Investors Confused: Hi-Value Stocks, Lo-Value Commodities

Investors Confused: Hi-Value Stocks, Lo-Value Commodities


The global growth slowdown is taking its toll on the US economy.

The OECD Quarterly National Accounts show U.S. real GDP growth in 2015, on a year-on-year basis, slowed from Q1 to Q4 from 2.9-to-2.7-to-2.1 and finally to 1.8 percent.

The Global Growth Outlook for Y 2016 of The Conference Board revises its GDP growth forecast for the US to 2%, down from 2.4% in December, stating it will be overall strong demand that will allow the US to grow at about 2%.

The Conference Board warns that raising profits will become increasingly difficult for companies as labor costs are expected to accelerate while labor productivity growth is expected to remain modest and interest rates are expected to rise.

It is not growth, but the US is not falling of the fiscal cliff yet.

All this becomes more interesting when we put it in context of what San Francisco Fed President John Williams, formerly an aide to Fed Chairwoman Janet Yellen, but not a voting FOMC member.

Recently he said: “Despite recent financial volatility, my overall outlook for the US and the global economy remains unchanged. There is plenty of concern about China’s slower pace, but as I said last year, this largely reflects a pivot from a manufacturing-based economy to one driven by domestic consumption and services-the exact engines that are currently powering US growth.

When I look at my December forecast and compare it with my outlook for unemployment and core inflation today, there’s virtually no change. The shifts in my forecast amount to just one-tenth of a percentage point. I therefore continue to see a gradual pace of policy normalization as being the best course. My preferred route is a gradual path of increases.”

Mr. Williams is taking the big picture view of economic life and is expressing less concern with micro managing. Therefore his outlook has not changed as a result of financial markets fluctuations.

I think the feedback loop from financial markets to the real world is, if not broken, at least damaged. I urge investors to remember that financial markets are not the economy.

Rising rents and medical costs lifted underlying US inflation in January by the most in nearly 4.5 years, signs of an uptick in price pressures that might allow the Fed to gradually raise interest rates this year.

The US Labor Department said Friday its Consumer Price Index, excluding the volatile food and energy components, increased 0.3% last month. The biggest gain since August 2011 and followed a 0.2% rise in December. In the 12 months through January, the core CPI advanced 2.2%, the largest rise since June 2012.

The CPI underlines some of the issues that the Fed is facing.

Beneath the surface of Crude Oil price volatility, core CPI has been rising steadily for the past year and was over 2% in December, it is the steady rising core CPI that demands attention. A trend increase suggests building underlying inflation pressures.

For investors it is important to keep in mind the ongoing, at least so far, core inflation pressures in the US are a US phenomenon and correlations of core inflation rates are extremely low globally, suggesting where inflation is occurring it will be primarily local in its driving factors and nature.

This is important because many investors are confused by the fact we are in a global disinflationary environment because of the low commodities prices, but that does not mean the rest of the economy, for example in the US, core CPI for the service sector, which represents about 75% of the economy, has a core CPI of close to 3%.

St. Louis Fed Pres Bullard, a Dove of the FOMC, said “I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations.”

Many of us found this strange for the reason market inflation expectations can only be important if the market is normally right in its inflation expectations or if market inflation expectations cause a change economic behavior.

Neither of those things is true now. But, there you go, Fed Speak is often confusing.

Friday February options expired and the US major stock market indexes finished flat to little changes at: DJIA -21.44 at 16391.85, NAS 100  +16.89 at 4504.36, S&P 500 -0.05 at 1917.71

Volume: Trade was heavy with over 1.1-B/shares exchanges hands on the NYSE

  • Russell 2000 -11.1% YTD
  • NAS 100 -10.0% YTD
  • S&P 500 -6.2% YTD
  • DJIA -5.9% YTD
WBR Analysis for DIA:  Overall Short Intermediate Long
Neutral (-0.17) Neutral (0.07) Neutral (-0.22) Bearish (-0.38)
WBR Analysis for SPY: Overall Short Intermediate Long
Bearish (-0.28) Neutral (-0.01) Bearish (-0.25) Very Bearish (-0.58)
WBR Analysis for QQQ:  Overall Short Intermediate Long
Bearish (-0.34) Neutral (-0.03) Bearish (-0.42) Very Bearish (-0.58)
WBR Analysis for VXX:  Overall Short Intermediate Long
Neutral (0.16) Neutral (-0.11) Neutral (0.12) Bullish (0.47)
WBR Analysis for OIL:  Overall Short Intermediate Long
Bearish (-0.49) Bearish (-0.31) Very Bearish (-0.62) Very Bearish (-0.54

Have a terrific weekend,

Paul Ebeling

West Brook Radio

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