PT
Barnum once said, “energy and patience in business are two indispensable
elements of success”. That couldn’t be more true with investing in
today’s markets. The volatility and prices of the Dow specifically have
seen near swings of 200pts on eight trading days out of the last two weeks of
the just closed quarter. These swings have shaken the faith of some
investors while other market timers continue their attempts to pick tops and
bottoms getting chopped up in the process. The markets and economy both
appear to be in a digestion phase. Meaning we’re feeling the
effects of the 45%+ drop in oil pricing while dealing with the accompanying
slowdown in capital outlays and hiring in those related industries. At
the same time we’ve also had to absorb the shocks from the polar blast that
blanketed the east coast along with the West Coast port shutdown.
Expectations for revenue, earnings and first quarter growth are all coming down
at the same time. Considering all these headwinds a nice market
correction seems inevitable, yet here we are a few percentage points from
all-time highs. Let’s take a closer look at the numbers.
Jobs- Well this one left a
mark. Friday’s jobs figure was highly disappointing to say the
least. The headline figure +126,000 new jobs was roughly 100,000 shy of
expectations. This figure clearly reflects the residual effects of below
normal temperatures and heavy snow accumulation. When viewing these
monthly figures it’s always best to look at the three month moving average at a
minimum, which currently stands at +197,000. We’ll wait for the April
figure to be released in May to conclude we’re recession bound just yet.
Purchasing
Managers Manufacturing Index(PMMI)-PMMI came in at +51.5% which reflects economic
expansion for the twenty seventh consecutive month. The New Orders
Index, Production Index and Employment Index all showed a softening from the
prior month while all remaining in positive growth territory.
Purchasing
Managers Services Index(PMSI)-PMSI registered in at +53.5% up a bit from
February’s release of +52.7%. This was the sixty second consecutive month
of expansion. The Business Activity Index, New Orders Index and
Employment Index all were solidly in growth mode. The commentary from
respondents were overwhelmingly bullish or pro-growth.
Leading
Economic Indicators(LEI)-LEI increased +.2%. Conference board economist
Ozyildirim noted, “ widespread gains among LEI continue to point to short term
growth”. He further commented that weakness in the Industrial sector and
business investment were restraining economic growth overall.
Producer
Price Index & Consumer Price Index and (CPI,PPI)- PPI fell -.5% in
February and was down -.6% for the trailing twelve months. In February,
no surprise nearly 30% of the decline can be traced to margins for fuels and
lubricants which were off 13.4%. Energy wasn’t the only culprit as we see
weakness across minerals, vegetables and chicken. CPI however ticked up
to +.2% with the core (ex-food and energy) mirroring the top line figure of
+.2%. Over the prior twelve months the index remains unchanged
overall. Our takeaway here is inflation has not been a problem, will not
be a problem for some time giving the Fed ample flexibility on future interest
rate hikes.
Gross
Domestic Product (GDP)-First quarter GDP report will be released later this
month. Nearly all analyst projections have been revised lower.
The new range looks to be from -.5%-+2% down from original calls for an average
of +2 ½%. This is a tough call. Clearly across the board the West Coast
port shut down and the arctic blast had a devastating effect on consumer and
product mobility, behavior and availability. We’ll find out just how
severe. Last year’s freeze was responsible for a -2.2% contraction.
We don’t anticipate a hit of this magnitude as the economy and consumer are
both on much firmer footing.
Where
we’re going:
Coming
into the year there were three huge Black Condors gliding above in threatening
formation. 1.Iran 2.Ukraine 3.Greece. The first two birds have been
grounded or on trajectory to do so for now. The third resemble more of a pigeon
than condor. Should Greece exit the Euro, well, so what. The
benefits to being a member of the Euro-zone are clear. An overleveraged,
over-entitlement dependent Greece with a political policy not of diplomacy and
negotiation but of nose snubbing and name calling in its place being asked to
exit the Euro would not be as destabilizing as originally hypothesized.
There does not appear to be other Euro members lining up to take that same path
which was once feared. Should Greece’s virtual EU membership card get
revoked, personally I’d feel worse having Costco revoke mine. In the end
Greece politico’s may or may not come to their senses. Greece
maintaining its EU membership would be a positive, but in the end would not be
a devastating blow.
Speaking
of the Euro-zone, we are beginning to see those ‘green shoots’ of spring
growth. After taking measures to firm up finances, liberalize work force
rules (for some) and re-liquify the financial system (in progress)EU growth is
now anticipated to move up +1.7% in 2015 and +2.1% in 2016. Another
bright spot for the global economy as China executes it’s long landing policies
and growth eases closer to +7% annualized growth in 2015 we are seeing an
acceleration in India’s economy which could pick up any residual slack in
global demand. India’s growth is targeted to expand (IMF and
S&P estimates)+6 ¾%-+7.9% for 2015 and +6.52%-+8.2% in 2016.
Impressive.
Domestically
we are feeling the front end effects of cheap oil That being slowed
expansion and investment in new projects and manpower. Visa has done some
good work here suggesting a six month lag for the consumer wealth effect to
flow through from sharp drops in energy translating to stronger retail sales
and consumer behavior in general. We should begin seeing a trickle
of that new found consumer wealth in this current month and gaining steam as we
get deeper into the year. We appear to be stuck in a good not great
economic growth scenario. The low inflation environment we currently
inhabit bodes well for the Janet Yellen lead Federal Reserve to put off any
sharp hikes in interest rates to the latter half of this year and/or into 2016
which should maintain the favorable backdrop for equities.
We
are cautiously optimistic as we enter earnings season. Should earnings
and guidance not meet our lowered expectations we’ll look to move to a more
defensive posture and raise our cash allocations. For now we remain
patient as for those who rush in too quickly well, PT Barnum had another
saying, something about “One being born every day”.
Thank
you again for your patience and confidence in these very challenging
times.
Yours
in pursuit of the KWAN.
