Tower Private Advisors
- Divergent equity index results
- Chairman Yellen speaks…or mis-speaks
Capital Markets Recap
Some interesting performances below (U.S. all green for one month; Europe quite mixed, etc.). Of note is that the S&P 500 touched a new all-time high today before backing off.
There were several interesting stories that popped up this week, including several related to comments in Janet Yellen’s first monetary policy meeting. First, there has been speculation that the Fed would modify its approach of trying to guide markets by referencing specific levels on specific indicators. For example, a 6.5% unemployment rate has been referenced for the past several months as one critical level. Well, the unemployment rate doesn’t tell the whole picture, as all know. So, with unemployment a hair’s breadth away from 6.5%, the Fed is going to move away from that, which Ms. Yellen made clear.
She also made clear–maybe too clear–that short-term rates would be heading upward–oh, about six months after it’s bond buying program ends. You will note below that, in March, the Fed further reduced by $10 billion its quantitative easing program of buying bonds. So, the present pace of buying is $55 billion; at the present taper rate of $10 billion per month, the Fed will be done buying bonds by September, at the latest; six months after that is–BINGO!–March 2015, which is far earlier than most have expected. The yield on the 2-year Treasury note, a proxy for monetary policy, jumped around and after Chairman Yellen’s comments, as shown below.
- The Federal Reserve released the results of its stress test of 30 major U.S. banks. Of the 30 banks, 29 passed with flying colors. The only one that failed was Zions Bancorp. The test was about capital adequacy, and Zion came up short. Its shares are down by a bit more than 3% today.
- A suvey of consumers in China found that almost two-thirds of them plan to withdraw funds from their bank accounts and invest the proceeds “in financial products sold on the internet.” Yikes.
- Thanks, at least in part, to last year’s big surge by equities, the top 100 corporations have seen their pension plan funding levels jump from 73% to 89%. Another year like the last one will leave them 108% overfunded, but they probably shouldn’t plan on that.
- Here’s an interesting development. There have been commodity funds around for a long time, and in increasing numbers as ETFs have proliferated. One problem, though, is that most have been based on futures contracts, and it just hasn’t gone well. A firm I’ve never heard of, AccuShares, has filed with the SEC to offer 12 ETFs that offer exposure to the spot prices of six commodities. ‘Coupla things… It’s typically the spot price that we’re most familiar with, as few of us care about wheat for October delivery. This will allow market participants to speculate on spot prices. Notice…12 funds, six commodities. Like the futures markets, these will represent zero-sum games. So there will be, for example, a long-oil ETF and a short-oil ETF. Basically–and I might be butchering this–if oil prices go up, the holder of the short ETF will experience a reduction in value, while the holder of the long ETF will receive a distribution. The funds’ holdings will be cash equivalents. In the past, because expiring futures contracts have to be rolled into further-out–and often higher priced–contracts there has been a natural decay in value. This could open up an entirely new arena for investors.
Most of the economic data released this week was largely in line with expectations. In housing, the NAHB Housing Market Index, and index of homebuilder sentiment, rose slightly, from 46 to 47, below expectations of 50. There is some risk that the uptrend in builder sentiment is going to taper off, as shown in the chart immediately below.
Housing Starts fell slightly (-0.2%) from an upwardly revised 909,000 (previously 880,000), while Building Permits rose by a much-larger-than-expected 7.7%–economists expected an increase of 1.6%. Existing Home Sales were exactly as expected by economists (down by (-)0.4%.) Elsewhere, inflation, as measured by the Consumer Price Index, was almost non-existent in February, with both the headline and core (i.e. excluding food and energy) numbers coming in at 0.1%, which was in line with what economists expected. That both the headline and core numbers were the same tells one that food and energy prices, on average, were unchanged in the month. On a year-over-year basis, inflation is up by just 1.1% at the core level; 1.6% at the nominal level. The Fed has plenty of disinflationary cover to continue its current monetary policy. Speaking of monetary policy, the Fed announced its plans to continue its taper program, announcing that it had purchased $55 billion of Treasury and mortgage-backed bonds, $10 billion less than in February. Given that it has been transparent about telegraphing its plans, that was exactly as economists had expected. Jobless Claims ticked up just a bit but did nothing to suggest any future direction for the series, as shown below.
It’s a busy week for the economists next week, with quite a few economic releases due out. There are several housing-related releases, including the broadest-based measure of national home prices, the House Price Index, Case-Shiller Home Price index, New Home Sales, and Pending Home Sales. Purchasing managers indexes are due out for the Manufacturing and Service sectors. We get the third incarnation of Gross Domestic Product, Jobless Claims, and a couple of regional Federal Reserve reports.
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors