If things were going as well as the Fed tells us, would it really be so concerned about even a slight increase in rates from levels that were once considered an “emergency” response? Last week’s release of the minutes from their January meeting indicates the Fed is aware of the obvious downturn in the data. We have to laugh when the “talking heads” depict the U.S. as a pillar of strength.
We just don’t see how numbers that in years past would have been discussed as quasi-recessionary are often ignored or even celebrated. For instance, manufacturing production is struggling to grow in recent months. Retail sales fell 0.8% in January after declining 0.9% in December. The dollars being saved at the pump are clearly not showing up elsewhere. The average consumer in the U.S. is pressured just to pay the bills because we have begun to see consumer-based lenders increasing bad debt provisions. Credit card companies noticed a credit turn as 2014 progressed and delinquencies in sub-prime auto debt are rising as well.
It is not hard to understand why it is tough out there for so many. The January employment report looked good in many ways, but the labor force participation rate remains stuck near multi-decade lows, so true unemployment remains atrocious. We seem to be adding high numbers of lower paying jobs in the last few months, but it is just not enough to grow the national income in the aggregate at the rates of yesteryear.
We also suspect the Bureau of Labor Statistics model may be assuming too many jobs are being added from new business formation in their so called birth-death calculation because their data is inconsistent with other sources on this key element of employment. Besides, employment is a lagging indicator which reflects the state of affairs a few months prior. How long will it take for layoffs in the oil sector to show up in the employment numbers? It seems like just a matter of time when the drilling rig count has fallen by about 30% over the last few months.
Our GDP slowed to back near that 2% level that we have been stuck at for years according to the first look at 4th quarter GDP. We know the pundits act as if it was the “best 2% growth ever” and they forecast that this year will be the one when we emerge from our funk, but they have been doing that since 2010 to no avail. The report also contained a big inventory build and a lot of healthcare spending, so we have a hard time getting too convinced that economic liftoff velocity is here. It is the second quarter in a row in which Obamacare spending seemed to dominate on the consumer side. It sure looks to us like maybe some serious income is being sucked into that program. No wonder the savings at the gas pump did not end up at the mall like the deciders told us it would.
Having watched us debase the greenback, our major trading partners are cheapening their currencies and cutting rates to escape intensifying deflationary forces as well. This is clearly impacting our competitive advantages. U.S. corporate revenues and earnings estimates are being trimmed substantially to account for the strength in the dollar and lower growth. The currency hit to sales of U.S. companies with meaningful foreign exposures in just released 4th quarter reports was large at 5-10% in many cases.
At this point, given the added pressure caused by the crash in oil prices, it is beginning to look like 2015 earnings may be below those for 2014, making it quite difficult to justify P-E multiple expansion from already bubbly levels. A year ago analysts were predicting about $122 in operating earnings (profits without all the expenses they don’t like to mention) for the S&P 500 for 2014 and now it looks like actual operating earnings are going to come in near only $113, 7% lower. Since early 2014 operating earnings estimates for the S&P 500 for 2015 have fallen from about $137 to roughly $119 for a total collapse of 13%. Of course, those are not GAAP estimates, which typically are about $7-10 lower than the non-GAAP operating measure. We just do not see the wisdom in paying a record valuation for a diminishing earnings stream. Did someone say something about a put contract with the Fed if anyone loses even one dime owning stocks? We missed that memo!
We are not sure how the Fed will be able to stomach raising short rates while many other central banks across the globe have been cutting them as growth concerns become more acute. Of course, that thought energizes the equity index chasers. Also, QE anticipation in Europe seems to have the “animal spirits” flowing again. Nonetheless, we can and will only depend on buying securities at prices that make sense to us, not “winks and nods”.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.