Play it Again (Sam)

View from the Hill 03 October 2014

by J. Clinton Hill

The market encountered the “turbulence” anticipated in last week’s letter. Economic weakness in Europe, Japan and China persists and the consequence is the headwind of an unsustainable stronger U.S. Dollar conflicting with U.S. exports. The latest addition to geopolitical problems (i.e. Russia­Ukraine war, revered terror of ISIS, and Ebola epidemic) is Hong Kong’s Umbrella Protests.

Although the U.S. economy occasionally sends mixed signals (e.g. recent housing market data), it displays remarkable resiliency from consumer and employment barometers. The song remains the same and the only thing pleasant to the ears of investors, so we’ll play it again and dance a while longer with Ms. America.

In summary, Bubba the consumer can take care of US, but his economic girth is not sufficient to save the world. Regarding Europe, on one hand there are Services, but on the other Manufacturing is absent and reliant upon a “beggar thy neighbor” weaker currency policy. Asia’s rising son, Japan, is expanding signs of hope in its Services and Business Conditions.

Market Condition

The long­term trend for blue­chip stocks or the SP­500 index, remains bullish. This week it successfully tested support @ the 1925 ­ 1928 levels. However, since the index is barely clinging to its intermediate lower channel, it can only garner a neutral rating. Many stocks trade below their 50 and 200 day moving averages and unless this trend reverses, it is not a good omen. The upcoming earnings season and forward guidance should provide better visibility, but the strength of the U.S. Dollar is a wall of worry for me. Should we get few household names cautioning investors on the future outlook due to the dollar’s increase, this will likely rattle both investors and the mainstream financial media.

Bullish Events

• Consumer / USA / Personal Income & Outlays ­ Aug­2014 : As forecasted by economists, the consumer sector continued to show signs of improvement as Mth/Mth Personal Income increased to 0.3% vs. prior @ 0.2% and Yr/Yr was @ 4.3% vs. prior revised @ 0.4%. Consumer Spending improved Mth/Mth to 0.5% vs. prior revised @ 0.0% and Yr/Yr @ 4.1% vs. prior revised @ 3.8%.
• Manufacturing / USA / PMI Manufacturing Index and ISM Mfg Index ­ Sept­2014: Although the index dipped slightly, U.S. manufacturing remains well above the expansion level of 50. Actual results were @ 57.5 vs. prior @ 579 and consensus @ 58. The ISM Manufacturing Index slowed to 56.6 vs. prior @ 59 and consensus @ 58.
• Services / Japan / PMI Composite Index ­ Sept­2014: The Composite component rose to 52.8 vs. prior @ 50.8. The Services component was @ 52.5 vs. prior @ 49.9.
• Services / UK / PMI Composite Index ­ Sept­2014: The Kingdom reported another robust reading @ 58.7 vs. prior @ 60.5 and consensus @ 59.
• Services / USA / ISM Non­Mfg Index ­ Sept­2014: Composite growth pulled back to 58.6 vs. prior @ 59.6 and consensus @ 58.8.
• Services / Europe / PMI Composite ­ Sept­2014: Although some investors were disappointed, the EU’s Composite component contracted to 52 @ vs. prior @ 52.5 and consensus @ 52.3 while its Services component slid to 52.4 vs. prior @ 53.1 and consensus @ 52.8. Anything above 50 is indicative of growth and the bottom line is that this is is a positive for the region. Germany’s Composite component improved to 54.1 vs. prior @ 53.7 and consensus @ 54. The Services component rose to 55.7 vs. prior @ 54.9 and consensus @ 55.4.
• Employment / USA / Employment Situation ­ Sept­2014: This month’s reading far exceeded previous results and expectations @ 248k vs. prior revised @ 180k and consensus @ 215k. The unemployment rate dipped below 6% to 5.9%.
• Employment / USA / Jobless Claims ­ week of Sept­27­2014: Jobless claims showed improvement @ 287k vs. prior @ 293k and consensus @ 295k.
• Economic Growth / UK / GDP ­ Q2­2014: Not all of Europe is on the ropes as the UK Yr/Yr growth came in at 3.2% vs. prior @ 3.2% and consensus @ 3.2%. Quarterly GDP growth was revised upward from 0.8% to 0.9%.
• Business Conditions / Japan / Tankan ­ Q3­2014: Japan’s large manufacturers improved to 13 vs. prior @ 12. CAPEX also grew 4.2% vs. prior @ 1.7%.

Bearish Events

• Real Estate / USA / Pending Home Sales ­ Aug­2014: Housing activity remained somewhat flat with the actual reading for the index @ 104.7 vs. prior revised @ 105.8. Mth/Mth, the index declined ­1.0% vs. prior revised @ 3.2% and consensus @ 0.8%. The poor results are being attributed to the lack of first time home buyers in the market and the strong demand for rentals.
• Sentiment / Europe / EC Economic Sentiment ­ Sept­2014: This index pretty much matched expectations @ 99.9 vs. prior @ 100.6 and consensus @ 99.9. Yet, the consumer component deteriorated to ­11.4 vs. prior @ ­10.0. Industry sentiment also contracted to ­5.5 vs. prior @ ­5.3.
• Manufacturing / Europe / PMI Manufacturing Index ­ Sept­2014: Europe continues to stagnate as evidenced by the downward revision of its previous PMI to 50.5 vs. 50.7 and its current reading dropping to 50.3. France and Germany are both below the Maginot line of growth at sub­50 levels. France’s PMI remained below expansion levels @ 48.8 vs. prior @ 46.9 and Germany dipped below the Maginot Line of 50 when it contracted @ 49.9 vs. prior @ 51.4 and consensus @ 50.3.
• Inflation / Germany / CPI ­ Sept­2014: Mth/Mth inflation remained unchanged @ 0.0% vs. prior @ 0.0%. Yr/Yr was also unchanged @ 0.8% vs prior @ 0.8% and consensus @ 0.8%.
• Monetary Policy / Europe / ECB Announcement: Under normal circumstances, maintaining a policy of low interest rates would be bullish for the markets. but Europe’s unprecedentedly lower levels @ 0.05 bps only underscores the fragile and anemic state of its economy. There was not even a hint of optimism in Draghi’s remarks to suggest a reversal of policy anytime in the near future. The beatings shall continue until morale improves.

ETF Weekly Summary of Capital Markets

*For your reference, “TWS” is a proprietary indicator developed by Hillbent that measures relative strength in a weighted manner over various time frames. “Vol %” compares weekly volume to average weekly volume and changes is expressed in percentages. Our investment bias indicator may temporarily display conflicting views between ETFs and their underlying indexes due to our proprietary trend analysis and algorithms, but such conditions are temporary short­term divergences as ETFs are designed to accurately mimic the indexes or securities they represent.