Archive for category: Investing

Last Week

We got a lot of data and central bank speak last week, but not a lot changed from a macro standpoint—except we were reminded that the U.S. economic rebound remains very much intact, despite mixed data. And, that was an incremental positive late in the week.

Despite that strong finish, things were ugly to start last week. Retail sales slightly missed expectations, falling     -0.3% vs. (E) -0.1%. The “control” group, which is retail sales less autos, gasoline and building materials, met expectations, declining -0.2%. But the previous month was revised lower, from a +0.4% gain to just a +0.2% gain.

Also early last week Empire State manufacturing, which is the first data point from October, plunged, dropping 6.17 vs. (E) 20.50. New orders, the leading indicator in the report, went negative for the first time in months.

And, despite retail sales being just a small miss and Empire State being historically volatile and not very correlated to national manufacturing activity—in a market that was nervous about growth everywhere—these disappointing reports definitely contributed to the stock market declines, as people (inappropriately) began to get nervous about U.S. growth.

But, the data late in the week helped calm some nerves. Industrial production beat expectations (up +1% vs. (E) +0.4%), the manufacturing subcomponent (which is the important part of the release) was a slight beat, and Philly Fed stayed strong (20.7 vs. (E) 20.0) and importantly contradicted and potentially invalidated the bad Empire State report. Finally, weekly jobless claims plunged to a 14-year low, which helped sentiment.

Again, bottom line was the data were mixed and the negative market reaction to the early-week “misses” was more a reflection of overall nervousness—not that the data were that “bad.“

Looking at the Fed, there was a lot made about “dovish” comments by Bullard and Williams (especially the Bullard comments).

But, neither one reflects the “core” of the FOMC. Although Fed Funds futures continue to push out the expected date of the first rate hike (now December 2015), the Fed will almost certainly end QE at the meeting next week.

This Week

This week is all about the October global flash PMIs, plain and simple. Chinese numbers come Wednesday night, while European and U.S. numbers come Thursday morning. Given that worry about global growth is the main negative influence on markets right now, these numbers are the next major catalysts for markets.

In China, the main focus is whether the flash PMIs can hold 50 (if they can, it’ll be a mild positive). In Europe, it’s the same question (can they hold 50?). Sentiment is so negative toward Europe right now, it’ll take a pretty bad number to make the outlook there materially worse. Finally in the U.S., the market will be looking for further evidence that, despite global issues and a stronger dollar, the manufacturing sector is continuing to expand at a decent pace.

After the flash PMIs, the next most important number to watch is the September CPI, out Wednesday. As you know, growth and dis-inflation are the two concerns in the market right now. Obviously the PMIs give us a glimpse into growth, and the CPI will give us a glimpse into the dis-inflation. A bounce back toward that 2.0% yoy increase in core CPI will be very welcomed by the market, if it occurs.

Third in importance this week are the Chinese economic data coming tonight: GDP, IP and Retail Sales. China’s been put slightly to the back burner with all this Europe worry, but growth there needs to maintain pace. If concern grows that China may not be able to maintain 7.0% annual GDP growth, this will be an added negative on the market.

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What Is Happening With Oil?

Oil collapsed further yesterday, dropping all the way to the low-$81 level. We and others have been pointing to the decline in oil as a potentially worrisome sign about the state of global growth, but you don’t have to work on a physical oil desk to figure out that, with oil falling through the floor, something else is going on here.

Both supply and demand influences are pushing oil prices lower.

On the demand side, foreign oil demand is falling. Yesterday, the International Energy Administration (IEA) significantly reduced expected oil demand growth for 2014—down to 700K barrels per day, from the previous 900K b/d. Although they kept 2015 demand growth estimates unchanged, it’s still a large reduction.

The main reason behind that demand-growth reduction is a drop in economic activity in Asia (mostly China) and Europe. Both economies are losing positive momentum (one slowly, one quickly), but these aren’t exactly new facts, and this demand reduction by itself isn’t responsible for the sharp drop in WTI crude prices.

There is also a significant supply aspect to this drop, but likely not the one you think. Simply put, OPEC is starting to fracture, and it is sending Brent crude, which is what’s traded globally, falling sharply. Last month, despite falling prices, OPEC increased production to a 13-month high, led by Saudi Arabia. In addition, Saudi Arabia is now cutting prices to multi-year lows for Asian and European buyers to maintain market share. And, it’s sparked a bit of a price war. Over the last week, Saudi Arabia, Iraq and Iran have all cut prices to buyers to try and compete on market share, and that is driving the price of Brent crude sharply lower (from $113 to $84.50 over the last 3 ½ months, or a -25% drop).

So, this recent plunge in oil prices has largely been a Brent crude-led phenomenon.

That’s important, because our firm and others are trying to figure out if the plunge in WTI crude prices (which is produced here in the U.S.) is reflecting a slowing of our economy, and basically the answer is “no.” WTI has fallen in sympathy with Brent crude, not because U.S. demand for oil is falling. U.S. demand isn’t falling – it’s still sitting basically near all-time highs.

Now, the direction of oil prices is very important to the stock market on a sentiment basis, so I’m not saying we can discount this plunge. And, I do not believe stocks will bottom until oil can stabilize.

But – in addressing the important fundamental question of whether or not the plunge in oil is a warning sign on the U.S. economy, the answer is “no.” It’s more a sign of dysfunction at OPEC, which could be a virtuous thing down the road.

