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

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

Markets closed mixed for the week again, logging new highs for the S&P 500 and the Dow, while the Nasdaq lost ground due to some earnings misses. So far, Wall Street is experiencing its best month this year since January, buoyed by reassurances from the Fed and generally positive economic data.

For the week, the S&P 500 gained 0.71%, the Dow increased 0.55%, and the Nasdaq lost 0.35%.

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

Time to Expect Inflation?

Inflation remains subdued below 2 percent across the developed world. While many economists fear deflation, this article details that this isn’t a one-way trade and presents several factors that argue that inflation is more likely. Massive ballooning of central bank balance sheets has not yet led to inflation; however this may not be the case in the future.

Additionally, in the emerging-markets space, structural changes and tightening labor forces will likely add to wage pressures. Similar pressure is likely to be seen in Germany as it hovers around full employment and within the United States as the economy continues to rebound.

Boehner Signals Clash with White House on U.S. Debt Limit

A Bloomberg article summarizes some recent rhetoric out of Washington that suggests Congress is heading for another bruising political fight over raising the debt ceiling in September. Neither political party’s views on the debt ceiling appear to have significantly changed since the last fight and public opinion remains mixed.

Over the coming weeks it seems likely that the political rhetoric over raising the debt ceiling will become increasingly contentious, which represents one potential headwind for financial markets over the remainder of the third quarter.

U.S. Home Resales' Surprise Drop Snaps Streak of Gains

On Monday, the National Association of Realtors released the latest home sales report which showed a fall in June, after two months of price increases. Sales in June fell 1.2 percent to an annual rate of 5.08 million units. Many economists remain optimistic about the housing recovery despite June’s lower numbers.

Annual increases vs. a year ago are up more than 15 percent and other measures, such as distressed property sales, accounted for a lower percentage of total sales, which is encouraging. The median time on the market for homes also has dropped considerably, to 37 days from 70 days a year ago. While June’s drop in home sales may raise some eyebrows, the long-term trend of improving home sales appears to remain on track.

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

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

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

Markets rallied strongly for another week, posting their second best weekly performance of the year and sending the S&P 500 and Dow indexes to new highs. Earnings reports and calming words from Fed Chairman Ben Bernanke contributed to the market surge.

For the week, the S&P 500 gained 2.96%, the Dow grew 2.17%, and the Nasdaq gained 3.47%.

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

China Facing Growth Dilemma

The Chinese economy grew 7.5 percent year-over-year in the second quarter, in line with expectations, but down from 7.7 percent in the first three months of the year to mark the second straight quarter of slowing growth. A large degree of uncertainty remains regarding the growth outlook for the second half of the year and beyond.

At issue is whether China is willing to sacrifice short-term growth through reform in exchange for more sustainable long-term growth. Subdued returns on assets, ever-rising leverage and high interest rates have reduced the effectiveness of monetary policy which will impact China’s ability to meet growth targets.

The U.S. Dollar Is Enjoying a Rare Period of Strength. How Far Can the Rally Go?

The U.S. dollar has risen this year against a broad range of global currencies. The U.S. dollar’s strength has been a headwind for a range of foreign investments, including emerging market debt and equities. An article from The Economist examines the reasons behind the U.S. dollar’s strength as well as its outlook.

The U.S. dollar index has risen 4.2 percent year-to-date and the article speculates a further 5 percent-7 percent appreciation may occur but that is likely to be the limit of its strength. The reasons: America’s economy is doing well enough to give its currency a boost, but it’s not so strong as to spur the sort of bull run the dollar enjoyed in the late-1990s.

Bernanke Boom Signaled by Yield Surge as Market Recalculates

A recent Bloomberg article provides an overview of the widely divergent views that have developed among bond market analysts given the recent sharp rise in yields. As the title of the article implies, some analysts view the rise in U.S. Treasury yields as a clear sign that economic growth will accelerate sharply in the second half of the year and ultimately yields will go much higher. The opposing view is that the current economic data does not justify much more of an increase in yields, with growth and inflation both running at below-average levels.

Our current intermediate-term view is that the odds favor yields stabilizing and not going notably higher in the second half of the year for many of the reasons noted in the article. One additional reason to believe yields will stabilize that is not noted in the article is that real yields on U.S. Treasuries using core inflation have become attractive relative to most other large developed market bonds, including the most attractive relative real yield versus the German bund in well over a decade.

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

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

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

Markets roared back to life last week as investors digested an upbeat June jobs report and decided that things were looking up for the U.S. economy. The monthly labor market report was the highlight of the shortened holiday week, and investors responded positively to the optimistic data.

For the week, the S&P 500 gained 1.59%, the Dow increased 1.52%, and the Nasdaq grew a healthy 2.24%.

