It was no big surprise that the Fed left monetary policy unchanged this
week. The real surprise to the markets was that the Bank of Japan kept
their policy unchanged. The markets expected more easing but didn’t get it.
Initially, world markets sold off and the Nikkei 225, (Japan’s major stock index), fell over 3.5%! Of course, the U.S. markets bounced on weaker-than-expected, first-quarter GDP growth.
I agree that it doesn’t make sense, but investors still hope central banks will act to help continue supporting the markets. One way or the other, we all like to get high with a little help from our friends.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on April 27, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you
First-Quarter GDP Inched Higher by 0.5%... The slow growth rate missed expectations of 0.7%, and follows the disappointing
1.4% fourth-quarter 2015 growth rate.
What it means – Companies are reporting falling earnings for the fourth consecutive quarter, and GDP is struggling to reach 2% annualized growth. This one seems obvious. We’re not moving toward escape velocity, we’re slowing to a standstill. With equities back near record highs, warning signs are flashing all over the place. Now is the time to be exceptionally cautious in the stock market.
On the academic front, so far the score is Atlanta Fed 1, New York Fed 0. The Atlanta Fed’s GDPNow model forecast first-quarter growth at 0.6%, while the New York Fed’s Nowcast put the growth rate at 0.8%. The first estimate of 0.5% was closer to the Atlanta Fed’s number. But the game isn’t over yet.
The New York Fed’s model is supposed to forecast the final GDP for each quarter, which isn’t published until three months after the quarter ends. So we won’t know who really won this match until the end of June. Of course, by that time, we also won’t care, since no one trades based on the second revision of a number that is almost 90 days old.
Federal Reserve Holds Rates Steady, But Leaves Open Possibility of Raising Rates in June… The Federal Open Market Committee did not change interest rates, but their policy statement noted that the stable U.S. economy can withstand measured rate hikes.
What it means – As I wrote to my Peak Income subscribers, Fed officials risk looking foolish. First-quarter GDP was 0.5%, and that comes after the fourth quarter growth rate of 1.4%. Remember, these are annualized numbers, so the actual growth for the last six months was 0.95%. That doesn’t scream “stable” or “solid” to me. Instead, it looks more like “recession around the corner.”
The Fed wants to raise rates so that it appears to take a normal stance on interest rate policy, but if we fall into recession soon, officials will have to immediately reverse course. But they did build in their own escape hatch. Their policy statement reiterates that the group is “data dependent.” That way, no matter what they do, they can blame the numbers. Remember, it’s not their fault. They’re just the small group of people with the sole responsibility for setting monetary policy for the most important economy in the world, that’s all.
U.S. New Home Sales Inched Higher in March, Up 5.4% over Last Year … The pace of new home sales reached 511,000 last month, well below the consensus estimate of 522,000, but still above February’s number.
What it means – First, it was housing starts and permits, then existing home sales, and now new home sales. All of these metrics posted disappointing results for March, which is supposed to be the start of the brisk selling season.
It could be that a lot of activity occurred in the warmer-than-normal winter months, thereby draining March of some of its power. It could also be that prices finally reached a point where few buyers want to jump in.
If activity remains muted for the rest of the spring, then it would encourage sellers to lower their prices, and could start a downward trend, especially if our economy hits a road bump or two.
S&P/Case-Shiller Home Price Index Up 5.4% over Last Year… The seasonally adjusted monthly gain was 0.7%, while the unadjusted annual gain slowed a bit to 5.4%.
What it means – Prices are rising more slowly than they had in recent months. The annual price gain was the lowest since October of last year. This falls right in line with the new home sales report above, and the other housing reports from last week. Real estate looks like it is topping.
Durable Goods Orders Increased 0.8% in March, Missing the Estimate of 1.6%… Orders are down 2.5% over last year. Stripping out aircraft, durable goods orders excluding transportation fell 0.2% in March, and are down 1.4% for the year.
What it means – Weak durable goods orders, particularly excluding aircraft, point to weakness in business investment. So far, companies are choosing to return capital to shareholders instead of making big bets on future demand. Unfortunately, investors don’t have any better use for the capital than companies do, so the cash ends up recycled in the stock market, driving up prices, even though earnings are down and GDP growth is anemic.
The Bank of Japan (BoJ) is Now One of the Top 10 Investors In 90% of the Stocks on the Nikkei 225 Average… Through its QE program, Japan’s central bank has become one of the biggest investors in the country’s stock market.
