Weekly Commentary January 27th, 2014

The Markets

Was it a stutter step or have markets lost their balance?

Anybody who knows football can tell you a lot goes into every play. Strategy, practice, game review, and preparation all affect outcomes, as do decisions and execution during games. Many, many factors influence gains and losses on the field. Similarly, numerous issues affect the performance of stock and bond markets – a fact that became abundantly clear when pundits tried to explain last week’s market downturn. Here are a few of the things which may have helped put investors on the defensive last week:

·         Fears of a China bubble: According to Barron’s, a dip in the nation’s manufacturing index stirred experts’ fears China may be experiencing a credit bubble that is creating property and infrastructure bubbles. If this proves true and the bubble bursts, the repercussions may be felt throughout global markets.

·         Concern about Federal Reserve tapering: The Fed has begun to pursue a less stimulative monetary policy and that has some worried about growth, especially in emerging countries which rely on foreign currency to finance their deficits, according to The Washington Post.

·         Anxiety about emerging markets resilience: Giving weight to concerns about the impact of changing Federal Reserve policy, currencies in Argentina, Venezuela, South Africa, and Turkey lost value late last week. The New York Times said rising interest rates may increase borrowing costs triggering painful readjustment periods in some emerging markets.

·         Unease over unemployment: Reuters suggested stronger economic growth in the United States, Japan, and Europe could camouflage issues related to youth unemployment and skills shortages.

·         Lack of enthusiasm over mixed earnings: Fourth quarter earnings reports have been roughly in line with the mixed results reported throughout 2013. Sixty-three percent of companies’ earnings beat analysts’ expectations, 12 percent were in line, and 25 percent came in lower than expected.

So, is this a correction? Or, has the bull market concluded its run? You may as well ask whether the Broncos or the Seahawks will win on Sunday. Nobody knows for sure.

how do you define ‘big data?’ There is little agreement about the definition of ‘Big Data.’ Broadly speaking, it is a term that describes the storage and analysis of large and/or complex data sets. According to the MIT Technology Review, “There is unanimous agreement that big data is revolutionizing commerce in the 21st century. When it comes to business, big data offers unprecedented insight, improved decision-making, and untapped sources of profit.” In other words, data – collected through rewards cards, social media websites, industry research, and other sources – is helping companies better understand their businesses and their customers.

Big data is helping companies in diverse industries. The International Business Times reported retailers, supermarkets, and pharmaceutical companies are collecting thousands of gigabytes of consumer data in real time and through online data mining in order to improve sales and marketing efforts. An article on Gizmag.com said:

“Pattern recognition software applied to patient records, clinical trials, medical reports, and journals makes it possible for computers to be used as diagnostic tools, comparing data to arrive at the best possible treatment plan… Fraud detection, pre-trial research in legal cases, stock trading, and patient monitoring are now handled by software after the arrival of big data.”

The Big Data revolution also is likely to change the employment picture in the United States, according to a report titled, The Future of Employment: How Susceptible Are Jobs to Computerization? The report covered a study which was released by Oxford University last September and evaluated about 700 different types of occupations in the United States. It found about 47 percent of jobs in the United States are at risk of being computerized within the next two decades.

Occupations at low risk of being computerized included therapists of different types, social workers, curators, anthropologists, and others. Those at high risk included telemarketers, loan officers, payroll clerks, legal secretaries, and (ironically) data entry technicians.

 

Weekly Focus – Think About It

“Truth is like the sun. You can shut it out for a time, but it ain't goin' away.”

--Elvis Presley, “The King of Rock and Roll”

Weekly Commentary January 20th, 2014

The Markets

Predict, forecast, divine, foresee… Each year, pundits, analysts, and authorities from around the world offer investors insight to what the year may hold. While prognosticating brings to mind the words of British Prime Minister Winston Churchill who said, “It is always wise to look ahead, but difficult to look further than you can see.” With that firmly in mind, let’s take a look at what some experts have been saying about 2014.

Last week, economists at the World Bank released their latest growth forecast which projects global economies will expand by 3.2 percent this year. That’s an improvement over last year’s growth rate of 2.4 percent. Developing nations are expected to grow faster than high income countries. The Global Economic Prospects report cautioned, “Growth prospects for 2014 are, however, sensitive to the tapering of monetary stimulus in the United States, which began earlier this month, and to the structural shifts taking place in China’s economy.”

The 10 active money managers sitting at Barron’s Roundtable found little to agree about as they discussed interest rates, stock prices, gross domestic product (GDP), and what to have for lunch. According to Barron’s:

“The Roundtable's optimists expect the global economy to pick up, bonds to tick up, and stocks to mosey higher, notwithstanding the errant hiccup. The pessimists… see crippled economies here and abroad, rotten government policies, and a selloff in stocks that could rekindle fears of, yes, systemic risk. Yet, somewhere between these poles, all say, lie plenty of investments worth a wager...”

