For the week, the S&P 500 and the Nasdaq each lost 1%, and the Dow fell by a fraction.
In Other Business News:
]]>*****
I love our freedom and you love our freedom, but do you ever get the feeling we sometimes go too far when exercising our freedom? I do. On the other hand, it’s not always easy to decide which step is a step too far. Consider the following exercises of freedom and the reactions they generated.
Summer is here. Enjoy your Memorial Day. Remember to honor those who have sacrificed and died for our freedom, and also have some fun.
]]>
We’ve gathered investors’ questions about the municipal bond market. Here to answer them, provide an update on the municipal markets, and discuss the bright spots around the country is Lyle Fitterer, CFA, CPA, managing director of Wells Capital Management’s Municipal Fixed-Income team. Lyle manages several Wells Fargo Advantage Municipal Income Funds.
]]>
April durable goods orders rose 3.3% from March. Excluding the volatile transportation component, orders rose 1.3%. Shipments of durable goods decreased 0.6% after increasing 3.3% in March. Inventories reached their highest level since the series began in 1992.
Defense aircraft and parts orders rose 53% for the month but are down 37.6%, reflecting the anticipated and actual effects of the sequester. The big drag from cuts to defense should be pretty well behind us. While defense might not add much to growth, it might not subtract much more.
]]> New orders for computers and electronic products were down 8.9% from a year ago but up 3.6% for the month. New orders in April for machinery and electrical equipment were up 1.9% and 0.7%, respectively. These three categories—computers, machinery, and electrical equipment—will likely continue to add to growth for the year as businesses shift from hoarding cash to disgorging cash.Because of the weak growth in orders and the high levels of inventories, there is little impetus for businesses to expand employment. Throughout the economic downturn, employment levels fell while aggregate hours worked didn't fall as much. That's because businesses gave more hours to the remaining employees. This recovery is still too weak to justify expanding payrolls much more than we've seen to date. I'm not expecting a ramping-up of hiring or economic activity into the end of the year. If anything, I think the first quarter may have been the high point of economic activity, but with the rest of the year keeping us out of recession.
While riskier assets still look attractive for the long term, if the S&P 500 Index pushes above the target of 1,720 we published in September 2012, I'd view that as the high-water mark for the year. That, of course, assumes we don't see major corporate tax reform, a big stimulus out of China, or big shifts in monetary policy. Those are three things that could push stocks quite a bit higher.
]]>In Earnings News:
]]>In Other Business News:
*****
I’m going to miss books and bookstores. I mean books with spines that you can pick up in your hands and leaf through, books you can put on a shelf after you read them and whenever you walk by you see them sitting there together like a party of old friends. Those kinds of books are slowly dying, and e-books—books from the “cloud”—are taking over.
And when physical books go, so too will go bookstores. I used to love browsing in bookstores. I would spend entire lunch hours searching for my next great read. Now bookstores, large and small, are winking out like stars before the approaching storm. Remember the movie “You’ve Got Mail?” Tom Hanks plays Joe Fox, the owner of a big-box bookstore chain who falls in love with Meg Ryan’s Kathleen Kelly, whose boutique bookstore is being put out of business by the low prices at Fox Books. Joe and Kathleen fall in love with each other while chatting anonymously online, not realizing they are bitter rivals in the business world. Before the movie ends and they walk into the sunset, Kathleen is forced to close her store, and Fox Books is triumphant. The irony is that in real life, Joe’s business model is also doomed, a victim of low prices on the internet, which brought Joe and Kathleen together. “You’ve Got Mail” came out in 1996 when the big chains looked unbeatable, but 1996 was also the year Amazon started selling books on the internet.
First, the little stores fell to the big stores, and now the big chains are falling. Walden and Borders are gone. Barnes & Noble is struggling. When I go into a Barnes & Noble, I’m amazed by how much bookshelves have retreated and games, toys, greeting cards, coffee, and chocolate truffles have taken over. I’m eager to see B&N’s next earnings report, which is scheduled for June 28. Thomson Financial forecasts a loss of 97 cents a share, and those results will come against a backdrop of a rumor that B&N tried to sell Nook, its e-reader business, for $1 billion, which is more than half of what some experts believe the shrinking bookstore chain is worth. The sale didn’t materialize, and Motley Fool, the investing website, recently concluded that B&N’s “final chapter will end with these three words: ‘just like Borders.’”
