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Tuesday, November 11, 2014

Brent crude oil prices are down again today to a four year low. The rapid drop in oil prices was the inevitable result of the transformation of the energy industry. The transformation was so profound we called it a tectonic shift in our 2012 forecast. The U.S. has become the top producer of oil and the OPEC nations now account for only 40 percent of the world’s oil production. Investors may be worried that falling oil prices will derail the shale revolution. However, our second tectonic shift, technology, has become a shield against falling prices. Drilling technology has become far more productive lowering the breakeven price considerably. According to the Energy Department, only 4 percent of shale production in North Dakota, Texas and other states need an oil price above $80 a barrel for producers to see a profit on investments. These tectonic shifts in energy and technology are creating jobs paying higher than those in the service sector, benefitting U.S. economic growth. As companies scramble to find qualified workers in these fields they should note that military service and experience often dovetails nicely with the skills and knowledge required for technology oriented positions. Sincere thanks to all of our veterans for their service and sacrifice.

Friday, November 7, 2014

The unemployment rate ticked down to 5.8 percent, the lowest level since July 2008. In October the number of new jobs added to the economy rose 214,000, and there was a net 31,000 upward revision for the months of August and September. The number of available job openings now stands at a 13 year high. Underemployment also fell to 11.5 percent and the labor participation rate ticked up to 62.8% as more people came back into the workforce. Although wage increases are still lagging, increasing only 2 percent YOY, they should respond as the labor market tightens further. Overall, this was a solid report and a continuation of the positive underlying story regarding the household sector. More importantly for the market, this report falls right in the sweet spot. It is consistent with the Fed’s overall plan for raising rates and will not apply undue pressure to raise rates sooner than expected. Please read the lastest global perspective on the markets.

Thursday, November 6, 2014

The labor market continues to show improving strength. Initial jobless claims came in last week at 278k, the lowest level since the Great Recession and the second lowest level in 35 years. This is good news for the consumer and consumer spending, but it also may signal stronger wage growth which will increase inflation, currently below the Fed's target of 2 percent. Meanwhile, all investor eyes are on Europe and the mounting pressure for the ECB to undertake additional stimulus. Please see Euro Zone Real GDP on page 17 of the Voya Global Perspectives book.

Wednesday, November 5, 2014

The midterm elections favored Republicans going into the election but the sheer magnitude of the sweeping victory astounded the cognoscenti. CNN reports, “A Republican tide ripped the Senate away from Democrats Tuesday, giving the GOP full control of Congress and In the House, CNN projected the GOP will have at least 246 seats, its largest majority since World War II.” CNN also reports “Stunning Republican gubernatorial victories came in reliably Democratic states, including those won overwhelmingly by Obama in 2012. Illinois ousted Democrat Pat Quinn in favor of Republican Bruce Rauner, while Maryland voters opted for Republican Larry Hogan over Democrat Anthony Brown. Republican Charlie Baker won a Massachusetts match-up against Martha Coakley, the state attorney general who lost a special Senate election to Scott Brown in 2010.” Other notable Governorship saves for the GOP were Florida and Georgia. Meanwhile, in the economy the ADP Employment Survey beat expectations on top a strong ISM Manufacturing Employment index. This bodes well for Friday’s Nonfarm-Payroll report. Please see Employment Payrolls on page 56 of the Voya Global Perspectives book.

Tuesday, November 4, 2014

The worrisome global growth story manifested itself in the trade data that was reported today for September. After months of narrowing because of lower petroleum imports, the trade deficit surged to 7.6 percent. Imports were not the story, but rather it was exports or lack of them that are behind the widening deficit. Exports to key trading partners China, Japan and Europe fell 3.2, 14.7 and 6.5 percent respectively and the overall 1.5 percent decline was the sharpest decline since February. This latest report may result in downward pressure on the third quarter GDP second estimate. However, based on the strength of the latest manufacturing PMI, the U.S. economy is running at 3 percent plus going into the fourth quarter. Please follow global trade on page 21 of the Voya Global Perspectives book.

Friday, October 31, 2014

It's no trick; Bank of Japan (BoJ) announced an enormous expansion to their monetary easing policy sending the Nikkei up 4.83 percent. It is spurring a global market rally and we may reach a new 52-week high today in the S&P 500. So much for a spooky October! Meanwhile, third quarter corporate earnings growth is 9.3 perecnt with seventy percent reported. Please see Voya Global Perspectives “Effective Diversification: 2014 Edition” discussing the “Folly of Gaming Diversification” for investors who were spooked in October.

