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Food Bank Donations Welcome! - November 18, 2014

Once again, Loveless Wealth Management is proud to announce that we are accepting donations for the Billings Food Bank at our office. Our donation bin was delivered yesterday and will be in our office through December 31st. Whether you are a client or not, we welcome all donations to this local worthy cause. Thank you!

Market Update - November 17, 2014

Oil’s relationship with the dollar

 

Have you seen the price of gasoline lately? The drop in price since the spring has been hard to miss. As of November 15th, Gasbuddy.com reports the average price of regular gasoline in the U.S. is $2.90 per gallon. Not surprisingly, it varies widely from state to state. South Carolina is the cheapest at $2.64 per gallon. If we throw out Hawaii ($3.96) and Alaska ($3.58), New York has the dubious honor of sporting the highest price in the 48 contiguous states at $3.26.

 

Index

Weekly Return %

thru Nov 14, 2014

YTD Return %

Dec 31, 2013 – Nov 14, 2014

DJIA1

+0.35

+6.38

NASDAQ Composite2

+1.21

+12.26

S&P 500 Index3

+0.39

+10.36

Bond Yields

Nov 14 Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.02    -0.01

0.07

2-year Treasury

 0.54      +0.03

0.38

10-year Treasury

2.32       Unch

3.04

30-year Treasury

3.04       Unch

3.96

Commodities

Nov 14 Price & Weekly Change

Year end 2013

Oil per barrel4

       $75.93               -2.50

    $98.42

Gold per ounce5

  $1,169.00            +14.50

$1,201.50

Sources: U.S. Treasury, MarketWatch, St. Louis Federal Reserve, CNBC, Energy Information Admin.

 

The Energy Information Administration (EIA) paints a similar picture. As of November 10th, the average price per gallon of regular gasoline across the nation stood at $2.94. This compares with a 2014 peak of $3.71 at the end of April.

 

As we head into the holidays and the inevitable trips to the mall, it’s an early Christmas present for consumers, though it is bringing some angst among producers.

 

Last week, the price of West Texas Intermediate crude4 (WTI) slipped to $75 per barrel, the lowest in four years (EIA), suggesting the decline at the pump may not be over. Clearly, gasoline prices are closely tied to the price of oil, which brings us to the next question – will prices rebound or are we entering a period where oil floats in a lower range?

 

In some respects, it’s an impossible question to answer. What will OPEC do if prices continue to decline? Saudi Arabia, the world’s largest oil producer, is an enigma, and the kingdom’s decisions surrounding prices are sometimes shrouded in mystery.

 

Will global hotspots interrupt production and support prices? Libya, Nigeria, and the Middle East in general have the potential to create unwanted surprises. These are variables in the pricing equation that are difficult to forecast.

 

So why have prices plunged? For starters, soaring U.S. oil production, compliments of the shale revolution (see Figure 1), and a soft economic outlook outside the U.S.

 

 

But let’s not discount the recent surge in the dollar.

 

Oil is priced in dollars when sold around the globe. In other words, when Germany or France or nearly any other country buys oil, it pays in dollars. And the stronger greenback has pressured oil prices.

 

Since 1986, the correlation between the Trade Weighted U.S. Dollar Index of Major Currencies (see note below Figure 2) and the price of WTI crude is -0.76 (St. Louis Federal Reserve data), where a reading of 1.0 = a perfect correlation, -1.0 is a perfect inverse correlation, and 0 = no correlation whatsoever.

 

Put in layman’s terms, 1.0 simply means the price of two assets move together, -1.0 means the two assets move in opposite directions, and 0 means there is absolutely no relationship between the assets.

 

Furthermore, since 2001, the inverse correlation falls to a very steep -0.85.

 

Coincidentally (or not), the latest upward move in the dollar happens to coincide with the recent plunge in oil prices – see Figure 2.

 

Note: the Trade-weighted Dollar Index of major currencies is an unmanaged index that weights the currencies of the major U.S. trading partners. It cannot be invested into directly. Past performance does not guarantee future results.

