2.
Economy – Inflation as A Result of Western Port Slowdown – Trade traffic
through western U.S. ports halted at midnight on Wednesday as port owners
(facility operators actually) stopped all loading/unloading activity for the
long holiday weekend (essentially a five day lockout). Longshoremen and
related workers to include truck drivers, crane operators and laborers were
told there was no work for them this weekend and that no ships would be offloaded
therefore no containers to depart via rail or road modes. Meanwhile ship
commerce to these ports is piling up in the form of laden ships with goods
bound for U.S. manufacturers, producers and consumers. And the dollar
counter continues to run as costs to the receivers of these goods are picking
up the tab for the goods to sit on these ships. This additional cost will
likely result in a slight pickup in producer prices and hence consumer prices;
and that is if the lockout is indeed short-lived and offloading resumes at a
normal pace. The normal pace for the last 7-9 months has been but a
fraction of the normal pace before contract negotiations fell apart last
summer. The inflation impact will be temporary but if the lockout
continues or the work slowdown resumes the broader impact on the economy could
set back the growth rate of the country’s economy just when we appeared to have
turned the corner. You will recall these ships have no choice but to go
the western ports since the Panama Canal cannot handle the majority of these
ships due to their size and to make the trip around Cape Horn or through the
Middle East is prohibitive in cost and dangers. The true cost of the port
closure/slowdown will be in lost production, lack of goods to sell and a reduction
in profits. All drags on the U.S. economy.
3.
Corporate Earnings – Growth is a Good Thing, But Is It Enough? – The earnings
season is progressing and for the most part Wall Street is pleased with the
results from the fourth quarter. As of Friday, 378 of the 500 companies
of the S&P 500 have reported with 71% of companies beating estimates, 11%
matching and 18% below expected earnings. These results created a blended
earnings growth rate (for the Index) of 6.5% for the quarter which is more than
respectable. The growth rate for the entire 2014 season was 10.3%.
This is in line with the consensus earning’s estimates most street analysts had
at the beginning of the year. A recent report (U.S. Census Bureau) stated
that retail spending fell .8% in January worse than the consensus of -.5%; this
following a decline of .9% in December. The biggest contributor was a
dive in gasoline station sales was and new automotive sales.
Interestingly enough spending at restaurants including casual dining was up in
January and in December. Nonetheless consumer spending in the fourth
quarter of 2014 was robust and consumer related stocks had corporate earnings
gains of 13.2% for the quarter; third highest recorded in the index behind
Healthcare (22.7%) and Technology (17.6%). Another view of the picture
has to do with revenue growth. Revenue growth to date is 1.9% for the
fourth quarter, a significant decline from the third quarter (4%) but the
growth for the year stands at 13.7% (also in-line with estimates) with 20% of
the companies left to report. But it is expected these revenue numbers
will keep pace with the previous results. All in all these earnings
numbers are about where we would expect them to be in a slow growth economy but
they do beg the question are they strong enough to sustain the economy in light
of the struggles in the European Union and the emerging markets?
4.
Federal Reserve Watch – The Focus Is On The Growing Economy – The Federal
Reserve Open Market Committee’s (FOMC) will not meet again until March 17 so
they have time to evaluate the economy as well as the health of our partners in
the European Union. Aside from Germany most of the European Union
countries are approaching the edge of recession if they have not already gone
into residence in that egregious zone (Greece comes to mind but Italy has been
in recession for nearly four years). While these situations are point s
of interest, the FOMC is focused on the trifecta of information they need to
study before deciding to raise short term interest rates. Namely,
unemployment (including wage growth), inflation level (target is 2%) and the
overall status of the country’s growth (gross domestic product – currently
sitting at 2.6% annualized through Dec 2014). Real inflation simply does
not exist. Excluding energy and food it is at .8%. There will be
some temporary price increases if the port situation in the western cities is
not resolved but longer term the impact may be negative on the GDP growth as goods
may not be available for production or sale. The impact of six
weeks of brutal cold weather in the eastern half of the country could also
impact the growth rate in the GDP (remember 1Q 2014?). We are also facing
a slowdown of exports due to the stronger U.S. dollar and the increase of
imports due to higher demand here. Anecdotally the stronger dollar helps
drive imports higher, keeps prices lower but we are witnessing a dramatic
reversal of the trade deficit which has declined over the last three quarters,
this gap is now widening again. On top of all this the flow of investment
dollars continues to fly into U.S. equity and fixed income markets as we have
positive yields on our government bonds, solid corporate earnings, a growing
economy and a reliable currency for trade. All of these are issues for
the FOMC to grapple with as they decide when to make the move towards higher
interest rates. Meanwhile the equity markets are seeing significant
strength after a disappointing January with the three major indices (DOW,
S&P and NASDAQ) hitting all-time highs this week. Clearly the mantra
of do not fight the FED is being adhered to as investors seek solace in the
equity markets, seeing them as the only clear alternative in the investing
market.
“You
recognize but one rule of commerce; that is (to avail myself of your own terms)
to allow free passage and freedom of action to all buyers whoever they may be.”
François Quesnay.
Have
a good week and be aware that the cold weather is haunting us still.
Steve