Perspectives from Above the Noise – Week of May 27, 2013

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

Fed officials went into a full-court communications press as markets wobbled on fears the Fed might begin shuttering its bond-buying program. To counter these worries, Fed officials stressed that there is no rush to exit and that the program is not on “autopilot;” rather, bond purchases will be scaled up or down as future conditions warrant.

While markets reacted poorly to the Fed’s news, economic data last week was generally positive. Stocks entered the holiday weekend down on worries that the Fed might cut back its quantitative easing. For the week, the S&P 500 dropped 1.07%, the Dow lost 0.33%, and the Nasdaq lost 1.14%.

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

Home Prices Accelerate by Most in 7 Years

Markets opened for trading on Tuesday well over 1 percent as news of a jump in home prices fueled buying. The S&P/Case Shiller Index, which tracks 20 metropolitan areas, climbed 10.9 percent, the biggest increase in seven years. Prices also gained 1.1 percent over last month’s report, which tracked March prices. Lower inventories and growing demand are causing higher prices. While many remain worried about fiscal tightening in Washington, the jump in home prices and surge in consumer confidence reveal a resilient economy.

Defending the Bull

Some analysts and market prognosticators are becoming skeptical over the sustainability of the current bull market, following the first weekly decline in the S&P 500 in five weeks. U.S. equities could very well be entering a market correction following a 16.6 percent increase since the start of the year for the S&P 500, but there are a lot of reasons for optimism both short- and long-term for U.S. equities.

As an article in Barron’s recently stated, “Private employment is up. Public spending is down. The deficit is shrinking. Companies are flush with cash. Housing has begun to grow again, as has U.S. manufacturing. And last, but not least, the U.S. may be on the verge of energy independence.” All of the factors listed are positive for U.S. equities.

At Last, Germany Secures Total Dominance of Europe

In a recent Bloomberg op-ed piece, Jim O’Neill, the outgoing chairman of Goldman Sachs Asset Management, provides an interesting way to think of German dominance in the European economy: the success of German soccer clubs in European competition. Much like the European economy, German clubs have become more dominant over the last few years against their neighbors. They have beaten English, Spanish and Italian rivals, and this weekend’s Champions League (European club tournament) final was played by two German clubs.

The strength of German clubs doesn’t just apply to on-the-field performance. Fiscally, they are in much better positions than clubs in Spain, Italy and England. While not perfect, the fiscal metaphor can explain much of Germany’s economic resurgence as its neighbors struggle.

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

Perspectives from Above the Noise – Week of May 20, 2013

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

Markets experienced some volatility early last week as stocks pulled back amid worries that the Fed may be tapering off its bond-buying program soon. However, investors soon regained their positivity after realizing that the Fed would not slow its quantitative easing activities without a simultaneous improvement in economic growth. In other good news, data showed that consumer sentiment is on the upswing, reaching its highest level since July 2007, according to the Thomson/Reuters University of Michigan inde.

For the week, both the S&P 500 and Dow Industrials hit new highs—the S&P 500 gained 2.07%, the Dow increased 1.56%, and the NASDAQ added 1.82%.

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

Gross to Buffett Omens Disregarded as Bond Sales Soar

A recent Bloomberg article details the very robust corporate credit markets, with sales of corporate bonds in the U.S. heading toward a record for the month of May. With yields still near historical lows and investor appetite for bond deals extremely strong, corporate issuers are aggressively acting to shore up any potential liquidity concerns with the majority of recent issuers citing refinancing among their use of proceeds. As noted in the article, the number of junk-rated companies that are under liquidity stress is now very low, an indication of the extent that corporations have been able to shore up any near-term liquidity concerns by accessing credit markets.

Japan Inc. Should Take a Look in the Mirror

Japan has been one of the strongest stock markets this year as new Prime Minister Shinzo Abe has implemented aggressive monetary and fiscal policies in the hopes of devaluing the yen and spurring economic growth. A recent Bloomberg op-ed piece by William Pesek argues that for these policies to work, Japanese leadership at the corporate and political levels must make some drastic changes. Specifically, Pesek writes about "willful blindness," which can be understood as the refusal to admit to mistakes in the past and lay the groundwork for future relationships with Japanese trading partners. Examples of this at the government level include nationalistic comments regarding World War II which provoke and incense China. At the corporate level, there is much resistance to restructuring meant to produce a more transparent environment. While a weaker yen may boost the Japanese economy in the short run, there are many structural issues that need to change for Abenomics to reap long term rewards.

