COMMENTARY

A Tale of Two Economies and A Market That Doesn’t Care

It is the best of times for a few. It is the worst of times for many, many more. It is an economic recovery that is gaining momentum. It is an economic recession that never really ended. Interest rates are at historic lows and home affordability is near historic highs. Yet home ownership has declined five years in a row… Please click on the link to read more of my article on Seeking Alpha.

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MANUFACTURING   UPDATE  

MANUFACTURING UPDATE Yesterday we learned that the Texas manufacturing index plunged from a reading of +7.4 last month to -15.6 in April. Texas is in the heartland of business activity for the production and servicing of energy exploration and development activity. The energy sector has been touted by pundits as one of the most important sectors for employment and economic growth, based on the boom in recent years in activity related to the development of domestic oil and natural gas reserves trapped in shale deposits. The decline in this survey presents a worrisome outlook for growth moving forward. Today the Chicago Purchasing Managers Index (PMI), a barometer for business in the region covering Indiana, Michigan and Illinois, fell to a reading of 49.0 in April from 52.4 in March. A reading below 50.0 indicates contraction. This is the lowest reading for the Chicago PMI since September 2009. The consensus of […]

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FUNDAMENTAL   DETERIORATION   CONTINUES  

FUNDAMENTAL DETERIORATION CONTINUES After three consecutive weeks of deteriorating fundamentals for the US economy, the stock market is beginning to show signs of sobriety, as it has in April of each of the past three years. The major difference this year is that the sobriety is not due to the conclusion of another round of quantitative easing (QE). To the contrary, the Fed continues to fill the punch bowl, but this year at a substantially faster rate—to the tune of $85 billion per month! In our opinion, this makes what looks like the early stages of another market correction far more ominous. The relentless money printing by the Federal Reserve is having no meaningful impact on economic growth or job creation, as evidenced by the disappointing payroll employment report on April 5, followed by disappointments in business (NFIB index) and consumer (U. Michigan Consumer Sentiment) confidence. Retail sales have fallen […]

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NO   JOB   GROWTH

NO  JOB  GROWTH   This morning the Bureau of Labor Statistics (BLS) reported that the economy created 88,000 jobs last month, and that the unemployment rate fell to 7.6%. This job count was well below consensus expectations of approximately 190,000. This comes as no surprise to us, because we believe the Fed’s quantitative easing (QE) program has very little impact on employment, in sharp contrast to Chairman Bernanke’s claims. Economic growth is slowing. Furthermore, the employment data is even worse than reported when accounting for the 92,000 job that were magically added to the bottom-line figure through the birth/death adjustment. This adjustment is a guesstimate by the BLS as to how many jobs are likely being created by small businesses that were too new to be accounted for at the time of the survey. This adjustment has historically underestimated job creation early in a recovery, and overestimated the figure in […]

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THE   MANUFACTURING   RECOVERY?  

THE MANUFACTURING RECOVERY? The divergence between financial assets and real economic activity continues to grow.  On Monday the US manufacturing PMI (Purchasing Managers Index) index was reported well below expectations at just 51.3, down from 54.2 reported in February.  This runs counter to claims that economic growth is accelerating in the manufacturing sector.  The February surge was very likely driven by recovery efforts following Hurricane Sandy.  Those efforts are largely behind us now.  The gradual declne in manufacturing activity over the past 3 years is clearly evident in the chart below.  

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SIGNIFICANT   DECLINE   IN   CONFIDENCE

SIGNIFICANT  DECLINE  IN  CONFIDENCE   The Conference Board Consumer Confidence Index declined significantly yesterday based on data collected through March 14. The reading of 59.7, from a revised level of 68.0 in February, was well below the consensus estimate of 66.9. Historically, this has been a leading to coincident indicator of household spending on major durable goods, such as automobiles. The purchase of new autos and trucks has been the impetus for the growth in real consumer spending over the past year. The Conference Board report indicates that households are starting to feel the cumulative effect of reduced after-tax incomes due to the reinstatement of the full FICA tax rate, which resulted in a 2% increase, and higher Medicare tax rates for upper-middle and higher-income households. This number clearly reflects a recessionary mindset, based on the fact that it is well below the average we have seen during the previous […]

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AN   EARNINGS   UPDATE

AN  EARNINGS  UPDATE   We are half way through earnings season for Q4 2012, and the numbers are falling well short of consensus estimates, again. The most recent update on index data through January 24 provided by Standard & Poor’s on its website, accounting for 148 company reports, shows a significant decline in estimates for the quarter to just $23.84 from what was $25.29 at the beginning of the month. This is 5.7% decline! (Source: Standard & Poor’s) We expect those that were more optimistic to take cover behind the notable increase in charges against operating earnings for underfunded pensions. The most notable announcements have come from Verizon (VZ) and AT&T (T). Still, should operating earnings fall below the $23.73 reported in Q4 of 2011 it will have been the second quarter in a row that earnings have fallen quarter-over-quarter and year-over-year. The last time we saw such a sequence […]

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2013   MARKET   OUTLOOK

In 2012 we emphasized real-world economic developments in our investment decision-making process and our outlook for financial markets. This resulted in a very conservative investment allocation and a consistently foreboding tone to our monthly Market Outlooks. The US economy did not perform well in 2012, but financial markets had a far different interpretation of reality in the second half of the year. The divergent paths of deteriorating economic fundamentals and rising market valuations naturally forced us to question our resolve on more than one occasion. Yet we refused to take the blue pill and embrace the fabricated reality on Wall Street that has been orchestrated by the Federal Reserve. It is understandable to conclude that the economy is strengthening when stock and bond prices rise, as they have the past six months. Rising asset values invigorate the growing consensus of optimistic pundits, regardless of the underlying fundamentals. It drowns out […]

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WEEKLY   UNEMPLOYMENT   CLAIMS

DID  CLAIMS  REALLY  DECLINE? The Department of Labor reported that the number of Americans seeking unemployment benefits fell last week to the lowest level in fives years. This was interpreted as a sign that employers are cutting fewer jobs, and that hiring is likely to pick up. The seasonally-adjusted number of 330k was very misleading. In reality, the actual number of people filing initial claims was 436k. This figure was an increase of 20k above the number of people that filed initial claims in the comparable week one year ago. It was the second week in a row that claims rose year-over-year, which hasn’t happened in over two years. For no apparent reason, the Department of Labor increased the divisor they used last year from 144 to 166 to seasonally adjust the number. You divide 436k by 166 to arrive at 330k. This is what led to the perceived decline. […]

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LET’S   HAVE   COFFEE

Investors are challenged with today’s low yields, increased uncertainty and staggering volatility. If you have questions about your current investment holdings, your investment strategy, or the financial markets in general, we would like to help. We invite you to give us a call or come into the office for a visit. At no obligation, we will give you our unbiased opinion. We have nothing to sell but ourselves. We will either validate that what you are doing makes sense, and that you are on track to achieve your objectives, or identify potential pitfalls and offer suggestions on ways to get you back on track.

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