Perspectives from Above the Noise – Week of February 25, 2015

A key macro event of the past week turned out to be last Wednesday’s Fed minutes, which revealed a more dovish sentiment than suggested by the January policy statement. The minutes, at least temporarily, sent the dollar lower and halted the sharp rise in Treasury yields. Several Fed participants expressed concern that sluggish wage growth could continue to hold back consumer spending. Fed officials also worried that market participants were becoming too calendar-focused, meaning investors were trying to guess the month of the first rate hike, and there was little evidence that the Fed was preparing to signal a mid-year move. More surprisingly, though, were concerns expressed about the dollar’s strength being a source of restraint on exports, one of the first direct indications of such concern.

Investors had been expecting Greece to receive an extension to its bailout program and were not disappointed as the country’s new leaders largely abandoned hopes for a large-scale reworking of its rescue package. Under the terms of the temporary deal, Greece will now submit proposals for reform measures to the European Commission, IMF and European Central Bank for review.

For the week, the S&P 500 rose +0.63%, the Dow Jones Industrial Average added +0.67%, and the MSCI EAFE (developed international) gained +1.55%.

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

U.S. Existing Home Sales at Nine-month Low, Supply Limited

Sales of existing homes declined by 4.9% in January and fell to their lowest level since last April, according to the National Association of Realtors. All four regions of the country experienced a decline in sales, even though the 30-year mortgage rate dropped to a 20 month low. Low housing inventories were the main culprit for the decline in home resales. The low supply of homes for sale is limiting the selection of homes to potential buyers and elevating home prices, which is keeping many potential first-time homebuyers out of the market.

Opinion: Six Differences Between Now and Last Time Nasdaq was at 5,000

The NASDAQ Composite currently sits at 4,960, less than 1% away from the 5,000 level it last hit at the top the Internet bubble in March 2000. Many bulls are quick to point out that today’s market is not nearly as expensive as it was 15 years ago. This view is supported by a variety of valuation metrics including P/E (based on trailing 12-month earnings), cyclically-adjusted P/E ratio (CAPE), Price/Sales, Price-to-Book, Dividend yield, and q-ratio, all of which are at significantly more reasonable levels today.

However, using the internet bubble as the standard for market valuation is problematic, as according to many valuation measures, that period’s market top represented the most extreme overvaluation in U.S. history. In fact, if you compare today’s market versus a broader historic sample, you find that the current market is more overvalued than the vast majority of the bull-market peaks of the last century.

Bove’s Mortgage Market Concern

In a recent commentary, the well-known and extremely opinionated banking analyst, Richard Bove, describes his concern that reported losses at Fannie Mae and Freddie Mac have the potential to severely disrupt the mortgage market. In Bove’s view, the private mortgage market has been impaired, potentially permanently, by rules put into place after the financial crisis.

As a result, Fannie and Freddie have continued to play an integral role in the mortgage market in recent years. However, if lawmakers move to limit the growth of Fannie and Freddie to reduce the risks of future losses, in Bove’s view, this would severely disrupt the housing recovery. It is an important issue that warrants close watching in the coming quarters.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of February 16, 2015

Economic data last week was highlighted by Thursday’s retail sales figures for January, which continued a trend that has persisted for several months of somewhat disappointing data on consumer spending. Despite the recent sluggish results, retail sales ex-gas and vehicles are still up 5.2% year-over-year. In our view, this is indicative of a domestic economy that is still on firm footing, although moderating from the strong growth experienced in the third quarter. Recent evidence that the labor market momentum is still intact, along with the continuing tailwind of low gas prices, should support some improvement in consumer spending in the coming months.

Investors are likely to remain fixated on the drama between Greece and the rest of the Eurozone in the coming weeks. Talks between the new leadership of Greece and Eurozone finance ministers stalled yesterday, temporarily creating volatility in global markets. Negotiations for Greece to receive an extension to its bailout package are expected to continue throughout the week ahead of the expiry of the current bailout loan on February 28.

