Archive for November, 2014

September Balance of Trade

Monday, November 17th, 2014

America’s trade balance worsened as the third quarter came to a close according to the Bureau of Economic Analysis.  Deteriorating to $43.0 billion from the revised $40.0 billion shortfall (originally $40.1 billion) seen a month earlier, exports were the primary culprit.  Despite recent headlines about America’s surging energy production, the petroleum chasm increased.  While we did export about $12.4  billion worth of energy products, we actually imported around $26.4 billion.  Compared to the prior three month period, the petroleum deficit grew $900 million or by 6.4 percent.  The goods deficit excluding petroleum jumped $1.7 billion, a 3.7 percent hike.  With stories about struggling developed economies continuing to make headlines, this worsening trend may take time to resolve.

Exports gave back all of August’s gains and then some in September.  The 1.5 percent decline in purchases of American made goods and service by foreign buyers dwarfed the 0.3 percent gain in the prior period.  Foreign buyers purchased less of every category except foods, feeds, & beverages.

Imports were nearly unchanged, growing by just $100 million.  Our nation imported additional consumer goods, other goods, and food, feeds, & beverages.  However, Americans bought fewer industrial supplies, capital goods, and automotive related wares.

As economies outside of the U.S. struggle to grow, this indicator may worsen in the months ahead.  Central bankers in Japan and Europe are engaged in experimental monetary policies as they attempt to boost their respective economies.  One consequence of this support is that it tends to make their currencies weaker.  This means American made goods and services (exports) will likely become more expensive to our trading partners as their currencies fall in value versus the dollar; simultaneously, foreign goods and services (imports) could become relatively cheaper here in the U.S.  This partially informs Atlas’ concern about America’s ability to support the rest of the world.  Foreign economies seem to want us to import their path to prosperity at the expense of our own.  Our nation is healthier than it was a few years ago, but only time will tell if our economy is strong enough to carry the globe.       (by C. Cox)

One for the Road

Friday, November 14th, 2014

As good times come to an end, it is not unusual to be offered “one for the road.”  Consequences for taking up the suggestion vary depending on what “one” represents.  For instance, grabbing a handful of my grandmother’s cookies when grandpa offered me “one for the road” as a child did nothing to increase my risk.  However, one is exposed to much more danger when accepting one for the road after bellying-up to a bar as a night out on the town winds down.  The 113th United States Congress is winding down its term, and Atlas figures they’ll take one last significant kick at the can before last call in December.

After doing just that for two years, the current session of Congress has yet another opportunity to give the budget a last kick down the road before their term expires.  Each U.S. Congress has two fiscal years for which they should pass a budget, and thus far, the 113th U.S. Congress has only managed to delay completing the process for 2015 after failing to finish the 2014 version.  As of October 1st 2014, the Federal Government is in fiscal year 2015, so even if the beltway gets it act together, this year’s budget will be late.

This past September, beltway leaders managed to give themselves an extension (perhaps governing was getting in way of campaigning), and this self-imposed deadline is quickly approaching.  With the exception of $88 million recently set aside to respond to the Ebola virus, their continuation expires on December 11, 2014.  Since Congress’ political party mix will be changing dramatically on January 03, 2015, Atlas fully expects the current leaders to give the budget one last kick for the road, using the 114th Congress as the excuse to do so; they’ll justify it by suggesting it is better for the incoming leadership to manage the power of the purse.  Look for an extension of the Continuing Appropriation Resolution, 2015 in the weeks ahead.  This fiscal year may not see a budget until it is nearly half-way over and the White House has submitted its 2016 budget proposal.  America’s role as global leader means the world still has its attention focused on our approach to governing and budgeting.  With that in mind, consequences of further mismanagement could be sobering if the globe and its markets question our process and the effect it may have on the stability of both our bonds and dollar.    (by C. Cox)

Third Quarter Productivity and Costs

Thursday, November 13th, 2014

Productivity slowed from July through September according to the Bureau of Labor Statistics.  On an annualized basis, the third quarter’s 2.0 percent improvement is a deceleration from the 2.3 percent uptick in the second quarter.  On a year-over-year basis, productivity has slowed to just 0.9 percent, down from 1.3 percent in the prior period but better than the 0.7 percent uptick in first quarter of 2014.

According to the BLS report, annualized nonfarm business output grew by 4.4 percent in the period, requiring just 2.3 percent more labor hours to produce the additional products and services.  For some perspective, the second quarter’s output increased by 5.7 percent, requiring just 2.7 percent more hours of work to achieve the additional production.

Those concerned about inflation watch this indicator because if productivity is declining, unit labor costs can begin to rise.  After a slight decrease in the second quarter, unit labor cost did grow, but by just 0.3 percent in the period.  During the current recovery, the growth of unit labor costs has averaged 0.9 percent, so this indicator is not suggesting significant price gains are on the horizon.

Productivity and costs are confirming what other indicators Atlas follows have been saying.  American output is expanding and the labor market is healing.  The economy has continued forward for two consecutive quarters after the weather related setback from January through March.  Firms’ need for labor is expanding, and while compensation is growing slightly, it is not enough to cause firms to raise prices dramatically.  Atlas acknowledges that the economy is not perfect, but it has been worse.      (by C. Cox)

October Employment

Wednesday, November 12th, 2014

Our economy created 214,000 net new jobs in October according to the Bureau of Labor Statistics (BLS).  The rate of unemployment fell to 5.8 percent, down from 5.9 percent in September.  Wages were marginally higher in the period (up 0.1 percent), but the average work week remained the same.  Also, labor force participation increased in the period, meaning a larger percentage of working age adults were willing to work than a month earlier.  But wait, there’s more!  The BLS found an additional 31,000 jobs in the prior two months as August and September data were upwardly revised.

By some measures, the labor market has not improved this quickly since the 1990s.  Year-to-date, America has averaged gains of 229,000 jobs a month, the fastest pace since 1999. October’s gain marks the ninth consecutive month in which the economy has added 200,000 jobs or more; this last occurred in 1994.

Before Atlas begins to sound too cheerful, let’s put income growth into context.  On a year-over-year basis, average hourly wages have grown by just 2.2 percent.  This is well off of the levels seen in other recoveries when they were 64 months removed from the end of the previous recession.  At this point in the last two recoveries, year-over-year wage gains were firmly over 3.0 percent (over 4 percent in the last recovery) and moving higher.  The current year-over-year trend is not accelerating and has been stuck between 2.21 percent and 2.48 percent for the last twelve months and has remained under 2.5 percent since October 2010.

For now, it looks like the Federal Reserve is on to something.  Just as they are wrapping up one experimental policy, economic growth is above 3.0 percent for two consecutive quarters, the unemployment rate reaches levels not seen since 2008, Americans are moving back into the labor force, and price measures remain controlled.  However, correlation is not causation and the central bank knows this, which is why Atlas continues to think that despite the evidence of a strengthening economy, overnight interest rates will remain low for an extended period.  Central planners should not want to burden this economy’s nascent improvements with a stricter monetary policy.                    (by C. Cox)

October Institute for Supply Management

Tuesday, November 11th, 2014

Economic growth continued in October according to the Institute for Supply Management (ISM) data.  Both of their primary reports remained well above the critical level of 50, suggesting the economy got off to a solid start in the final quarter of the year.  Manufacturing pushed higher to 59.0 from 56.6 in September.  Non-manufacturing slowed a little in the period but still managed an impressive reading of 57.1 after 58.6 a month earlier.

September matched the best month of 2014, August’s reading was just as lofty, and these two months are the best readings since February 2011.  An important standout within the tally came from new orders.  This forward looking portion of the report catapulted to 65.8, an uptick of 5.8 points from a month earlier.  These orders should translate into higher output in the months ahead as firms fill the requisitions.  While it is a small fly in the ointment, export orders slowed in the period.  This slower pace of expansion probably reflects the troubled economic times in which many of our trading partners find themselves.  Additionally, the downward pressure being exerted on various non-dollar currencies as global central banks embark on (or in some cases continue) their own experimental policies tends to make  products bought from the U.S. more expensive.  This trend is amplified as the Federal Reserve mostly wraps up its current quantitative easing program which seems to be strengthening our dollar in world markets.

Non-manufacturing ISM is comprised of four components, and three out of these four were weaker in October than in September.  Business activity, which has grown for 63 consecutive months, slipped from 62.9 to 60.0, a respectable count nonetheless.  New orders dipped to 59.1, a drop of 1.9 percentage points.  Deliveries were faster than a month earlier, a negative for this indicator because it suggests orders were too easily managed with the existing resources.  Employment, the lone category to improve, moved up to 59.6 from 58.5 in September.

From the looks of the ISM data, the American economy continues to strengthen.  Output is humming along and there are ample new orders to keep both portions of our economy busy in the near future.  Atlas’ primary concern resides outside of our nation.  Many developed economies are struggling, so it may be only a matter of time before we know if America is strong enough to carry the weight of the world on its shoulders.     (by C. Cox)

October Consumer Attitudes

Monday, November 10th, 2014

Feelings are relative, and measures of consumer attitudes that Atlas follows reflect this as current levels are quite high for this recovery but are rather mediocre compared to other recoveries.  The Conference Board’s Consumer Confidence hit a level it has not reached since October 2007.  Its counterpart, the University of Michigan’s Consumer Sentiment Index reached its highest mark since July 2007.  Americans are growing more optimistic relative to other points in this recovery, but at 86.9, Consumer Sentiment just moved past its average reading in the year prior to the Great Recession.  Consumer confidence jumped to 94.5 from 86 in September but is still below its 12 month average leading up to the downturn of 103.4.

Expectations improved markedly in both surveys.  Consumer sentiment’s expectations components jumped to 79.6 from 75.4 a month earlier.  Most of the uptick came from the improving jobs market outlook.  Consumer confidence’s expectation measure leapt 8.6 points to 95.0 and is closing in on its recovery high of 97.5 which it put in way back in February 2011.  Expectations in the Conference Board’s survey were also led by an improving outlook for the labor market.

During this economic recovery, measures of present circumstances have been well ahead of those which measure expectations and remain stronger at this time despite having decelerated recently.   Both polls showed marginal improvements for the current situation categories, remaining near recovery highs.  The lack of appreciable acceleration in this portion of consumer attitudes may help explain the slow upward trend of consumption..  There may be a link between current feelings and one’s willingness to spend, but Atlas tends to believe the link between consumption and demographics is stronger.  Clearly anticipated inflation is not a current factor as it was nearly unchanged in both polls.

More consumers who feel secure are necessary for a more robust recovery.  Since the official end of the recession in June 2008, economic growth has been lackluster relative to other recoveries and expansions, and these surveys have also been disappointing.  Perhaps the combination of improving consumer outlooks and better economic data (like the improving GDP and unemployment trends) will prove to be the necessary mix to keep America exceptional within a dour global backdrop filled with possible pitfalls.      (by C. Cox)

Halloween Candy

Friday, November 7th, 2014

A quick scan of the ever-reliable internet shows Americans bought about 600 million pounds of candy for Halloween.  My favorite, chocolate, tipped the scale at 90 million pounds by itself!  While there are many ways an individual can participate in this annual sugar orgy, the most economical would be to snatch bags of the stuff from small children you can easily outrun once darkness descends.  Obviously there are things wrong with that approach.  For one, you can’t be selective about the haul; you must take what you get whether or not you like everything in the bag.  And there always seems to be at least one house where a toothbrush gets dumped into the sack, designed no doubt to ruin the kids evening while loading their parents up with guilt.

There is another way to score your favorite candy.  Wait until November 1st and hit the local drugstore.  They mark all of the stuff down by half or more.  While not a steal, it’s still a deal.

Why does the price of candy plummet buy 50% in one day?  It’s that basic principle of supply and demand.  Procrastinators hurry in at the last minute to stock up for the evening’s event on October 31st; come November 1, and suffering from the inevitable gluttony enjoyed the prior night, no one wants to even see another piece of chocolate.  Demand was high, thereby boosting supply.  When demand suddenly abates, it leaves suppliers with too much of the good stuff on hand, which then must either be sold at a much reduced cost or left to wither.

This simple concept also forms the basis for portfolio construction here at Atlas.  We look for trends which suggest demand for an asset class is building.  Such movements are not as predictable as Halloween, but they still show up as a gradual rise in prices.  We try to locate those sectors of the economy where such demand is beginning to manifest, buy into the surge, and hold on until demand begins to wane. Once supply starts to overwhelm demand, resulting in a new, declining price trend, we expect to realize a gain by selling the current position and moving to another sector where demand is just beginning to develop.  In simpler terms, we sell the chocolate in late October and start buying turkeys.

How we do this is not as straightforward as observing a calendar.  It involves a sophisticated  computer program, scads of daily data, and our constantly monitoring a wide array of indicators.  We don’t have the convenience of a sure-thing date in time, nor, hopefully will we suffer annual overnight drops in the worth of our portfolios to such a drastic extent as I just saw in candy.  In our investing world, changing demand tends to leave a more orderly footprint, one we can act on in a timely fashion.  That is in bold contrast to the value, for instance, of a surprisingly large inventory of toothbrushes which I recently acquired.  Please let me know if you need of a couple; at these prices they’re practically a steal.    (by J R)