The early pain markets
experienced appears directly related to people playing with OPM (Other People’s
Money)namely hedge funds liquidating and closing out positions. Note last
year’s most loved stocks GOOG, AMZN, FB took huge hits after reporting
impressive earnings results and last year’s worst performers oil and mining
have experienced equally impressive price spikes after having reported terrible
quarterly results. This suggests large positions being closed and was
reflected in the price action and short covering rallies for commodities stocks
in some cases up 30%-50%. It also helps to explain some of the immense
selling pressure that sent health care REIT’s spiraling including some we
own. The prices of which have recovered some in the recent rally but more
work needs to be done to repair the damage.
Where we’re at:
Jobs. Non-Farm Payrolls registered in at a solid
+242,000 headline figure for February with positive revisions to the prior two
months adding an additional 30,000 jobs created. The participation rate
climbed to +62.9% which reflects a gain of +.5% since September. This
shows people who’ve been long term unemployed are re-engaging the work force.
Finally. The Fed has been waiting for this figure to begin ticking higher
as a sign of a healthier work environment becomes more inclusive.
There was broad based growth across the spectrum notably in healthcare, private
education and construction which are good paying jobs. Retail trade and
food services also trended well but these jobs tend to be on the lower scale
which may explain the tick down in hourly earnings. Mining once
again continued to experience declines.
ISM Manufacturing-ISMM. ISMM saw an increase of +1.3% to +49.5% which
while still in contraction territory inched closer to the neutral +50%
level. There were bright spots. The New Orders Index held steady at
+51.5%. The Production Index popped +2.6% and Inventories +1.5%. The big
declines continue to be in Prices Paid Index at +38.5% reflecting lower
materials pricing. On the whole comments from respondents were fairly
positive. From Chemicals “U.S. business demand is solid, international
soft”. Computers “mobility spend is up”. Machinery “very
strong demand”. Furniture “orders are coming in stronger than
expected”. So, while the headline figure remained in contraction
territory should the demand continue its trajectory we would anticipate this
indicator to return to positive growth come March’s release.
ISM
Non-Manufacturing-ISMNM. ISMNM
was virtually unchanged ticking down -.1% to +53.4% from January. A
relatively positive report. The Business Activity jumped +3.8% to +57.8.
New Orders dropped 1% but remain at a still comfortable +55.5%. Once
again respondents were positive on the outlook. Healthcare “overall
business is increasing”. Transportation “overall business transaction
volume and inventory up year over year”. Information “business and
revenue holding steady”. This report continues to point to a
continued steady and moderate rate of expansion.
Leading Economic
Indicators-LEI. LEI dipped .2%
in February. The headline figure was impacted by big declines in equity
prices and unemployment claims. Both of these headwinds have dissipated
of late and as such we may see this indicator flip back positive when next
released on March 17th.
Existing Homes Sales. Existing sales were up +.4% to the highest
level in six months at a 5.47 million annual run rate. Sales stand +11%
year over year the largest gain since 2013. The market is on solid
footing constrained by a shortage of supply which in turn is pushing up
prices. These higher prices may also have the effect of squeezing
out first time would be buyers. Prices were up 8% year over year
the largest increase since April 2015. The lack of supply is reflected in
the level of unsold inventory which currently stands at 4 months. For
reference a market in balance would be closer to a six month supply.
Factory Orders. Factory Orders rose +1.6% the largest jump in
seven months. Ex-aircraft (which tend to be volatile month to month)
orders rose a still healthy up +3.4% the sharpest spike in over two
years. Commercial aircraft orders leapt 54.4%. Machinery
+4.6%. This was a pleasant surprise as the strong dollar has been a
strong hurdle to overcome and has weakened exports. While this is
certainly good news it is worth watching as the US dollar remains at elevated
levels and foreign central banks continue on their respective Quantitative
Easing programs which may further weaken their currencies and strengthening the
US greenback pressuring this sector again.
