Wednesday, June 17, 2015

Perspectives from Above the Noise – Week of June 15, 2015


In 2015, retail sales data has been surprisingly soft given the boost consumers were expected to receive from lower gasoline prices. After five straight months of coming in below expectations, last Thursday's report on retail sales for May finally provided some encouraging evidence that the widely-anticipated second quarter rebound in economic activity might be taking hold. May retail sales rose by 1.2% and the prior two months were revised up by a net 0.6%. Sales excluding autos, gasoline and food rose a still healthy 0.8% on the month. After the upward revisions, retail sales in the three months including May rose at an annualized 5.1% rate versus the prior three months, indicating some solid if not spectacular momentum in consumer spending.

Events in the Greek bailout drama appear likely to dominate headlines in the coming week with news this weekend that negotiations appear to have broken down over the Greek government's demands for debt forgiveness. Although Greece represents a tiny portion of global GDP, a potential exit from euro could create extreme market volatility with somewhat unknowable consequences. Beyond short-term volatility, the most concerning development would be a sharp tightening of financial conditions in Europe which could severely erode the optimism that has surrounded the ECB's quantitative easing program and signs of increased bank lending.

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

The Fed Won't Ruin Bond Markets --Bloomberg

"With the Federal Reserve poised to unleash its first interest rate increase in almost a decade there's a debate among investors about whether the past is any guide to how markets will react to a monetary tightening.

Quantitative easing has seen the Fed's balance sheet more than quadruple in the past seven years to $4.5 trillion; the bond-buying program also means Treasury yields have been driven to record lows. Moreover, with the Fed Funds Target Rate stuck at 0.25 percent since the end of 2008, the market is full of fresh-faced traders with zero experience of buying and selling securities when rates were anywhere other than close to zero."

The retreat of 'peak oil' --Washington Post

"The recent OPEC meeting provides an opportunity to understand the mysteries of the global oil market. As expected, OPEC decided not to cut its oil production. Barring unanticipated developments, prices will drop, says oil analyst Larry Goldstein. Potential oil supply, including drawdowns from bloated inventories, exceeds demand. Goldstein rightly cautions, however, that no one knows where prices will settle.

First, oil demand is what economists call price inelastic. Slight changes in supply and demand can produce large price swings. People and businesses need fuel. If oil is scarce, they still need fuel and will pay dearly to get it. If oil is plentiful, they don’t need much more fuel and, therefore, require huge price discounts before buying more. This is what’s happened. Supply and demand have unexpectedly expanded the global surplus, reducing prices."

Putin's Risky Game of Chicken  --The New York Times

"As tensions between the West and Moscow sharpen over Ukraine, NATO countries have seen a dramatic spike in provocative actions that risk a harrowing accident or devastating miscalculation. A NATO-Russia military-to-military dialogue would reduce these risks — if President Vladimir Putin and the Kremlin allow it.

NATO has ratcheted down its political dialogue with Moscow in protest over Russia’s illegal seizure of Crimea and involvement in the conflict in eastern Ukraine. But the alliance should seek to engage Russia on a professional military level to minimize the danger of missteps or misunderstandings when their forces operate in close proximity or near each other’s territory."

1-Week Market Watch

DJIA       +0.28%
S&P 500 +0.06%
MSCI EAFE (developed International) +1.39%

Articles chosen and summarized by the Tower Square Investment Management team. Tower Square Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Tower Square Investment 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.