The fear and uncertainty continue, depending on the day.... - Updates and Commentary by Howard Isaac
- Howard Isaacson
- Mar 15, 2015
- 5 min read
This was a week marked by a bit of volatility, uncertainty and fear of this coming week, due to the Fed meeting on the 17th and 18th and the Chair’s press conference.
The S&P 500 ended the week at 2054, down from 2071 last Friday and 2104.50 the prior week.
Source: http://www.marketwatch.com/
The yield on the 10 year US Treasury moved lower this week to 2.12% from 2.25% last Friday, as expectations for the next rate hike moved lower and then higher…..
Source: http://www.marketwatch.com/
The German 10 year Bond Yields fell by more than 30% over just one week to 0.22% from 0.35%, as Quantitative Easing continued to do as it had been intended, which was reduce rates….
Source: http://www.marketwatch.com/
The Euro continued its move towards parity as it ended the week at 1.0497 from last week’s 1.0843. The ECB’s quantitative easing combined with the Fed’s goal to begin raising rates does not bode well for the Euro. (This summer may be a great time to travel to Europe and to spend some more valuable US$s.) Below is the 3 month chart:
Source: http://www.marketwatch.com/
WTI Crude broke down this week dropping to $45 from 49.78 last Friday, as production continued to increase (except in North Dakota, which saw its first decline in recent history), and storage here in the US became further limited. (See below for more details.)
Source: http://www.marketwatch.com/
The following likely will be the last time I show this in a while, as regional natural gas prices appear to have normalized:
Let us look at some of the economic releases that have moved the markets:
Consumer Sentiment Index from the University of Michigan came down from a prior reading of 95.4 to 91.2, moving back to a level last seen in November. Both “current conditions” and “expectations” moved lower. http://www.sca.isr.umich.edu/
The Producer Price Index continued to move lower, with a m/m change of -0.5% and yr/yr change of -0.7%. Without food and energy, m/m the change was -0.5% and yr/yr was 1.0%. Hence, the targeted rate of 2% inflation by the Fed is no where to be seen, currently. [Strong reason here for Fed not to raise rates.] http://www.bls.gov/ppi/#tables
Money Supply and the Fed’s Balance Sheet were essentially unchanged. http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
Rig Counts and Production:
Natural Gas Supply and Demand:
Levels of current natural gas versus historical averages:
Crude inventories continue to climb in the US.
US Crude Production continues to climb. Imports continue to decline.
US Crude Oil Storage capacity is at 60%, according to the US Energy Information Administration.
The following that shows inventory levels increasing at an faster rate than sales levels provides a rational explanation for very limited/non existent inflation (supply is greater then demand).
Source: Bloomberg.com
Retail sales m/m were down -0.6% and excluding gas and autos was down -0.2%, versus a positive 0.2% last month. Y/Y retail sales were up 1%. Non-store retailers (web) and food services and drinking places [yes, that is the formal description] were up 8.6% and 7.7%, respectively. http://www.census.gov/retail/marts/www/marts_current.pdf Weather is being given credit for the month to month shift.
Export prices were down -0.1% m/m and -5.9% yr/yr. Import prices were up m/m by 0.4%, but down -9.4% yr/yr. http://www.bls.gov/news.release/pdf/ximpim.pdf
[Again, not strong support for a rate increase and further appreciation of the USD.]
Source: Bloomberg.com
New unemployment insurance claims came in at 289k, less than prior week’s 325k, showing continued strength in employment, though no massive improvement. http://www.dol.gov/ui/data.pdf
The Bureau of Labor Statistics released their Job Openings and Labor Turnover statistics for January, showing 5mm job openings at the end of January, up from the 4.9mm at the end of December. There were 5.0mm hires in January. Overall the figures were very similar to those from the prior month, with no signs of improvement or breakdown in the labor markets. ” Over the 12 months ending in January 2015, hires totaled 59.1 million and separations totaled 56.0 million, yielding a net employment gain of 3.1 million.” http://www.bls.gov/news.release/pdf/jolts.pdf
MIT maintains a parallel price/inflation index that is driven by online prices. Below is a chart of annual inflation since 2008 as compared to the formal CPI:
Source: http://bpp.mit.edu/usa/
According to FactSet.com, we are currently seeing the largest cuts to earnings estimates since Q2 2009. Changes in the energy sector, materials and mining, and consumer discretionary (Mattel, Amazon, Expedia, etc.) were the key drivers in the cuts. On the tech side, Intel announced reductions to the expected revenue numbers and income. http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_3.13.15 Given the efficiency of the markets, these changes in expectations should already be reflected in market pricing.
The International Energy Agency has estimated that global oil demand has continued to rise, after bottoming in the 2nd Q of 2014. They do continue to see an oversupply of crude globally until either production ticks down or demand moves higher. https://www.iea.org/oilmarketreport/omrpublic/
Oil and gas rig counts were down again for the week, declining by 56 and 11, respectively in the US, leaving 1,125 remaining operating in the US. Canada’s rig count fell by 80 over the week to 220 for the entire country. In the US, North Dakota, Oklahoma and Texas each have more than 100 rigs continuing to operate. http://www.bakerhughes.com/rig-count
Other relevant economic info:
The linked research paper documents the dramatic increase in costs to citizens when a country joins the Euro Zone. The documented increase in costs is after the normalization of domestic regulatory reporting, implementation of VAT and other EU requirements, which also increase costs and prices in advance of the currency change….. http://www.mit.edu/~afc/papers/CNR_Latvia.pdf Of course, this has a tremendous [negative] impact on the consumption potential of the citizens of the new Euro country.
Excellent interview with leading economist from University of Chicago: http://www.marketwatch.com/story/inflation-doesnt-justify-fed-move-this-year-sufi-says-2015-03-13
Thoughts and commentary:
Ups and downs highlighted the trading activity this week. We expect that we will continue to see similar has we move forward into the earnings season. Though lower energy prices are a good thing for the US economy, the impact of lower revenues and earnings in the energy sector on the statistics has been a bit problematic. Further appreciation of the USD will exacerbate foreign currency losses and translation costs for overseas revenues and assets.
The Fed will be meeting this week. All will be sitting to hear what Chair Yellen has to say regarding “patience”, as well as the need to move rates higher here in the US. Given the statistics we review, the on goings in the economy, and the lack of momentum in inflation, I would be surprised if the Fed raised rates in June or July. They may remove the word “patience”, though I am confident that we will also hear “timing of the increase depends….”.
From the market’s volatility which creeps higher any time the likelihood of a rate increase comes up, we can see that the stock market is still not “standing on its own legs”. Time will tell and Chair Yellen and her team are very smart. I do have confidence in doing the right thing.
In the mean-time, we continue to look for opportunities based on valuation and enterprise growth.
Have a great week!
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