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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.

Wednesday, September 24, 2014

New single family home sales, which are based on pending contracts, jumped at the highest rate since 1992, surging 18 percent to an annual level of 504.000. Some other positive housing news - the share of deals in existing home sales that were all cash fell to 23 percent in August from 29 percent in July. This is the lowest share since 2009 and opens a wider avenue for first time buyers. Also, the number of homes available is up 4.5 from July 2013, giving buyers more choices. Continued job growth and an easing of credit conditions are needed to keep the housing market moving in the right direction. Please follow Home Sales and Housing Starts on page 60 of the Global Perspectives book.

Tuesday, September 23, 2014

Geopolitical uncertainty may be the Rodney Dangerfield of the markets, currently getting "no respect". The U.S. and several Arab nations yesterday carried out air strikes against ISIS in Syria and the market yawned. The possibility that China might miss expectations in the HSBC Manufacturing PMI moved the market a lot more yesterday, but fortunately it came in above expectations today. Emerging markets are driving global growth and hopefully we will get more record IPOs from China and other emerging markets. Meanwhile, getting back to normal means broad global diversification; please refer to our latest monthly report.


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