Have we been here before? - Updates and Thoughts by Howard Isaacson

After suffering the worst week not experienced since 2011, the Dow gained 4.5% over two days this week and experienced is biggest weekly gain in almost two years. http://www.cnbc.com/id/102284110

The S&P 500 index, moved to 2071 this Friday from 2002 last Friday. We are a few points short of the close of 2075 from two Fridays back. The Dow ended at 17,805, up from 17,281 last Friday, but lower than the 17,859 closing value two Fridays back. http://www.marketwatch.com/

The ten year yield on Treasuries rose to 2.16% from 2.08% last week and 2.31% two weeks back. Yields on the German, Japanese, Spanish and Italian 10 year bonds continued their downward movement, while UK’s yields were marginally higher. http://www.marketwatch.com/

Of course, no review of a week is not complete without a snapshot of oil pricing, which bounced around this week:

Overall, it was a week of reasonably good news economically, both looking back and looking forward (other than energy related statistics).

Homebuilder confidence dropped by one point to 57, but continued to indicate very high levels of confidence nationally. http://www.bloomberg.com/news/2014-12-15/homebuilder-confidence-in-u-s-hovers-around-nine-year-high.html

Industrial production has increased 5.2% over the past 12 months, including 1.3% in November. Capacity utilization increased to 80.1% from 79.3% in October. On the negative side, the Empire State Factory Index fell to -3.6% from 10.2 in November. A negative number in this index indicates manufacturers in NY State believe business conditions are deteriorating for them. http://www.marketwatch.com/story/industrial-production-surges-in-november-2014-12-15

The consumer price index declined by 0.3% in November, and was up 1.3% for the 12 month period. Price declines were led by energy but also showing declines for the month were apparel. New and used cars and trucks and commodities other than food and energy. Medical led the increases for the month. http://www.bls.gov/news.release/cpi.nr0.htm

U.S. hourly wages increase by 0.6% in November (combination of 0.3% increase in real hourly earnings and a decrease in the CPI of 0.4%) http://news.morningstar.com/all/market-watch/TDJNMW20141217171/us-hourly-wages-surge-06-in-november.aspx

The number of workers seeking first time unemployment benefits declined by 6,000, to the lowest level since October. The four week average showed a marginal decline of just 750 workers. The seasonally adjusted total number of “insured” unemployed workers declined to 2,373,000 from 2,520,000, but the raw data showed an increase of 423k unemployed over the prior week to 2,576,000. http://www.dol.gov/ui/data.pdf

The index of leading indicators increased 0.6% in November, after gains in September and October. http://www.conference-board.org/pdf_free/press/PressPDF_5347_1418896809.pdf

So, bottom line, things here in the US are looking pretty okay. Definitely broad steps forward, while at the same time, some spotty weakness. This, in my opinion, is all good as we continue to move forward in this expansion and low interest rate environment.

As noted in last week’s notes and commentary, the big wild card for this week was going to be, and ended up being, the Fed’s statement on Wednesday afternoon and Chair Yellen’s Press Conference following the release of the statement. She pleasantly shocked the talking heads with her subtle change in language without changing the meaning. Patience, caution and responsiveness, remain key to their future rate increases. These may happen as early as April or much later, all depending on the stability of the US economy (actual stability demonstrated by statistics, as well as perceived stability, demonstrated by stock, bond and commodity market movements.)

As we all saw this week, the Fed saved the markets from its own irrational fears. This occurred also in October, when select Fed Bank Governors made key comments to clarify their positions and opinions and provided a calming hand and voice, which removed some uncertainty and stabilized the markets.

Also this week, Congress resolved the government funding issues, for the near future, which also had an effect of removing one bit of uncertainty. Though the near term uncertainty regarding government funding has been addressed, I want to share the following three slides which indicate the tremendously scary shifts within the Federal budget. (I remember clearly the days of President Reagan’s era when leading economists were preaching the future fall of America due to the budget deficits of that time. Looking back, they were mere pennies, versus the $18 trillion debt today.)

Comments:

It is amazing how quickly the days and weeks go, and how fast the end of the year will be upon us! I anticipate getting out another commentary before the end of the year.

We have been looking for and identifying some value opportunities through this recent volatility and especially are researching hard as we reposition portfolios for the new year. We expect another decent year in the markets. Based on the underlying profit and loss statements and balance sheets, there will certainly be winners and losers. Not all companies will move higher in unison. 2014 has been a very difficult year for the mid and small cap growth names (after an unreasonably strong 2013). We are optimistic that 2015 will be a better year for these companies, as companies have continued to grow into their valuations.

We definitely expect tightening by the Fed in 2015, but… the Fed is watching very closely the value of the US Dollar relative to the Euro, Yen and other currencies, balances of trade, and the velocity of money here in the US. In my opinion, the Fed has matured over the past 15 years and has become much more sophisticated as to their mission, the world and complex interactions. The Fed is also monitoring the steps the European Central Bank will be doing in 2015 for their additional Quantitative Easing, and the movements of the Central Banks in Japan and China to try and stimulate the acceleration of their economies.

Interestingly, some of the statistics we have come to rely on, specifically the Consumer Price Index, will be reconstituted and certain revisions will be made. Of course, statistics (especially economic statistics) only provide us hints of the world, but the markets and algorithms that do instantaneous trading take the numbers and changes as Gospel. These reconstitutions can create some inconsistency in the new year. Patience, research, and understanding will all pay off well in terms of management of risks and positioning for upside.

CapitalRock and I are working hard every day on our clients’ behalf. I look forward to communicating with you before the end of the year, and in the meantime, I wish all a very happy and safe holiday season!

Have a wonderful week!

#economy #finance #rates