Perspectives from Above the Noise – Week of April 22, 2013

3 Stories in the global economy that should not go un-noticed

Even as we share this week’s column with you, the events that unfolded last week in Massachusetts and Texas are still fresh in our minds. Our hearts will remain with the victims and their families, as well as the residents of Boston and West Texas, as they rebuild their lives from these tragedies.

Earnings drove much of last week’s selloff as major indices experienced their biggest drop so far this year. Although the earnings reported thus far have largely beat estimates, disappointing reports from a handful of companies had an oversized effect on markets. For the week, the S&P 500 lost 2.11%, the Dow fell 2.14%, and the Nasdaq trimmed 2.70%.

Here are the 3 stories this week that rose above the noise:

That Swooning Feeling

During the previous three years, the U.S. economy showed signs of strengthening in the first quarter, followed by weakening in the spring and summer. The Economist argues in a recent article that the U.S. economy may follow a similar path in 2013. U.S. manufacturing, retail sales, and employment data were all encouraging through the first two months of 2013 before weakening in March.

The author feels that the trend of the economy and stock market weakening in the spring and summer over the last three years is a coincidence, rather than a new seasonal pattern developing, as some economists feel is the reason. In 2010, the first Greek bailout occurred in May, the Arab uprising and Japan tsunami occurred in March 2011, and last year’s decline was partially weather related.

The culprit this spring, in the author’s opinion, is austerity, as both the $85 billion in budget sequestration and payroll tax increase went into effect during the first quarter, putting downward pressure on economic growth in the second quarter.

China’s Recovery Falters as Manufacturing Growth Cools

HSBC Holdings Plc and Markit Economics reported that China’s Purchasing Managers’ Index (EC11CHPM), which is based on a survey of purchasing managers in the manufacturing sector, came in at 50.5 points for April. This is above the level of 50 that separates expansion from contraction, but is markedly lower than the 51.6 points recorded for March.

This release adds to concerns that the pace of China’s overall economic growth may be faltering and is unlikely to pick up again during the current quarter. Orders for new exports contracted in April after a temporary rebound in March, suggesting external demand for China’s exporters remains weak. Last week, Goldman Sachs, Royal Bank of Scotland Plc and JPMorgan Chase & Co. cut 2013 GDP estimates 7.8 percent, in-line with 2012’s pace.

Dow 16,000!

The Barron’s cover story this week discusses the latest readings from its semiannual Big Money poll of professional investors. Notably, the poll finds the highest level of bullishness in the over 20-year history of the data. Remarkably, only 7 percent of respondents classified themselves as bearish on equities.

This survey is consistent with other investor sentiment surveys we have seen in recent weeks showing continued caution among individual investors and extreme optimism among institutional investors. On balance, the high level of investor confidence currently prevailing creates a potential headwind for equities in the second quarter until sentiment reverts to more normal levels.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of April 15, 2013

3 Stories in the global economy that should not go un-noticed

Despite some disappointing economic data, markets moved higher again last week. Retail sales contracted in March for the second time in three months, and consumer confidence tumbled in April in a double-whammy that sent equities into a spiral early last week.

For the week, the S&P 500 rose 2.29%, the Dow gained 2.06%, and the Nasdaq grew 2.84%.

Here are the 3 stories this week that rose above the noise:

The Jobs Machine

Recently, an article from The Economist cited how important immigration of high-skilled workers to the U.S. is for creating new innovative companies and more jobs. Roughly 40 percent of today’s Fortune 500 firms were founded by immigrants or their children. Many of these companies are in the high-tech sector, where every new job created is estimated to create more than four jobs in the local economy.

However, recent trends show the proportion of startups founded by immigrants is falling. Many believe this is a result of the government making it more difficult for immigrants to obtain permanent residency. If this trend continues, it could mean more jobs for U.S. competitors and less jobs here at home.

Housing Starts in U.S. Surge on Demand for Multifamily Units 

Housing starts in March jumped more than expected, as detailed in this Bloomberg article. Starts in March reached over a 1 million annual rate, which is the highest level since June 2008. While single-family housing starts came in below expectations, multifamily starts rose 31 percent.

The rebound in housing starts back to close to historically normal levels has positive implications for economic growth and employment, with residential investment providing a boost to GDP in 2012 for the first time in seven years and looking set to provide a bigger boost in 2013. One modest concern in today’s report was a decline in building permits, an indicator of future construction. Nonetheless, the solid current level of housing starts is likely to continue providing an economic boost in the near term, helping to overcome the headwinds of higher taxes and spending cuts.

IMF Reduces Global GDP Forecast, but still sees 3.3% Global Growth in 2013 

The International Monetary Fund (IMF) trimmed its global growth forecast but still expects the global economy will expand 3.3 percent this year, less than the 3.5 percent forecast in January, after 3.2 percent growth in 2012.

The IMF sees the 17-country euro area shrinking 0.3 percent with a 50 percent chance of recession the most immediate threat to global growth. Its outlook for Japan, the world’s third-largest economy, was raised to 1.6 percent growth this year from 1.2 percent previously. Its U.S. growth outlook was reduced to 1.9 percent from 2 percent. The forecast for global growth next year is 4 percent, compared to 4.1 percent in the IMF’s January projections.


Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of April 8, 2013

3 Stories in the global economy that should not go un-noticed

Markets pulled back last week as investors reacted to several disappointing economic reports and expressed concern that a spring swoon is around the corner. The big news was Friday’s job report, which showed a drop in the overall unemployment rate from 7.7% in February to 7.6% in March. However, much of the drop can be attributed to discouraged job seekers who stopped looking for work rather than organic job creation.

For the week, the S&P 500 lost 1.0%, the Dow trimmed 0.1%, and the Nasdaq fell 1.9%.

It is the job report that influenced the selection of our 3 stories this week that rose above the noise:

Vanishing Workforce Weighs on Growth

One particularly concerning element of last week’s disappointing jobs report was a large decline in the labor force participation rate, which fell to its lowest level since May 1979. Although a trend of declining participation has been in place for over a decade, the recession accelerated the trend and there has been hope that workers would come back into the workforce as the economy recovered.

An article from The Washington Post provides a nice overview of some of the implications of the decline in the participation rate, most notably a population with eroding skills and a decline in long- term potential GDP growth. Not mentioned, but important for its investment implications, is the potential for future wage inflation as the number of qualified workers in the workforce shrinks.

Unions, Inc.

The Economist published a story that looks at the state of organized labor in the world. In 2012, American union membership was at a 96-year low. Similar trends are also taking place in much of the developed world, where union membership has been prevalent. As globalization has made shifting jobs to the lowest-cost option easier, unions have suffered because their bargaining power has declined.

Younger workers are also seeing less value in joining unions, with many workers in the U.S. opting not to join when given an option. While the overall trend for union membership is declining, some unions have adapted to the changing environment, and made themselves more flexible to company demands while still providing value to their membership. This article provides a look into some of the changes occurring, and gives an idea of what labor unions may look like in the future.

Austerity Bites?

Weak job growth in March may have been a delayed reaction to the tax increases that were part of the fiscal cliff deal, according to The Economist’s Free Exchange blog. Job growth remained relatively strong in January and February, despite the expiration of the payroll tax and marginal tax increase for high-income earners. However, the U.S. economy added only 88,000 jobs and retail employment dropped by 24,000 in March, elevating concern that a slowdown in consumer spending may be around the corner.

Any slowdown in economic activity resulting from the fiscal cliff and budget sequestration may only be temporary. As the article points out, “and to some extent, this report simply drags expectations back to where they were early in the year, when it was anticipated that fiscal policy would meaningfully slow growth in the first half of the year but allow for an improvement later on.”

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of April 1, 2013

3 Stories in the global economy that should not go un-noticed

Sequestration, continued economic turmoil in Europe, and debate of Federal Reserve fiscal stimulus dominated the headlines in the first quarter of 2013. We continue to keep an eye on the facts that rise above the noise of the media.

Equity markets experienced one of the best first quarters in years, with the Dow logging its strongest quarter since 1998. After flirting with record highs for more than a week, the S&P500 finally broke through its 2007 ceiling to close at a new high of near 1,570. For the quarter, the S&P500 gained 10.03%, the Dow increased 11.25%, and the Nasdaq closed up 8.21%.

Here are the 3 stories this week that rose above the noise:

Hiring Spreads, but Only 14 Cities Top Prerecession Level

The employment picture has improved a great deal since the bottom of the 2008-2009 recession, but still remains below the pre-recession peak employment level of 2007 for 86 of the nation’s 100 largest metropolitan areas.

Overall, there are still 3 million fewer people employed compared to the pre-recession peak. Six of the 14 metropolitan areas that have a better employment situation than in 2007 are in Texas, with the Lone Star State benefitting from an economy that is heavily based healthcare, energy, technology, and education. Additionally, the Texas real estate market did not collapse, further improving their employment situation.

Surge in High-Yield Bonds a 'Big April Fool's Joke'

With interest rates sitting at extremely low levels, investors have piled into asset classes traditionally viewed as less interest-rate sensitive,” such as high-yield bonds. The spread of high-yield rates over Treasuries have compressed considerably since the heights of the credit crisis in 2009.

A recent CNBC article looked at the concerns various money managers have over the strong run in the high-yield market. As with any market, there is a difference of opinion as to where we are in the credit cycle of high-yield bonds. However, warning signs, such as foreign investors using leverage to access the high-yield market, are raising eyebrows. We believe that as long as the Fed keeps its low-interest-rate policy intact, high-yield bonds will continue to attract new money.

As Economy Heats Up, Traffic Backs Up

Floyd Norris writing in The New York Times discussed an off-the-beaten path economic indicator that is confirming more well-known indicators in showing a surprisingly resilient U.S. economy. The indicator, known as the Inrix Gridlock Index, measures traffic patterns and considers increasing delays as an indicator of increased economic activity.

Currently, the indicator shows a broad increase in traffic backups in the U.S. and general weakness in Europe. Although the indicator does not have a long history to examine at this point it is an interesting additional data point which is currently confirming the relative strength of the U.S. economy that is also showing up in traditional economic indicators.