This Market Rally Is Past The Bulls or The Bears, Now It All About the Monkeys

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.

While it’s not time for the monkey and the dart board we do take our cue from Kikazaru and prefer to “hear no evil”.  Basically block out the noise, focus on the improving global economic fundamentals and maintain our aggressive exposure to the markets.  External shocks could shake us.  One we are keenly watching is the potential for a super spike in energy prices precipitated by a complete and outright civil war in the Middle East and a further deterioration of the fighting in Ukraine supported by Russia’s President Putin.  

 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!