Morning in Arizona

Morning in Arizona
Rainbows over Canyonlands - Dave Stoker

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Friday, February 27, 2015

Live Long and Prosper

Financial Review

Live Long and Prosper

DOW – 81 = 18,132
SPX – 6 = 2104
NAS – 24 = 4963
10 YR YLD – .01 = 2.00%
OIL + 1.03 = 49.20
GOLD + 4.50 = 1214.70
SILV + .04 = 16.67

We are wrapping up the first 2 months of trading. January was a down month for stocks, but February turned positive, with record high closes posted for the Dow, the S&P 500 and the Russell 2000. The Nasdaq went almost entirely green for the month, closing in on 5000, and actually setting a new monthly closing high, taking out the March 2000 monthly close of 4572.

For the month, the Dow Industrial Average gained 5.6%, the S&P 500 gained 5.5% and the Nasdaq added 7.1%, and the Russell 2000 added 5.8%. Year to date, , Dow Jones Industrial Average +1.7% YTD, S&P 500 +2.2% YTD, Nasdaq Composite +4.8% YTD,  and the Russell 2000 +2.4% YTD.

Junk bonds are poised to deliver gains of 2.3% for February, the best monthly result since 2013, while investment-grade debt has registered losses. Investors are also returning to the equity markets, with the MSCI All-Country World Index touching a record Thursday after two losing months. Markets in Germany, the United Kingdom and Sweden hit all-time highs. Japan, the poster child of deflation, saw its stock index reach its highest point in 15 years. This should confirm that markets love it when central banks crank up the printing press. Even Greece saw its stock market tick up.

Part of the risk-on sentiment is because oil dropped, fast and hard, and nobody was quite certain where prices would go. Nobody likes to try and catch a falling knife. Oil started the year at $54.26 a barrel, dipped down to $44.37, which now provides support, and is basically back where it was at the start of February hovering right around $49 to $50. Gold is up about 2.5% year to date but down from the highs of 1308 in late January. And the CRB Commodity index is down 2.5% year to date.

Wall Street has traded in a tight range of late, with both volatility and trading volumes drying up as the earnings season winds down and Federal Reserve Chair Janet Yellen’s recent Congressional testimony delivered no surprises. While markets have held near record levels, whenever we hit records traders worry equities have gotten stretched and could be vulnerable. Yale professor and Nobel prize winner Robert Shiller’s measure for stock values, the Shiller P/E, is at levels last seen before the financial crisis. Consider also that 71% of IPOs had no earnings the day the company went public, a level last seen in the Dot-com bubble. That’s a lot of investing in stocks that only have promises and projections.

The most important economic data next week will be the monthly jobs report. Best guesstimate is that the economy added about 235,000 to 240,000 jobs in February. Of course, we still have to get past Friday, and in Washington the politicians are still trying to figure out how to keep the Department of Homeland Security open for business. On a 68-31 bipartisan vote, the Senate cleared a so-called “clean” DHS bill, after stripping out provisions that would have blocked President Obama’s recent executive orders on immigration. Now, it is up to the House to take action, and the best that might happen is a 3 week extension.

The U.S. economy grew a revised 2.2% in the fourth quarter of 2014, mostly because companies restocked warehouse shelves at a slower pace than the government originally reported. Gross domestic product was marked down from an original estimate of 2.6%; still, it was better than estimates of a mark-down to 2%. But the slower pace of growth actually might be good news: One of the key reasons growth was revised lower was company inventories were smaller than first thought in the fourth quarter. That could signal slightly stronger growth at the start of 2015, as companies stocked up for the American consuming public.

Moreover, imports rose more than first expected, resulting in a larger trade deficit, which in the calculus of GDP actually subtracts from growth. But that also suggests that American consumers are gaining strength. Consumer spending continued to rise at a 4.2% clip in the fourth quarter, the most since the last three months of 2010. Demand for services climbed 4.1 percent, the most since 2000.

Revisions to third-quarter personal income also showed the picture brightening. Wages and salaries rose by $87.2 billion, a $20.5 billion improvement from the prior estimate. Preliminary data for the fourth quarter showed a $94.4 billion advance. Job growth has strengthened over the past year, with payrolls rising 257,000 in January to cap their strongest three-month run in 17 years.