And, what does the new chairwoman of the U.S. Federal Reserve expect? After all, according to The Wall Street Journal which reviewed more than 700 predictions made by Federal Reserve officials about growth, jobs, and inflation, Janet Yellen made the most accurate forecasts from 2009 through 2012. In an interview published in Time Magazine this week, Yellen said the Fed's policymaking committee generally is hopeful that U.S. economic growth could be upwards of 3 percent during 2014. Additionally, she anticipates inflation will move toward 2 percent and the housing market will pick up and continue to recover.

Ms. Yellen offered no prediction about another subject of great concern to many Americans – the outcome of Super Bowl XLVIII.

if you’ve ever doubted the idea that change is constant, just consider the last couple decades. Businesses that once were thriving have languished. Industries that were lynchpins of American capitalism have gone the way of the Pony Express. Here are a few examples of things that have changed in recent years:

• Telephones: More than 90 percent of American adults own cell phones, according to the Pew Research Center, and more than one-half rely on that Swiss army knife of communication, the smart phone. The popularity of cell phones put public payphones on the endangered species list and may prove to be the downfall of landlines. According to a Center for Disease Control and Prevention report, almost 40 percent of American homes have only cell phones. That’s a big change from 2003 when the percentage was less than 5 percent of households.

 

• Books: Electronic publishing platforms mean authors have the option to publish carefully-scribed works themselves and make the books available to the public at bargain prices. Digital books have made access to the written word easier and, one can only hope, they may lead to primary and secondary schools being able to offer the most up-to-date textbooks to students.

 

• Movies: A new Harris poll found two-thirds of Americans go to the movies less often than they did a few years ago. The majority prefer the convenience of watching what they want, when they want, in the comfort of their homes. Instead of going to the theater, they own or rent DVDs and Blu-Rays, subscribe to movies-on-demand or streaming services, and record movies played on TV for later viewing. Of course, the medium for movie watching has also changed. In addition to the big screen, you can view a film on your tablet, smart phone, wall-sized television, or another device.

The world is changing all the time. While it is impossible to predict which trends have momentum and staying power, industries in transformation often open new opportunities for investors.
 

Weekly Focus – Think About It

“It's not that I'm so smart, it's just that I stay with problems longer.”

--Albert Einstein, Theoretical Physicist

Weekly Commentary January 13th, 2014

The Markets

The People’s Republic of China (PRC) appears to have taken the words of American industrialist Henry Ford to heart. Ford said, “There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.”

Last week, we learned from CNBC China’s annual trade was more than $4 trillion in 2013. That pushed the PRC ahead of the United States and gave it standing as the world’s biggest trader. According to The New York Times, China’s annual trade surplus, in U.S. dollar terms, was the largest since 2008 and 12.8 percent ahead of 2012’s surplus. In other words, China exported more than it imported.

It’s interesting to note imports to China increased significantly. In fact, imports rose more than exports which reflects strong domestic demand, according to an expert quoted by CNBC. That demand may have been driven by rising wages and a growing middle class. The New York Times wrote:

“Export gains… suggest that despite years of predictions of trouble for China’s export juggernaut, it has not yet been derailed by fast-rising costs for blue-collar labor, by an appreciating Chinese currency, or by foreign investment shifts toward other, lower-wage Asian countries… Blue-collar pay has soared between fivefold and ninefold in dollar terms in the last decade, wrecking China’s reputation as a low-wage place for export-oriented manufacturing… A decade ago [a company] paid about $75 a month for entry-level industrial workers and provided virtually no benefits. Now, [a company] pays $570 a month plus $100 a month in government-mandated benefits.”

The Economist forecast China’s economy will overtake the United States’ in 2019 if economic growth averages 7.75 percent a year in China and 2.5 percent in America and inflation averages 4 percent and 1.5 percent, respectively, between 2010 and 2020. In late 2013, the Organization for Economic Cooperation and Development forecast growth in China would accelerate to about 8.2 percent with 2.4 percent inflation during 2014, according to Reuters. Growth in the United States is estimated to be 2.8 to 3.2 percent with inflation of 1.4 to 1.6 percent for the year, according to the Federal Reserve.

is the glass half full when it comes to unemployment? or is it half empty? You’re probably familiar with that famous saying about the three types of lies: there are lies, damned lies, and statistics. When trying to parse the implications of economic data from government and non-government organizations, the myriad of ways in which statistics can be sliced and diced quickly becomes apparent.

December’s jobs report, which was released last week, is a prime example. The unemployment rate fell from 7.0 percent to 6.7 percent; however, just 74,000 jobs were added in the United States during the month. That’s less than one-half the number of jobs economists had anticipated. So, there was less unemployment, but the number of new jobs created didn’t meet expectations. Does that mean the employment picture is weaker than experts thought?

