Archive for April, 2014

February Trade Balance

Wednesday, April 30th, 2014

The trade balance widened in February according to the Bureau of Economic Analysis. The downtick came as exports dropped by 1.1 percent in the period. This $2.0 billion slowdown in exports was exaggerated by the $1.0 billion uptick in imports. The total trade deficit was $42.3 billion versus January’s shortfall of $39.3 billion.

This indicator comes out with considerable lag, so this data is not terribly actionable, but it does provide an important description of the economy. One interesting narrative in this release is the change happening with America’s trade shortfall versus China. This $20.9 billion deficit is the smallest since March 2013. Both components of trade are improving in America’s favor on a year-over-year basis. Exports to China have grown by 6.2 percent in the last twelve months. Meanwhile, imports from China fell 6.0 percent in the same period. This pattern certainly resonates with the slowing GDP data being released from China.

Our nation’s trade balance has shown a distinct trend since January 2012. The gap has been closing since that time. The current setback is only concerning because the smallest deficit since that time occurred in June 2013 and has not been as small since. To continue the improving drift, the gap will need to shrink to less than $34.4 billion before it widens beyond $43.4 billion. (by C. Cox)

March Consumer Sentiment

Tuesday, April 29th, 2014

Consumers’ attitudes were less optimistic in March versus February according to the University of Michigan’s consumer sentiment index. The tally for the period was 80.0, down from 81.6 at the end of the previous period. This is the lowest reading in four months. It seems Americans feel virtually the same about their present situation, but there was a decline in their expectations. Predictions for inflation remained the same.

Consumers seem to be concerned about something on the horizon. It does not seem imminent because current conditions barely budged in March. The tally stands at 95.7 which is nearly identical to the 95.4 measure in February. The downtick in expectations may be driven by concerns about several potential threats to the relatively calm period. Perhaps Americans are worried about the uncertainty around monetary policy. Also, there are new geopolitical tensions between Western Europe, the U.S., and Russia that may have motivated the drop in expectations. The cause of the apprehensiveness is not important to Atlas. Our concern is the impact it makes on consumption.

There is some relationship between consumer attitudes and their willingness to spend money. The drop in sentiment over the last three months may cause Americans to rein in their outlays. A drop in consumption is not good for an economy that depends on spending for roughly two-thirds of its output. The hope is that the chill in American attitudes will abate as the weather warms up. (by C. Cox)

March Institute for Supply Management

Monday, April 28th, 2014

According to surveys conducted by the Institute for Supply Management (ISM), not only did the economy grow in March, it accelerated. Both segments of output turned in better tallies than those seen in the previous month. Some of the acceleration was influenced by weather (February was a particularly harsh month) but the uptick is encouraging nonetheless.

Manufacturing’s improvement was subtle, moving to 53.7 from 53.2 in the prior period, but any count over 50.0 is interpreted as growth. New orders remained high and increased. This leading indicator went from 54.5 to 55.1. New export orders were also strong with a reading of 55.5. Backlogs remained elevated as well with a tally of 57.5, a 5.5 point gain! Growing new orders along with accelerating backlogs mean manufacturers have lots of output to generate in the months ahead.

The service portion, the larger part of the economy, accelerated from 51.6 to 53.1. Employment made a large impact on the total. Non-manufacturing jobs subtracted from the indicator in February but gained 6.1 points in March to 53.6. Like the manufacturing segment, new orders accelerated in the service portion of the economy.

Atlas sees the combined ISM tally as a positive indication for the economy. There was concern about the pace of output during the winter, but this is giving us a positive first clue into the state of the economy without the inclement weather. It may be indicating that the scales on the economy’s bud were hearty enough to withstand the difficult winter, setting the stage for a full bloom in the spring. (by C. Cox)

Divide and Multiply

Friday, April 25th, 2014

Around here signs of springtime are popping up everywhere. Having laid dormant through the hot summer and colder winter, bulbs are beginning to force their green blades through the dirt and into sunlight. I’m seeing daffodils, freesias, Dutch iris and amaryllis beginning to bloom all around my yard. They come up thick because I rarely tend to them. Bulbs need to be uprooted, divided, and replanted if their multiplication is to be optimized.

In some respects, this process of division and multiplication corresponds with our method for managing portfolios here at Atlas. Our methodology is rather simple. We use division to determine what investments should be bought. Once planted in your portfolio, we watch for them to multiply. The difficulty lies not in process but volume. The investing universe has a myriad of components; literally thousands of calculations must be done on a daily basis to monitor and update the composition of each account.

If you divide 1 by 1, you get 1. Divide 2 by 1 and you have 2. Divide 3 by 1 and you have 3. Simple enough. Putting these three calculations in order gives this progression: 1, 2, 3. Obviously the number is getting larger. Why? Because the top number in each equation keeps getting bigger while the bottom one stays constant. The difference would be even greater if the bottom number was getting smaller. The difference would continue to grow a bit even if the bottom number got bigger, so long as the top number was growing faster still. We say the top number’s growth is stronger than the bottom one’s in this example. Put another way, the top number is exhibiting relative strength vis-a-vis the bottom one.