For all of 2014, the U.S. economy grew at a 2.4% clip, compared to 2.2% in 2013. You will recall that the first quarter of 2014 was negative, with bad weather taking the blame; today we see that the fourth quarter was pretty tame, but the summer was sizzling with economic growth around 5%. The hope is that the summer of 2015 might be just as strong.

One area of weakness might be in manufacturing. The Institute for Supply Management-Chicago Inc.’s business barometer slumped to 45.8 in January from 59.4 the prior month. It was the first time the measure dropped below 50, signaling contraction, since April 2013. The 13.6 point plunge was the second-biggest in data going back to 1979, only behind a 19.2 point plunge at the height of the meltdown in financial markets in October 2008. The magnitude of the drop suggests special circumstances, such as the work stoppage at West Coast ports or bad weather, were at play, although we won’t know if this was a one-off report until next month.

A report showing more Americans signed contracts to purchase previously owned homes in January rounded out a week of housing data that depicted an uneven recovery. The index of pending sales climbed 1.7 percent after a 1.5 percent drop the prior month that was smaller than initially estimated, according to data from the National Association of Realtors. Pending sales are a leading indicator because it tracks contract signings, as opposed to purchases of existing homes, which are tabulated when a deal closes, typically a month or two later.

Germany’s parliament approved an extension of Greece’s bailout today. Other EU countries are expected to vote in favor of the deal. The terms of deal aren’t going over well in Athens; protesters were angry at a pending deal to extend Greece’s financial bailout package with international creditors. The Syriza party, which came to power in Greece on a promise to roll back Troika imposed austerity, does not accept a strict, minimalist reading of the Eurogroup text. Look for Syriza to cancel privatization of ports and airports. Look for Germany to get upset.

Earlier this week, International Monetary Fund Director Christin Lagarde threw cold water on the tentative agreement between Greece and the EU warning that many of Athens’s pledges were vague and “not conveying clear assurances that the government intends to undertake the reforms envisioned.” Lagarde may want to moderate her insistence that everyone follow rules as if they were set in concrete, considering that the IMF itself has been so flexible with its own rules when it suited its managing directors. As the fight has unfolded, some of the IMF’s skeletons have been exposed, including the fact that the IMF bent rules to stick Greece with unpayable debts in the first 2010 bailout, and then imposed austerity measures that knowingly plunged the country into depression.

It is clear that Syriza aims to test how much freedom of action it has. This guarantees a fresh fight at the end of April, when EMU inspectors will demand proof that reform legislation is being enacted and enforced, and an almost certain showdown in June when Syriza’s four-month reprieve expires. It must then negotiate a third bail-out or face hostile markets alone. It could hardly be worse than what the IMF has already done to Greece.

Tomorrow, Warren Buffett will release his annual letter to shareholders, and this year’s letter is special because it marks the 50th anniversary of Buffett’s purchase of a struggling New England textile maker known as Berkshire Hathaway.  Buffett appears to be in a particularly reflective mood. In December, he said he had already composed around 20,000 words, or around 30 pages, roughly twice the typical length.

Of course investors love to follow the Buffett letters; you can learn a lot. In 2008, when Buffett famously “bet on America” by investing $5 billion in Goldman Sachs he left out the part where he bought preferred shares priced at a discount, paying a 10% dividend and offered only to him. Because of those provisions Buffett’s stake in Goldman is up about 200% more than anyone who thought they were buying alongside him. Maybe the most important thing we can learn from Warren is that we can’t really invest like Warren.

Leonard Nimoy passed away today. Of course he played the role of Spock on Star Trek. In 1973, Martin Cooper made the first cell phone call; Cooper said he was inspired by Star Trek and Captain Kirk’s gold flip top communicator. One of the first pieces of technology to come out of Star Trek was the automatic door. Today, you can find that once futuristic technology at any corner store. Spock and Kirk and the crew of the Starship Enterprise had technology that allowed them to understand any alien language thanks to a universal translator; today we have Google translate.

Those giant view screens on the bridge of the starship; today we have skype and GoToMeeting. The tricorder now goes by the brand name Scanadu. Transparent aluminum is now called ALON and it is made by a company called Surmet. Remember when Kirk or Spock would talk commands to the computer; today we have Siri, Cortana, and OK Google. We can’t send people through a transporter, but we can lock in on a location with GPS. And we don’t have a holodeck but that should change next year with the release of Windows 10.

Live long and prosper.

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