Daily Archives: September 9, 2014

Heads Up!

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Scottish Independence would shake up the Global system. Polls released today showed for the first time that a majority — an extremely small majority, but a majority nonetheless — of Scots favor independence. A poll is not the election which will be held Sept. 18. The political union between Scotland and England might be abolished after 300 years. The implications of this are enormous and generally ignored.

One of the principles of post-World War II was the inviolability of Europe’s borders. Border disputes were the origin of centuries of war, and so Europe’s borders were frozen after World War II to avoid discussion.

Scotland separating from England can’t be minimized. If that centuries-old union can be revised, then anything can be revised. Scottish separatists’ reason for splitting is that they are a separate nation, that each nation has the right to its own state and the right to determine its own destiny, and that they no longer choose to be in union. But if they have the right to determine this, why shouldn’t others in Europe enjoy the same right?

For example, modern Spain is an amalgam of regions. One, the Catalan region — which contains Barcelona — has a strong separatist movement. If Scotland can leave the United Kingdom, then why shouldn’t Catalonia be allowed to leave Spain? Meanwhile, if French-speaking Belgians and Dutch-speaking Belgians wish to part ways and return their two regions to their respective countries of origin, why should they not be allowed to? And why shouldn’t the eastern part of Ukraine be allowed to secede and join Russia?

Raising the stakes, this is an issue that goes far beyond Europe. There are seemingly innumerable separatist movements in India, China, Africa and so forth. If Scotland has the right to leave the nation-state it is part of and form a new one based on ethnic identity, why can’t anyone follow suit? And if anyone can do it, but they are blocked by the state they wish to leave, is resorting to violence in pursuit of independence legitimate?

Having Scottish Independence happen in the heart of Western Europe would set a clear precedent that would expand geographically and conceptually. It would legitimize similar movements globally and force a reconsideration of what a nation is. Ultimately, a nation would be whatever the majority says it is (Source: Stratfor Global Intelligence).

The “Heat Map”

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Most of the time the U.S. stock market looks to 3 factors (call them the “pillars” that support the stock market) to support its upward trend – let’s grade each of the pillars.

CONSUMER SPENDING: We have graded this factor B (above average) based upon the increase in retail sales as reported in recent economic reports.

THE FED AND ITS POLICIES: We continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.

BUSINESS PROFITABILITY: We CONTINUE to rate this factor B- (slightly above average).

The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have identified one potential international crisis hot spot:

Iraq and the “powder keg” in the Middle East including Gaza. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate this Middle East powder keg situation as a 3 at this time. This is unchanged from last week, but still elevated. Risks continue to lurk, and they deserve our ongoing attention.

NOTE: There is no change from the last report.

The Economy

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Manufacturing remains strong for the US economy.  US Factory orders popped 10.50 percent in July from a revised 1.50 percent in June while construction spending increased 1.80 percent in July.  The Institute for Supply Management Manufacturing Purchasing Managers index increased to 59 percent in August from 57.10 percent in July.  A reading above 50 indicates the manufacturing economy is generally expanding.

The labor market reported mixed results as US Initial Jobless Claims were 302,000 coming in near its moving average, while US Non Farm Payrolls decreased to 142,000 in August from 212,000 in July.  Payrolls was a big surprise for economists, many believing this report being a one month blip.  The Labor Force Participation Rate increased to 62.90 percent in July from 62.80 percent in June.  The participation rate averaged near 66 percent for the prior decade which confirms the “slack” in the economy the Fed has been referring to.  US Average Hourly Earnings grew .20% in August from the prior month.

A great deal of focus was on the European Central Banks interest rate decision.  As expected Mario Draghi, President of the ECB, increased monetary stimulus by lowering the interest rate on the main refinancing operations of the Euro system by 10 basis points to 0.05% and the rate on the margin lending facility by 10 basis points to 0.30%.  The rate on overnight deposits was reduced to -0.20%.  In addition to the changes in interest rates, the European Central Bank will purchase a broad portfolio of asset-backed securities.

This week’s labor report and Europe’s monetary stimulus decision leads to continued healing and slow growth of the US economy.  Lower rates in Europe should keep US rates low while the Fed continues to provide accommodative policies in order for the labor market to strengthen.

The Numbers

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Last week, U.S. Stocks and Foreign Stocks increased. Bonds declined. During the last 12 months, STOCKS outperformed BONDS.

