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Thursday, February 19, 2015

Oil is consistently in the headlines because it is a key economic driver of the global economy. But in the future water may be the new oil. Many investors are not aware of the severe drought conditions here in the U.S. – not just other parts of the the world. California's current 4-year drought has resulted in the worst conditions in 1,200 years. The quest for water has driven some California cities to explore desalination techniques in order to use the ocean water as a potential supply (see WSJ 2/18/15 page A3.) This process is expensive but ongoing technological advances should bring cost down. The need for usable water is prevalent across all business sectors, not just agricultural concerns. Technology firms, for example, need substantial quantities of water to keep their servers cool. The fracking process which has spurred a U.S. energy revolution is also extremely water intensive. And not to mention, it takes 8 gallons of water to make one gallon of beer. Please see the Voya Global Perspectives™ 2015 Forecast where we introduce the tectonic shift to water.

Wednesday, February 18, 2015

Investors are anxiously awaiting the release of the Fed’s FOMC minutes today to gauge how soon they can anticipate a rate hike. So far this year the 10 year treasury yield has moved up to about 2.1 percent from 1.6 percent at year end. The bond market is aware that a zero interest rate policy is not appropriate in this economy and investors should not obsess about an interest rate hike – it will happen eventually. Bonds are appropriate in a portfolio because they provide diversification and risk control as well as income. Senior Loans in particular should do well in a rising interest rate environment because their interest rate floats. So far this year Senior Loans have posted a return of 1.25 percent while some other bond classes have been negative. In past rising interest rate regimes senior loans have done exceptionally well. Please see page 38 of the Voya Global Perspectives™ book for a historical view of senior loans and interest rates.

Tuesday, February 17, 2015

The surging dollar will produce winners and losers. Companies that are more domestically oriented will not feel the pinch of the strong dollar as much as those positioned in the international arena. This means mid and small caps will be better insulated than large caps which tend to depend more on international customers and exports. If sales growth shrinks, earnings will naturally feel the squeeze too and earnings are the driver of the markets. But, on the other hand, a strong dollar will make the U.S. equity markets more attractive to foreign investors, providing both capital and currency appreciation opportunities. European manufacturers will benefit as the euro is now at a multi-year low against the dollar making their goods more attractive. Mining companies will also get some lift that will buffer them against the fall in commodity prices because they sell their goods in dollars but pay costs in local currency. Emerging markets are worried about a Fed rate hike and its effect on their dollar denominated sovereign bonds but, the strong dollar and low oil have been helping their economies grow stronger. An investment environment with so many potential outcomes favors strong active management and broad diversification. Please review asset class correlation on page 68 of the Voya Global Perspectives™ book; negative or near zero correlations offer the best diversification benefits.

Thursday, February 12, 2015

Retail sales declined 0.8 percent in January primarily because of a whopping 9.3 percent decrease in gasoline sales, the biggest drop in six years. But core retail sales which exclude gasoline and auto sales were also disappointing, ticking up only 0.2 percent. Clearly consumers are not sinking all of their gas savings windfall into retail goods just yet. However, this report was not entirely negative. Restaurants and drinking establishments posted a 13.1 percent surge suggesting consumers are not averse to spending the extra cash. Perhaps consumers just need a little time to get used to low oil prices. In addition, year-over-year sales are 3.3 percent above January 2014 and total sales for the November 2014 through January 2015 period were up a solid 3.8 percent from the same period a year ago. The encouraging pace of job growth will boost consumer spending which is 70 percent of the economy. Please follow retail sales on page 13 of the Voya Global Perspectives™ Book.

Wednesday, February 11, 2015

Low oil is unequivocally good for U.S. Consumers. However, it's never that easy. Lower oil prices will take a bite out of capital expenditures especially in the energy sector. Companies will be less willing to invest in new projects and capex is what drives future job growth. Currently the labor market looks strong. In fact the latest JOLTs report released yesterday shows 5 million job openings in the U.S., the most since 1999. But let's keep our eye on capital expenditures as an indication of sustainable robust economic growth.

Tuesday, February 10, 2015

The latest news from Greece cast a shadow over U.S. markets yesterday. Greece is backing off some of the strict economic debt reduction plans just as a high stakes bailout deadline extension is looming. Yes, there is a slight chance that Greece will be forced out of the euro zone and that would undoubtedly roil global markets. But Greece is a small part of the Eurozone economy (2.5%) and has significantly more to lose than the Eurozone as a whole. In addition the ECB has turned on the stimulus spigot to keep bond yields low and many of the countries that were struggling have started to turn the corner limiting the risks of contagion that were dominant in 2011. Tensions are high now but the market should see past Greece. Please see our views on the markets in our latest monthly commentary.

Friday, February 6, 2015

If the Fed is looking for a reason to delay raising interest rates, it is going to have to look somewhere other than the jobs market. The U.S. Economy added 257k jobs in January with solid increases across most industries and the highest private sector job increases since 1997. The unemployment rate ticked up to 5.7 percent as more people were encouraged to enter the workforce in search of employment. In addition, December was revised up to 339k from 252k and November was revised up to a whopping 423k from 353k. However, the best news in this report is that workers are starting to see some wage gains. Hourly wages surged .5 percent in January, the biggest jump in six years. Please follow payrolls on page 56 of the Voya Global Perspectives™ book.

Thursday, February 5, 2015

The December trade deficit widened 17 percent to $6.8 billion, the highest level in more than two years. The strong dollar has hindered exports and boosted imports. But oil was also a factor in this latest report. There was a sharp and surprising increase in imports of petroleum and a decline in exports of oil-related products. The trade deficit detracts from GDP so the 2.6 percent initial print for Q4 is unlikely to be revised up. Please follow trade on page 21 of the Voya Global Perspectives™ book.

Tuesday, February 3, 2015

The last couple days have been good for U.S. equity markets but while most U.S. markets are still down for the year, emerging markets have been quietly staging a revival. They are up almost 1 percent (MSCI EM Index) for the year. Worries of a strong dollar and low oil prices have not derailed these markets. Most emerging markets are net importers of oil. And emerging market valuations are compelling when compared to the valuations in U.S. markets. Please follow these fundamental valuations on page 53 of the Voya Global Perspectives™ book.

Friday, January 30, 2015

Fourth quarter Real GDP substantially missed expectation increasing at an annual rate of 2.6 percent versus consensus of 3.3 percent, reported the Bureau of Economic Analysis. Real personal consumption expenditures (PCE) increased 4.3 percent which was the standout for the report. We are starting to see the consumer benefit from lower oil prices in contrast with the lagging negative Retail Sales report. Also, as expected, we are seeing fixed investment decelerate and investment in equipment plunge compared to the previous quarter. In the fourth quarter compared to the third quarter, fixed investment dropped to +1.9 percent from +8.9 percent and investment in equipment dropped to -1.9 percent from +11.0 percent, wreaking havoc on corporate earnings in the energy sector as well as other sectors that derive a benefit from this important sector. Please see the Voya Global Perspectives GDP report.

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