Finally, the logical question then is, “Are oil stocks a buy here?” No, I don’t think yet, as the chances of a further decline in oil prices are high. But, certain sectors of that market (low-cost, lower-leveraged domestic oil and natural gas producers, and select oil service stocks) will be fantastic buys. But we’ve got to be patient and let this OPEC spat settle itself out – because if they want to drive oil lower, they will continue to succeed.

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Last Week

The focus of the global economy shifted entirely to Europe last week, and the continued lackluster economic numbers were among the main reasons we saw such massive volatility and selling in risk assets. At the moment, U.S. and Chinese data are firmly in the backseat (barring any major disappointments).

Specifically within Europe, focus was on Germany last week and the data simply weren’t good: Monday it was August manufacturers’ orders, which slumped —declining -5.7% vs. (E) -2.5%. Tuesday it was August industrial production, which fell -4% vs. (E) -1.1%). And then Thursday exports dropped -5.8% in August—completing a trifecta of negative data from Germany.

Now, to be fair, August is typically a bad data month in Europe, and especially the export numbers were hurt by the timing of a holiday. But at this point the No. 1 concern for the market is global growth and, specifically, whether Europe is backsliding into a recession. And as Germany goes, so goes Europe. So, the bad data elevated fears about global economy growth.

While the European data were the most important last week, the most followed/anticipated release was the FOMC minutes, which surprised markets by being exceptionally dovish. The main takeaway was the “core” of the Committee appears much more concerned about growth in Europe, global growth and the stronger dollar than most people thought. As a result, they seem to be putting a lot of weight behind these risks, implying they may be more dovish than the market thinks.

Oddly, these “dovish” minutes were somewhat contradicted by FOMC officials’ comments later in the week, as multiple Fed presidents—including former Vice Chair Dudley and current Vice Chair Fischer—implied “lift off” for interest rates remains mid-2015. That muddled message added to the volatility in stocks last week.

Muddled message aside, the market took the Fed is dovish last week, and Fed Fund futures are now pricing in a rate hike sometime in Q4 2015.

Turning to actual data in the U.S., it was sparse but what we got was good: the 4-week moving average for jobless claims fell to an 8-year low, while both the Kansas City Fed Labor Market Index and the new “Labor Market Conditions Index” both showed further improvement in the jobs market (some tried to spin the LMCI as dovish, but it wasn’t).

Finally, Chinese composite PMI slightly missed expectations but remained solidly above 50, and the market largely ignored the release.

Bottom line is the main concern of the market is the health of the global economy, and last week’s data were not reassuring.

This Week

It’s going to be a busy week, as there are multiple reports from all regions of the globe (U.S., Europe and Asia), although as mentioned, the European data will be the most important.

Starting with that, then, we get multiple readings on inflation and growth from Europe.

First, the growth numbers to watch (in order of importance): EMU industrial production comes Thursday (it’s going to be bad—just a question of how bad). The German ZEW Business Survey is released Tuesday night (look at the expectations component), while Italian GDP is released Wednesday (there are fears that Italy is already in a recession).

Turning to inflation, we get final inflation readings for September (we got the “flash” readings two weeks ago). There shouldn’t be any major surprises, but given the concern about deflation, if the flashes are revised down even by just -0.1%, look for that to pressure the market.

Italian CPI comes Tuesday, Germany CPI is released Wednesday, EMU HICP comes Thursday, and French CPI comes Friday.

Again, this is all about Europe at the moment, so any good news on the growth or inflation front will be welcomed by risk assets.

Turning to the U.S., it’s also a busy week. By all accounts, U.S. growth remains “fine,” but this market is unsettled and it needs a confidence boost. Good data this week, especially from Empire State manufacturing and the Philly Fed (Wed/Thurs), could help sentiment. That’s because they are the first look at October data and will remind everyone growth here is still good.

Also on the calendar are retail sales (Wednesday) and industrial production (Thursday), as well as weekly claims and housing starts (Friday). Again, while none of these numbers will change anyone’s outlook on growth for the U.S., they will affect confidence, so good numbers are needed.

Finally turning to China, its trade balance was better than expected, while CPI and PPI are tomorrow. Again, not to be repetitive, but the No. 1 concern is about global growth—if the trade numbers are a disappointment, that’s going to be a headwind.

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FOMC Minutes

The minutes were obviously dovish, given the stock market surge, dollar decline and bond rally. They were taken as dovish for three primary reasons:

• First, the FOMC voiced considerable concern about the state of the global economy and the potential negative impact on our economy.
• Second, the strengthening dollar was expressly cited as a potential headwind to growth and to the Fed meeting its inflation target of 2.0% (so the dis-inflation we’ve been talking about).
• Finally, with regard to the FOMC statement, the removal of the “considerable time” phrase (and more broadly, any material alteration of the language of forward guidance) was seen as potentially being interpreted as “hawkish.”

Given the minutes, it was no surprise then that “Considerable Time” and “Significant Underutilization” stayed in the September statement – and it’s clear from the minutes that the FOMC is still much more concerned about the various risks to the recovery. And this is totally trumping any urgency to begin to normalize policy.

The bottom line here is that is would appear the majority of the FOMC is more dovish than we previously believed, and their confidence in the economy remains low. This was a dovish event, and while it doesn’t necessarily mean we’re going to see expectations for the first rate hike pushed out from June 2015, it’s certainly a step in that direction.

From an investment takeaway standpoint, although I don’t think we’re going to see stocks immediately move to new highs, I think we will see money move back into more risky/higher yielding instruments, so as a result if you own SJB I would take at least some profits, and I’m closing out our EUM hedge this morning, as the Fed’s dovish will send money back into lower quality, higher yielding assets in the near term.

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