Not long ago, I “self-published” an e-book on a website called Smashwords.com, which bills itself as the favored publisher of independent authors. Smashwords posted the book on its site and forwarded it to some other sites, including Barnes & Noble’s Nook bookstore. By going with an e-book, I thought I was being hip. After all, Joe Fox is so last century. But in the end, e-publishing was pretty unsatisfying—like throwing a paper airplane off the rim of the Grand Canyon. I watched it for a nanosecond until it vanished into the virtual “cloud.” But I didn’t get to follow its graceful flight, if any, or its humiliating crash, if any. And afterword, I had nothing real to pick up and display battered and muddied on a shelf. It didn’t feel like I had created a new “old friend” for myself or for anyone else, even if it lives forever in the “cloud.”
I have no doubt that the internet will vastly extend the reach of human knowledge, but it will also deprive us many, dog-eared, old friends. And I like Jerry Seinfeld’s funny—if untrue—comment on this subject: “A bookstore is one of the only pieces of evidence we have left that people are still thinking.”
]]>There’s really no story here. I just wanted to share a really great headline. (The LA Times)
Scientists in Uruguay have made it easier for you to count sheep as you fall asleep…by making them glow in the dark. (Nature World News)
This is one of those “Huh...who knew?” articles, as in “Who knew people would pay so much for a pigeon?” (I bet you thought I was going with the Bea Arthur painting, didn’t you?) (Miami Herald)
When you think of smuggling something across a border, I’m pretty sure KFC isn’t top of mind. But it’s a growing business in Gaza. (The Christian Science Monitor)
]]>From the editorial:
The potential impact on participants' retirement savings if they are exposed to excessive risk near retirement can be devastating. Evaluating portfolio managers on long-term participant outcomes is a stretch, but as an industry, it is the direction we need to go. As asset managers, we have an obligation to design retirement products for the long-term benefit of those we serve. We believe in managing risk for the long haul.]]>
To me, it looks like the market moves were driven by confusion over central bankers’ commitments to continue easing and concern over the pace of deceleration of the Chinese economy. The Bank of Japan upgraded its growth outlook, but it simply affirmed its previously announced expansionary policy plan. In the U.S., Chairman Bernanke testified that monetary policy would be flexible and adapt to changing economic conditions. The minutes from the May meeting of the Federal Open Market Committee (FOMC) didn’t provide any new information, but it was reported that a number of participants discussed tapering asset purchases by June. It was after the release of the minutes that the market started to weaken.
]]> Part of the problem is that many investors may not realize that participants are not the same thing as members of the FOMC. It was originally, erroneously reported in many news outlets that the members of the committee discussed tapering by June, but it was likely the nonvoting participants that were keen on tapering. At FOMC meetings, there are many participants, including nonvoting members. The only opinions that really matter are the voting members of the committee. And the voting members have continued to express a bias toward more easing, not less. Don’t doubt the Fed’s commitment to keeping rates low.It was later reported that a purchasing managers’ index (PMI) of Chinese manufacturing came in at 49.6. Anything above 50 means activity is higher, while a reading below 50 means activity is lower. I have been critical of reading too much into PMIs considering they tend to give as much weight to big companies as small companies and they are based on survey questions that are subject to different interpretations. For each of the 11 indicators, respondents are asked how the current month compares with the previous month. Output increased, new orders decreased, stocks of finished goods expanded, and prices—both for outputs and inputs—decreased. On its face, these point to lower inflationary pressures and reflect slower growth in domestic and foreign demand.
Slower growth in China isn’t anything new. Policymakers in China are aiming for a 7.5% expansion of the economy in 2013, which is a deceleration from the 7.8% growth rate in 2012. A PMI reading coming in below 50 should be expected. The Chinese government has a lot of flexibility to hit its growth rate target. Don’t doubt the policymakers’ commitment to hitting their target.
]]>The Dow dropped 80 points, with 23 of its 30 components retreating; the S&P 500 fell 13; and the Nasdaq lost 38. Decliners led advancers by more than three to one on the NYSE and nearly three to one on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $10.20 to close at $1,367.40 an ounce, and the price of crude oil sank $1.90 to settle at $94.28 a barrel, initially due to a report showing plenty of supply of crude oil, but losses accelerated after the release of the Fed’s minutes.