Economists Predict Increase in Consumer Spending

The National Association for Business Economics surveyed 49 economists at the end of April and the results show increased optimism for accelerated consumer spending this year, helping offset a contraction in government spending. Economists elevated their consumer spending growth forecast to 2.3% for 2013 from their prior prediction in February for growth of 1.9%. Overall, economists predict solid growth in auto sales, housing and corporate profits. The consensus view among economists is for auto sales to increase to 15.4 million units in 2013 compared to 14.4 million units sold in 2012, home prices to increase by 4.4% in 2013 and 4% in 2014, and for corporate profits to improve by 5.3% this year and 7.5% in 2014. The consensus view remains for the U.S. economy to grow by 2.4% this year and 3% in 2014.

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

Perspectives from Above the Noise – Week of May 13, 2013

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

Markets turned out another solid performance last week as all three major indices reached new highs. As we near the end of earnings season, 90% of S&P 500 companies have reported in, with 67% beating earnings expectations. If all remaining companies post numbers in line with estimates, earnings will be up 5.3% over the first quarter of 2012.

For the week, the S&P 500 added 1.19%, the Dow gained 0.97%, and the Nasdaq increased 1.72%.

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

Are Stocks Cheap? A Review of the Evidence

While the rising stock market has many concerned that financial markets are becoming overheated due to the Fed’s policies, a recent study published by the Federal Reserve Bank of New York suggests that the equity market is trading at its most undervalued levels ever.

In the study, the authors surveyed banks, economists and central banks around the world regarding their preferred models of equity risk premiums. Using a weighted average of 29 models, the authors found that “we will enjoy historically high excess returns for the S&P 500 for the next five years.” While the study contains a number of qualifiers, it is interesting on several levels, including its implied message regarding the future of U.S. monetary policy if the Fed believes equity prices are undervalued.

Oil Plunge Cools U.S. Import Prices in April, Tames Inflation

After years of quantitative easing and Fed-induced liquidity, many are worried about the prospects of rampant inflation in the future.

However, the data continues to show inflation is not a concern for the economy right now. Import prices dropped in April as a result of cheaper energy prices. As long as inflation remains subdued, the Fed will have less of a reason to discontinue its current easy monetary policies.

U.S. Economic Path since ’07 Proves Superior to EU Slump

The United States and Europe have traveled down separate paths since the 2007-2009 recession. The United States implemented a stronger and more immediate response to the financial crisis and focused on bank liquidity and strong fiscal and monetary stimulus. Europe, on the other hand, was less urgent in its reaction and focused on austerity over fiscal stimulus. The U.S. plan was more effective.

Today, the U.S. unemployment rate is 7.5 percent, which is high relative to other post-World War II recoveries at this stage, but much lower than in Europe, where unemployment is at 12.1 percent. Additionally, the U.S. is achieving positive GDP growth and expansion in manufacturing, while Europe is stuck in another lengthy recession and is suffering from a contracting manufacturing sector.

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

Perspectives from Above the Noise – Week of May 6, 2013

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

Perspectives returns today after a brief vacation week. While I was away, the Dow Jones Industrial Average popped over the 15,000 mark--continuing to set new records.

U.S. markets closed out last week with a bang, after a better-than-expected jobs report eased concerns about a stalled economic recovery. For the week, the S&P 500 gained 2.03%, the Dow gained 1.78%, and the Nasdaq gained 3.03%.

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

Diminished Housing Wealth Effect Keeps Pressure on Fed

In previous recoveries the “wealth effect” from rising home prices provided a strong boost to consumer spending, helping drive faster economic growth. The wealth effect from rising home prices is present in this recovery, but the impact has weakened. In prior recoveries, each dollar increase in house value generated roughly $0.03 to $0.05 of spending, but has dipped to roughly $0.01 of spending in the current recovery.

One reason is tighter credit standards, which have limited refinancing opportunities for homeowners to lower their monthly payments. Additionally, homeowners are not tapping into their home equity as much. Positively, rising home prices have increased homeowner equity from $6.2 trillion in 2009 to $8.2 trillion at the end of 2012.

Look at the Doughnut, Not at the Hole

In a recent MarketWatch piece, Irwin Kellner breaks down the most recent jobs numbers. At first glance, things appear to be improving. The unemployment rate has declined steadily, now at 7.5 percent. Jobless claims also continue to decline, with last Thursday’s report coming in at the lowest level since early 2008.

However, other measures of economic health, such as the labor force participation rate and the employment to population ratio, are either declining or flat because many people have stopped looking for work. In a healthy economy, these measures would rise after a recession. While recent nonfarm payrolls and jobless claims are encouraging news, other measures of employment need to show progress as well before the U.S. labor economy can be considered back on track.

A Tandem in Trouble

A current article from The Economist focuses on the growing political tension among the core of the eurozone, in particular between Germany and France. Although the relationship has always been strained, the article describes growing signs that the French are moving toward closer political ties with the troubled southern countries and pushing away from German austerity. The complicated and increasingly fractured relationship among Europe’s core adds to the region’s numerous economic challenges and may lead to increased market volatility in the second half of 2013. 

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