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Wednesday, October 8, 2014

The rise of the U.S. dollar has some investors worrying about its effect on corporate profits. The dollar was up 7 percent in the third quarter. This is, for the most part, welcome as it helps U.S. domestic businesses with lower costs, but could put a damper on multinational companies doing business overseas. It’s very rapid ascent is also potentially disruptive to markets. On the other hand, companies that purchase raw materials overseas for manufacture in the U.S. will benefit and both consumers and companies are also benefitting from lower commodities prices because commodities such as oil are usually priced in dollars. Please read all about the state of the U.S. economy and what is worrying investor in "Europe the Fly in the Ointment as U.S. Economy Buzzes."

Tuesday, October 7, 2014

The U.S. economic picture looks solid. Earnings season starts this week and expectations are for robust growth. Additionally, falling gas prices will be a catalyst for holiday retail spending and a boost to GDP. Despite all of this good news the market and investors are uneasy, and not without reason; the global landscape is not without risks. The latest numbers for Europe, particularly Germany which has been an economic powerhouse until recently, looks grim. A recession in Europe could affect the U.S. rosy earnings outlook for Q4 and the beginning of 2015. That is exactly why investors should own bonds as part of a globally diversified portfolio.

Monday, October 6, 2014

Share buybacks and dividends have been getting the credit for lifting the market in the last few years. A recent story in Bloomberg stated U.S. corporations are poised to spend $914 billion on share buybacks and dividends this year, or about 95 percent of earnings in 2014. Stock buybacks are a boost to the stock price, but do little to enhance overall economic growth. Instead, business investment is needed to fuel innovation, efficiency and future sustainable growth. Spending 95 percent of earnings does not bode well for future growth. However, this headline misses the fact that companies as of Q2 have 1.57 trillion in cash sitting on their balance sheets, down from 1.62 trillion as of Q4 2013. Companies must use the cash (which is earning nothing) in some manner to enhance stockholder value. So while the amount of share buybacks is at historical peaks, companies are drawing down the huge stockpiles of cash and not necessarily spending all of their earnings. Indeed, the latest GDP report showed non-residential fixed investment was up 9.7 percent for the quarter. Attributing the lift in markets to share buybacks also ignores the fact that corporate earnings are at record highs and P/E ratios are well within historical averages. Please follow earnings growth on page 8 of the Global Perspectives book.

Friday, October 3, 2014

Today’s blockbuster nonfarm payroll report drops unemployment to 5.9 percent with a 248K headline jobs number. Unemployment rate drops to a 5-handle; add "handle" to the end of a whole number, ignore the decimal, and you’re instantly smarter. A key driver to the drop below six percent was the positive revisions to July and August amounting to 69K additional jobs. The participation rate changed little in September and U.S. markets are applauding. Meanwhile, Europe is "the fly in the ointmen" as Germany’s manufacturing contraction presages European recession. But for now follow employment trends in the U.S. on page 57 of the Voya Global Perspectives book.

Thursday, October 2, 2014

Super Mario makes his first policy mistake "too little too late". ECB President missed an opportunity today to greatly expand QE to sovereign debt purchases and he blew it. European markets summarily voted with selling across the board that is spilling into U.S. markets. Apparently, Mario was not as alarmed as the market was when superstar Germany posted contraction in its manufacturing a precursor to recession but we think he will be back – and soon – once he looks at the tape. Meanwhile, in the U.S. initial jobless claims came in lower than expected at 287K last week and have been below the key 300,000 mark for three straight weeks. The latest round of data indicates layoffs are at the lowest level in 14 years. Please follow Monetary Policy Outlook on page 46 of the Global Perspectives Book that shows the extent of European Central Bank (ECB) tightening.

Wednesday, October 1, 2014

The ISM PMI Index of U.S. manufacturing companies dropped to 56.6 percent in September from 59 percent in August, indicating that manufacturing grew more slowly but still robustly. In fact, the production component of the report was the highest since January 2010 and the latest overall reading is consistent with 4 percent plus GDP. The ADP payroll report also showed private sector hiring picked up in September adding 213,000 jobs, the sixth consecutive month of more than 200K in job growth. Private sector job growth was broad based across all sectors and company sizes. Coupled with the low initial jobless claims data (below 300K the last two weeks) expect a solid non-farm payroll on Friday. The fundamentals in the U.S. continue to strengthen while Europe wobbles. Germany’s manufacturing sector deteriorated in September with their PMI falling to 49.9 percent indicating slight contraction - the first time since June 2013. Please follow U.S. manufacturing on page 11 of the Global Perspectives book.

In case you missed Karyn Cavanaugh's September 30th appearance on CNBC’s Closing Bell, watch it here.

Tuesday, September 30, 2014

Home prices were up 0.6 percent in July but the annual growth rate slowed down, with year-over-year home prices rising 6.7 percent. This is the slowest pace since late 2012 and a slowdown from the annual growth of 8.1 percent in June. It may not sound like it, but it’s actually a good report. Home price increases are outpacing inflation and every tick up in prices means more upside for home owners who have been underwater. They’re on their way to being above water or may be above water already. More good news about the slower rate of appreciation is that it will attract more new buyers into the market. Please follow the S&P Case Shiller Home Price on page 59 of the Global Perspectives book.

Monday, September 29, 2014

Consumer spending rebounded in August, up 0.5 percent, led by auto sales which were the highest since January 2006. This is another indicator that the economy is indeed expanding at a moderate pace. Meanwhile, the bond market is abuzz with news of a shake-up in the biggest bond house in the U.S. As money shifts, investors may be tempted to park their funds in cash for fear of rising rates. However, we have been in a rising rate environment for a year now. Bonds are the diversification and risk control you need to sleep at night when all of the geopolitical noise keeps you up. Please see an example of a diversified portfolio on page 5 of the Global Perspectives book.

Friday, September 26, 2014

U.S. GDP for the second quarter was revised upwards. The final reading came in at 4.6% up from 4.2%, primarily because of better exports and higher business investment. This is the best economic performance since fourth quarter 2011 when the economy also grew by 4.6%. Please follow GDP on page 63 of the Global Perspectives book.

Thursday, September 25, 2014

Look past the headline durable goods orders, which on the surface plunged by a record 18.2 percent in August after a record surge of 22.5 percent in July. The huge swing was mainly because of volatile commercial aircraft orders. New orders for durable goods rose by a seasonally adjusted solid 0.7 percent and more importantly business investment also increased. Business investment is slowly climbing back after dropping more than 16.7 percent in 2009 and non-residential fixed investment is now steadily claiming a bigger contribution to GDP. This investment is more economically beneficial than using corporate earnings for dividends and the recent rash share buybacks. The final Q2 GDP number is due tomorrow and don’t be surprised if you see another upward revision. Meanwhile, the positive trend on the employment front continues with initial unemployment claims ticking up to 293K last week, but coming in less than expected and hovering near an eight year low. Please follow durable goods on page 62 of the Global Perspectives book.


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