In Earnings News:
]]>In Other Business News:
*****
One of the key tasks of anyone working in artificial intelligence, or AI, is to create a computer program that not only can think, but can also devise strategies for learning on its own. Researchers at the Tokyo Institute of Technology may have done just that with what they call SOINN, or Self-Organizing Incremental Neural Network (cue concern about impending AI takeover of the world).
The researchers already programmed SOINN to learn from its visual experience, an incredibly difficult task that humans take for granted. Now, according to Diginfo TV, they’ve taught it to learn while surfing the internet. As an example, the researchers showed SOINN a picture of a rickshaw, which it had never encountered before. SOINN guessed it was a car, which isn’t a bad guess, given that rickshaws near traffic-congested Tokyo probably go as fast as cars, and if there’s one thing AIs hate, it’s traffic (“Never compute and drive,” the old saying goes that I just made up now). Then SOINN was told to search on the keyword “rickshaw,” and on its own it searched through thousands of images of rickshaws it found on the internet, learning the key characteristics of what separates a rickshaw from a car. In subsequent tests, SOINN was able to successfully identify rickshaws in pictures of other things.
Understanding how a unified thing can be composed of individual characteristics is one of the great problems of philosophy and computer science (today it’s called mereology, the theory of parts and wholes). It’s why we don’t see a pile of metal and rubber parts—wheels and headlights and doors—we see a car, to which those parts in some sense belong, and which is different from the people—with their legs and arms and heads—that are in the car: unified things with many parts that are different from other unified things with many parts. Without this understanding, there’s no object recognition, similar to newborn infants: Looking at a picture of a rickshaw in front of a crowd of people would be like looking at a picture of wheels and arms and legs and a metal frame, a bunch of random pixels. That an AI can learn object recognition on the fly is a big achievement.
This development is great news, not because we’re finally on the brink of a workable form of AI, but because we no longer have to worry about AI taking over the world, like Skynet in Terminator or like in the Matrix movies. If the AI is learning from the internet, there’s no telling how much false information will clog its memory, rendering it unable to defeat a determined humanity that put the false information there in the first place. We can be sure only that it will know a lot about cats.
]]>For the Bank of Japan, it will still try to double the monetary base (currency in circulation and bank reserves) over the next two years. I doubt that this will increase the rate of inflation to 2%, the Bank of Japan’s stated goal. The problem Japan faces is not that there is not enough monetary base to support a vibrant economy. The problems Japan faces relate to a dysfunctional financial system that isn’t translating the monetary base into money supply. Only structural reforms can fix those problems, and that is the third arrow of Shinzo Abe’s plan for reviving the sleeping giant. I’ll be watching developments on the trade and regulatory fronts in Japan for signs of life. Thus far, there is a compelling reason to believe these changes will be forthcoming. Japan’s willingness to participate in talks to enter the Transpacific Free Trade Area is encouraging. It will be difficult to execute on this agreement, though, because it will require the Japanese government to open up its heavily protected agricultural and health care markets.
]]> In the United States, the Fed is likely to continue to do as much as it can to support the economy, including possibly increasing the pace of asset purchases (also known as quantitative easing, or QE). Chairman Bernanke outlined the benefits of Fed policy: Low real interest rates support spending on durable goods and housing. The chairman also acknowledged the risks of low real interest rates, like the cost to savers who rely on interest income from savings accounts and government bonds. There is also the risk associated with investors reaching for yield by taking on more risk than they otherwise would. For the first cost—to savers—the chairman effectively said that though it’s painful to get lower income in the short run, it’s probably worth the longer-run benefits of higher returns from a more vibrant economy. For the second cost—of investors reaching for yield—the chairman said the Fed can address that through its monitoring and regulatory functions.While the Fed is concerned about investors reaching for yield, that doesn’t mean it is going to stop or taper its asset purchase program. If anything, to avoid disrupting the financial system, the Fed’s concern is an argument for deferring the day of tapering. As we’ve said before, this is not the time for long-term investors to be sitting in cash on the sidelines, as the Fed has all but admitted it will do what it can to support those investors adding risk to their portfolios.