For the week, the S&P 500 rose +2.02%, the Dow Jones Industrial Average added +1.09%, and the MSCI EAFE (developed international) gained +2.05%.

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

Is a June Rate Hike Coming? Traders Say One Thing, Economists Another

Economists and traders are at odds over the timing of the next Federal Reserve rate hike. Economists generally believe that the Fed will likely raise its key federal funds rate in June, given the strong state of the U.S. economic recovery and the labor market. Traders don’t agree, pointing to current market dynamics such as Fed funds futures, which are implying just a 20 percent chance of a rate hike in June.

Additionally, the markets overall don't seem to be pricing in a great deal of bad news as stocks continue to trade at record highs. All eyes will be on this Wednesday’s Fed release of their last policy meeting minutes, looking for potential hints to a June rate hike. If so, this hint could cause bond prices to get hit hard (rising rates move inversely to bond prices) and in turn have a negative impact on stock prices.

Markets Show Little Panic on Greece

U.S. stocks fluctuated, the euro strengthened and declines in Greek bonds failed to push yields to record highs as markets showed little panic after talks between Greece and its creditors broke down. Moreover, Spanish and Italian 10-year Treasury bond rates remain below U.S. 10-year Treasury bond yields as investors are showing little concern over potential fallout from Greece’s impasse.

Greece has until the end of this week to request an extension of its bailout program. Without a deal, the government could run out of money by March and be forced to choose between breaking election promises or abandoning the euro. For now, the market is clearly betting on a solution being found.

Japan Economy Makes Meek Exit from Recession

Japan was able to escape its recent recession in the final quarter of 2014, but GDP growth was well below expectations. Japan’s economy grew at a 2.2 percent annualized rate vs. the consensus expectation for 3.6 percent growth. The final quarter was disappointing for Japan’s economy, but Japan finally emerged out of its recession and there are signs that consumer sentiment is picking up, which should aid the recovery.

Japan’s economy fell into a six-month contraction following a large sales-tax increase last April. The Bank of Japan (BOJ) implemented a massive quantitative easing program in an attempt to spur growth and inflation following several years of stagnant growth and deflation. However, Japan’s economy continues to stagnate and inflation remains below the BOJ’s 2 percent target.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of February 9, 2015

The standoff between the new leaders of the Greek government and the European Central Bank (ECB) grew more tense last Wednesday when the ECB restricted the access of Greek banks to its direct funding lines. As a result of that move, junk-rated collateral offered by Greek banks will no longer be acceptable by the ECB for regular financing, and that news caused a sharp late-day selloff in U.S. equities. An important point, however, is that Greek banks will still have access to emergency liquidity assistance from the Bank of Greece, backstopped by the ECB, with the primary difference being a higher rate of interest than regular ECB financing operations.

The big domestic data point for the week came on Friday with the monthly nonfarm payrolls report. In contrast to several recent economic reports indicating a slowdown in U.S. activity, the jobs report continued to indicate strong momentum in the labor market.

For the week, the S&P 500 rose +3.03%, the Dow Jones Industrial Average added +3.84%, and the MSCI EAFE (developed international) gained +1.66%.

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

Despite Low Oil Price Outlook, U.S. Oil Output “Party” should Last to 2020

Since falling to a low of $44.50 per barrel on January 29, U.S.-based crude (WTI: West Texas Intermediate) has rebounded nearly 20 percent to trade near $53. Despite this gain, Citibank issued a note to its clients on Monday warning that that the recent rally may be a “head fake,” and that crude could possibly fall to as low as $20 per barrel.

The bank expects a bottom in the oil market between the end of the first quarter or early in the second quarter, as shale producers may end up cutting rigs by about 50 percent. Prices will start to rise when the buildup in inventory ends and companies start to draw down inventory for a sustained period. A lack of storage may be a major obstacle in the second quarter and could cause a "production crunch," the analysts said.