 

With the U.S. economy apparently decoupling from other major global economies, including Europe and Japan, some analysts believe the dollar could be entering a longer-term bull market. If this is the case, it would likely create a headwind for oil.

 

Shorter-term, the Dow and the S&P 500 Index marched into record territory for the third-straight week (MarketWatch data). In contrast to October, falling oil prices are no longer being viewed negatively by investors.

 

At the time, weaker oil was perceived as a proxy for weaker global economic activity – a negative for stocks. Today, the continued decline is being viewed more as an issue of oversupply; therefore, investors are taking a more sanguine approach.

Schwab Impact 2014

Last week, the Loveless Wealth Management team enjoyed a great Schwab Impact conference in Denver. We were witness to some heavyweight keynote speakers including former President George W. Bush, former Fed Chairman Ben Bernanke, international economist Dr. Dambisa Moyo, as well as a host of others.  It was great to get some new perspectives on the current state of economics,   and also some valuable historical anecdotes. 

Schwab Impact is structured as a learning rich environment. Our team took full advantage of classes offered on such topics as client focus, technology, current economic opportunities, behavioral investing,  as well as how we can excel to stay one step ahead in our pursuit to serve our client base to the best of our ability.

In this competitive industry, it is imperative to continue to learn and improve both ourselves and our business, in order to provide our clients with exceptional service.

Market Update - November 11, 2014

The Economy, the Labor Market and Goldilocks:

 

First off, I want to express my deepest gratitude for all those who have served our country to protect our freedoms, and I wish all a happy Veterans Day.

 

You probably remember the story of Goldilocks – not too hot and not too cold. That seems to be an apt description for the economy these days. It’s moderate economic activity that’s not too hot and not too cold. In other words, it leads to noninflationary growth, which promotes corporate profits and encourages an expansive monetary policy – all which are a plus for stocks.

 

Index

Weekly Return %

thru Nov 7, 2014

YTD Return %

Dec 31, 2013 – Nov 7, 2014

DJIA1

+1.05

+6.02

NASDAQ Composite2

+0.04

+10.92

S&P 500 Index3

+0.69

+9.93

Bond Yields

Nov 7 Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.03         +0.02

0.07

2-year Treasury

0.51         +0.01

0.38

10-year Treasury

2.32         -0.03

3.04

30-year Treasury

3.04         -0.03

3.96

Commodities

Nov 7 Price & Weekly Change

Year end 2013

Oil per barrel4

       $78.43               -2.27

    $98.42

Gold per ounce5

  $1,154.50              -9.75

$1,201.50

Sources: U.S. Treasury, MarketWatch, St. Louis Federal Reserve, CNBC, Energy Information Admin.

 

But not growth that would be too hot, or economic activity that might bring about much higher inflation or a series of sizable rate increases by the Federal Reserve. Or too cold, where the economy slows and threatens to morph into a recession.

 

This brings us to the labor market and last Friday’s release of the jobs’ report. The U.S. Bureau of Labor Statistics (BLS) reported nonfarm payrolls grew by 214,000 in October, and August and September were revised modestly higher.

 

We’ve now experienced nine straight months of nonfarm payroll growth in excess of 200,000, the longest 200,000-plus winning streak since the mid-1990s (BLS). In some sense, it’s been a Goldilocks labor market since the start of the year. Not too hot, or one that would encourage a significantly tighter monetary policy, or one that is too cold, which might be signaling an economic contraction.

 

Shaded area marks recession; Last date: Oct 2014

 

At just under 140 million part-time and full-time jobs, we’ve surpassed the peak seen at the onset of the Great Recession (Figure 1) – good news.

 

Separately, weekly jobless claims data provided by the Department of Labor reveal that both first time filings and continuing filings are near historically low levels. Undoubtedly, that is progress.

 

Yet, scars remain and a fairly sizable number of able-bodied men and women who would like to secure jobs that match their skill levels cannot find work. It’s one reason why the Fed has yet to raise rates from rock-bottom levels.