Perhaps coincidentally, existing home sales data were released by the National Association of Realtors while the chairman was testifying before Congress. Existing home sales in April hit their highest level since 2009, coming in at a 4.97 million seasonally adjusted annualized rate. That is 0.6% higher than the March number and 9.7% higher than April 2012. If the Fed is going to take credit for the housing recovery, then it will have to take responsibility for keeping mortgage rates low. Tighter credit conditions are somewhat restraining further growth in the housing market, and it doesn’t look like there is much that will be done about that. Thus, I think, the Fed will be inclined to accelerate the pace of purchases of mortgage-backed securities if mortgage rates drift higher. That means more QE before less.
]]>
As North America becomes increasingly more significant in the energy production scene, what are the investment opportunities and how might this growth story transform the U.S. economy? Tom Pence, CFA, managing director and senior portfolio manager with Wells Capital Management’s Fundamental Growth Equity team explains in this excerpt of On the Trading DeskSM from Friday, May 17, 2013.
To start, Tom, by what measure is North America growing relative to other energy producers?
I think we’re far ahead of our competitors right now, Peter. We’re first to really develop and exploit fracking technology, and we’ve utilized it in a way that’s dramatically driven down recovery finding costs. Before, a lot of companies thought those assets were going to be unrecoverable. This is about a 10-year cycle of exploiting our energy reserves and driving down our dependence on foreign oil in a way that’s not only going to provide very cheap oil and gas for U.S. manufacturers and consumers but also improve our overall competitiveness on a global basis. That is, I think, transformational.
How are you tapping into North America’s energy renaissance?
We have a few energy positions on right now, but frankly, we see a negative outlook on that commodity price going forward. It’s difficult to invest in the energy sector and make money when you have declining commodity prices. But absolutely we’re able to tap in to some themes that would benefit, say, Kansas City Southern [Railroad], which is benefiting from helping a lot of these disparate producers who are far away from pipelines to get their oil moved to refining centers. Quanta Services is the contractor helping build some of those pipelines and ultimately finding a permanent solution. So, yes, we can see opportunities like that up and down the market-cap spectrum as we go forward in the equity markets.
How will this transform the U.S. economy, if at all?
The U.S. consumer now is faced with sort of a job market that’s created by the private sector, by the corporate sector that now has an incredible tailwind in energy behind it. As that creates more jobs, that job tailwind is going to dovetail with a housing recovery tailwind that’s happening at the same time. So if you’re creating more jobs, the housing sector is creating more jobs, and the Fed has been putting this liquidity into our system and raising the price of assets—raising the price of homes, which is the biggest asset on most consumers’ balance sheets—then I think it just creates an environment here where you’re eventually going to push forward with capital being deployed, more companies hiring, more jobs created, more people at work, and then maybe even rising wages ultimately. And that would be an exact reversal, Peter, of what we lived through from 2000 to 2010.
That’s very encouraging, but let me ask you about fracking. I live in New York, and anytime anyone mentions fracking the hackles go up. Does the environmental issue raise political risk for you in investing in energy, and how are you viewing it?
It is absolutely a risk; it is a political risk that could slow this trend down. Now the science that we’ve seen, and we’ve spent a lot of time talking to people who are experts on this and many drillers and petroleum engineers who are neutral to the whole industry and can talk about geophysical structures and what happens. We really think that a lot of the hyperbole that’s come out has really been a little bit more politically motivated, but I would not take that lightly. That’s going to be something that the industry is going to have to embrace, address, and show scientific evidence. The discussion has been out there now for three years, and so far it looks like science is winning the day.
Tom, with the moment that remains we welcome a parting thought for investors.
I think something is really becoming transformational right now in the U.S. economy. I think this market is telling us we’re going to have a period of very competitive energy prices, a sort of recovering housing market that I think has legs for the next three to four years, and a stronger dollar with falling commodity prices globally. Putting us sort of in a catbird seat that we really haven’t been in, Peter, since the 1990s, and I think that’s very exciting. That’s transformational.
Tom, thanks for joining us here again On the Trading Desk.
Thank you, Peter.
The Dow rose 52 points, with 18 of its 30 components gaining ground; the S&P 500 gained 2; and the Nasdaq was up 5. Advancers led decliners by six to five on the NYSE and nine to eight on the Nasdaq. The prices of Treasuries strengthened. Gold futures lost $6.50 to close at $1,377.60 an ounce, and the price of crude oil fell 75 cents to settle at $96.18 a barrel.
