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Friday, December 8, 2017

The U.S. economy added 228,000 jobs in November and the unemployment rate is 4.1%, a 17-year low. Job gains were broad-based, but notably strong in education and health care categories as well as in construction and manufacturing. The hiring in the manufacturing sector is an affirmation of the extremely robust PMI’s we have been seeing over the last several months. So what’s not to like? Wage gains. Despite the tight labor market, wages inched up only a mere .2%. Companies are bound and determined to hold down costs and therefore reluctant to invest in their employees. Corporate tax cuts should help jumpstart corporate investment, wages and productivity – but that will take time. Meanwhile, the market continues to grind higher on a steady stream of upbeat economic data.
Please follow the non-farms payroll report on page 63 of the Global Perspectives™ book.

Thursday, December 7, 2017
Since 1999, earnings for S&P 500 companies have grown more than 200% while the price level is now only 60% higher.

The 17th century is often referred to as the Dutch Golden Age because during this time period, the economy of the Netherlands soared – primarily due to their expansion of trade across the world. In fact, Amsterdam was one of the richest cities in Europe between 1600 and 1700 due to the Dutch dominance in global trade. In the mid-1500’s an exotic flower was brought to Holland from the east. It was a tulip. The rare and elegant flower soon became a status symbol. Soaring demand created tulip traders. As the growing season was limited, tulip derivatives contracts were created. Popularity and prices soared until a single tulip bulb was worth about 10 times a craftsman’s annual salary. It is approximated that tulip flippers could rake in an estimated equivalent of $60,000 per month. No wonder farmers were selling their houses, animals, and heirlooms for a single bulb! Then one day in 1636, the music stopped. Panic ensued, sellers overwhelmed the market and prices dropped to the floor. The Tulipmania bubble popping sent the Dutch economy into recession for several years. A bubble is an irrational sharp increase in prices based on the greater fool theory, not economic fundamentals. The trouble with bubbles is that they can persist for years, confounding investors, and you don’t know just when they will pop. Does this remind you of anything? Hint: it’s not Beanie Babies. That one already popped. And it’s not the market – corporate earnings levels are supportive of these price levels. Please compare earnings to prices on page 7 of the Global Perspectives™ book and watch Karyn Cavanaugh’s latest comments on the market.

Wednesday, December 6, 2017

The 3% growth rate of the past two quarters seems to be continuing. The NY Fed Q4 Nowcast is expecting near 4% real GDP growth, while the Atlanta Fed GDP Now is looking for 3.2% growth. The St. Louis Fed Economic News Index of Real GDP is clocking in at 3.1%. And the PMI data shows good growth as well. The November ISM Manufacturing PMI came in at 58.2 with the Overall Index at 53.8, up a trick from October. Importantly, the New Orders component is at 64 with the 12-month moving average at 62 – the highest rate in over a decade.
Plus, the synchronized e global rebound can clearly be seen in the current level of PMIs and the on-going rise from mid-2016. Right now, basically no major country has a sub-50 reading compared with seven countries below 50 in May 2016. The big engines of global growth – The Eurozone, U.S. and UK are all printing results around 60, with Germany at the head of the league table at 62.5. Today is St. Nicholas day, the traditional day in Europe for gift giving. The round-up of November data looks like a very satisfying present. Please see page 9 of the Global Perspectives™ book.

Tuesday, December 5, 2017
Projected market volatility spikes in times of crisis then drops as fears subside. Current levels are below average, but the Fed’s path to normalization of rates may lead to more typical volatility levels.

As tax reform moves forward, investors are jockeying for position, rotating in and out of stocks and sectors, trying to determine the biggest beneficiaries of the potential tax plan. The tech sector is taking it on the chin because these companies generally have the lowest effective tax rates and therefore lower potential gains. The consumer, financial, and healthcare industries - on the other hand - generally pay higher tax rates. Value vs. growth has also been added to the mix with value expected to outperform growth. And bets are being made on small caps vs. large caps, with small caps expected to outperform due to their more domestic orientation and the limitation anticipated on pass-through tax rates. Although some businesses will be bigger winners than others, the winnings will be widespread. In fact, S&P 500 earnings are expected to surge by 6-10% in 2018 due to tax reform. Earnings are the fundamental driver of markets, so investors want to make sure they stay in this horse race. In addition, ensuing economic growth will help not just earnings but consumers, manufacturing, jobs, housing and confidence. In the meantime, all the uncertainty surrounding the tax plan specifics could spook markets and cause a surprise volatility spike. Investors should always remember this and try not to get too complacent in the saddle. To learn more about market volatility, please see the chart on page 26 of the Global Perspectives™ book.

Friday, December 1, 2017
The U.S. manufacturing report has rebounded after a month of contraction; the latest eurozone and emerging markets reports also indicate expansion.

The Senate says they have the votes to pass tax reform, mitigating some of the impact from the latest Washington drama roiling markets. It is likely tax cuts will happen and that will move the already positive earnings trajectory higher. The latest Washington headlines are providing an unwelcome distraction but lack the power to derail the bull market when the economic backdrop is so darn good. Today’s ISM PMI is just another affirmation of economic strength – 58.2% with an employment component up to 64% and 14 out of the 18 industries tracked reporting expansion. The manufacturing renaissance bodes well for accelerating corporate earnings in 2018. So keep your eye on the ball – corporate earnings growth. You can review the lofty manufacturing PMI’s on page 8 of the Global Perspectives™ book.

