Showing posts with label ECONOMICS. Show all posts
Showing posts with label ECONOMICS. Show all posts

January 30, 2018

It’s All Relative

Many have used the above title to explain nearly everything, and cite examples. However I’ve found that more often than not the positions that people need to rationalize for comfort often come at the expense of the facts. The facts I’m talking about are simple ones, such as what goes up must come down. But as the market responded today to massive disruptive actions by Amazon, JP Morgan and Berkshire Hathaway announcing they were entering the healthcare industry some outlets are suggesting that’s why the market went down today. You can probably already guess, I don’t agree, here’s why.

Interest Rates
Recent move in interest rates have seen a rise in the yield of 10 year Treasury Notes to over 2.7%. This is not a level seen since 2014 and can be directly attributed to both the recent action of the Federal Reserve Board and the growing concern of inflation. Needless to say the stock markets can withstand changes in interest rates as long as they don’t happen too quickly. And while there is also over $200 billion dollars in Treasury Debt to be auctioned in the next thirty days that too could be have an effect on current interest rates. In all there is economically much to look at and it’s up to the Fed to make a decision on further rate hikes. That distracts the markets attention, and that can feed a correction.

The Dollar
Recent concerns that the dollar is sinking are often discussed as a negative, and I don’t know why. A lower dollar is inflationary and having studied the behavior of the dollar’s correlation to the domestic trade balance, the impact to the economy is negligible at best. As a service industry the US doesn’t need a weak dollar to grow, even with the current interest in manufacturing. Our economy is based on consumption, not trade, and that isn’t going to change soon (if at all). Likewise as long as the Fed is poised to raise interest rates, that has the effect of pushing the dollar up, which is naturally disinflationary. But right now the currency is feeding inflation fears here, and even abroad, and that can feed a correction.

The Market
As you know investment value can come in two packages, those representing the fundamental value of a company and those the technical value of a stock. The former is an elusive valuation and the latter occurs when the broad markets decline as they’ve done this week.  Coming out of strong year the broad markets found their way higher as earnings results and creeping acceptance of the benefits of the recent tax plan (for companies at least). But since the beginning of last year the recent charge amounting to an aggregate increase of over 30%  rendered the expectations of any corrections either too ambitious or too complacent, but not impossible. And best, not necessarily a bad thing either.


What occurred following the announcement of the mega merger designed to defy the existing rule of the health care industry is, in my opinion, welcome news, but hardly original news. As recently as last year when CVS Pharmacy (CVS) bought Health insurer Aetna (AET) the game was on. The shift of medical consumers toward urgent care centers and other resources for flu shots and prescriptions has sent a clear message to the medical industry that price does matter. Couple that with today’s release of consumer sentiment data that was the highest  since before the financial crisis and I’m not just being optimistic, I see value in the market after today’s decline and the newest disruption that has arrived to deliver it. 

December 1, 2017

Another Update, Yawn (Not!)

This is no time to snooze. This week was one for record books for the massive amount of incomplete news, the mixed outcome of some important economic stats and the unruly price action of the broad indexes, up one day, down the next. For the most part, its business as usual, but with the markets at such lofty levels for the year, I see the goal should be to remain cautious and ignore the more impulsive investor behavior in favor of a protective strategy. Here’s why.

The Markets
With the equity markets continuing their impressive year, getting the most recent lift from the optimistic expectations stemming from current tax legislation, the facts are still elusive. I have as much to like and dislike from what I’ve read and my overall take away is that the potential of the markets to rise on the circumstance and sell on the outcome has rarely been stronger. That said other investment environments and external events are serving as strong distractions, including, OPEC cutting oil prices, bitcoin rising to record levels on the back of an announced launch of a tradable futures contract by Dec 18th, and what turned out to be a very good earning season especially for the retail industry, always a good sign for the markets and the economy.

The Economy
Between the recent estimate upgrade of the 3rd Quarter GDP from 3.0% to 3.3% and the release of the highest consumer confidence level in 17 years the economic news has been mostly good. I say mostly, because among the contributors to recent volatility in the markets has been a decline in the Chicago PMI manufacturing index, albeit from larger than normal recent rise it is still worth paying attention to. Mainly because as most of the positive news focuses on indicators that suggest continued downward pressure on the unemployment rate and potential higher inflation, inflation could become a problem at some point too.

