Grand Street Advisors
Market Snapshot
June 2014
“A
nickel ain’t worth a dime anymore”. Huh? Yogi Berra was a very good
baseball player. He was an excellent wordsmith. Far too many hedge
funds and ordinary investors in general have adhered to this Yogi-ism
with regard to the US dollar and specifically equities. Many have
missed the market bottoming all the way up to recent near daily record
highs being posted by the Dow Jones Industrial Index and the S&P
500. Clearly this daily push to even loftier levels cannot go on
uninterrupted. When does it end and why? Attempting to catch an
absolute market top or bottom is a fools game and a recipe for
failure. When there appears to be signs of froth in valuations, smart
investors begin taking profits and build a reserve to take advantage of
any selloffs. When fear and selling volume spike in a bear market or a
correcting market, again smart investors begin dollar cost averaging
into the market. Going all in or all out doesn’t make for a solid
investment strategy unless you’re playing Texas Hold-‘em.
So, with the market continuing to plow ahead to all time record highs let’s take a look at where we are:
The
US economy continues on a moderate growth trajectory with ISM
manufacturing coming in at an expansionary +55.4, while Leading
Indicators increasing +.4% in April suggesting more of the same going
forward. Industrial Production dropped -.6% after rising +.9% and year
over year is up 3 ½% which is consistent with our view of the
expansion. Factory Capacity Utilization dropped to 78.6% leaving 2.4%
in excess capacity when measured against the long term average of 81%.
The vitally important Housing sector appears to be suffering from a few
contributors. 1.Lack of supply. 2.Availability of credit. 3.
Weather. 4. Affordability. Some good news in the sector, home price
increases have moderated along with the frigid temperatures and bank
underwriting standards have eased. While the recent housing data
points are yet again, good not great, the tree in the forest we should
focus on is building permits which augur future growth. Permits rose
8% in April to a 1.08 million annual run rate the best since 2008.
We’re waiting for non-farm payrolls out this Friday
but the real time employment index, weekly unemployment claims last
week ticked down to 300,000 the lowest level since August 2007. The
trend lower in claims is solid and suggests stronger job creation in the
months ahead. We look for Friday’s non-farm figure to come in around
215,000-225,000 which again would continue the improving growth trend.
Overseas
we see the Chinese managed economy, with Central bank support in a
bottoming pattern with growth around 7 ½-7.6% rate of expansion. India
is in a similar patter but a few percentage points lower at 4.5-4.7%
targeted growth. Japan is experiencing the desired effects of
Abe-nomics with sales holding steady even after a substantial sales tax
hike and growth stabilized. Investors wait for the promised structural
reform to the Japanese economy that may finally break the grips of two
decades of deflation and stagnation. If the Asian economies are in
fact bottoming this would provide a solid backdrop for US exporters and
the global economy in general.
To Europe, Thursday
should provide interesting theater. The Mario Draghi lead European
Central Bank will unveil plans to jump start lending and the economy
while fending off a Japan like era of stagflation. They may hold off
on a US Federal Reserve like asset purchase program, aka QE but they may
be the first to go to negative interest rates in order to prod banks to
improve lending. Another arrow in the quiver is to provide long term
low interest rate loans to Euro area banks to again provide the mother’s
milk to any expansion, cheap funding.
Back
home the US experienced a disappointing first quarter contraction of 1%
in the economy as expressed in the GDP figure. The market was largely
given a pass on the weak first quarter economic performance due to the
effects of the frigid temperatures effects on consumer behavior. At
this point the second quarter is tracking at a +3.6%-+4.2% GDP rate of
growth. So, if we average out the two, we’re back close to a near 2%
expansion with stronger growth anticipated going into the third and
fourth quarters leaving us close to a 3% growth rate for all of 2014.
Tuesday’s release of Domestic auto sales showed strong demand across all
brands pointing to an annual run rate of 16 ¼-17 million. No matter
how you look at these figures, robust, suggesting earlier weakness was
indeed weather related. We anticipate the Federal Reserve to hold the
course on tapering their bond purchasing and make the cut from $45
billion to a combined $35 billion monthly purchases of US Treasuries and
Mortgage Backed Securities. The verbiage accompanying the Federal
Reserve announcement to cut QE should also stay the course of “very low
interest rates for an extended period of time” which we believe keeps
current zero interest rate policy in tact into mid-2015.
Against
this backdrop of China, India and Japan economy bottoming, a newly
aggressive ECB along with a still very accommodative Federal Reserve
policy we maintain our aggressive posture to the market. With regard to
those prognosticating a resumption of the Bear market while watching
the markets march to near daily and weekly new highs, well as Yogi put
oh so well, “It’s like déjà vu all over again”.
Thank you again for your confidence and patience in this very challenging environment.