Returns through 9-5-2014

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds- BarCap Aggregate Index

– .4

 4.3

  6.3

  2.5

  4.4

4.7

US Stocks-Standard & Poor’s 500

 .3

 9.8

23.4

21.7

16.7

8.3

Foreign Stocks- MS EAFE Developed Countries

 .1

2.2

12.9

13.0

  7.8

6.8

Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.

“Your Financial Choices”

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“Your Financial Choices” The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week, Laurie will discuss: “Budgeting: It is like dieting – people don’t want to do it, talk about it or stick to it.”

Laurie will take your calls on this topic and other inquiries this week. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville and Macungie area – or listen to it online from anywhere on the internet.  For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.comand visit www.wdiy.org.

Motivational Quote of the Week

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“Get going. Move forward. Aim High. Plan a takeoff. Don’t just sit on the runway and hope someone will come along and push the airplane. It simply won’t happen. Change your attitude and gain some altitude. Believe me, you’ll love it up here.”

– Donald Trump

Personal Notes

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This is my favorite time of the year. During this time of the year, I can watch the Pirates play baseball, catch some Friday-night high school football, play golf, watch or attend Lafayette or Lehigh football, play golf (duplicated on purpose!), organize my Fantasy team, watch several NFL games, visit PPL center in downtown Allentown to experience hockey with the Phantoms Hockey, and enjoy the change of season, color in the leaves, and visiting with my wife Jo Anne and our two daughters Erika and Jennifer and their husbands who live in the Valley.

Thomas M. Riddle
President, VNFA

The Markets This Week

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When not tweeting tributes to Joan Rivers or getting in line to buy the Apple iPhone 6 for their back-to-schoolers, investors’ attentions last week were fixed squarely across the pond.

Economies throughout the euro zone, including mighty Germany, reported weakening growth in August as sanctions on Russia began to reverberate. Even the U.K., previously unaffected by the fragile financial state of the European Union, saw its manufacturing Purchasing Managers Index decline. The prospect of a full-blown slowdown led the European Central Bank to cut already-low interest rates from 0.15% to 0.05% and announce plans for additional stimulus to try to keep its recovery on track. A slowdown in Europe is seen as the biggest risk to growth here, especially since the euro zone accounts for 20% of world gross domestic product, and multinational earnings are connected strongly to its economic activity.

“We have to be on alert for the slowdown in the euro zone to come home and hit the U.S.,” warns Nancy Lazar, founder and chief economist of Cornerstone Macro, an independent provider of economic research and investment strategies.

U.S. markets seemed to shrug off concerns, rising slightly in the Labor Day-shortened week. The Dow Jones Industrials Average ended Friday up 38.91 points to close at 17,137.36, the second highest close in history. The S&P 500 rose 4.34 points on the week to end at a record close of 2007.71 and the Nasdaq Composite Index advanced 2.63 points to close at 4582.90.

Conditions remain strongly supportive of continued growth domestically, Lazar notes, and the U.S., for now, remains decoupled from the troubles abroad and is driving what global growth there is. Reflecting that strength, and notwithstanding a weaker-than-expected payroll report, her firm raised its estimate for third-quarter gross domestic product growth in the U.S. to 4% from 3.5% based on strong auto and heavy-truck sales, improving housing starts, increasing exports, and stronger capital spending by businesses. Indeed, Lazar expects the economic expansion in the U.S. to last three to five more years.

She’s not alone. Morgan Stanley strategist Adam Parker and economist Ellen Zentner believe the probability of a cycle peak remains low and predict the S&P 500 could reach 3000, should the expansion continue for five years or more. Their estimate is based on earnings per share growth of 6% a year and a price-to-earnings ratio of 17 times. The duo define the bull market of the past five years as the deleveraging and “repair phase” following the financial crisis. Only now, they say, is the U.S. economy entering “the very early stages of expansion.”

Another sign of confidence: Initial public offerings are at levels not seen since 2007, and total proceeds in 2014 could reach $80 billion, the most since 2000 and up by almost 50% from last year, according to Renaissance Capital. Already 188 companies have come public and there could be as many as 100 more by year end, with the most notable China’s e-commerce giant Alibaba set to raise as much as $24 billion.

(Source: Barrons Online)