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Capital Markets Recap
…a stream of consciousness collection of top stories IMO from the week
- Percentage of Americans delaying retirement increases to 62%. Two years ago it was 42%.
- The debt ceiling is…suspended for three months. I guess that means it doesn’t matter until then.
- Euro:Dollar exchange reaches 14-month high. So much for the Euro going down the tubes.
- “The latest bout of optimism in the markets is welcome, but governments should not let it infect them with a dangerous complacency,” so said The Economist. That same complacency has hit investors it seems. That’s what John Hussman, of the Hussman funds, said last week in a dispatch titled “Capitulation Everywhere.” It’s evidenced in the low Volatility Index readings, bullish individual investor surveys, and elsewhere.
- Automatic spending cuts are set to kick in on March 1–this is the part of the Fiscal Cliff that was postponed–and The Washington Post cites lawmakers who say there is “little hope of averting them.”
- Rep. Paul Ryan says the spending cuts will be allowed to take place, but the government won’t shut down.
- Some guy from the Potomac Group–surely from a John Grisham novel–says the U.S. economy is in better shape than you think. He sees the unemployment rate going to 7% by the end of the year. Economists have less than enviable forecasting records. I wouldn’t quit your job to look for a new one just yet.
- The Federal Reserve said it will continue to buy $85 billion of bonds each month. It intends to keep rates at zero until the unemployment rate falls to 6.5%, according to a number of sources. Here’s a word cloud of the Fed’s statement, released after its every-six-weeks rate decision meeting.
- Christina Romer, former economic advisor to the Pres, says the U.S. economy is doing better than Europe precisely because we avoided the harsh austerity it embraced. What do you think?
- The Department of Justice is filing an anti-trust lawsuit to block Anheuser-Busch InBev from acquiring the 50% of Grupo Modelo that it doesn’t already own.
- Amazon shares reached an all-time after beating Q4 earnings estimates
Security flavors of the week…as usual, more ETFs were launched this week
- WisdomTree is debuting an actively-managed corporate-bond ETF, the WisdomTree Global Corporate Bond ETF. This is the second coming of ETFs, the actively managed kind.
- iShares is launching the iShares MSCI USA Momentum Index fund, which will own stocks with the “potential for above-market momentum.” Momentum is one of the drivers of stock performance that the efficient markets crowd hasn’t been able to explain. It’s sort of Darwin’s platypus.
- You say you don’t invest in gold because it doesn’t pay a dividend? Well, that hasn’t changed, but Credit Suisse is launching an exchange traded note (i.e. it’ll have the credit risk of CSFB), the Credit Suisse Gold Shares Covered Call ETN, that will systematically write covered calls on the big GLD gold ETF.
- Master Limited Partnerships (MLP) are the income-generation vehicle of choice for many in this ultra-low-yield interest rate environment, so, naturally, MLP funds are popping up like weeds. Two companies are teaming up to launch the Yorkville High Income Infrastructure MLP ETF. Some day this market will get overcooked; investors will lose millions and will swear them off. That day’s probably not here yet, but be careful.
- And now for some really useful ETFs. iShares has announced it’s getting ready to launch its next series of target-maturity-date bond ETFs. Some day the aircraft carrier that is declining interest rates will change course, and interest rates will head back up. When that happens, bond funds will, generally, start to sport negative signs on portfolio statement, especially in front of the gain/loss numbers. That’s one reason that investors prefer individual bonds…”but if I hold it ’til maturity I won’t lose anything.” Right, right. “Not so, with a bond fund,” they say. Right, right. Anyway, while individual bond investors really should be in bond fund to gain their diversification and monthly income distribution, they generally don’t like the no-maturity-date feature of the funds–even thought their fund of bonds has no maturity date. A n y w a y … these target date ETFs just own bonds set to mature in any one year. Accordingly, they give investors the benefits of bond funds (diversification, monthly income) with the certain maturity (December 31, 20XX) of an individual bond. The new iShares ETFs will have target maturities of 2016, 2018, 2020, and 2023 in both investment-grade and finance-sector varieties (four of each.)
I’m not a big fan of tying market moves, which comprise more than a few hands and more than a few motivations, to specific news, but perhaps it’s different in futures. Here’s a look at the overnight and pre-New York open activities in the front-month S&P 500 contract. Notice the spike at 8:30 AM that occurred on the Nonfarm Payrolls release, and, later, at 10:00 AM, when the ISM Manufacturing index was released. Cash markets open at 9:30, so the S&P 500 cash index is flat until then. The trouble with tying market moves to specific stories is, for example, what happened at 2:00, when the market started to roll over? Well, Utah Lawmakers approved some change in some pay structure; the NYT released some story about remembering Ed Koch; maybe some rumor spread on trading floors–who knows.
Out of these two releases, only the second one offered any reason to rally. The first one came in like this:
- Nonfarm Payrolls grew by 157,000. That’s just 2,000 jobs more than last month’s print, and it’s 8,000 less than the dismal scientist crowd estimated.
- Private Payrolls declined by 2,000 from December and were 2,000 shy of economists’ estimates.
- Manufacturing Payrolls grew by just 4,000; down from 25,000 in December and less than the 10,000 expected.
- In what is probably the most widely recognized economic data point, the Unemployment Rate moved up to 7.9% from 7.8%.
- Average Weekly Hours Worked fell by six minutes.
Following Wednesday’s release of Q4 GDP, which showed a (-)0.10% decline, perhaps the morning’s second release, ISM Manufacturing, grew unexpectedly from 50.7 to 53.1, far better than the 50.7 that economists had expected. This diffusion-index report indicates growth when the reading is above 50; contraction below 50. As one can see from the Payroll summary above, however, manufacturing payrolls grew very modestly in the last month, and it’s a relatively small portion of our economy–even though there is no nation that produces more stuff than we do.
Regarding that GDP report, it seems that
everyone the bulls are dismissing it, that it’s an artifact of the temporary [and vaporous?] year-end fiscal cliff worries. Capital spending’s going to rebound, there’s a newfound willingness in Congress to work together (what?!). Rather, I think it’s a case of spineless Republicans turning belly up. It seems the best they can come up with is to approve the debt ceiling increase, asking only that Congress produce its first budget in four years or else all the congresspeople forfeit their pay. ‘Like any of that will happen.
Hey, have you noticed your paycheck? All else equal, your 2013 weekly paycheck is lower than 2012′s. Hello…. Apparently, this came as some shock to the fine folks surveyed by the Conference Board. I would have thought that anyone able to fog a mirror would have known the 2% payroll tax cut was going away as part of the Fiscal Cliff, and that it’s not hard to calculated 2% of one’s pay. According to folks smarter than I, the folks surveyed were shocked…shocked…SHOCKED! to find this was the case. Accordingly, confidence (top panel) fell to levels of a year ago, as is on display below.
Key indicators to watch
- ISM Non-manufacturing survey – arguably this indicator covers more of the economy than does today’s ISM Manufacturing.
- Initial Jobless Claims
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors