Weekly Recap & Outlook – 05.31.13

Tower Private Advisors

Below

  • Right out of Monty Python’s Ministry of Silly Walks come comments from the Ministries of Silly Comments
  • Rising rates? What rising rates?
  • Wishy washy economics

Capital Markets

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Top Stories

  • Unless you’ve been hiding under a rock you might have heard that Japan is flooding the market with yen, as it seeks to get the nation out of deflation mode. Naturally, other countries are crying foul, as it tends to make there currencies more expensive, which means their exports are more expensive. Well, the International Monetary Fund says Japan’s actions are fine so long as it “pursues domestic goals, and is accompanied by comprehensive fiscal and structural reforms…”
  • Speaking of Japan, The New York Times declared that an improved industrial production reading in that country has calmed investors. That’s what you call this 15% drop in two days? Calmed? Brilliant!

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  • In other over-the-pond matters, it looks like someone might be up for reelection in Germany. Der Spiegel reports that Germany has abandoned calls for austerity (i.e. belt tightening) and has, instead, called for economic stimulus. I’m nearly certain Rod Serling is standing nearby in monochromatic suit–and skin, hair, and everything else–as I read that it plans to “dramatically expand lending and investing in fiancially stressed eurozone countries…” What?
  • Germany, France, Spain, and Italy–this is sort of comical–banded together to announce, at a conference, that Europe must deal with sharply rising youth unemployment–20 handles on the unemployment rate are common. ‘Trouble is, over there, unemployed youths tend to throw things like rocks, bottles, and governments–that would be overthrow.
  • And in a week of surreal comments, the “executive director for financial stability” in the Dilbert comic strip at the Bank of England said the “central bank cannot guarantee that interest rates will remain extremely low for the next d e c a d e or so.” or SO? “Market participants should be aware of …the possibility of rate rises.” Sometimes I wish I swore.
  • Back home, where people are saner, the SEC is preparing to make some pretty dramatic changes to money market funds. Namely, that they–which ones they are remains to be seen–may have to use a floating price. That means that your $10,000 in a–okay, probably not just any–money market fund could be worth more or less the next day.
  • Reuters announced that advisers are telling their clients that the trend in interest rates (up) is set to continue. So here’s that trend.

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  •  I wouldn’t get too trended up just yet. The 0.5% rise over the last month is likely to be reversed. In fact, rates could fall by 0.4% and still be in the rising trend channel. I wonder how many of those advisers will still be riding that horse. I’m guessing most will be back to talking about this–now this is a trend!

big trend

  • I’m no gold bug, but it’s interesting to see how quickly folks abandon their enthusiasm for things. An Austrian hedge fund executive expects gold to reach $5,000 per ounce in the next 5-10 years, as governments’ monetary experiments fail. Meanwhile, in the futures pits, the gold Commercials–typically the producers; i.e. the mines–are as long as they’ve been in several years, which is to say they’re the least short they’ve been.
  • Recall that Paul Volcker was the Federal Reserve tough guy in the early ’80s who cranked up interest rate to choke off inflation. He weighed in on the current Fed and said that:
    • too much is expected of it
    • the dual mandate (full employment, stable prices) may not be feasible
    • the most recent round of quantitative easing may be ineffectual

This Week

The CaseShiller Home Price Index jumped to a 10.17% year-over-year increase. Stunning! For the bears in the crowd I’ve shown how far the index remains below the 2004 peak…-35.5%. The bulls can observe that national home prices–on a couple-month lag–are 158% higher than the were in 2009.

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The balance of the week’s economic releases, however, showed a bit of sogginess in the economy. Here’s the list of them with charts that follow.

  • Initial Jobless Claims rose by 14,000 over what was expected. Bad at the margin, but the measure looks solid for now. A sustained rise to above 400,000 would be needed to call it into question.
  • Personal Income was unchanged in April. In March it rose by 0.3%. Those are monthly rates, with big implications; annualized, the figures are 0.0% and 3.6%.
  • Q1 2013 Gross Domestic Product was revised slightly lower, from 2.5% to 2.4%, in the first revision following the initial release.
  • Regional indicators painted a mottled picture.
    • Richmond Fed Manufacturing Index – reading of -2 was better than expectations for -4 and the prior reading of -6
    • Dallas Fed index remained below zero; that’s bad
    • Milwaukee Purchasing Managers index fell to 40.67 from 48.43 (previous month) and 49.00 (expected); readings below 50 suggest contraction
    • Chicago Purchasing Managers index rose to 58.7, far above the previous month (49.0) and expectations (50)
  • The University of Michigan survey of consumer confidence rose by 0.8 to its highest reading since October 2007

 

Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors

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