In Earnings News:
]]>In Other Business News:
*****
The world’s first test-tube burger will be available to eat in London for the reasonable price of $325,000. That’s not the price to buy the burger, according to a report in The New York Times; it’s how much it cost to manufacture it. And “manufacture” seems to be the right word. Dr. Mark Post, working in the Netherlands, used a few cells from a cow’s neck to create strips of beef muscle cells in a culture. It took about 20,000 strips of the muscle cells to make the burger. (If you find this sort of thing unappetizing—and I sure do—I apologize that Daily Advantage comes out right before dinnertime. If it helps, a cake story is next.) But it does represent a major breakthrough in lab-generated food, one that might take a long time to catch on but which might become necessary to feed a burgeoning global population. Right now, it’s prohibitively expensive to create lab meat, but eventually, the theory goes, it will be cheaper because there are fewer inputs needed to create a burger. Scientists don’t need to transform thousands of pounds of feed and thousands of gallons of water into a whole cow; they can concentrate on creating only the muscle in cultures. I imagine a marketing campaign along the lines of Folgers Crystals’ “We switched your regular coffee with Folgers Crystals and you didn’t notice,” except this campaign might result in more lawsuits.
Here’s a more appetizing story, depending on how you look at it: USA Today reports that birthday-cake flavor is showing up in more and more foods. Just in the past few years, 17 new products have been introduced that tout the flavor that brings back the nostalgia of youth or, more accurately, the memory of last night when I ate half a cake by myself. There are cake-flavored Oreos, cake-flavored blended beverages, cake-flavored toothpaste, and cake-flavored vodka. There’s even cake-flavored ice cream, which I can attest to, having had a local food truck version in Austin a week ago. It was ice cream, cake, and frosting blended in a cup and drinkable like a shake. (Because it was blended, I’m guessing that shakes out a lot of the calories in a complicated process that researchers call “wishful thinking.”) This is the kind of breakthrough our scientists should be working on, not lab meat.
Would you eat laboratory-created meat? (Or laboratory-created cake flavor, for that matter?) Leave your thoughts in the comments area below.
]]>The Dow fell 19 points, with 18 of its 30 components declining; the S&P 500 dropped 1; and the Nasdaq retreated by 2. Advancers led decliners by about four to three on the NYSE and six to five on the Nasdaq. The prices of Treasuries weakened. Gold futures gained $19.40 to close at $1,384.10 an ounce, and the price of crude oil rose 64 cents to settle at $96.93 a barrel.
In Earnings News:
]]>In Other Business News:
*****
Perhaps no one is having as much fun with Google Glass as the people making fun of the early adopters wearing Google Glass. Many people who weren’t one of the 2,000 or so people chosen to get the face-wearing smartphones seem to think that the glasses make people look—what’s the delicate word for this—dorky. (This assessment is in no way influenced by the fact that I was not one of the chosen 2,000.) I mainly dislike Google Glass because I feel like a Luddite for disliking Google Glass. I know that that’s circular reasoning, which is another reason I don’t like Google Glass: I don’t like being made to engage in circular reasoning.
But like it not, Google Glass is coming, which means one of the #1 growth industries over the next few years will be writing Google Glass etiquette guides. (The other growth industry will be, “Congressional inquiries into the privacy implications of Google Glass,” which kicked into gear last week with a letter from members of Congress to Google.) These guides are necessary because the glasses will represent one of the biggest privacy intrusions into the lives of unsuspecting people since the invention of cameras, or microphones, or video-recording devices, all of which are already on smartphones. Put like that, it doesn’t sound as big of a deal.
The Wall Street Journal recently published its own Google Glass etiquette guide, and it covers the basics. A few of them are:
In fairness to Google Glass, almost every new communications technology has spawned etiquette guides. Just remember the grainy faxes pushing penny stocks or how rude it was that anyone could cause a telephone to ring inside your own home at any hour of the day or night. That was shocking a hundred years ago. Etiquette guidelines were established, and no one was ever annoyed again, particularly during the dinner hour, the sanctity of which is respected by telemarketers everywhere. Hold on. I may have just undermined my own argument.