The Fed
In the meantime it’s hard to imagine the fed won’t increase interest rates at their next meeting on Dec 12 and 13th. With good economic data that comes from consumer’s activity the outlook for inflation still seems the primary incentive as well as Europe is showing similar signs of pressures. However, rather than talk much about the reporting board the outlook for the expiration of the current chairpersons term is leading the concern as to whether the incoming replacement will raise rates too aggressively. No reason I can see for that happening but the news adds to the current market volatility.

The Government
Which bring us to the nerve center for market volatility. While much of the media activity swirls around the current administration the financial markets have managed to focus on the economy and corporate activity instead. Good thing, since there is much that will eventually come out of the current political dilemmas that will get a fair spin that an investor can act on.

There you have it, a rising market, lots of volatility and very few answers to much external activity. Generally I choose to shift to more large cap and dividend friendly investments to be better prepared for any unexpected surprises. I still think the year will end on a high note, so I’m more looking into the first quarter of next year.

August 23, 2015

Bad Company

This has been a challenging week for the stock markets around the world and as yet another media frenzy challenges the collective patience of investors and observers alike it’s the latter that is usually hard at work discrediting individual companies such as this week’s shaming of Amazon (AMZN) for having a corporate culture that is too aggressive. Never mind that calling upon disgruntled employees to generate an article smells like an agenda, Amazon has well over 150 thousand employees worldwide and certainly among them there are those for whom the job isn’t a fit as well as those for whom it is. I can understand, while disagreeing with the argument, that work place behavior within an environment that sells for profit might appear unsavory to some. But in my experience many tedious jobs, for which my own has been cited, are not often not seen that way by those who are engaged in what I call a “labor of love”.  

So while the global markets are in turmoil I think there is more to be gained by following events such as:

China continues to seek ways to address the slowing of its economy. There is no suggestion yet of a recession, but the continuing decline in oil prices does suggest some credibility in economic predictions that mostly lean to a slowdown with a growth rate higher than the  western democracies but significantly lower than the average over the last 10 yrs. Some signs of stabilizing will have to be realized before the markets can truly calm down. In the meantime I have lightened up on emerging market exposure in accounts.

The Federal Reserve Board continues to show ambivalence among its members. Interest rates are going to rise, but in the meantime the Federal Reserve is sending mixed signals that aren’t helpful in the pursuit of market clarity. Since it’s been nearly 8yrs of no Fed activity many on the sidelines are predicting a rate hike in September. It can be said that the stock markets were ill positioned for such a move, therefore this week’s decline makes more sense, even if still uncertain.

Oil prices are obviously poised to outpace the normal bounds of necessity. And while I’ve spent much time writing about the potential benefits of lower energy prices, the current speculation of prices into the 20’s is bothersome. Maybe it’s because of the continued potential for manipulation on the Futures market or maybe it’s more for its contradiction to historical changes in the price of oil. I’ve watched those prices closely as an indicator of both global growth and inflation for 30 years during which the culprits to volatility were easy to trace. Recession made oil prices decline and wars, or threats thereof, made the price rise. The Middle East which has been a strong voice in the OPEC consortium has historically favored keeping prices low, in western logic to keep the consumer hooked. Only signs of stronger global growth will stop the current trend.

War posturing is currently in the news regarding the rising tone of rhetoric passing between North and South Korea. More than Ukraine or self-inflicted challenges facing Greece, I think this development is worth paying attention to, not because war is inevitable but because it could bring the type of distraction the current global market rout is hindering.

Much will be discussed over the weekend about what the market did and little about why. Picking on corporate America at the expense of following genuine news is consistent with the emotive style of our news services and in my opinion is getting tiresome. The markets are correcting and there are increasing signs that risk is showing some value. As of today all three major indexes are negative for the year. So far it is both brisk, since people jump to sell but procrastinate to buy, and widely felt in all sectors. I’ve ben raising cash and will look for opportunities to allocate it.