Our goal is to compare almost every investment choice available and find those few which we believe can remain relatively stronger than the rest for an extended period of time. This is labor intensive but we have some excellent technology to facilitate the comparisons which we believe points out the brightest blooms in what otherwise would just be a field of weeds. (by J R)

Final Fourth Quarter GDP

Thursday, April 24th, 2014

Fourth quarter economic growth was revised up in the final attempt to quantify the nation’s output from October through December 2013 according to the Bureau of Economic Analysis. The final revision moved the annualized growth rate to 2.6 percent from the first revision’s 2.4 percent count. The inflation measure included in the report remained unchanged at 1.6 percent.

A few important components were revised upward. Final sales of domestic goods came in at 2.7 percent from 2.3 percent in the earlier revision. This means global demand for American goods and services were better than the earlier data suggested. Also, final sales to domestic purchasers were bumped higher to 1.6 percent from the prior estimate of 1.2 percent, indicating stronger demand from consumers and businesses than the previous calculation demonstrated. However, it was not all upward reappraisals. Nonresidential structures and intellectual property rights were revised lower.

Even with the upward revision, the final quarter of 2013 represents a slowdown from the prior period which grew 4.1 percent. Fortunately, your resident optimists here at Atlas found a silver lining in the data. The year-over-year improvement has accelerated for each of the past two quarters; the third quarter’s 12 month look back was up just 2.0 percent versus the fourth quarter’s 2.6 percent rate of improvement. Since the relatively longer term progression is still accelerating, the economy may have temporarily waned during a waxing trend. (by C. Cox)

February Personal Income and Expenditures

Thursday, April 24th, 2014

Personal income rose by $47.7 billion in the month of February according to the Bureau of Economic Analysis. This 0.3 percent uptick was identical to January’s percentage uptick and the second consecutive monthly gain after a slight setback in December. Also, Americans spent more during the period as the growth rate of expenditures accelerated. Inflation data included in the indicator continued to be mild.

Wages and salaries are the largest component of personal income in America. The rate of increase slowed slightly in this category. After increasing by $17.2 billion in January, this component managed to grow by 0.2 percent or $13.0 billion in February. Payrolls expanded by $5.2 billion in the goods producing industries after contracting in the prior period. Income growth within the service industry slowed substantially from $17.3 billion to start the year to just $7.8 billion in February.

Americans spent 0.3 percent more money during the month than in January. Consumption of wares expected to last at least three years continued to decline but fell at slower pace. This is the third consecutive monthly downtick for durable goods. Nondurable expenditures managed to make back some of January’s sharp slowdown, increasing by 0.3 percent after the 0.9 percent fall. Spending on services continued to grow, albeit at a slower pace.

One of the most popular parts of this indicator is its inflation gauge. The central bank pays particular attention to the core personal consumption expenditure (PCE) price index which excludes food and energy costs. Despite their attempts to increase the rate of inflation within this subset, the year-over-year change has been between 1.1 percent and 1.2 percent in every month since April 2013. The Federal Reserve is looking for sustained price increases over 2.0 percent. The last time this measure of inflation was greater than 2.0 percent on a year-over-year basis was September 2008. That was the period when some of the nation’s largest financial firms failed or were forced to take some other form of action by regulatory authorities. Since that time, this inflation gauge and the world have not been the same. (by C. Cox)

February Durable Goods

Tuesday, April 22nd, 2014

Orders of wares expected to last three years or longer were mixed in February according to the Durable Goods report provided by the Census Bureau. The headline tally grew by 2.2 percent for the month, following a downtick of 1.3 percent to start off the year. The turnaround in the overall tally is encouraging, but there seems to be some hesitation by companies to invest in equipment as the core figure, which excludes defense and aircraft capital expenditures, dropped by 1.3 percent in February.

Orders grew by nearly $5 billion dollars during the period. Most of this surge came from the volatile transportation component; the $4.6 billion or 6.9 percent increase to $71.4 billion follows two consecutive months of decreases and was led by a $1.8 billion uptick in orders for nondefense aircrafts and parts. Motor vehicle and parts orders were up just over $1.6 billion for the month. Defense spending on aircraft and parts was also up in February.

Atlas considers core capital goods orders a proxy for business confidence. When firms anticipate a substantial increase in their business’ growth rate, they often spend money on new equipment. February’s weakness in the core figure could be suggesting that companies are not expecting growth to improve enough to require additional capital equipment.

Another clue into the economy found within this indicator is the shipment data. This demonstrates orders which have been completed that will go into the quarterly GDP tally. After falling by 0.6 percent in January, they were 0.9 percent higher in February. This portion of the report is not indicating that there was a strong economy in the first quarter of the 2014.

From the perspective of the Durable Goods report, the economy is continuing in a “more of the same” fashion. America’s output continues to grow but the rate of change is tepid. This will likely allow the central bank to keep short-term interest rates pinned to the floor for an extended period of time even after the unconventional policies expire. (by C. Cox)