Archive for month: December, 2014
Your Weekly Economic Update
/in Investing/by Tom 2Below is an excerpt from the “Economic Section” of the Sevens Report originally released on 12.29.14
Economic Update
Last Week
There were two key takeaways from last week’s economic data: First, the U.S. consumer re-emerged in the 2nd and 3rd quarters of 2014, and was the main driver of growth in the U.S. economy during the second half of 2014. Second, the stronger U.S. dollar is starting to have an impact on the economy and we should expect further moderation in manufacturing metrics going forward. Importantly, this moderation in the manufacturing sector isn’t a bad thing as long as the landscape continues to improve for the U.S. consumer. It’s much more positive for the U.S. economy to be led by a resurgence of the U.S. consumer than continued manufacturing growth (because consumer spending is nearly 70% of the U.S. economy).
The key number from last week was the final revision of the Q3 2014 GDP report. Final GDP was 5.0% saar (beating the 4.3% expectation), and the gains were driven by consumer spending. PCE (broad consumer spending) was revised higher to 3.2% from 2.2% while Gross Domestic Purchases (the amount of goods purchased by the country regardless of where the goods came from) was revised to 5.0% from 4.1%.
Again, those who are skeptical of the recovery will point out that a lot of the uptick in consumer spending came from increased healthcare expenses, and that is true. But the bottom line is these are healthy numbers for the economy, and they again underscore the shift we are seeing from a manufacturing-led recovery, to a consumer-led recovery (which again is much more healthy and positive for risk assets).
Case in point, November Durable Goods missed estimates, as the headline was weaker than expected. Meanwhile new orders for Non-Defense Capital Goods Excluding Aircraft were flat month-over-month and the rolling 3-month moving average fell by 1%. The soft Durable Goods report confirmed the lackluster PMIs we saw in November and December. To be clear, it’s not like manufacturing activity is falling out of bed, but we are seeing some moderation due to the stronger dollar, which again is “ok” as long as it’s accompanied by a surging consumer.
From an investment standpoint, this shift from a manufacturing-led recovery to a consumer-led recovery is important, because we can expect continued outperformance from consumer-leveraged names (RTH, consumer finance companies) and, generally speaking, underperformance from industrials with heavy foreign revenue exposure. That isn’t a particularly insightful observation, but it’s something to think about as you plan asset allocations for early 2015. (During the last several years, industrials have soundly outperformed consumer names, so double-check to make sure you’re not too heavy in stodgy, goods-producing, foreign-leveraged manufacturers and industrials.)
This Week
It will be another quiet week given the holiday, but the highlight will be the global final manufacturing PMIs on Friday. That said, the most important manufacturing PMI, China’s, won’t be released until next week. So, focus will be on Europe and the U.S. Specifically, the December “flash” PMIs in Europe showed some small signs of life, especially in Germany, so it will be important not see those flash PMIs revised lower.
Here in the U.S., we can expect some more moderation in the ISM Manufacturing PMIs. But again on an absolute basis, the manufacturing sector is still growing; it’s just losing momentum due mainly to the stronger U.S. dollar.
Greek Election Update: Is The EU Preparing for a Grexit?
/in Investing/by Tom 2Greek Election Update (Originally Released 12.29.14)
The biggest event of this holiday week has already come and gone, as the Greek Parliament failed to elect a President and there will not be general elections in early February. PM Samara’s gamble has failed, and as of this writing the Athens stock market is down 11% and European markets are off about 1%.
From an investment standpoint, despite the drop in Greek shares, we do not see this as a negative game changer. To be clear, the reason stocks are down is because the market is afraid the looming election will delay QE by the ECB at the Jan 22nd meeting, not because of a fear Greece will leave the EU or default if Syriza gains a majority. It is important to realize the true “negative” outcome the market is worrying about.
Bottom line, even if Syriza wins the general election, the party has moderated materially and no one is afraid of another default/Greek exit showdown. This is all about QE and frankly we don’t think this results in a delay of QE be the ECB in January, assuming the governing council is planning on doing it already.
So, we do not see this as a negative game changer in our “Europe outperforms” thesis, and we would be patient buyers of this dip.
Financial Newsletter: Stock Market Closes Higher, Energy Stocks Underperform
/in Investing/by Tom 2Equities
(originally released to subscribers on 12/23/2014)
Market Recap
Stocks drifted higher to start the week yesterday, modestly extending last week’s gains despite declines in energy stocks. The S&P 500 added 0.38%.
Futures were higher before the open yesterday as they rallied in sympathy with global shares, which were broadly higher on ECB stimulus hopes and further stabilization in the Russian ruble and global oil prices. (However the gains in oil turned out to be short-lived.)
It was a relatively quiet open and overall quiet morning session in the U.S. equity markets as stocks drifted sideways, largely ignoring mixed economic data (existing home sales missed while the Chicago Fed survey beat).
After lunch, a combination of further short-covering and trader positioning ahead of this morning’s busy economic calendar helped push the S&P 500 to a fresh all-time-high, albeit amid very low volumes. There were no real news catalysts yesterday to speak of.
Trading Color
Looking at the market internals, yesterday’s rally to new all-time highs was not very impressive. The S&P 500 badly underperformed the Dow as they gained 0.38% and 0.87%, respectively. Meanwhile the Nasdaq and Russell 2000 largely traded in line with the S&P.
High-beta stocks actually fell 0.10% yesterday while their low-volatility counterparts added 0.63% on the session.
Looking to sector trading, energy was among the worst performers, which was no surprise given the 3%+ drop in WTI futures. Healthcare was the other big underperformer, falling 1%. Gilead led the way lower, down 13% after the largest US drug-benefit manager chose a medication from competitor AbbVie as the “only Hepatitis C treatment approved for patients.”
Meanwhile industrials, consumer discretionary and staple stocks, tech, and financials all handily outperformed—all rising around 1% on the day.
Bottom Line
Stocks hit new highs yesterday but XLE and JNK both declined for the first time since early last week. We are near year end and volumes and liquidity are low, so we could easily see a continued push higher into year end on “nothing” really, but XLE, JNK and the ruble are still the leading indicators of this market.
If yesterday was the start of another roll over in XLE and JNK, then I do not think you want to be buying this rally. Bottom line, keep watching XLE and JNK.
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