The
Federal Reserve has not veered from tapering their bond purchases as they see
continued gradual improving underlying fundamentals driving growth. As
for the robust recovery we’re all on the watch for, well it’s like Justice
Steward said regarding porn vs. art “I’ll know it when I see it.” The
numbers can deceive sometimes but they never lie, so let’s get right to the
digits.
ISM
Manufacturing PMI (PMI)- The recently released April ISM Manufacturing
Index rose to 54.9% up +1.2% vs. the March release of 53.7%. This
was the eleventh consecutive month of expansion. The report reflected a
55.1% showing for the new orders index. The employment component registered in
at 54.7% a +3.6% increase. Of the 18 industries included in
the survey 17 reported growth. Respondents pointed to weather driven pent
up demand being released in the US along with strong demand from Asia.
ISM
Non-Manufacturing PMI (Service Sector PMI)-The new Services Sector PMI
came in at 55.2% a +2.1% improvement over March. The business activity
index climbed +7 ½% to 60.9% along with the new orders index rising from 48 to
58.2%. The important employment component while still in expansion mode
eased off from 53.4% to 51.3%.
Leading
Economic Indicators (LEI)- LEI for March jumped up to +.8% which is improved
from February’s +.5%. On a longer term view year over year the index is
up 6.1% sharply up above the 2.3% annual average gain.
Industrial
Production (IP)-IP
showed an increase of +.7% in March after February’s +1.2% gain. For the
first quarter as a whole IP moved up at a 4.4% annual clip. Importantly
Capacity Utilization (Cap-U) increased to 79.2%. While improved the
figure still leaves some slack in the line to absorb any future
inflationary pressures when they arise.
Retail
Sales-
Retail Sales were up +1.1% from February and +3.7% year over year.
Strength was notable in autos and other motor vehicle dealers up +9
½%. Clearly we can see how strongly weather restrained sales earlier in
the year and only now are being recouped. We look for continued
improvement along these lines as we get deeper into the warmer spring
temperatures.
New
Homes Sales-
An improving homes sales environment is a critical piece of this becoming a
sustainable economic recovery. Right now we’re getting mixed
signals. March’s new homes sales figures were a seasonally adjusted
annual run rate of 384,000 below February’s 449,000 figure. Building Permits
came in at a seasonally adjusted annual rate of 990,000 or 2.4% below
February’s rate of 1,014,000 but up +11.2% year over year. Weather
and a choppy interest rate environment may have impacted the sales
figures. We’ll be watching closely.
Consumer
Price Index & Producer Price Index (CPI & PPI)- Both CPI
and PPI remain well below the Federal Reserve’s target of 2%. March’s PPI
came in at +.5% following a -.1% decline in February and +.2% for
January. Meanwhile CPI increased +.2% after rising +.1% in
February. Ex. Food and energy (cause who eats or heats their homes) the
index rose +.2% also.
Non-Farm
Payrolls(Jobs)-Non-Farm
Payrolls registered in at 288,000 for April. Many, upon hearing
this release thought this much better than anticipated figure would have sent
the market rocketing higher. As always the devil’s in the
details. The unemployment figure dropped to 6.3%. Sounds good
right? Would have been if not for the 806,000 folks that dropped out of
the labor force or referred to as the labor participation rate.
This followed an increase of the labor pool of 503,000 in March.
Clearly an uneven figure that make this monthly number extremely difficult to
model. Two issues may be driving the drop in the participation
rate, baby boomers retiring and long term unemployed deciding not to attempt to
reenter the workforce once long term extended unemployment benefits were not
renewed. Yet another reason for Congress and our President to
strongly consider reforming current Immigration policies. Also, the
average hourly workweek remained unchanged and the same was reflected in the
wage component, unchanged.
Going
Forward.
The
first four months have been frustrating to say the least. First we
contended with a little froth in the market as a hangover from the December
rally. After we regained our footing we received a polar smack down that
sent consumers running for the comfort of their couches, toting popcorn and a
good moving. Again, we recovered as weather warmed, consumers thawed and
corporate cap-ex kicked into gear. THEN, just as we’re ready for
the next leg of this rally to kick in, Private Equity firms began the
onslaught of garbage class IPO’s knocking the stuffing out of even good quality
growth stocks as sellers overwhelmed buyers in a rush to raise cash for these
“hot” IPO’s. (After seeing many of these issues lose half their values
it’s no wonder retail investors don’t trust Wall Street bankers and brokers).
Still yet we recovered and pushed the indices to new record highs. In the
face of an all-out potential civil war in Ukraine instigated by Herr Putin’s
land grab, we continue to hold near those market highs in equities.
Investor conviction is surely being put to the test.
The
Federal Reserve lead by Chairwoman Yellen continues the exodus from its monthly
bond purchasing program or QE. Most recently the Fed moved the
monthly purchases down $10 billion to $45 billion and plans to be completely
QE’d out by October 2014. That is if there are no shocks to the economy
either internally or exogenous. External shocks could come from 1.a
hard landing in China as they try and manage their economy to a slower growth
path while promoting domestic consumption simultaneously. 2. Japan’s
Abe-nomics proves unsuccessful potentially leading to another massive stimulus
jolt of QE and/or a catastrophic sovereign debt default. 3. The
budding Eurozone economic renaissance stumbles from its recent positive
trajectory. 4. Russia cuts down on the flow of gas and oil to the
Eurozone sending prices spiking creating a drag on growth. 5. Venezuela’s
economy continues spiraling downward, inflations rise higher into the
stratosphere accelerates and the country slides into a full out civil war
rebellion.
For
now we remain fully invested as the market appears fairly valued with weakness
seen as opportunities to purchase solid core holdings at times of market
stress. The EU financial system is writing off bad loans and
investments. After some prodding by regulators banks are recapitalizing
leading to a healthier lending environment which should lend support for
further progress in expanding the economy. China’s economy while
slowing some is in the process of trying to pop the real estate bubble
before it becomes to bubblicious. Worker incomes are rising leading
to increased domestic consumption while at the same time damaging export
competitiveness. A double edged sword they can live with since they
sport a population in excess of 1 billion. Japan’s Abe-nomics seems to be
having the desired effects as consumption has held steady even after they
raised sales taxes a full 300 basis points from 5% to 8%. Most
importantly the US cold snap has ended and the warm weather is beckoning
consumers back outside. There were very real fears that the consumer may
have been tapped out and the first quarter slowdown was something more lasting
and troubling. Thus far this doesn’t appear to be the case with sales
strength seemingly across the board and cap-ex picking up along with job
creation. As for the acceleration and sustainability of this economic
recovery some investors can’t see the forest for the trees. At GSA, well,
we’ll just know it when we see it.
Thank
you again for your confidence and patience in this very challenging
environment.
Yours
in pursuit of the KWAN!
