If only
investors shared the wisdom of Mizaru, Kikazaru and Iwazaru they’d be
much better off and wealthier. From the Buddhists the translation
basically comes down to refusing to allow one’s self to dwell on
negative or evil thoughts. We realize this is asking a lot from retail
and even professional investors as with any market move higher yet
another expert is predicting the impending doom and bear market
looming. In the current environment the ability to block out the noise
and focus on the fundamentals clearly would lend towards a bullish
tactical allocation and free ride to prosperity.
First to the Fundi’s:
Jobs: The Non-Farm Payroll figures released Thursday
caught everyone off guard surging +288,000 where street economists were
looking for a figure in the range of 205,000-215,000. The three month
average is no slacker at +272,000 also reflecting a continuing trend of
strengthening job creation. Hourly earnings also ticked up slightly to
+.06. The “noise” in the number? There remains in some circles
questions about the quality of jobs being created. Some say they are
low paying and low quality. It would appear to me anyone out of work
for an extended period seeking work and finally able to find a job
wouldn’t argue the quality. As we know once employed and engaged the
employed appear more attractive to suitors as well. Also, looking
through the report would argue this point of quality as well.
Professional and business services added 67,000 vs the prior 12 mo.
Average of 53,000. Healthcare added 21,000 to headcount. Financials
and Manufacturing added 17,000 and 16,000 respectively. All showing
stability and/or improvement as the economic recovery continues to
broaden and become more inclusive.
Leading
Economic Indicators (LEI): LEI increased +.5% in May after having
posted a +.3% gain in April. Nine of the 10 components were either
neutral or showed gains while building permits were the one main culprit
easing off a bit. This figure again suggests continued economic
expansion over the coming months.
Housing:
New homes sales spiked sharply in May +18.6% to 504,000 units the best
in nearly six years. Also continuing on the housing recovery theme,
Existing Homes sales rose 4.9% to a seasonally adjusted annual run rate
of 4.89 million in May up from April’s 4.66 million annual run rate.
The 4.9% gain was the best showing since August 2011. Existing homes
sales were benefitted by increased inventory and a slowing of price
increases.
Housing
Starts came off a bit in May retreating to the 1 million unit
annualized run rate. Again some of the best numbers in almost six
years. Permits eased off also reflecting a soft patch in the
multi-family sector but was somewhat offset by a rebound in single
family housing permits.
Industrial
Production (IP): IP popped +.6% in May the third increase over the past
four months and puts the twelve month average close to a +.4% rate of
growth which would reflect a steady as she goes environment. Capacity
Utilization rose .2% to 79.1% still leaving a potential 1.9% of slack
capacity in order to absorb any future inflationary pressures.
Institute
Supply Management Manufacturing (ISM): ISM Manufacturing for June came
out at 55.3% for June the 13 consecutive month of expansion for
manufacturing and 61st month of expansion for the overall economy.
There was a bit of noise buried here in the report. New order grew +2%,
employment was flat as were inventories. There was a bit of a slowdown
in production and order backlog. So, all in all a solid number and
there could be some seasonality issues to explain the easing off the
faster pace of growth.
Institute
for Supply Management Non-Manufacturing (ISM). ISM Non-Manufacturing
for June came out at 56% a slight slowing from May of .3%. For the most
part respondents were very positive. With construction commenting on
“the very strong environment” Science and IT “Business outlook is good
and steady” and from Retail “sales in many categories are improving
partially due to pent up demand” which they anticipate carrying deep
into the second quarter. The negative draw came from Healthcare and
Social Assistance citing reduced reimbursements.
On
the global scene we witnessed more signs of stabilization as well.
China’s official PMI registered in at 51% for June vs. 50.8 in May which
was a six month high. As well the HSBC Composite China PMI index
(which is comprised of both manufacturing and services)came out at 52.4%
for June vs. 50.2% in May. Both figures suggesting continuing economic
expansion in the world’s second largest economy. Two camps have taken
opposing ground as to China’s hard landing or soft landing (with regard
to overall economic growth). I tend to come down on the side of Peking
Finance Professor Mike Pettis when he terms it China’s Long Landing.
The long landing appears to be playing out. In the long landing China
slows down lending or credit creation. Economic growth contracts one
percent a year for five or six years. This scenario is bad but not
disastrous as growth would still be good not great and unemployment
remains manageable. The professor warns that banks and financial
institutions constantly rolling over or extending loans to prevent
default (going on currently) absorbs capital to spur growth and puts at
risk support for future expansion. So, in his scenario the Chinese
economy slows over time to a still healthy rate but doesn’t crash. In
the Eurozone the pace of expansion slowed a bit here posting a 52.9%
rate of expansion in June vs. May’s 53.5%. In the Eurozone PMI you need
only dig into the details to see reasons for optimism as the New Orders
Index jumped up to 53.1% vs 52.6 the fastest pace in three years. One
last look abroad to see the effects of Abe-nomics sees the Japanese
economic expansion as reflected in the PMI at +51.5% for June vs. 49.9%
in May. This return to expansion mode is somewhat more positive than
it appears after the large hike in sales taxes from 5% to 8%.
Clearly
the global economy is showing signs of stabilizing and in most cases
expansion. Fueled and aided in no small part by global central bank
stimulative policies and market activities. This Central Bank support
will have to end at some point. The Federal Reserve continues to exit
from its Quantitative Easing program, but remains nearly one year away
from any interest rate hike. The European Central Bank has just begun
their earnest attempts to jump start their respective economies. They
have recently gone to negative rates (never thought I’d hear that one in
my career) and may soon begin direct open market asset purchases.
Japan’s Central Bank remains full throttle open committed to growth
policies and easy money. China continues its targeted stimuli to
stabilize growth while attempting to take some froth out of their
domestic real estate market and prices. Market tops and bear markets
typically are a result of Federal Reserve monetary policy becoming more
restrictive and/or conservative, clearly there is no signs of that shift
taking place.
Earning season is upon us which we see filled with the potential for positive upside surprises as corporate guidance has been very conservative leading up to quarter end. As we said for now we monitor these and other situations that may disrupt business and energy flows and maintain our posture to the markets wary for early signs to adjust positions and raise cash.
Thank you again for your patience and confidence in these very trying times.
Yours in pursuit of the KWAN!
