While
growing up back east in the Big Apple our family always had at least one
quad-ped with a tail, better known as a dog. The one that was my favorite
and best friend was a Chow and German Shepherd mix. He was brown and
white and BIG whom we named Bear. He was extremely protective and
would spring to attack mode when anyone even looked cross. Thing
is, it wasn’t until I was much older that I realized he’d spring to attack mode
with anyone, anytime friend or foe, just never against us. I realized Bear
was wise beyond even his dog years and adhered to the old saying, “you don’t
bite the hand that feeds you”. Some, and for me far too many,
investors continue to gripe and get downright ornery about the
current and very generous Federal Reserve monetary policy. A policy
which arguably rescued the global economy, our capital markets and for many a
lifetime of savings. So, no need for tail wagging or face licking just
looking for an end to the teeth gnashing.
The
US economy continues an improving trajectory at a speed of good not
great. We are a near $17 trillion economy expanding at a 2 ½% to 3 ¼%
annual growth pace. The US recovery is far more broad based and on firmer
footing than our global partners. So, that being said let’s just get
right to it.
Where
we are.
Institute
For Supply Management Manufacturing-ISM Manufacturing. ISM
Manufacturing for February came in at +52.9% down -.6% from January’s
+53.5%. There was a general easing off the accelerator across the board,
but 67% of the reporting manufacturers reported growth, 17% reporting unchanged
and 16% reporting contraction. Respondents commented as
follows: “West Coast ports is an issue for exporting” Food and
Beverage. “The major concern for us is the ongoing situation with the
West Coast ports” Transportation Equipment. “The dock delay on the West
Coast is seriously impacting the supply chain” Computer and Electronic
Products. “Business in general is staying its course. Concerns abound
over strike possibilities by West Coast Longshoreman” Machinery. You can
see a clear trend here. The takeaways here. The +52.9% while lower
is still solidly above the +50% mark which denotes growth. As well the
West Coast Longshoremen strike has by now been resolved and the backlogs are
now being dealt with and cleared.
Leading
Economic Indicators-LEI. LEI increased +.2% in January on top of the
+.4% gain recorded in December. The trailing six month average comes in
at a reasonably healthy +2.3% showing with broad based gains and participation.
The most recent reading continues to suggest a slow growth environment
with a lack of strong residential construction continuing to act as a drag on
growth.
Industrial
Production-IP.
IP rose +.2% in January. While the US factories continue to chug along at
a moderate level exports seem to have hit stall speed, potentially impacted by,
yet again the downshift to snail speed at the West Coast ports.
Factory Capacity Utilization stood steady at +79.4%.
New
Homes Sales-NHS. NHS dropped-.2% in January. The supply or
inventory of unsold homes stood steady at 5.4 months.
Existing homes sales also took a hit down 5%. Both figures
appear to have been impacted by the severe cold snap experienced across the US and
the sharp rise in pricing. Housing Permits edged down also to a
1.05 million annual run rate. Should this slow growth mode take root it
would be problematic to the US recovery as construction plays a sizable role
in the domestic economy. We do not anticipate this scenario as the
generally favorable conditions are still present. These include strong
and growing employment, ultra-low interest rates along with a deleveraged
consumer.
Jobs- The real time gauge
of the employment picture, weekly unemployment claims have entered into a
seasonally choppy period allowing for seasonal workers being released now that
the holidays have come and gone. We’ve witnessed swings of +/-
30,000 over the course of the last month pushing the gauge above and below the
300,000 threshold leaving us currently at 294,000. Next the
granddaddy of jobs figures the monthly Non-Farm Payrolls . Non-Farm
Payrolls rose 257,000 in January with private average hourly earnings
increasing +.12. Good news along with the recent announcements from
major retailers hiking hourly rates nationally. February’s Payroll
figure will be released this upcoming Friday with the expectations for another
gain in jobs right around +230,000.
Where
we are going.
The
US economy is resilient in it recovery not withstanding we continually shoot
ourselves in the foot. Starting with a dysfunctional Capitol that for the
past six years have shown us leadership at its worst. Starting with a
President that continues to circumvent both houses and back to a Congressional
lack of leadership that almost resulted in initiating a bear market raid in
response to a government shutdown. Then most recently the Longshoremen’s
union(which many of my uncles and both my grandfathers were members of) nearly
shutting down the West Coast Ports at the most important time of the year,
holiday season. Despite all of these attempts to inflict pain on both
business and consumers in order to trigger a negative backlash the US economy
keeps chugging along.
This
contrasts with our global partners. The Euro-zone is showing early signs
of recovery. However, due to a European Central Bank that had been
shackled by the Euros structure, large budget deficits, Germany’s adherence to
austerity as tonic for anything that ails EU members and a renewed fear of a
Greexit, it’s no wonder Euro-zone GDP would be lucky to generate the forecast
+1.3% for 2015 and +1.9% expansion in 2016.
Now
we shift to China. China remains an interesting story. China is
attempting to shift the economy to one less reliant on exports. They
were/are a low cost provider of labor. Their goal is to diversify away from
cheap labor and real estate to include the higher margin, higher paying
services and technology sectors while spurring domestic
consumption. China’s approach to markets appears to shackle if not
completely lock out US companies only to encourage domestics to build out
mirrors of US success stories. Think Google vs Baidu. Look again at
Amazon and EBay vs Alibaba and Tencent. Chinese companies don’t
necessarily innovate, they do however replicate and quite
successfully. We could continue to list companies in Banking and
Insurance and many more. We’ll see how well they fare when China finally
opens the doors for US competitors. China’s economy is anticipated to expand
at a 7% annual rate though growth has been choppy. In response the Chinese
Central bank recently eased monetary policy to help juice the slowing
domestic growth rate which had been feared to have dipped below that
pace.
Shifting
our gaze just a bit we see Japan continuing its own Quantitative Easing
program. Prime Minister Abe has staked his legacy on finally jump
starting the Japanese economy and stabilizing inflation. We are seeing
early signs of success. India has also joined the program of the race to
debase one’s currency. The Central Bank of India recently cut rates to
spur growth. This coupled with recent steps taken by new Prime Minister
Narenda Modi to encourage business investment and spur infrastructure spending
are encouraging measures. Much like Europe, India and Japan recognize the
structural issues restraining growth each country face cannot be resolved by
rate cuts alone. Finally after a near lost decade all are beginning the
arduous task of taking on structural reform and the powerful unions. In
order to unlock each countries growth potential, workforce liberalization must
occur while attempting to simultaneously root out at least some corruption.
These steps being taken currently will in retrospect prove to be baby
steps and take a few more years to implement but they are finally heading in
the right direction.
When
we take our view from ten thousand feet above we see even better times
ahead. The Euro-zone should continue its early stage recovery aided by
the European Central Bank’s Quantitative Easing program of $60 billion monthly
asset purchases. This should reinforce modest 1%+ 2015 growth
accelerating albeit from a low base closer to 2% into 2016. We look
for Japan’s GDP to expand at a .6% annual growth rate for 2015 bumping up to
+.8% in 2016. India and China are targeting an impressive annual GDP
growth rates of 7% +or – ¼%. These tailwinds for the US
economy should be aided in no small part by the generationally low
current interest rate environment provided by Fed Chair Yellen. So, when
the Federal Reserve finally begins to normalize interest rates later this year
or early next year, before investors begin growling and gnashing their
teeth they’d be much wiser and take a note from my old friend and “be the
bear”.
For
now we maintain our aggressive exposure to the markets while monitoring the
data for any signals to become more defensive.
Thank
you again for your patience and confidence in these very challenging
times.
Yours
in pursuit of the KWAN.