Not necessarily. According to The Economist:

“Payroll gains were revised up in November to 241,000 (from 203,000) suggesting that some of December’s hiring may have been pulled forward. The two-month average of 157,000 is probably a better picture of reality than either month’s tally. Finally, the household survey, which while typically more volatile is still a useful check on the better-known survey of employer payrolls, shows employment rose 143,000, one reason the unemployment rate plunged to 6.7% from 7%.”

Does that mean the employment picture is positive?

Not necessarily. The number of people participating in the labor force in the United States was trending south before the recession started back in December of 2007. Our workforce has been shrinking because of cyclical factors, like people giving up on finding jobs because jobs are hard to find, and structural factors, such as Baby Boomers retiring and the participation of women in the workforce has been leveling off.

All in all, 3.9 million Americans (that’s about 38 percent of all unemployed workers) have been unemployed for at least 27 weeks. Are they discouraged? Have they retired? Are they raising children? There are probably some statistics out there that could provide further insight.

 

Weekly Focus – Think About It

“The superior man acts before he speaks, and afterwards speaks according to his action.”

--Confucius, Chinese philosopher

Weekly Commentary January 7th, 2014

The Markets

Like a half-full bottle of champagne that was left uncorked overnight, stock markets were anything but effervescent during the first few days of 2014.

On Tuesday, December 31, the Standard & Poor's 500 Index (S&P 500) bubbled upwards, finishing 2013 at an all-time high. On Wednesday, markets were closed as Americans celebrated the New Year. On Thursday, despite relatively positive economic news, the S&P 500 suffered its worst first-day-of-the-new-year performance since 2008. Is it a hangover? Is it lethargy? Are people still on holiday?

Some folks think a key issue is concern about the Fed’s changing monetary policy. MarketWatch suggested investors are wary about the timing of and reasoning behind the Federal Reserve’s decision to taper quantitative easing (QE) this month, as well as conflicting comments made by Fed officials. Last Friday, Philly Fed President Charles Plosser suggested the U.S. central bank may need to become aggressive about raising rates. His comments don’t square with those of outgoing Chairman Ben Bernanke who has said rates will remain near-zero for some time to come.

Plosser’s comments raise red flags because tapering QE is not the same as tightening monetary policy. Tapering is simply providing less economic stimulus. If the Fed raises rates, it will be tightening monetary policy. Generally, tighter monetary policy is used to constrict too-fast economic growth or curb rising inflation. Barron’s may have provided some insight into Plosser’s statement when it declared:

“…We also suspect U.S. and global economic growth will quicken more than most anticipate…Stronger economic growth combined with a further tightening in the resource markets (i.e., expect the unemployment rate to decline toward 6% by year-end and for the factory utilization rate to rise above 80% during the year) may lead to a modest rise in the U.S. inflation rate and produce the first "inflation scare/overheat/can the Fed exit fast enough" panic of the recovery.”

Hold onto your hats! The minutes of the Fed’s Open Market Committee meeting will be available this Wednesday and the way in which they’re interpreted could buffet markets.

 

what makes a great invention? It probably depends on who you ask. The angel investors (a.k.a. sharks) on the television reality show Shark Tank share their opinions on air, and Time Magazine recently revealed its thoughts in print when it published, “The 25 Best Inventions of the Year 2013.” The article suggested a great invention solves either a problem people thought couldn’t be solved (such as helping quadriplegics walk) or a problem they didn’t realize needed to be solved (who knew we needed a cronut – the offspring of a croissant and a donut – or an invisible skyscraper). Among Time’s top inventions for 2013 were:

• The Smart Lens: (slide 5) Ever been frustrated by the low resolution of photos snapped with your mobile phone? Now, you can attach a smart lens and your smart phone will take pictures like a high performance camera and save them online automatically.
• The edible password pill: (slide 10) Nope. It’s not on the market yet but, sometime in the future, you’ll be able to swallow a pill with breakfast. The chip inside will be powered by stomach acid and make your body into its own unique personal password every single day. The FDA has already approved it.
• The 3Doodler: (slide 12) If you think 3D printing is neat, check out the 3Doodler. It’s a pen that melts and cools colored plastic so you can sketch and scribble actual structures. It’s the more sophisticated brethren of Popsicle sticks and pipe cleaners.
• Artificial memories: (slide 14) It’s likely to be just as controversial as cloning and the human genome, but scientists at MIT have managed to implant false memories in mice. They hope human applications will help treat depression and post-traumatic stress.

 

From the wheel to disposable diapers to the worldwide web, inventions have powered new industries and changed lives. So, are our most inventive days behind us? There are a few pessimists out there, but the Time Invention Poll found more than one-half of respondents think there are plenty of great inventions ahead. Where will they be discovered? Those polled said the United States, China, Japan, India, South Korea, and other nations.
 

Weekly Focus – Think About It

“Creativity requires the courage to let go of certainties.”

--Erich Fromm, German psychologist and philosopher