]]>
I always try to be reasonable. I listen to every argument with an open mind and try to sift out the value of everything I read. If the point being made is contrary to my own views, I pay even closer attention and weigh the arguments on both sides. Sometimes, however, I begin to lose my patience. Sometimes, I just do not see the merit of a line of reasoning.
The most recent example of this is the argument that the stock market’s powerful rise (over the past six months and over the past four years) has been the product solely of Federal Reserve (Fed) largesse, not a real improvement in fundamentals, and therefore, it is bound to end badly. It has been called a “sugar high” and the “feeding of an addiction to liquidity.” It implicitly invokes a lovely but lost world where fundamentals and stocks advanced peacefully together, a time when things made sense and earnings led prices higher.
]]> Pining for an imaginary worldI believe that rising markets driven by fundamentals have been more ephemeral than markets driven by increasing liquidity. In the first three quarters of 1987, stocks rose mightily as earnings and earnings expectations pushed higher. How did that work for you in October of that year? In 1999, earnings and revenue expectations soared along with prices. What happened after that? Current increases in expectations never seemed to guarantee future increases, and current shortfalls never seemed to drag future fundamentals down. Earnings and prices may be correlated over the long run, but I believe that the latter predicts the former and not the other way around.
Following the Fed is (eventually) following fundamentals
In my experience, the best and tightest correlation has been between Fed stimulus and equity prices. Unless valuations are extremely high (which I do not believe) or fundamentals become uncontrollably awful (which I do not foresee in the next year), then equity prices tend to rise when the Fed is pushing money at the economy and tend to fall when the Fed is pulling money away from the economy. If the degree of stimulus or restraint diminishes and that diminishment is justified by the success of earlier Fed actions, then stocks usually do not reverse direction. I believe that this is because the Fed will not diminish the stimulus until less stimulus is needed. In other words, they will not stop or slow until they have induced the improving fundamentals so beloved by today’s sidelined investors.
I want to own stocks when fundamentals are forced to go from worse to bad. After that, I want to own them when they go from bad to good. Once fundamentals are good, they can get better or they can get worse. You have to be smarter than I am to figure out what to do with equities then.
]]>The three major indexes gained ground for the fourth consecutive week. This week the Dow gained 1.5%, the S&P 500 rose by 1.9%, and the Nasdaq advanced by 1.8%.
In Other Business News:
]]>*****
One of the many outward signs that I’m a dinosaur is that I still wear a watch. In fact I probably have about two dozen watches, many of which are no longer working, the victims of hard use in the garden, the workshop, and the trout stream. None of my watches ever stopped a bullet like in the movies, but I just can’t bring myself to throw even the most mundane—but loyal—companion away.
No matter, help is just around the corner. Watchmakers are turning the old-fashioned, mechanical watch into a status symbol with outlandish new designs. Breitling, for example, has a watch called “Emergency II” that contains two 7-inch antennas. If I ever get lost on a trout stream with this not-so-little beauty, I can pull out the antennas and they’ll relay my location via satellite to my dog, who will run to my rescue with a little barrel of whiskey on her collar. Jaermann & Stubi sells golfing watches that compare handicaps and record performances. Some of these watches are made with metal melted down from golf clubs of the sport’s big stars. A company called Rainbow Watch GmbH has a timepiece called “Rainbow Inspiration One” that changes the color on its face every three minutes. And a tiny firm called MB&F makes a watch called “Horological Machine No. 3” that replaces the usual hands and dial face with revolving barrels and ball bearings that display the minutes and hours. Says the founder of MB&F: “Mechanical watches have no practical reason at all to exist anymore. The only reason is because they are works of art. You need guts to wear what we make.” You also need money: The company makes only 20 watches a year, and the selling price is $91,000 per watch.
Potential headlines for this story:
Have a great weekend. And if you’re hungry for a little good news about the economy and America’s future, listen to Tom Pence discuss “Tapping into North America’s energy renaissance” as my guest for On the Trading DeskSM.
]]>As North America becomes increasingly more significant in the energy production scene, what opportunities arise for investors? And in the long run, how might this growth story transform the U.S. economy? Here with insight is Tom Pence, CFA, managing director and senior portfolio manager with Wells Capital Management's Fundamental Growth Equity team.
]]>
