With
all the angst generated by elevated anxiety from a potential .25% basis point
(1/4% of 1%) rate hike we at GSA have to wonder have investors been captured or
corralled into the Federal Reserve’s Habitrail? Have investors been
abandoning all common sense and reason, trading kneejerk style at every and any
Federal Reserve headline, statement or missives. Unfortunately, we
believe the recent trading activity suggests too many investors are getting
caught doing just that. We were all in one global easing mode module
content to take on risk and invest across a broad spectrum of assets of varying
quality. Then, the Federal Reserve added on a tube and module, baits it
with some tightening talk and many investors go stampeding through exiting
their home base and core investment principals fearing they might miss out or
there might be something better on the other side. I’ve found out
over the years those who stay true to their long term disciplines, in times
like these tend to have a lot less competition picking through the scraps
tossed aside during panic selling leading to successful outcomes.
Where
We Are.
Gross
Domestic Product(GDP). The US economy clearly regained its footing in the second
quarter as GDP was revised up to +3.7% coming off the first quarters +.6%
showing. The third quarter currently appears to be trending towards +3%
rate of growth helped by strong demand for housing, auto’s, aerospace, retail
sales along with a resilient level of consumer confidence. Estimates for
the fourth quarter stand close to +3.5-+4% which would see us exit 2015 at a
+2.7-+2.8% level. Good not great but a solid foundation heading into 2016
where GDP is targeted to expand at greater than 3% barring another polar blast
or government shutdown.
Leading
Economic Indicators(LEI). LEI in July registered -.2% after a fairly robust June
reading of +.6% and May’s +.6%. This minor setback against the fallback
of the prior two months strong readings would suggest we remain in a Goldilocks
environment, not too hot not too cold and steady as she goes mode.
Purchasing
Managers Manufacturing Index (PMMI). PMMI came in down 1.6% to +51.1%.
Across the board respondents were positive. Food and Beverage noted the positive
impact from falling oil prices. Transportation pointed to the
strong demand but a bit of softening. Computers and electronic pointed to
the headwinds created by the stronger dollar which has since stabilized from
the reporting period. Machinery saw heavy demand from the automotive
industry upgrades to equipment. Lastly Furniture and related
products pointed to strong business (see impacts from housing) while finding
labor remains a challenge. So, we may be seeing a bit of softness in the
headline figure but the underlying businesses appear on solid footing and well
above the 50% break even level.
Purchasing
Managers Non-Manufacturing Index(PMNMI). PMNMI rang in at a very strong
+59%. Arguably since non-manufacturing or services accounts for 90% of
the economy this should have a heavier weighting in our view. We
saw strength across the board here. Business activity index +63.9%.
New Orders Index +63.4%. Employment Index +56%. By
sector. Healthcare noted “overall business is increasing”.
Construction seeing business as “good and no signs of any slowdown”.
Retail trade stated “ business and our market sector continue to be strong with
continued growth and stability”. Again a very solid
showing.
Industrial
Production (IP).
IP popped to a +.6% the highest level since November. Again here we see
how the strength in autos contributed +.8% in manufacturing. Capacity
Utilization rang in at +78% up +.3%. This improved level still leaves an
ample 2.1% below its historic average of unutilized capacity to act as an
inflationary buffer.
Inflation. No matter which
indices or indicator utilized as a proxy all remain in favorable
territory. All remain below the Feds stated 2% target rate. Many
remain fairly stable, that is ex-energy. Energy costs are down
substantially. So, we look to the core or figures ex-food and energy
which tend to be the more volatile components. Core PCE is up a very tame
1.2% year over year. So, again I ask what is the rush by the Fed hawks to
hike rates?
Housing. Housing starts
ticked up +.2% to a 1.206 million annual run rate in July. On a year over
year basis starts have increased +10.1% and permits are also up strongly +7.5%
which bodes well for the upcoming quarters.
Where
We’re Going:
In
order to assess where we’re going we need to understand how we got to where we
currently are. The recent market sell-off has many investors confused,
was it due to a potential Fed rate hike? Was it the well telegraphed
slowing of the Chinese economy? Is there an end to Global Central Bank
QE? I would say the following; 1 Overblown. 2. Well known. 3. A
resounding NO. I would also add to this great debate. Could
causation be, as opposed to the Amaranth Advisors collapse ($10 billion Hedge
Funds bet large on an increase in natural gas prices) in which one firm bet
big, bet wrong and lost/collapsed that currently far too many Hedge Funds with
hundreds of billions have entered into the same commodity related bets
and are getting decimated? This would help explain large unexplained
selling as redemptions requests pour in along with margin calls being
executed. A few recent casualties. A Carlyle Group(considered
some of the more savvy investors by many) related fund saw assets fall from $2
billion to $50 million. Another $650 million Hedge Fund Armajaro Holdings
closed down after values fell precipitously in the first seven months of the
year. These are just two of the most recent that closed but the
list of closures is long and the dollar amounts large, at least they were at
one point.
Taking
a view from ten thousand feet above we see China’s economy is slowing to a
targeted 7% rate of growth +/-. This slowing also pressures the exports
of their trading partners mainly its Asian neighbors and markets of Japan,
Taiwan, Australia and Korea among others. But, as we broaden our view we
have to factor in the effects of the rebounding economies of India +7%+, a
rebounding UK and Euro Zone that may finally break above a 2% growth rate in
2016. Honing our focus over to the US, still the largest economy in the
world, we see 2015 growth accelerating 3%+ into 2016 relying primarily on the
domestic consumer which still accounts for 70% of demand.
I
believe we experienced the recent sell off for the following reasons. 1.
Seasonality. Many professional trades/investors take vacations at this
time of year before sending kids off to school. 2. The markets were
fairly valued, not cheap not expensive at 18x earnings awaiting a catalyst to
drive direction. Energy’s volatility and collapse provided one
catalyst. 3. China devalued the Yuan. 4. Crowded commodities
related trades gone wrong experiencing forced liquidations.
If
correct we should see a continuation of the ongoing bottoming process the
markets are attempting succeed. This should be followed by investor
refocusing on corporate and economic fundamentals. The US is creating
200,000+ jobs a month or close to 2 ½ million annually. Inflation is
benign. Global economic growth is slowing incrementally but is
stable and could resume to faster growth as we look into 2016 an
2017. Global Central banks even if the Fed hikes rates by the ¼%
are incredibly stimulative and show no signs of abruptly ending QE or hiking
rates. This backdrop would pose US and European equities in a very
attractive light. The current market gyrations may be with us for a
bit longer but when the time come to move we won’t be with the crowd wondering
“who took my cheese” and we won’t get caught on any tread wheels
either. We’re looking for our next opportunities now so we’ll capture the
next leg higher when it comes. For now we maintain our aggressive posture
to the markets remaining open to the next catalyst to dictate market
direction.
Side
note: Someone much brighter and more clever than myself once stated “the bear
market enthusiasts have correctly predicted 30 of the last 11 bear
markets”. Always keep this handy as we never can tell when one of those
experts may find a podium or platform so they can take a shot at their fifteen
minutes of fame, again.
Thank
you again for your patience and confidence in these very challenging
times.