July 8, 2015

Sleight of Hand

At the risk of being too abstract this environment reminds of the sleight of hand maneuvers that one might experience close-up to a magician or perhaps a street card game table. One that underscores what I believe is a primary reason for the confusion fueled volatility being experienced in global equities. Namely, while the events in Greece play out the press, in its zeal to occasionally elevate a story above reasonable merit, draws attention away from the proverbial elephant in the room, and that would be China.

Not to suggest the Greek situation isn’t dire, but in my previous opinion, more dire for the citizens than for rest of the world. And not that China is the only bump in the road however, while all this has been playing out Chinese equities, for example as measured by the iShares China Large-Cap ETF (FXI) have declined by over 20% since April 23rd.  And while it’s important to remember that, similar to our markets, the need for a correction is even greater for the Chinese who have enjoyed equity appreciation on the back of vigorous growth over the last ten years. In short, unlike the Greek situation, the correction in China also comes with sizable current account surpluses with many western countries, including the US. Those surpluses will allow the Chinese government to defend the financial institutions and provide support for its widespread industrial resources. But to concur with the risk of being too optimistic, the surpluses also represent the complex inter-connectedness of the Chinese economy with its industrial partners creating a reasonable amount of fear on the global investing stage, and that includes us.

So in the recent correction in the US equity markets, and the race to find the cause to attribute it to, my message remains the same. Not to simply rely on the importance of patience, weakness in the Chinese stock market is important but it too will give way to the next exploitable crisis. Today the New York Stock Exchange halted trading of all stocks due to a technical problem. Important to consider that the NYSE is not the sole exchange for the stock market and therefore its problems are widely contained.

In the next few days the Federal Reserve Bank might speak about rates, the Chinese might increase its current programs to stabilize their markets, a solution might occur between Greece and the EU, and the effect of all these events on investing such as oil declining due to a strong dollar, interest rates declining in spite of a Fed that wants them to go up, might reverse. When it comes to the digital universe and the ability to see the entire world in a glimpse unique to our times it’s worth noting the obvious flaws in having too much access to information. In my opinion, having experienced many corrections in the past, including the recent watershed event, this is a correction, not a systemic crisis.

As is customary during past declines (and there have been a few) there will be some activity in most accounts to take advantage of both desirable risk opportunities and for taxable clients to harvest some gains at the same time. Please don’t hesitate to call me if you have questions or concerns, I’m available for everyone at any time.

June 12, 2015

Let It Be

We are not experiencing a bear market. There, I said it, and while it is my opinion it has not been arrived at in simplicity. Rather only with the understanding that the future economy is only as complicated as the clues that are provided to us, with the most obvious, jobs growth, consumer behavior and inflation, most statistical data is suggesting positive growth expectations are not unrealistic to forecast. Not necessarily strong growth either, but maybe on average, more of the same. So what are my reasons for being constructive? Here goes:

My Employment Reason – Combines 3 pieces that I feel have to be viewed together. Using last month’s Unemployment statistics we found out that job growth was around 280k new jobs, a very good amount by most historical measure. The number was augmented by adjustments to previous month’s numbers resulting in higher growth for them as well. As good as the number was the Civilian Unemployment rate for May was 5.5%, which was at face value a good low number. But the nagging truth about participation in the workforce, which could be higher or lower thereby rendering the data incomplete, cannot be ignored. Lately the participation rate has hovered at a consistent rate (approximately 63%) that while not the best is the equivalent of no news on the matter, and I hope we all can agree that sometimes no news is good news.

My Consumer Reason – When watching the consumer, individual statistics really tell the story. But I prefer to also look at an average, an eight month average to be exact, to find evidence of momentum. Consumer Sentiment as measured by the University of Michigan came in at 93.6 versus an 8 month average of 85.3. Retail Sales data last came in at 1.2% higher than the previous month and versus an 8 month average of .4%. While these numbers can change as quickly as the tastes of the general consumer, they suggest the potential for momentum, and with any upcoming signs of wage growth, that’s good enough for me right now.

