3 Stories in the global economy that should not go un-noticed
Stocks experienced another down week, driven largely by low volume, anticipation of a budget deal, and investor caution before the Federal Open Market Committee (FOMC) meeting. The House passed a breakthrough budget deal that will avoid a government shutdown in January and blunts the next round of automatic sequestration cuts. The Fed’s FOMC meeting will be in focus this week as investors wait to see whether the central bank will send out 2013 with a bang or a whimper.
For the week, the S&P 500 lost 1.65%, the Dow fell 1.65%, and the MSCI EAFE (developed international) lost 1.57%.
Here are the 3 stories this week that rose above the noise:
U.S. Crude Oil Output to Climb Toward Record by 2016
Based on projections, U.S. crude oil production will approach a record by 2016, climbing to the highest level in 46 years as rising output from shale formations lifts domestic supplies, reducing the nation’s need for foreign oil. The surging production is having a positive impact on the country’s persistent trade deficit as consensus expectations now expect the trade deficit to narrow to only 2.4 percent of GDP compared to 5.8 percent in 2006. Domestic output will grow annually by about 800,000 barrels per day to 9.5 million barrels per day by 2016, nearing the record level of 1970.
Production Gain Shows U.S. Factories to Spur Growth: Economy
Strength in manufacturing continues to provide support for continued U.S. economic health in 2014. A report released today by the Federal Reserve showed factory production grew 0.6 percent in November, which followed a 0.5 percent gain in October. Production is up 1.5 percent over the past five months, three times more than the 0.5 percent gain in the first six months of the year.
The automobile space has been one of the underlying driving sectors as auto assemblies climbed last month to an 11.6 million annual rate, the most since June 2006. Capacity utilization and productivity are also at multi-year highs supporting the U.S. manufacturing story.
Companies Turning Again to Stock Buybacks to Reward Shareholders
A Washington Post article examines the recent surge in companies repurchasing shares of their stock in the open market. As detailed in the article, total share buybacks are approaching the record high level reached in 2007. We have mixed feelings on share buybacks for many of the reasons noted in the article. Generally, steady repurchase programs done from free cash flow have the potential to create lasting shareholder value in our view.
However, broadly speaking, companies have had a tendency to aggressively repurchase shares only when times are good and profits very high, for example in 2007. This in many cases had led to ill-timed repurchases and with the valuation of U.S. stocks arguably becoming stretched the surging buybacks may prove to be neutral at best for long-term shareholder value.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