Despite this, the International Energy Agency (IEA) said in its monthly oil report that the recent crude oil price correction will cause the North American supply “party” to mark a pause, but will not bring it to an end. The report forecasts that the United States will remain the world’s top source of oil supply growth up to 2020, defying expectations of a more dramatic slowdown in shale growth. The IEA said oil prices could face further weakness in the first half of 2015 due to continued increases in inventories, which could come close to revisiting the record highs reached in 1998.

Jobs Report Shows Growing Economic Strength

Gene Epstein provides a summary of the very strong recent employment data in a recent Barron’s article. The employment data remains a bright spot for the U.S. economy, and again in January failed to show the type of deterioration recently evident in other economic indicators.

In addition to several measures of employment growth reaching the best levels since the late-90s in recent months, the most recent jobs report also indicated the best monthly gain in average hourly earnings in six years. As Epstein points out, this provides some reason for optimism that growth will remain resilient in 2015 and also increases the odds that the Fed will announce its first rate hike before the end of the year.

Fed’s Powell Seeks Greater Confidence on Inflation Rebound

Federal Reserve Governor Jerome Powell prefers that the Federal Reserve wait for signs that inflation will increase to the Fed’s 2 percent target before raising interest rates. The Fed has a dual mandate—to promote maximum employment and provide price stability. In Governor Powell’s view, the employment situation is improving, but inflation remains too low.

In fact, inflation has fallen short of the Fed’s inflation target for 32 consecutive months. Powell stated that the Fed can be patient, because low inflation buys the Fed some time before raising interest rates. Although he is pleased with recent improvements in the labor market, he feels there is still a lot of slack in the economy based on the slow pace of wage growth and the large number of individuals working part time for economic reasons.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of February 2, 2015

The Fed's latest policy statement was released last Wednesday and proved more eventful than expected by disappointing investors who were anticipating a more dovish stance in light of growing global deflationary pressures. Unsurprisingly, the Fed removed its "considerable time" language from the statement and kept the phrase "patient" to describe the timing of the first rate hike. This means there will almost certainly be no rate hike for at least the next two meetings. At the same time, the Fed offered a more upbeat view, saying the U.S. economy was "expanding at a solid pace," upgraded from a "moderate pace" in the previous statement. 


For the week, the S&P 500 fell -2.77%, the Dow Jones Industrial Average dropped -2.87%, and the MSCI EAFE (developed international) lost -0.25%.



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



India and Australia Take Steps to Lift Growth

India and Australia joined a long list of global central banks that have recently announced additional monetary stimulus efforts to bolster their economies. India reduced the statutory liquidity ratio (reserves that commercial banks must hold) to 21.5 percent from 22 percent in an attempt to free banks to lend more instead of parking money in government bonds.

The Reserve Bank of India had previously surprised investors by cutting rates on January 15. Separately, the Reserve Bank of Australia reduced its benchmark interest rate by a quarter-point to 2.25 percent, as the mining sector there has slowed because of tumbling mineral prices. Most economists had not expected the Reserve Bank of Australia to cut interest rates until its next monetary policy meeting in March.

What Negative Bond Yields Mean for Investors

A posting from The Wall Street Journal MoneyBeat blog explores one of the remarkable characteristics of early 2015, which is negative yields on European government bonds. There are several explanations cited for the negative yields, including central bank policy and fears of widespread deflation. Several potential beneficiaries of the negative yield are also explored, including U.S. Treasuries, global equities, gold, and the relative value of the U.S. dollar.

U.S. Auto Sales Roar off to Fast Start in January

Sales of new cars and trucks roared off to a fast start in January as General Motors said its January sales jumped 18.3 percent from a year earlier, Chrysler Group’s sales rose 14 percent and Nissan was up 15.1 percent, a January record. Industry observers said that January auto sales sustained the momentum from last year due to high consumer confidence and low gas prices.

The strong January auto sales are a positive data point on the strength of the U.S economy. In a recent survey, analysts said they expect light vehicle sales to rise about 200,000 to 16.7 million units in 2015, the sixth consecutive year of growth and the longest streak since WWII.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer. 

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.