Thursday, October 30, 2014

There should be no question that QE3 initiated in September 2012 and expanded in December 2012 to $85 billion per month was a success. The revisionists who dispute this don’t have the facts on their side. In the third quarter of 2012 a key indicator for future corporate profits, ISM Manufacturing, turned negative. Due to this Global Perspectives initiated concerns warning that 3Q-2012 earnings growth were at risk of being negative for the first time since 3Q-2009. As the third quarter earnings season progressed it looked ominous and then when the final reports came in for the S&P 500, in fact earnings growth was negative. Earnings growth tends to trend in one direction for long periods of time so a single negative reading is a precursor to a profits recession and worse – a bear market. The Fed’s extraordinarily aggressive QE3 came at the right time, lifted investor enthusiasm, bolstered business confidence and consumer spending. Earnings growth rebounded the very next quarter and has continued to be positive since. While QE3 doesn’t get all of the credit it was the right medicine at the right time. QE3 was an unequivocal success. Meanwhile, U.S. GDP handily beat expectations at 3.5 percent. Please see page 45 of the Voya Global Perspectives book, "Monetary Policy," to compare the Federal Reserve’s balance sheet expansion to the ECB’s balance sheet contraction.

Wednesday, October 29, 2014

Twenty-seven years ago this month the stock market plunged. Investors dubbed that horrible day Black Monday. Many investors may remember the more than 33 percent drop from August through the beginning of December that year; but do they remember that in 1987 the S&P 500 actually ended the year in positive return territory? In 1987 the market was up 2 percent. This year October 2014 started out on a bad note, however, as of this week the S&P 500 has turned positive for the month. Large caps are not the big story here. It’s actually small caps that have soared, up 4.7 percent for the month and are now positive YTD. Global Reits are also up 4.7 percent for October and over 12 percent YTD. Diversification works. Gaming diversification and market timing doesn’t work. Please see an example of a globally diversified portfolio on page 5 of the Global Perspectives book.

Tuesday, October 28, 2014

Economic data reported today was mixed. First the bad news - durable goods orders were weak in September, falling 1.3 percent mainly because of the volatile aircraft orders component. However, nondefense capital goods shipments rose at a 16.0 percent at an annual rate in third quarter, suggesting capital expenditures and exports in the 3Q GDP report should be strong. Next the okay news - housing prices as reported by the Case Shiller Index showed 5.6 percent year-over-year growth in August. This means housing prices are still clearly rising, but at a slower rate. Finally, the good news - the Conference Board reported that consumer confidence in October rose to 94.5 from 89 in September, a seven year high. Falling oil prices, improving labor conditions and an overall positive U.S. economic outlook are bolstering consumer sentiment. Meanwhile, corporate earnings continue to look strong with year-over-year growth of about 7 percent with half the companies reporting. Concerns of the global growth outlook are still present but the market has settled down after weeks of volatility. An up day today may actually reverse the S&P 500 returns for the month from negative to positive. Please follow durable goods orders on page 61 of the Global Perspectives book.

This morning on Fox Business, Doug explained what caused the current drop in oil prices and what this means for consumers. If you missed it, watch it here.

Friday, October 24, 2014

Brazil used to be the darling of Latin America but has stumbled in the last few years. Now Brazil is in recession and facing soaring inflation. Its investment grade bond status is threatened by its ever widening budget deficit, business confidence is near a five year low and it was the only BRIC country to experience a decrease in foreign direct investment last year. However, the election of a new leader on Sunday could turn things around. Presidential candidate Aecio Neves is running against incumbent Dilma Rousseff. In the last 12 years many Brazilians have risen out of poverty under her Worker’s Party rule, but in the years under her direct oversight growth in Brazil has fizzled, averaging less than 2 percent per year. Neves is known to be extremely pro-business. Similar to the election of Narendra Modi in India, this could be the spark Brazil badly needs. Meanwhile, U.S. markets were up big yesterday based on news that Germany’s PMI manufacturing index beat expectations coming in at its best level since July and Saudi Arabia cut its oil production – putting a stop to the steep decline in oil prices for now. Please follow international economies on page 52 of the Voya Global Perspectives book.

Also, in case you missed Doug on Bloomberg TV yesterday click here to hear more about his views on the markets and Voya’s Born to Save campaign.

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