Thursday, November 30, 2017

Despite hurricane disruptions, the U.S. economy grew 3.3% in Q3, the fastest rate of economic growth in three years. The components of GDP are consumption, investment, net exports and government spending. So what changed in this mix? Quite simply – investment, business investment. Companies are realizing they have to invest and spend on capital equipment in order to boost productivity and stay competitive. Non-residential investment increased 7.3% over the preceding quarter. In the recent past, it has been the consumer doing the heavy lifting. Don’t worry, consumer spending is still steadily increasing. The latest consumer spending readings reported a .3% increase in October after a strong 1% surge in September. Consumers are enjoying higher wages and record high household net worth. Personal income was up .4% in October, the second month in a row. But businesses are finally coming to the GDP table and that’s good news for sustained growth. The last time we saw two consecutive months of +3% readings was in 2004/2005. Now, it looks like we may have a chance of making it three in a row with Q4. All this good news makes you wonder why the bears don’t just go into hibernation already. Please watch Doug Cote’s unequivocal anti-bear spray on CNBC..

Wednesday, November 29, 2017

In the past year, there has been a major sea change in the US economic outlook following the election of President Trump. The main changes thus far have been twofold: an improved confidence in the economy and a major deregulatory push. The change in confidence began as early as November 2016 and is a key driver of the economy, it’s ‘animal spirits’. That pick-up can be seen in the NFIB Small Business Optimism Index (holding at 13-year highs); the Conference Board Consumer Confidence Index (holding at 15-year highs); and the University of Michigan Consumer Current Economic Index (holding at 15-year highs). ISM new orders are up some 10%. Since January, the Administration has gone on a deregulatory tear, reportedly withdrawing nearly 500 regulations per a Washington Post study, while promulgating virtually no new regulations.

And now the fruits of those labors are being seen. Real GDP has averaged 3.2% QoQ growth over the first two full quarters under the new Administration. Unemployment claims are at near 50-year lows, with the unemployment rate seemingly heading below 4%. Capital goods non-defense new orders (ex-aircraft) have risen by an annualized 9.6% rate over the past six months to October 2017. Capital goods shipments are up nine-straight months, and have melted up. Orders and capital goods shipments are the seed corn of an economic revival. Tax reform can be the fuel boost to lock it in. - Special Guest Blogger: Tim Kearney

Tuesday, November 28, 2017
The shale oil and gas revolution has made energy cheaper for U.S. manufacturers and spawned many high paying jobs. The recent drop in oil prices has caused the energy sector to cut back.

The U.S. has a glut of natural gas which has depressed prices below $3.00/btu. Fracking technology has opened up plentiful reserves and driven down extraction costs. This excess supply has created opportunities that are both economic and strategic. Over the next five years, the IEA (International Energy Agency) reported that the U.S. will begin liquefying and shipping gas all over the world and, by 2022, will produce more than a fifth of the world’s gas supply rivaling titans like Norway and Russia. In the liquefied gas market, the U.S. is expected to become the second biggest exporter. This will direct dollars into the U.S. economy. In addition, it will provide a strategic diversification benefit to many of the eastern European countries that rely on Russia for gas supplies. Remember a couple years ago when Russia threatened to put Ukraine in a deep freeze by cutting off supplies? Well, last week Louisiana announced that it will be exporting liquefied natural gas to Poland via the Sabine Pass terminal. Growing exports of LNG to eastern Europe will dull Russia’s influence and power. Diversification is good whether it’s across asset classes or energy sources. Please follow natural gas prices on page 75 of the Global Perspectives™ Book.

Wednesday, November 22, 2017

One reason that currency forecasts are a formidable challenge is that they don’t exhibit any form of cash flow to anchor their value. Bonds have coupon payments while equities have earnings or dividends as cash flows that can be discounted back to arrive at some present value for the asset. So what factors can we rely on to forecast the direction of currencies?

In the short term, we believe in a regime-dependent approach that incorporates momentum, sentiment, and other macro based factors to forecast near term currency direction. Over the intermediate term, we look at relative interest rates and growth rates which can make domestic assets attractive or unattractive versus foreign assets. Using a two factor model based on interest rate and growth rate differentials, we estimate that a 100-point shock in the relative Citi Economic Data Change Index for the U.S. versus a basket of its majors would push the dollar roughly 10% higher in a years’ time, while a 1% shock in 2-year rate differentials would also push the dollar higher by roughly 10% over a years’ time. We also rely on other longer term signals to help form our secular view. Looking at the long-term view for the dollar, we start with purchasing power parity (PPP), which compares relative prices for goods and services, as our valuation anchor. Knowing this can deviate from fair value for periods of time, we view this as useful once it reaches stretched levels while also looking at this in conjunction with metrics such as relative current account balances and productivity which can justify periods of sustained over/undervaluation.

Putting all this together, we believe that in the near term we could continue to see some modest dollar strength as relative economic momentum and interest rate differentials are supportive along with market positioning that is fairly dollar negative. Any positive announcement on the tax reform front will also support a higher dollar in the near term as well. However, looking at the longer term view, with the flat trend of relative productivity and expectations for an increasing deficit, the dollar has room to move lower as PPP vs. a basket of its majors is currently neutral and has room to move to the downside.

Please look at page 54 of the Global Perspectives Book to see how the dollar has fared against emerging markets.

Tuesday, November 21, 2017

M&A (merger and acquisition) activity is in the news and on the rise. Deals tend to correlate with business confidence so an uptick in activity is an affirmation of the accelerating economic growth, both in the U.S. and abroad. Companies seek deals to harness growth and innovation, combat disruptive technologies, navigate globalization, and maximize brand strength. Many firms have cash they need to put to use while others are taking advantage of low interest rates. Most deals tend to create synergies which boost earnings and shareholder wealth. So in case you needed yet another reason to believe in this bull market, here it is.

Please watch Karyn Cavanaugh discuss the global synchronized expansion on CNBC Squawk Box.


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