LSA Connect

Today, as expected, the Fed Open Market Committee kept the Fed Funds rate on hold (target of 0.00% to 0.25%) and continued their bond-buying program of Treasury and MBS debt on the order of $85 billion a month, although it did allude to the possibility fine-tuning the pace of these purchases as needed.  The FOMC acknowledged that the economy is continuing to expand at a ‘moderate’ pace, as have household spending and business investment, and that labor conditions have shown some improvement as well.  At the same time, government fiscal policy involving the budget isn’t helping matters and the continued high levels of unemployment remain higher than the committee’s comfort zone.  So, business as usual—although the debate about when stimulus should be removed appears to have picked up steam (at least in the media), aside from recent softness in recent numbers in April.  Such soft periods ‘buy’ the Fed time, it seems.

We receive questions occasionally about interest rates and where they’re headed, as well as if this continued stimulus could jumpstart potential inflation.  We have several pieces in the portfolio that are built-in both structurally and in anticipation of possible rising rates (mathematically, the amount of percentage points lying above where we are now is significantly above the number of tics between current rates and the zero bound).  In portfolios, our average duration in the fixed income portion of our portfolios remains quite low, which is a defensive positioning against rising rates, and our use of high yield and floating rate securities provides higher-yielding alternatives to more conventional debt.  We expect that if/when rates move higher over time, perhaps coinciding with more consistent and/or higher economic growth, such positions could prove even more beneficial. 

Inflation remains contained at this time, but is a continual long-term threat to purchasing power (despite the environment).  Specifically, aside from the niche fixed income discussed, assets such as foreign stocks/bonds, real estate and commodities may prove their worth, as could certain types of equities in a diversified portfolio.  Clients may not always remember that story; but the owners of long-term government bonds certainly could feel the pain at that time.

(0/-) The advance estimate of real GDP for the first quarter came in a bit weaker than expected, at an annualized +2.5%.  It was better than last quarter’s +0.4%, but a bit slower than the +3.0% consensus estimate.  However, some of the underlying figures were improved (which is why this is considered more of a ‘neutral’ than ‘negative’ assessment).

Within the dataset itself, things looked a bit better.  Personal consumption expenditures were stronger than expected at +3.2% (vs. a forecast of +2.8%), business fixed investment rose just over +2% and final sales rose.  Inventory investment added +1.0% to the bottom line, which stood in contrast to the negative impact it made in Q4.  What accounted for the slight disappointment?  Government spending continued to look weak with both pre-emptive cuts and sequester effects, shaving almost 1% off of GDP—the biggest part of which being defense spending.  The trade deficit widening (more imports than exports) caused a further 0.5% takeaway.  As you can see, those smaller numbers start to add up after a while. 

From a pricing standpoint, the GDP price index grew +1.2%, a tenth of a percentage point under forecast and the Core PCE price index rose by the same amount (a tenth-percent above estimates).  These show that input costs remain contained. Continue reading →

Every quarter LSA will post our Break Even Analysis that shows the impact of drawdown in an account.  The term drawdown refers to the peak to bottom drop an investment experiences or in simple terms what was the biggest percentage loss experienced.    This chart reflects the biggest cumu Continue reading →

Economic Update:

It was a busy economic week—particularly in terms of housing and inflation indicators.

(0) The March Consumer Price Index declined -0.2% on a headline level, which was lower than the flat reading expected.  The core CPI, which excludes food and energy prices, rose +0.11%, which was below the forecasted +0.2%; so this, too, was tempered.  The primary difference between the two measures was the -4% decline in seasonally-adjusted gasoline prices during the month, while the core figure was affected by a -1% decline in apparel prices (which sheds additional color on the decline in retail sales on the month) and fraction of a percent rise in owners’ equivalent and primary residence rental measures.  On a year-over-year basis, headline and core CPI rose +1.5% and +1.9%, respectively, which are both in line with continued subdued inflation pressures.

(+) Housing starts rose +7.0% for March, which strongly outperformed expectations of a +1.4% gain and came on top of a similar gain for Feb. (based on an upward revision from the original +0.8% to an updated +7.3%).  Single-family starts fell -5%, but multi-family led the way with a +31% gain—then again, both of these measures tend to be volatile month-to-month as we all know.  On a year-over-year basis, total starts are up an astounding +47% (the single-family portion of which was up +29%).  Building permits fell -3.9% relative to a forecasted gain of +0.3%.  Continue reading →

Economic Update

(-) Retail sales for March came in weaker than expected, down -0.4% on a ‘headline’ level as opposed to consensus expectations of a flat reading.  The biggest impacts resulted from a -0.6% drop in auto sales and a -2.2% drop in gasoline sales (is that really bad news?).  Removing auto sales from the equation didn’t change much, with the same -0.4% on identical flat expectations.  The ‘core’/control component experienced a different result, but same magnitude, falling -0.2% versus a forecasted gain of +0.2%.  The latter piece, which excludes several items that tend to be more volatile (such as the auto, gasoline and building materials components) also saw weaker numbers from more stable demand areas such as electronics, department stores and sporting goods, although personal care also dropped a bit.  Why did this happen?  Perhaps some seasonal adjustments, a dose of bad weather and an especially early Easter holiday may have played a role.  These seem small, but it’s things like this that can alter the numbers by as much as a few tenths of a percent—especially in heavily-populated areas where shoppers are concentrated.

(0) Inventory results were mixed for February.  Business inventories rose +0.1%, which lagged the forecasted +0.4% level.  Retail inventories were the primary driver, while auto parts also rose; the ex-auto retail measure, however, was up a bit more, at +0.4%.   Wholesale inventories, by contrast, fell -0.3% month-over month as opposed to an expected +0.5% gain.  Non-durable goods were the catalyst. Continue reading →

The chart of the week looks at the various quantitative easing programs and how they have impacted the markets.  It also demonstrates that when these programs end investors Continue reading →

It was a downbeat week, at least relative to many so far this year, but we knew there needed to be a pause in the flurry of good news at some point. This did not come as a drastic surprise, as a few positive factors have begun to even out during the last few months and the sequester impact may have started to inch into the underlying data somewhat.

(-) The ISM manufacturing survey came in weaker than expected, which affected market sentiment due to the ISM’s broad following. The index fell to 51.3 compared to a consensus expectation of 54.0, as several underlying components dropped—such as new orders, production as well as inventories. However, the employment segment rose a bit. Overall, with a few monthly exceptions, ISM has remained strong (the true measure is its being above 50—which is the most important part of this diffusion index and signifies a positive result as opposed to negative). In line with other measures, the employment component of this survey has steadily been improving, albeit slowly. It is possible that some seasonal and inventory/price-related effects may have altered the numbers, but that is only speculation at this point.

(-) The March non-manufacturing ISM index fell as well, from February’s 56.0 to 54.4. This was compared to an expected consensus 55.5 reading, so the decline was to a lesser degree than was the manufacturing variety. In this survey, employment fell, as did new orders and overall business activity. While this now stands at a 7-month low, the above-50 reading is still more bullish than bearish. Continue reading →