Another week with new highs and high uncertainty
- isaacsonhoward
- Feb 22, 2015
- 4 min read
Positive movement on the Greek front, the implementation of the Russian/Ukraine cease fire, decent earnings results and mixed economic news, all helped to support a movement higher in the stock markets. Significant economic and political issues remain open, but there do not appear to be any imminent and apparent “bombs”…. within the coming week.
Market Action reviews:
After a reasonably mellow 4 days, the S&P 500 powered higher to new highs, on the news of an extension of the Greece debt discussions. The S&P closed at 2110 up from 2097 last Friday.
Source: Marketwatch.com
The 10 year Treasury rates ended at 2.12 up from 2.05 last week, continuing on its 3 week upward trend.
Source: Marketwatch.com
The German 10 year Bond Yield continued to bounce significantly in terms of percentages, ending at 0.33% up from 0.31% last week.
Source: Marketwatch.com
The Euro ended flat on the week at 1.1381 from 1.1391 last week.
Source: Marketwatch.com
WTI Oil moved down to $49.91 from $52.62 last Friday. Prices were impacted by the continuing increase in inventory levels in the US.
Source: Marketwatch.com
Natural gas, showing a little pricing pressure due to the weather, closed the week at 2.939 MBtu up from 2.804 last Friday and 2.579 two weeks back.
Local spot prices, though, differed greatly from the national average:
Economic and other reasonably relevant data points from this past week:
The economic news for the week was fine. Nothing super strong, and nothing surprisingly weak.
Of the 500 companies in the S&P 500, 443 have reported earnings through February 20th, with 75% reporting above the average estimate for earnings and 58% above for sales. Factset.com notes that the Forward 12 month P/E is the highest it has been since 2004 for the S&P 500. While this fact alone could be disconcerting, see the following chart from FactSet.com:
Industrial Production figures released by the Federal Reserve indicated that the index was up 0.2% in January, after being down 0.3% in December. 12 month growth aggregated 4.8%, with mining up 8.5% y/y and utilities down 6.6% y/y. Mining, which includes drilling and oil and natural gas extraction, was down by 1% in January. http://www.federalreserve.gov/releases/g17/current/
Housing starts for January were down to 1.065 million from 1.087 million last month. The number of permits was also down to 1.053 M from 1.06 M last month. Y/Y January 2015 starts were up 18.7% from January 2014, including the Midwest region which was up 125.8%. Thus, these figures can be tremendously skewed by weather. http://www.census.gov/construction/nrc/pdf/newresconst.pdf
Here is the one month and 5 month averages:
Source: Bloomberg.com
New jobless claims came in a bit lower than last week and the 4 week average is very close to the low hit in the 4th Q of last year.
Source: Bloomberg.com
Bloomberg’s Consumer Confidence Index was up to 44.6 from prior month’s 44.3, the best reading in the past 4 years, driven by gas prices and job growth. http://www.langerresearch.com/uploads/m0219jh4.pdf
Philadelphia Fed released their survey of general business conditions and it was 5.2, down from 6.3 last month. Expectations ranged from 6.0 to 15.0. The number indicates the expectation of moderate continued growth with maybe a hint of lower confidence.
Source: http://www.philadelphiafed.org/
Baker Hughes reported the latest rig counts which showed a reduction this week of 48 in the US and 22 in Canada. From this time last year, 733 less rigs are at work in North America! Interestingly, the number of vertical rigs has been almost cut in half over the year, while horizontal rigs are down a bit more than 20% from last year. Natural gas rigs are down 15.5% y/y, and oil rigs are down 28.5%. http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-reportsother
Crude oil inventories continued higher, up 7.7 million barrels over last week to an 80 year high for this time of year! http://www.eia.gov/petroleum/supply/weekly/pdf/highlights.pdf
Even with the extremely cold weather in the North, storage inventories of natural gas this week were higher than the five year average, for the first time since late 2013. http://www.eia.gov/naturalgas/weekly/
The Markit Purchasing Managers’ Index was reported at 54.3, towards the high end of estimates and slightly higher than over the past few months. Production volumes were up and rising at the fastest pace in 4 months, though supplier deliveries were down, attributed to the West Coast Port slow down and poor weather in the NE. http://www.markiteconomics.com/Survey/PressRelease.mvc/76d54ef7fac944e6a41abf20258b097f
Business inflation expectations per the Federal Reserve Bank of Atlanta at 1.7% for the next year. They also reported that unit prices are up 1.5% over last year. https://www.frbatlanta.org/research/inflationproject/bie.aspx
The Atlanta Fed also publishes their estimates of the likelihood of deflation and they have noted that the “deflation probabilities remain at 0%” over the next 5 years. It has been at this level since
September 2013. https://www.frbatlanta.org/research/inflationproject/dp.aspx
The following summarizes the public comments of Fed Governors regarding the Fed Funds Rate change possibilities:
Consumer borrowing and delinquency rates:
Delinquencies on student loans:
Here was an excellent article published in today’s WSJ that identifies the obstacles to come for Greece and the timing…. The extension they announced yesterday is not “complete” and is subject to numerous approvals, and follow-ons. SO the issue has not been resolved, only deferred. http://blogs.wsj.com/briefly/2015/02/20/greece-bailout-extension-5-things-to-know/
Conclusion:
With the above items noted, once again, much rests on the Fed, the European Union and Greece, global geopolitical movements, oil and natural gas, and consumer actions. We are encouraged by the recent rallies in the smaller cap company space, the continued revenue growth in many sectors and emerging companies, and continued innovation. At the moment, it appears that the volatility that came with the start of the year in so many areas (oil, gas, interest rates, currencies, and equity markets) may have settled down a bit. We are hopeful.
At the same point in time, one item of certainty is volatility as we move forward. Our assessment is that the opportunities at this moment exceed the risks, but selection, allocation, and risk tolerance are crucial over the coming months.
Have a great week!
Comments