Monetary Policy. As Dire Straits put it so well, “money for
nothing, your chicks for free”. Money, in many countries around the globe
is being treated worse than nothing as Central Bankers race to
debase. There are negative rates in Japan along with the Euro-zone
among others. The Quantitative Easing strategy is running peddle to the
mettle and the needle on the speedometer looks pinned but for some reason we’re
not going very fast. How long this can go on is anyone’s guess or a
fools guessing game. Central bankers globally are monetizing their
debts. This must come to an end. The sooner it does the healthier
our economies will be. The Federal Reserve appears stuck between a
rock and a printing press. The first attempt at beginning the
process of “normalizing”rates or hiking borrowing costs seemed quite
destabilizing to global markets. Keep in mind they raised one quarter of
one percent, .25% and markets shuddered. The problem I believe lie
in the global linking of our markets, currencies, interest rates and
economies. This is where those chicks come home to roost, nothing is
free. No question the US economy is in a position to handle higher
rates. However, the EU and Japan are still attempting to regain their
economic footing and as such are debasing their currencies and purchasing
massive amounts of assets monthly. Should the US continue to move without
regard to their central bank counter parties actions the US dollar may continue
strengthening. This in turn hurts US exports and gives exporters of those
countries an added advantage to sell to US consumers thus hurting US domestics
as well. Combined these two weights could pull down the US economy
pushing us back into recessionary territory. This is my attempt to
shed a bit of light on the situation, rather simply.
For now Federal Reserve
monetary policy remains highly accommodative and supportive of growth.
They have done nearly all they can to assist in stabilizing the US economy and
more than most thought they could. The responsibility to
reignite a higher level of expansion should have shifted long ago to the brain
trust occupying D.C. Those squatters got the address wrong when they
sought to vent their rage and Occupied Wall Street. The irresponsible and
overly compensated have been hiding in broad daylight in D.C. for years.
A policy response to boost productivity and business investment spurring growth
in employment and higher wages is what is needed. The time is
now. Unfortunately for many Americans the silence has been deafening from
those we elected.
Going Forward:
This presidential election
season seems best captured by Naughty by Nature “You Down With OPP?”(other
people’s property). In one contest we have one hopeful threatening to tax
the US into recession. His plan (though both contestants plans have many
similarities) would introduce higher taxes across the board. He proposes
raising the top Federal rate to 52%, hike capital gains 20%-40%, adding on a 6%
payroll tax among others. His plan would raise (or reallocate) an
estimated $1.5 trillion annually or $15 trillion over ten years. So,
shall we take all this new “found” treasure trove and say balance the
budget? Pay down our debt? NO! It’s free money so spend it
while you can.
Another contestant in this
year’s reality TV show “Election ‘16” would build walls along our boarders and
shut off immigration totally while penalizing US companies that operate
abroad. According to this contestant these moves would incent US
employers to hire domestically and force up wages. While it sounds good
to hear the US actually needs a healthy level of immigrants coming to our
shores and an expanding our work visa program. There are jobs here
in the US that Americans simply won’t do. There are American jobs that
outstrip our domestic supply of trained and skilled workforce. Barring
immigration would be a disaster and could drive our economy over the
cliff. Three of these remaining candidates have offered up financial
plans that claim to balance the budget. They do so by ramping up spending
on defense and steering clear of any cuts to Social Security and Medicare all
the while promising large and generous tax cuts for both businesses and
individuals. I thought we were watching “Election 2016” not David
Copperfield. Hey I love the sound of a strong defense and cutting my
taxes. Basic math just keeps me from getting too excited.
At this point in time the
market seems willing to shrug off the rhetoric. As the field is
narrowed we may not be able to continue doing so. The recent rebound in
oil pricing has removed a major headwind to the markets recovering some of the
high ground ceded earlier. While we don’t see oil spiking to the $60-$70
levels $35-$45 seems likely. $40 feels like the Goldilocks rate.
Not too hot to temper consumers good mood and spending habits. Not too
cold to continue the carnage of jobs lost, earnings eliminated in the
sector. There is a meeting of OPEC and Non-OPEC members
scheduled in March this should help determine if we’re heading for higher
ground or a retest of the mid $20’s is in the cards. I believe the worst
may be behind us, but until an agreement is hashed out by producers on
production freezes or cuts mine remains a hedged bet.
I’m not sure who wins what in
this year’s showdown but I do believe this year’s candidates are simply telling
us what the latest polls tell them we want to hear. I do know when
Politicians are talking about OPP forget about Naughty by Nature be afraid very
afraid.
For now we remained committed
to the market patiently deploying our cash.
Thank you again for your
patience in these very challenging markets.
Yours in pursuit of the KWAN!
