Investors seem to be
waiting for signs of a lifeguard. When I was six years old, so many many years
ago, I was playing along the shoreline and got caught in a powerful riptide. It
was forceful and what happened next seemed to do so in a blink of an eye.
Before I knew it I was 50 yards out in very choppy waters lapping up against the
rock jetty. I fought as long and hard as I could and took in a lot of seawater
before finally succumbing to exhaustion and water intake. As I went under for
what I thought was the final time I still remember seeing the body of the life
guard 8-10 yards away cutting thru the water doing the butterfly stroke coming
at me. I’ve never forgot that sight even though I passed out immediately
afterward. The next thing I remember was being resuscitated on the beach with
a slew of strangers standing around staring down at me in horror. I responded
rather appropriate from my vantage point, I coughed up a bit of salt water and
balled my eyes out, until my aunt gave me a yo-yo to calm me down.
Unfortunately not enough yo-yo’s to pass out to investors
today.
It had been quite a
different scenario the markets were facing this past summer compared to the last
few years. Remembering back, we’ve had to battle the fear of a double dip
recession, then the US losing
its precious AAA credit rating followed by the fear a potential default and
ensuing financial contagion caused by the postage stamp sized
Cyprus. Skeptics of this years
rally were left suggesting sluggish growth and expensive Price Earnings
multiples primed the markets for a return of the bear market and that any rally
was one built on a deck of cards waiting to crumble. Well, 15% later what
else are they left to say, except admit their miscalculations.
Where
we are:
Leading
Economic Indicators (LEI) - LEI witnessed a
.6% jump after having been flat the prior month. We saw strength notably in the
new orders and new building permits indices which points favorably to future
growth and continued expansion.
Housing. We have a few data
points here worth noting. As mentioned above, building permits as a whole
increased 2.7% in July and are up 12 ½% over the trailing 12 months. Keys to a
continued recovery are consistent or an easing of underwriting criteria,
pricing, interest rates and of course the availability of credit. Next we saw
housing starts move up 5.9% in July to an 896,000 annual run rate.
Gross
Domestic Product (GDP) – Domestic GDP was
recently revised up from an uninspiring 1.7% growth rate up to 2.5%. The main
culprits for the upgrade were firms restocking inventories (which only do so in
anticipation of future sales) and a resurgence in our exports. Both very
positive going forward.
Purchasing
Managers Index (PMI)- The August
Manufacturers PMI came in +.3 to 55.7% the high water mark for 2013. We saw
strength from furniture and related products, fabricated metals and paper
products. They also note some drag from government and military spending and on
the cost side seeing some relief from lower commodities prices.
Purchasing
Managers Non-Manufacturers Index (Services Sector PMI). The SSPMI LEAPT to
58.6% the highest since January 2008. Again we see reflected here new orders
gaining steam to 60.5% and the employment index increased 3.8% to 57% both very
good numbers supporting the case for continued growth and economic expansion.
Retail
Sales- Retail sales edged
up .2%. We also saw a nice .2% revision up to +.6% from the prior month. The
consumer continues to defy the experts and adheres to the “Buy Mortimer! Buy!
(Trading Places with Dan Aykroyd and Eddie Murphy reference here). Ex-Autos
which tend to be a bit volatile month to month, sales came in at a respectable
+.5%.
Weekly
Unemployment Claims-Claims came in at
323,000 the lowest level sine July 2008. Continuing claims following not
surprisingly down 3,000 to 328,500. Less people on unemployment suggest more
people re-entering the work force and adding to the throngs of our great
consumer nation.
Black
Vultures:
1.
Syria-not really a BV
since a strike on Syria is all but a given. The BV is
really the aftermath. I believe the markets will absorb the initial Syrian
strikes. The great unknown is what happens if Syria/Iran responds by striking
Israel or Turkey? The US simply cannot
light that fuse and go home. We have the potential to be dragged into a much
longer and wider area conflict.
2. Debt Ceiling/Budget
negotiations. The resolution to this problem seems fairly simple. Congress has
already approved the spending now they need to raise the debt ceiling in order
to pay for outlays. Instead Congress wishes to use these negotiations to
extract the spending cuts and tax overhaul that both sides agree need to be
addressed. Both thus far seem incapable of agreeing to anything aside from who
to aim Patriot missiles at.
Going
Forward: The global economy
continues on the mend with China and the EU showing signs of
stabilization and a resumption of growth and expansion. The US is speeding full
ahead on its way towards energy independence, this glut of cheap domestic
natural gas is also a boom for a resurgent US manufacturing sector. This is
really a game changer and under discussed. The US as a
manufacturer of something other than Intellectual Property and services can and
should be the solution to our employment woes. The millions of jobs lost during
the housing collapse evaporated. Many of those jobs will NEVER come back.
Energy and manufacturing will /can lead us back and be the job creator the
current economy is searching for. The US market is transitioning from one
driven by Federal Reserve Stimulus to one focused on Fundamentals. It will
continue to be a rocky road as the Fed removes the monthly $85 billion monthly
purchases and nervous investors will tremor with each adjustment to the program
to see if we can hold up. I believe the fundamentals are capable of filling
that Fed void. As the Fed takes its foot off the accelerator and the markets
begin to bob up and down investors may begin to look for that Lifeguard when all
they need to do, as when caught in any RIP is go with the flow.
We maintain our
aggressive posture to the market and will continue to monitor economic,
geopolitical and market releases for any signs to adjust our positions.
We thank you for your
patience and confidence in this very challenging environment.
Yours in Pursuit of
the Kwan.
James
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