What it means – In the U.S. and Europe, central banks only buy bonds. But in Japan, the BoJ can buy a wide range of securities, including exchange–traded funds (ETFs) that own equities. The BoJ’s QE has gone on for so long, and is so big, that the central bank’s ETF investments now put it in the top 10 of investors in almost every stock on the Nikkei 225. As time goes on, the BoJ will buy more ETFs, and hold an ever-larger share of the equities outstanding. It’s hard to see a good ending for this.
When countries own private companies it’s called nationalization; whether or not they pay for it is immaterial. The government will be able to exercise control over management decisions, dictating how funds are spent. This distorts the profit motive of companies, and eventually effects efficiency. But none of that really matters. The Japanese are on a monetary policy trajectory that should end with a massive explosion, blowing up the yen and devastating their financial markets. The only question is, when?
BoJ Leaves Monetary Policy Unchanged… The decision surprised the markets, sending the yen higher and crushing the Nikkei stock index.
What it means – When announcing the decision, BoJ official Kuroda explained that the recent move to negative interest rates needed more time to work. I think this translates into: “Our last move failed miserably. We don’t know what to do next, so we’ll sit on our hands until we think of something smart.”
The central bank has few choices, but holding pat isn’t one of them. As the yen strengthens, Japanese exports suffer, which drives down profits and pushes inflation lower. Expect Japan’s economic growth to stall as prices turn lower. Eventually the BoJ will have to do something to weaken the yen.
Unilever Sells $1.68 billion of Bonds at Very Low Rates… One tranche of the debt matures in 2020, pays zero interest, and was sold slightly below 100%, earning investors a 0.08% yield.
What it means — I hope they sent the European Central Bank (ECB) a thank you note. Ever since the ECB announced it would buy corporate bonds along with government bonds in the latest round of QE, corporate bond yields in Europe have plummeted.
Investors desperately want to get their hands on bonds ahead of the ECB, hoping that when the central bank starts buying it will drive rates even lower. Chances are, these investors are right. Unfortunately, none of this helps long-term investors looking for yield to achieve their goals. They’ll have to wait for another day, possibly years from now, before things in the bond markets return to anything close to normal.
Norway Offers Asylum Seekers up to $3,600 to Go Home… The Northern Atlantic country is offering families with two children $2,400 if they volunteer for deportation, and the first 500 to take the offer will receive an additional $1,200.
What it means – If it works, it’s worth every penny. The small nation took in 35,000 refugees last year, up from 11,000 in the previous year. There just aren’t many places to put people, and they're expensive to care for. The payment for deportation is an efficient way to get those who will most likely be rejected for asylum out of the country quicker, thereby saving resources.
Saudi Aramco to Sell Shares… Saudi Arabia announced it will offer shares in the national oil company.
What it means – This is an offering for people who don’t know history. ARAMCO stood for Arabian-American Oil Company. It was a group of American oil companies that in the 1930s bought the concession to drill for oil in the country.
Over time, the Saudis decided they wanted a better deal, so profits were split 50/50. Then in the 70s, the Saudis decided they would either buy out the group, or nationalize the assets, whichever one the Americans wanted. Clearly getting paid is better, so they took the cash.
By 1980, Saudi Arabia owned 100%. They paid around $2.7 billion. Now the company is estimated to be worth $2.5 trillion. A 1,000% return on a $2.7 billion investment is pretty good. Now they want to sell shares. Then what? We wait until the next time they want to exert ownership? What possible security or guarantee could they give that would be good enough? Chances are new shareholders will do well at first, but I won’t be among them.
Next Week – The first week of May brings a report on factory orders and a couple of other lesser announcements, but the focus will be the U.S. Employment Situation report on Friday.
We are on a mission to save your assets.
200 N. Westlake Blvd., Suite 109
Westlake Village, California 91362-3783
805.495.2077 800.266.2077 888.WHY.BEPOOR
The information presented here has been provided by HS Dent. HS Dent is an economic research company that uses various techniques to study the potential impact of various changes in demographic trends in our economy. No one person or strategy can accurately predict market movements. Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be place on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
The opinions in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.
Indices are unmanaged measures of market condition. It is not possible to invest directly into an index. Past performance is no guarantee of future results. In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss
Securities and advisory services offered through National Planning Corporation (NPC), Member
FINRA/SIPC, a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies.