Pretty Good!
I’ve been fortunate to have been able to spend the past few weeks traveling and meeting people around the Pacific Northwest, the Rocky Mountain States and the Southwest. Watta great country! What great people!
Since I didn’t write a letter last week due to that, this one’s a little long so I can get mostly caught up.
One thing I did during the tour was to ask a lot of folks what they were thinking and feeling about the current economic situation. The vast majority responded with a variation on “pretty good.” Based on what the data shows, those answers weren’t a function of giving me a polite response. Our economy – and markets – are, in fact, pretty good. Here’s some reasons why I say that…
JOBS INFO
While my media buddies like to position every monthly non-farm payrolls report as the most important one ever, this last one may actually have affected more than a few views on how we’re doing overall.
The Labor Department reported Friday that non-farm payrolls increased 257,000 in January. These are the biggest gains in 17 years! The job numbers for November and December were also each adjusted higher by a combined 147,000. The really good news – the upward revisions came from civilian employment, an alternative measure of jobs that includes small-business start-ups. Payrolls have now been up 200,000+ for eleven consecutive months.
The unemployment rate, calculated from a separate survey of households, climbed to 5.7% in January, up from December’s 5.6%. That’s not bad news since the rate rose because the labor force has grown as more Americans are actively looking for jobs. To me, this is a sign of growing confidence among households…they believe there are jobs to be found, so let’s go look.
There’s always somebody that wants to suggest that the “real” unemployment rate is infinitely worse. The rate they refer to is called the U-6 rate, one that’s been tracked by the Bureau of Labor Statistics (BLS) since 1994. By definition, this rate includes marginally attached workers and people who are looking for full-time work, but can only find part-time work. The current U-6 number is 11.2%.
Not great, to be sure. However, let’s put it in perspective. The average for the U-6 rate over the past 30 years has been 10.7%. With us now tracking the right way and, with more folks out looking for work, this number should continue to drop.
US ECONOMY
Sorry about all the data but sometimes it’s helpful to see the numbers to better understand how we’re doing. Case in point is our balance of trade.
According to the Bureau of Economic Analysis (BEA), real exports of goods and services rose 2.0% year over year to a record high during the last quarter of 2014. Real imports rose even faster, by 5.3% year over year…also to a record high. Exports suggest that the global economy continues to grow, though at a slow pace. The US economy is performing well, as confirmed by the increasing demand for imports, showing our consumers have the ability and interest to spend.
Dr. Ed Yardeni provides a great insight. He says the sharp drop in the global price of oil and the strength of the dollar has been weighing on our economy. That’s due to the combination placing pressure on the corporate profits of energy and multinational companies – one of the reasons those type shares have been under pressure. Some of these companies are responding by cutting capital spending and their payrolls. These are typical cyclical responses.
Recent reported weakness in capital goods orders has been for machinery, particularly construction and industrial equipment. Dr. Ed said the former may be related to the cuts in the oil patch. The latter may be attributable to a pause in the US manufacturing renaissance as those companies adjust to the effect of the strong dollar. While there has been widespread concern that the global economy could drag us down, I believe it’s also possible that the US economy will lead the rest of the world higher.
OIL
Bad news has been converted by traders into good news, as was seen in the oil price movement over the past couple weeks. Friday’s closing West Texas Intermediate (WTI), aka, US; crude ended just about $6 per Barrel higher than two weeks ago.
The bad news, certainly for those directly affected, is the announced energy company layoffs, together with the drop in the number of rigs being used to find new sources. While the per barrel price remains about 50% below last June’s high, the fundamentals of the oil market haven’t really changed.
What changed is the trader’s perception that these events will work down the oversupply and, ultimately, lead to shortages and higher prices. They want to buy ahead of the price recovery. Traders are extremely headline sensitive, as evidenced by the wide daily price volatility this past week.
To me, this action is suggestive of a couple things. One is that the price is settling in, trying to find a level. You may recall in my letter of 23 Jan, I made mention of Abdullah al-Badri, the Secretary-General of the Organization of the Petroleum Exporting Countries (OPEC). He said then that, “Now the prices are around $45-$55 and I think maybe they reached the bottom and will see some rebound very soon.”
The WTI price on the 23rd was $45.59 per barrel. Yesterday, even after all the mid-week flipping about, it ended at $51.69 per barrel. I think that it could be that al-Badri’s comment put a floor under the price, though the near-term fluctuations will almost certainly continue.
The other point is that it appears the overall market may be sensing oil prices are stabilizing. This would change investor attitudes for the better about the global economy, in general, and may be why the markets rose this week.
US MARKETS
After a tough January, this positive week brought each of the three major US stock market indicators back up to just about unchanged from year-end. With rates dropping, bonds continued strong – best sector of the year…so far.
BONDS
How much lower can yields go? I would have – and did – say it would be higher than they are now. Our 10 year US Treasury Note closed Friday at 1.96%. The Japanese 10 year was last bid at 0.34%. Germany’s 10 year came in at 0.37%. The Swiss is actually negative. As you can see, there’s pretty good motivation for people most everywhere in the developed market world to invest here cuz money goes where it’s treated best.
The payroll report mentioned above had a direct effect on our 10 year note Friday, causing its return to rise. That’s because the thinking is that the job report will provide more motivation to the Fed to begin raising rates by June in response to our strengthening economy. This will cause rates on our new bonds to go up and make the dollar rise as well.
The “U” word – uncertainty – has many people and companies keeping demand unusually high for cash, bonds and equivalents high. Matter of fact, according to Dr. Scott Grannis, in December, 2008, individuals alone had bank savings balances of $4 Trillion. Today, in spite of returns of, effectively, zero, those type balances have risen all the way up to $7.7 Trillion – in spite of having witnessed and participated in a huge recovery since ’08. I must say I truly don’t get it. Bonds make sense in an allocation but not to this extent…After-tax and inflation, real rates are less than zero…buying power is steadily being eliminated.
STOCKS
While on my tour, I had occasion to meet with some fund managers. Here are some thoughts consolidated from my notes.
High US corporate profitability looks sustainable, going forward. Profit margins of the non-financial S&P companies – especially in the manufacturing sector – have risen sharply in recent years because of structural changes, such as those driven by globalization, outsourcing and process reengineering, this according to both Oppenheimer and AllianceBernstein. None of those three factors are expected to go away anytime soon.
Some sectors of the market, especially those related to consumers, will see benefits from lower energy prices. On the other hand, interest rate sensitive sectors, i.e., utilities, gold and bonds for instance, will likely be subject to downward pricing pressures as US rates rise.
Finally, it seems as if the S&P is in a trading range right now and will need to get through 2060 in order to see some sustainable upward moves. The index closed Friday at 2055.
Hope you’ve found this useful and agree that things are, in fact, pretty good. Please call when I can be of help with your investments!
Cheers!
Mike
Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
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