Tower Private Advisors
- Blue light special in aisle seven
- Subdued but improving economy
Capital Markets Recap
Municipal bonds continue to be on sale. They haven’t been helped by the Detroit bankruptcy, but that’s probably little of the reason for their current clearance sale prices. Rather, it was the large May/June interest rate spike. Here’s an example:
Pennsylvania Turnpike Revenue
Motor Licensed Fund
5.00% due 12.01.33, callable 12.01.22
AA by Fitch
A1 underlying rating by Moody’s
The bond is selling at a 4.88% tax-free yield to maturity; 4.77% to the ’22 call date. The former is 140% of the comparable Treasury note yield; the latter, a whopping 190%. For someone in the highest Federal income tax bracket, that’s a monstrous 8.08% taxable equivalent yield or 7.95% to the ’22 call date. That’s a 41% increase from the yield at issue. Get ‘em while they’re hot; these high yields aren’t going to last.
- A few issues remain unresolved: whither China? whither Emerging Markets? whither Commodities. A couple of ETFs launched this week couldn’t care less, it seems. WisdomTree is launching the WisdomTree Emerging Markets Dividend Growth ETF, which will buy stocks of emerging markets country companies that are likely to raise their dividends. Not that it’s late to the party or anything, but iShares is launching the mouthful-of-a-name iShares Dow Jones-UBS Roll Select Commodity Index Trust ETF. It’ll invest in up to 20 commodities. There have been some indications that China is emerging from its little slump, however, with Factory Orders increasing by 9.7% in July, Retail Orders up by 13.2%, while Fixed Income Investment increased by 20.1% since the beginning of the year. If China recovers, so do the other emerging markets, and so does commodity demand.
- While we’re on exchange traded funds, Schwab is getting ready to launch two-, nine-, and 12-month target date bond ETFs. This looks like fallout from the distinct possibility that money market mutual funds will soon move to floating rate net asset values (NAV). If your cash won’t exactly be cash, ‘might as well own something with a little return.
- While we’re on the subject of energy, The Economist said that global oil consumption has peaked and been in decline since 2005. Next, the Energy Department has approved a third natural gas liquifaction export facility. While the first suggests lower oil prices, the latter suggests higher natural gas in the U.S.; lower, overseas, as–only at the margin for now–the arbitrage of high foreign/low U.S. natural gas prices begins to happen.
- In the search for yield, investors have flocked to Master Limited Partnerships (MLP), which include the so-called toll takers in the energy transportation business. Taking advantage of that (the passive tense is regretted) is Global X Funds, which is launching its own MLP ETF, which will boast the one of the segment’s lowest expense ratios at 0.45%.
- Finally, the New Economy punched the Old Economy in the kisser with the announcement that Jeff Bezos–the founder of Amazon.com–and not the internet retailer, itself, was buying the Washington Post. There seems to be something dramatic about that announcement.
- Greece, however, is a submerging market. That country saw its Unemployment Rate reach 27.6%.
- Italy’s GDP fell by just 0.2% in the second quarter, and since a much larger drop was expected, some are thinking the boot-shaped country may be ready to emerge from its recession.
The economic news that came out this week was mostly good, but with most of the data in this subdued recovery, they call come with asterisks. One has to be pleased with the reports this week, but they don’t show a strong economy.
We started out the week with a reading on the service sector–ISM Non-Manufacturing–that suggested continued expansion in that sector. The asterisk on this datapoint is that readings in this recovery have only edged into the lower ranges of previous recoveries, as shown below. If the economy were an automobile, we might be having trouble getting out of third gear.
The weekly report of Initial Jobless Claims produced a new, post-recession low, which is good. The reading of this week’s jobless claims actually ticked up from the previous week but was low enough to drop the 4-week moving average, which economists often prefer, as it eliminates some noise in the data, to a post-recession low.
The Job Openings and Labor Turnover Survey–JOLTS for clever–for June was released. I show it below with two other indicators, one of which is going the wrong direction. That makes for one of the asterisks on this chart, namely that the Labor Force Participation Rate (orange line) is lousy. Only 63.4% of the working age population is considered to be in the work force. That makes a 7.4% unemployment rate look a bit worse. The second asterisk is that job openings are not to pre-recession level. Again, a subdued recovery, albeit a recovery.
Finally, housing bad news presents a mixed picture. On display below are Mortgage Delinquencies and Mortgage Foreclosures. Both continue show improvement in a line that’s moving from–as Dennis Gartman might say–from upper left to lower right, but both are only back to mid-recession levels.
A whole bunch of important stuff…
- Consumer & Producer Price Indexes
- Initial Jobless Claims
- Empire State Manufacturing index
- Industrial Production & Capacity Utilization
- NAHB Housing Market Index
- Philly Fed Business Outlook
- Housing Starts & Building Permits
- University of Michigan Consumer Confidence
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors