John Davidson's Economic Comments
This week's economic releases confirmed the rebound in U.S. housing, but portrayed softer activity in Europe and Asia. The federal reserve chairman's testimony to Congress identified three risks (sequestration, Europe and energy prices) to justify his pledge to continue quantitative easing. Surprisingly, equity price rose. More sensitive to economic activity, bond yields and commodity prices fell. The U.S. dollar rose against the Euro, Pound and Looney.
Finding a rationale for the rising equity market this week of mixed economic news, the failure of Washington to avoid sequestration and the increase in 2013 tax rates in the U.S. is not a simple task. Both the rising interest rates and the falling commodity prices are consistent with an economic environment of slowing growth and lower demand for natural resources. There are a number of possible factors contributing to rising stock prices:
• Sequestration was widely expected, and, therefore, already priced into the markets.
• Continued strong earnings reports kept stocks fairly valued on a forward looking P/E basis.
• Sequestration is expected to subtract over a half point from U.S. 2013 GDP, but will not tip the U.S. into recession.
• Housing has taken over the lead in U.S. recovery.
• The Fed's commitment to QE was reinforced in Federal Reserve Chairman Ben Bernanke's testimony to Congress.
• Although the sequestration's allocation is far from optimal (the term "stupid" has been widely used to describe the idea of sequestration), the budget tightening impact on GDP is the same whether or not there is a $1 subtracted from spending or added to tax revenue.
• The real negative impact of the failure of the partisan-elected officials to do what is best for the country is long-term, but the stock market short-term focused.
• The reported agreement to extend the continuing agreement to avoid the shut down of the government March 27 delays the near-term crisis.
• Uncertainty in Italy's election adds to Europe's woes so where else do you invest? (This does not explain why equity markets globally rose on the week).
• Budget deficits are expected to improve as the U.S. recovers in any case.
• Other factors?
Camden Conference speaker camcasts have been posted and can viewed by clicking here. All of the speakers were well worth listening to, but the session "Nuclear Issues and U.S.-Iran Relations" and Seyed Hossein Mousavian's interaction with moderator Nick Burns has generated a lot of interest.
Housing has taken over the leadership in the U.S. recovery. New Home Sales (blue in the chart) shot up over 15 percent to 437,000 in January. In other housing releases, the monthly supply of homes for sale has dropped two weeks to 4.9 months of sales. The National Association of Realtors Index of Pending Sales rose 4.5 percent to 105.9. The Case/Shiller Home price Index of 20 cities increased +0.9 percent (seasonally adjusted) or +0.2 percent (NSA) in December, leading to a 6.8 percent YOY increase. The FHFA House Price Index increased +0.6 percent in December.
Other Economic Releases
The Conference Board's Consumer confidence Index rebounded over 10 points to 69.6 in February. On the softer side, New Orders for Durable Goods fell -5.2 percent, but Ex Transportation Orders rose 1.9 percent. U.S. 4th quarter GDP was revised from negative to positive +0.1 percent, less of an upward revision than expected. Affected by the year-end fiscal cliff, January's Personal Income fell -3.6 percent, but Consumer Spending managed a +0.2 percent increase. The ISM Purchase Managers' Index for Manufacturing rose a point to 54.2; the competing PMI Manufacturing Index fell a point to 54.3, but both remain well above the 50.0 demarcation for expansion. For the week of Feb. 23 Initial Claims for Unemployment fell to 344,000, which brought the four-week average down to 355,000.
The Eurozone PMI Manufacturing Index remained at 47.9 in February. The EC Economic, Industrial and Consumer Sentiment Indices all showed improvement in February. The EU Unemployment Rate ticked up to 11.9 percent in January. Germany's PMI for Manufacturing crossed into the expansion zone to 50.3 in February. German Retail Sales rose 3.1 percent in January. Germany's Unemployment Rate remained at 6.9 percent. The UK's CIPS/PMI Manufacturing Index crossed into the contraction zone to 47.9 in February. The UK's 4th quarter GDP fell -0.3 percent unchanged from the previous report.
China's CFLP Manufacturing PMI dropped to 50.1; the PMI Manufacturing Index dropped 2 points to 50.4 in February; both indices remained just barely in the expansion zone in February.
Equity markets ended up higher across the board in spite of the U.S. sequester and softer economic news. Falling interest rates pushed the Merrill Lynch Bond Indices higher. In the U.S., monthly mutual fund inflows reached an all-time high in February. The Dow and S&P Indices are selling at 15.48 and 17.85 times the prior 12 months earnings, but only 12.53 and 13.68 times expected earnings.
Government Bond yields were lower across the globe and credit spreads were little changed on the week
Currencies & Commodities:
The U.S. dollar rose against the Euro, Pound and Looney. Only the Yen rose against the U.S. dollar on the week. Commodity prices fell while only natural gas prices rose on the week.
Who is John Davidson?
John W. Davidson, CFA, started writing these Comments over a decade ago as a personal discipline when he was promoted to chief investment officer from portfolio manager.
Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine.
He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts, and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income, and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.
His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.
His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he has appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services often quote his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and courses at the National Graduate Trust Officers' School.
Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a Naval Officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserves, from which he retired as a captain in 1994.
Davidson is treasurer and board member of the Camden Conference. He is treasurer of the Maine Conference of the United Church of Christ, serving on the executive committee and the coordinating council, the governing board of the conference. He is also on the investment committee of the Pen Bay Health Foundation.
In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at firstname.lastname@example.org.