 

Market Update - November 3, 2014

A Stock Market Rollercoaster

Whether you’ve been on a rollercoaster or tried to bungee jump, October’s action probably compares to both – a sharp descent followed by a steep rebound.

 

Index

Weekly Return %

thru Oct 31, 2014

YTD Return %

Dec 31, 2013 – Oct 31, 2014

DJIA1

+3.48

+4.91

NASDAQ Composite2

+3.28

+10.87

S&P 500 Index3

+2.72

+9.18

Bond Yields

Oct 31 Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.01       Unch

0.07

2-year Treasury

0.50       +0.09

0.38

10-year Treasury

2.35       +0.06

3.04

30-year Treasury

3.07       +0.02

3.96

Commodities

Oct 31 Price & Weekly Change

Year end 2013

Oil per barrel4

     $80.70            -0.60

    $98.42

Gold per ounce5

  $1,164.25            -68.50

$1,201.50

Sources: U.S. Treasury, MarketWatch, St. Louis Federal Reserve, CNBC, Energy Information Admin.

 

With the headlines telegraphing all kinds of angst in early October (in reality, the S&P 500 Index lost a modest 7.4% from its September peak to its October 15 closing bottom [St. Louis Federal Reserve]), the S&P 500 Index added 2.3% during the month and claimed a new high. The Dow also climbed out of its hole, rose 2.0% last month, and also notched a new record (St. Louis Federal Reserve).

 

Good news is good news

Advance data from the Bureau of Economic Analysis revealed that Q3 Gross Domestic Product (GDP – the broadest measure of economic activity) grew by 3.5%, which makes it the fourth quarter in five that growth has exceeded 3% (BEA).

 

Moreover, the expanding economy is generating faster employment growth (BLS), which is helping to put the economy on a firmer footing.

 

It’s not that we’ve entered a new economic boom; far from it. But it’s steady, it’s putting people back to work, and it’s generating rising profits. And higher profits are one of the key variables in the stock market equation.

 

Without a doubt, we aren’t experiencing the kind of growth we saw in the 1990s. Yet, some of that growth was driven by an unsustainable tech boom. Nevertheless, the general trend is encouraging.

 

Note: unlike the quarterly announcement of GDP, which is reported as an annualized 3-month rate of growth, the above graph examines the rate of change in GDP versus one year ago.

 

The end of QE

Last Wednesday, the Federal Reserve confirmed it will end quantitative easing or QE. QE is the complicated-sounding name given to the bond purchases the Fed has been making on a monthly basis using freshly created cash.

 

But if we go back a couple of years, any talking of ending bond buys was typically greeted negatively by investors simply because Fed support has been viewed as a positive for stocks. The general thinking: stocks might falter without the monthly liquidity injections into the financial system.

 

As the economic picture has brightened, there’s a growing sense that a broadening recovery can play a bigger role in aiding stocks rather than Fed support from its bond buying program.

 

The program has not been without its detractors and many question how effective it has really been for the economy. Note that data from the BEA reveal this has been the weakest recovery in over a generation.

 

 

Bad news is good news

A growing economy is a big factor in how stocks will perform. But so is the posture of central banks. And not just the U.S. central bank – the Federal Reserve – but global central banks, too.

 

Economic weakness in Europe has forced the European Central Bank to implement unconventional measures designed to aid its faltering economy. That’s been a plus for stocks.

 

Early last year, the Bank of Japan significantly ramped up its version of QE. As a percent of its total economy, the amount of assets it is buying dwarfs what we’ve seen in the U.S. (Bank of Japan, Wall Street Journal).

 

As the month came to a close, the Bank of Japan surprised investors by announcing even more aggressive measures. What’s happening in Japan – weak economic growth (bad news) – has prompted the Bank of Japan to inject even more cash into its financial system as way to stimulate its sagging economy. The result – markets rallied around the world as the month came to a close (Wall Street Journal).

 

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