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

Why Underemployment May Be Worse than it Looks

Last Friday’s jobs report was a roaring success according to most investors. However, the rarely mentioned underemployment rate, a measure of those who have recently quit their jobs and those taking part-jobs but would rather have full-time work, jumped 14.3 percent.

One measure by Gallup puts the underemployment number at 17.2 percent of the work force, down from its peak in 2010, but still at an unhealthy level. This could mean the quality of new jobs being created is not as high as investors initially expect when they see favorable jobs reports. Those working part-time also saw an increase on Friday’s report. Numbers such as underemployment and part-time workers bear further scrutiny before the market declares the labor market back on track.

Short Looks Beautiful to Bond Investors

With yields on the 10-year U.S. Treasury spiking from an early-May low of 1.63 percent to its current level above 2.6 percent, many investors believe that further rate increases are likely and are looking to reduce interest-rate risk in their portfolios. One common approach is to reduce duration by switching to shorter maturities.

A recent article in the Wall Street Journal points out that “Going to shorter maturities typically lowers yield. If you find a fund that invests in bonds maturing soon but doesn't require you to take a lower yield, chances are you're just magnifying other flavors of risk." The article also notes that floating rate notes, a fixed income category that sports low durations, come with an often overlooked element — lower borrower credit.

Central Banks Hone Tools to Pop Bubbles

Another article in the WSJ examines some of the tools being used by global central banks to control asset bubbles in the wake of easy global monetary policies that have been in place since the financial crisis of 2007-2009. Central bankers worldwide are watching these experiments closely —among them U.S. Federal Reserve Chairman Ben Bernanke — as they search for ways to halt borrowing binges before they morph into bubbles.

Some initial results are encouraging. For example, in Canada, housing prices have reversed their rapid rise and fallen for five months after the government changed rules to effectively increase monthly payments on new loans. The ability of these new “macro-prudential” policies to control bubbles has important implications for investors, which have endured two major bubble-bursting episodes over the past 13 years and are concerned about the future possibility of another one forming.

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

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

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

Despite a spike in volatility, markets were still able to eke out gains last week. Friday also marked the end of the month and the end of the second quarter; though June ended in the red, equities closed out the second quarter in the black. This marks the third positive quarter in the last four. So far this year, the Dow has surged more than 13%, while the S&P 500 and Nasdaq have increased nearly 13% each.

For the quarter, the Dow gained 2.27%, the S&P 500 climbed 2.35%, and the Nasdaq rose 4.15%.

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

Earnings to Get More Scrutiny amid Taper Talk

A recent article from Marketwatch.com details some potential headwinds for stocks as we enter second-quarter earnings season. In addition to continued concern over potential Fed tapering of asset purchases, the article notes several reasons that second-quarter earnings and second-quarter outlooks may be challenged.

These earnings headwinds include the diminishing impact of stock repurchases, rising interest rates, continued sluggish economic growth and government spending cuts, and very weak revenue growth in the first quarter providing little momentum. Also of note is a high level of negative earnings pre-announcements in recent weeks.

While the recent market correction may have already priced in many of these risks, the potential earnings headwinds noted in the article suggest volatility may remain elevated as we head into second-quarter earnings season starting next week.

Slow-Motion U.S. Recovery Searches for Second Gear

The Wall Street Journal argues that the U.S. economy is poised to experience accelerated growth beginning in 2014, following four years of sluggish growth. Growth is expected to reach its highest level since 2005 next year according to several economists and the Federal Reserve increased its 2014 growth projection as well, based on improvements in the economy’s fundamentals.

Headwinds for the economy persist, including recent weak manufacturing activity and debt sequestration, but improvements in housing and employment, coupled with increasing domestic energy production, are providing optimism that U.S. economic growth will accelerate in 2014.

Bear in the China Shop

In its latest issue, The Economist details the recent credit crunch in China and growing concerns that the country is heading for a credit crisis similar to what the U.S. experienced in 2008. Although the recent signs of stress in interbank lending in China are concerning, the article highlights some key economic factors which suggest a full-blown financial crisis in China is unlikely anytime soon.

In particular, the article notes that China has a very high savings rate, in contrast to the United States in the years leading up to its crisis. The article also makes the important point that the largest Chinese banks are already state-owned, a situation which can lead to inefficient lending decisions but which also offers the opportunity for a speedy cleanup of the financial system.

Finally, the article notes that the current interbank lending crunch in China was caused by the central bank refusing to lend as it attempts to clamp down reckless lending. In the U.S., the interbank lending market froze because banks were not willing to lend to each other. These are important insights in understanding just how much risk the current credit crunch in China poses to the global economy.

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