My Productivity, Inflation and General Economic Reasons – Are based on Producer and Consumer inflation, which means, how much costs rise when making stuff versus selling stuff. Here we’ve seen, contrary to expectations virtually no inflation growth over 2%, which would be needed to get the Treasury‘s attention. This is good, except for the fact that the world economy is still dragging and even with some glimmer of energy, inflation is not likely to rise very much in the near future. That said, Productivity trends, as measured by Manufacturing statistics and Industrial Production statistics have also been dragging domestically, and that takes some of glow off of my forecast.

So where does that leave us? With consumers armed with cash coming from more employment and better wages, action has to take place, at which time the productivity machine should start its engines. And while asking for inflation might be too premature, my forecast is only modestly optimistic, the overall influence on stock prices should be equally modest and positive. That could be the recipe for some uncertainty and the volatility that feeds on it, which is what the markets are experiencing right now. So I choose to let it be, it’s not unexpected and it’s also not a bear market.*

May 24, 2014

How much is that 狗 in the Window

Most of you have heard me say that employment is the catalyst for economic growth.  It provides revenue to the government in the form of taxes.  Corporations benefit from improved public consumption of goods and services, which also increases output.  It also benefits individuals by giving them the confidence to consume all those goods and services. However, unemployment can hinder the economic landscape.  Everything from crime rates to divorce rates display changes in employment. Both the individuals who have a stable employment situation as well as those who have a less stable employment situation affect the most important driver of our economy in the last 100 years: consumption.

The near tidal wave of coverage that is afforded to the worldwide race to bring the next technological disruptor has revealed many interesting possibilities for consumers. But the challenge that fact presents to companies often overlooks the casual belief that the US consumer is the ultimate prize. But are they? After being in business since 2000 and traded on the US stock exchanges since 2005 Mr. Yangon Li, the 45 year old founder and head of Baidu Inc. (BIDU) the Chinese search firm that competes with Google was asked what his plans were for competing for the attention of the US consumer. His response was that there were no plans other than continuing the expansion underway in China. Given that the Chinese population is over four times the size of the US, with India not far behind, his response makes a lot of sense to me. And with this week's IPO (Initial Public Offering) of the company (JD) an internet based e-commerce business with a profile similar to Amazon (AMZN) and the Chinese shopping search giant Alibaba, whose IPO is expected in the summer, both have articulated the same strategies.

So many of the companies we own are generating revenues that are dispersed to the benefit of countries that have strong economies and while our markets reflect that growth in aggregate performance the focus is instead on where are the profits from sales are going. Yes a lot has been in the news profiling the attempted purchase of AstraZeneca (AZN) by Pfizer (PFE) as a means of ducking their tax obligations on overseas revenues, but you don't have to follow the money very far to see the consumer centric firms holding their own mountains of cash abroad. Apple (APPL), Google (GOOG), Microsoft (MSFT) and even Starbuck (SBUX) are all are generating revenue with the same global philosophy in mind, namely it's not the US consumer that is the prize of the 21st century, but the foreign consumer.

Now I'm not going to get dirty messing in the mud fight over how to get that money repatriated, my point is that while the US has the benefit of being a stable and industrious country, we have to try harder in the future as I believe whether we like it or not the baton has been passed to where the domestic growth is clearer in the once emerging, now rapidly developing countries around the world. The good news is the world has never been easier to invest in and that's what I aim to do.

February 16, 2014

The Rewards of Being Choosey

As earnings have rolled out in predictable fashion with results being hyper analyzed and focus disproportionately placed on style over substance the real trends often disappear in the deluge of information at our disposal. With that being the muck that I generally wallow in I couldn’t help noticing something amiss in the aggregate earnings of the retailers that recently reported results and guidance. What stood out to me is not only the consistency in the disappointing earnings of the most high profile retailers, including American Eagle (AEO) and Amazon (AMZN), who saw their share prices decline, but that those results don't reconcile with the surprising 31% increase in advertiser paid clicks that Google (GOOG) reported sending its stock higher. Or do they?

