five of the world's fastest-growing economies will be in sub-Saharan Africa. And today the WSJ reports that the savvy US fast food chains are jumping onto this global expansion train. Already there are more than 1000 chicken chain restaurants are on the continent, and the burger chains are queuing up to get in on this relatively untapped lucrative market. The path forward is not without hurdles; lack of beef suppliers, equipment and water sources pose challenges. But the emerging middle class consumer potential will drive efforts forward. Meanwhile here in the US, the market opened a little wobbly on the implications of the budget deal. On one hand the deal provides a level of certainty which is positive for markets but on the other hand it opens the door a little wider for Fed tapering. Please follow the ever-expanding world GDP on page 10 of the Global Perspectives book.

Monday, December 09, 2013

China Hard Landing

China recorded its biggest trade surplus in almost five years in November, as robust exports surged ahead of import growth. Exports jumped 12.7 % in November, benefitting from a recovery in demand from high-income nations like the U.S. and Europe. Also last week, data showed manufacturing activity in China grew at its fastest pace in 18 months in November. This is directly in contrast to consensus views forecasting slower growth in China. The impending Fed taper is certainly a worry regarding the emerging markets and how it may throw a monkey wrench in their growth trajectory but if we go back to last year at this time, investors were solely focused on one thing – “Fiscal Cliff”. This year the primary focus is “Fed Taper”. We caution investors to not ignore global risks but to keep their eye on the fundamentals, which are slowly marching forward. Please follow China’s economic indicators on page 15 of the Global Perspectives book.

Friday, December 06, 2013

Employment Payrolls

Today’s non-farm payrolls report is indicative of the economic news we have been receiving lately – signals that the economy is slowly strengthening. The report shows that 203,000 jobs were added in November and the unemployment rate is expected to tick down to 7%. An additional notable positive is that manufacturing added 27,000 jobs while lower paying sectors such as retail and leisure increased but contributed a smaller percentage of the increase than in previous months. Some negatives - the labor participation rate is still near historically low levels and the number of long-term unemployed is still a big issue. We certainly have a way to go when it comes to unemployment, but the latest data shows we are moving in the right direction. Obviously this is a nod toward Fed tapering, and bond yields moved up after the data was released. But the equity market opened higher this morning. Perhaps the market is finally getting comfortable with tapering and getting back to normal – where good news is good news. Please follow the payroll report on page 50 of the Global Perspectives book.

Thursday, December 05, 2013

Real GDP (Q/Q)

The headlines are big – 3Q GDP revised higher to 3.6%, the highest rate since early 2012, but while this looks like a great number, the reality is that a build-up in inventories provided the bulk of the increase. This is likely to be unsustainable, and fourth quarter GDP is expected to be weaker. Additionally, net exports were moderately more negative than in the first release as was consumer spending, the chief driver of the economy. Private consumer expenditures rose only 1.4%. down from 1.5%, and lower than the 1.8% recorded in 2Q or 2.3% in 1Q13. This headline is a negative for the market because it suggests an early taper is in the cards. Indeed, Atlanta Fed Chairman Dennis Lockhart announced yesterday in a speech that tapering in December was “on the table”. Please follow GDP on page 56 of the Global Perspectives book.

Wednesday, December 04, 2013

Tectonic Shift — Trade

Another blowout economic report: The ADP Payroll report of private sector jobs showed that 215,000 new jobs were added in November, well above expectations. The breakdown was as follows - service providers added 176,000 jobs, the most in a year, while goods producers added 40,000 jobs. Small businesses added 102,000 private jobs, large businesses added 65,000, and medium businesses added 48,000. Meanwhile, on the international front the trade deficit fell by 5.4% which is good news. Both exports and imports increased but exports driven by petroleum rose more. The small rise in imports is significant because it may suggest Americans are feeling more confident about the health of the U.S. economy. And increasing exports signal strength in overseas economies, which would bode well for the U.S. and the global economy next year. So the message is pretty consistent here, and it is all good. However, the market opened with a pout because good news makes tapering more probable. ‘Tis definitely the season to not pout because you know who is coming to town, and if history is any guide may bring a rally with him. Please follow the tectonic shift in trade on page 17 of the Global Perspectives book.

Tuesday, December 03, 2013

S&P 500 Earnings

Cyber Monday sales surged yesterday, surpassing last year by 20% and breaking the single day record. This is welcome news after a slightly disappointing Black Friday. Perhaps consumers spent Black Friday in auto showrooms. Auto dealers are reporting that holiday promotions are paying off with sales over the weekend far exceeding analyst expectations. Meanwhile 3Q earnings season is winding down, and with 99% of the companies reporting, earnings growth stands at a better-than-anticipated 3.5%. So while the market may be looking a little weary as it strives for a ninth straight week of gains, there is really nothing on the economic naughty list to concern us for now. The next big economic data points are the ADP payroll report on Wednesday and the non-farm payroll report on Friday. Please follow S&P 500 earnings growth, the fundamental driver of the market, on page 7 of the Global Perspectives book.

Monday, December 02, 2013

Consumer as Game Changer

The Institute for Supply Management (ISM) reported significant positive economic news today. U.S. Manufacturing accelerated in November, rising to 57.3% from 56.4%, its highest level since April 2011 and a blowout compared to expectations of 55%. New orders and employment growth were particularly robust, and this bodes well for the next employment and GDP reports. On the flip side, the holiday retail season started with a disappointing decrease in total sales for the first time in seven years. While the numbers are still preliminary, it appears actual sales are down but store traffic is up, as are online sales. Overall retail sales are still expected to increase about 3.9% this season, but consumers are looking for deals and are squeezing retail profit margins as much as possible. Retailers are caught in an enormous game of chicken as consumers are willing to wait until the last minute for even bigger discounts. Today is Cyber Monday so hopefully you will be able to do your consumer duty and squeeze in a little lunchtime online shopping. Please follow retail sales on page 9 of the Global perspectives book.