Back in the 1990s a company called Napster exploded (pre viral verb) on the internet and quickly gained infamy singled out as the scourge of the music industry. But its stature as a resource to millions of potential consumers wasn't lost on those companies looking to navigate their business models on the internet.  As composite data from Napster was analyzed it was clear that in addition to the contemporary hits of the time amounting to the bulk of sharing it was the thousands (yes thousands) of one-off tunes that millions of music enthusiasts found interest in. Seeing the internet as a platform to distribute a product that could easily fill the demands of this new and traditionally ignored consumer base, budding entrepreneurs, among them Jeff Bezo's of Amazon fame, focused on the product that presented the main catapult of potential, it was choice. In his book "The Long Tail" Chris Anderson describes the notion that the traditional distribution resources, such as music or book stores, could never compete with the ability of the internet marketplace to distribute five times the inventory of the largest brick and mortar establishments. True to historical precedent the music and book industries pushed back hard. While accepting that the internet could reach more interested consumers than your well known bookstore and record chain it was believed that elusive product desirability could only be reached by still holding tight to the old model of finding and exploiting hits. Napster proved that giving the people what they want, all the people, not only those looking for hits, was the future of retail sales. And whether consumers knew it or not didn't matter, Google knew it.

So is it possible that there is a permanent move away from the traditional storefront in areas that can never be as faithful to customers as can be delivered over the internet? Perhaps, although there is still a lot to learn about how the internet hasn't changed the consumer, for example a paid click could be about window shopping as much as about retail sales. At the same time we can see in the employment reports of the past year the sectors showing a visible expansion in growth underway in restaurants and bars, satellite medical businesses, medical offices, grocery establishments, barber shops and the thousands of nail stylist storefronts punctuating the New York City landscape.

Many of us were told over the years that the challenge of being faced with too many choices is that they undermine decisiveness. That probably remains somewhat consistent for many of us, but companies are increasingly finding ways to provide choices on a scale never envisioned possible. And when older companies are being assailed for not being innovative enough, what's really being said is they don't have enough choices to establish their model with the potential of a global consumer. Once they do that potential is enormous. And I always thought you had to try shoes on before you bought them, guess not.

January 11, 2014

To Participate or Not To Participate, That Is the Question

“The unemployment rate declined from 7.0 percent to 6.7 percent in December, while total nonfarm payroll employment edged up (+74,000), the U.S. Bureau of Labor Statistics reported today. Employment rose in retail trade and wholesale trade but was down in information”*

This employment release was a negative surprise even for those that follow an in line with estimates strategy. However as with most surprises the elements of defense and offense in the arena of diminishing reality the focus will once again ignore demographic elements within the statistics including the workers that have permanently stopped looking for a job. The question I have is why would they do that? 

The civilian labor force participation rate* declined by 0.2 percentage points in December bringing the annualized rate to 58.6 percent or a decline of 0.8 percentage points over the year. What was curious is that while there is certainty in the decline of participation in the job market, the year over year employment-population ratio was unchanged.  This tells me that while no consolation for the losses experienced by people at every economic level of the economy the total number appear to be slowing. This Leaves room for expansion of the workforce moving forward, but I wouldn't be surprised if the employment rate begins moving back towards 7% during 2014. That would be troublesome for the markets. 

Also, it should come as no surprise that young people have had a very hard time getting work in this economy. While most trends favor jobs in technology that carry a degree of sex appeal, the participation rates are in the 50 to 60 percent range for men and women over 20yrs old suggest to me that a great diversity of jobs would readily pick up the slack, and in fact already has to some degree. In the past year much of the growth outside of IT has been in Healthcare, Retail, Wholesale trade, transportation, financial activities, warehousing and manufacturing. The focus on the dearth of skills also ignores the lost traditions of corporate training programs leaving the need to generate higher profile for the many jobs that have demanded creative, marketing, writing, sales oriented and complementary social and networking skills that will increasingly be needed to meet the needs of the growing of product and service industries that even some tech companies such as Google (GOOG) and Apple (AAPL) have been migrating to for the past few years. 


Today's numbers are part of a longer term trend that begins with baby boomers that have decided the need to work through retirement age. Good numbers or bad as traditionally interpreted are becoming less important if not focused on how the economy is changing. And those changing fortunes and economic circumstances that have touched millions of Americans will untimely create an economy that I believe will require more skills than are currently discounted for and that could produce jobs that are more sustainable if not more socially based. Jobs even your friendly introverted portfolio manager could love.

* Search – BLS Employment Report