Everybody has a plan until they get punched in the face” — Mike Tyson
Dear Clients and Friends,
February was a good month for stocks, surprisingly so given the fact that January had started so poorly. It seems that nervous investors began to calm down as oil prices stabilized and 4th quarter corporate profits once again, expanded at an impressive rate. The “Plow Horse” economy (as Brian Westbury refers to it), continues to expand at a steady 2.5% pace. Not too strong to create inflationary pressures and not strong enough to produce 300,000 jobs per month, although it is likely that the record setting bad weather over most of the East Coast and the recent dockworkers strike, will impact the economy over the near term. The bottom line is that economic growth continues, job creation is accelerating and wages are beginning to rise. With that, look for the FED to declare victory on its Dual Mandate of price stability and full employment and begin to raise short term rates (the fed funds rate) as early as this coming June.
Brian Westbury, Chief economist at First trust says, “Expect gradualism from the FED in the early stages of any rate hike cycle especially coming off of its ZIRP (Zero Interest Rate Policy). Under Greenspan and Bernanke, interest rates rose by 25 bps (basis points) at every meeting from mid-2004 through mid-2006. This time expect to see a rate hike of 25 bps at every other meeting. Starting in June and then moving very gradually – rather than waiting longer but moving faster once rate hikes start – would give the FED the chance to test out its new system for lifting rates in an era of bloated balance sheets. Right now, no one knows if its gradual plan will work as planned and that includes the FED itself. Assuming it does, we aren’t worried about how the initial phase of rate hikes will impact the economy or the equity markets. It would take a federal funds rate of 3% or above, to slow the economy. Until then, the FED won’t be tight, just less loose. “Plow Horse” growth and rising stock prices have not depended on QE’s and ZIRP. Ending these policies won’t alter our outlook either.”
I see it a bit differently. We have spent nearly six years in a Zero Interest Rate Policy. While it has been a real struggle for savers, it has been hugely positive for borrowers and corporations. Feasting on cheap capital has almost become a way of life and I am concerned what the withdrawal process will feel like once it is taken away. How will the markets react? Are they prepared? It depends on what the economy is doing when the time comes but the initial tendency of the markets will be to correct then followed by a period of unusually high volatility. Oh well, you can be sure that we will “stay tuned” on this one.
Here are some interesting things that have caught my attention recently:
1.) Non-farm payrolls are up more than one million over the past three months, the largest gain for a three month period in over a decade.
2.) The diffusion index shows that 66.2% of all industries have increased employment in the last year, the highest since 1998.
3.) Where have the 3 million jobs been created over the past 12 months? The industries with the largest gains have been: Professional services +660,000; Education and Health +539,000; Hotels, Restaurants and Entertainment +527,000: Construction +321,000- and Retail +318,900.
4.) Jim Cramer – “I was staring out the window the other night at Bar San Miguel, my small plate Mexican restaurant in Carroll Gardens, Brooklyn, mesmerized. Mesmerized by the fact that no one was walking by. We’re next to a busy subway stop and people are always walking by, looking in and coming in. No one was walking by. It was like some sci-fi movie where all human life had been obliterated. I can’t be alone in this moment, the whole darned country is snowed in and frozen shut and its making us huddle in by the television…..binge watching when we should be spending.”
5.) Where to stash your cash? Some Americans are sleeping on it – literally. According to a recent survey from American Express, 29% say they’re keeping some savings in cash, bills and coins. Of that 29%, 53% say they are hiding it in a secret location.
6.) Amex didn’t ask exactly where that cash was stashed, but a Marist College survey of 1,080 adults found the most popular place – with 27% of the vote – is the freezer. A little less than 20% hide cash in the sock drawer, while 11% put it under the mattress and 10% secure it in a cookie jar.
7.) In-N-Out Burger store managers make $100,000 per year with full benefits and a 401k.
8.) Wal-Mart has realized that staff turnover was hurting business and it is willing to spend $1 billion this year on higher pay and more career opportunities to keep store workers in their jobs.
9.) Disney will raise prices for its parks; the main Magic Kingdom in Orlando will see a 6% increase to $105 per day while other parks will see a 3% increase.
10.) Delta Airlines said it will use a projected $2 billion in fuel savings this year to pay down debt and return cash to shareholders, the latest evidence that U.S. carriers are using the windfall from cheaper oil mainly to retool balance sheets rather than reduce airfares.
11.) Tim Cook CEO of Apple, “On average we sold 34,000 iPhones ever hour, 24 hours a day, every day of the quarter.” Just WOW.
12.) Inflation, what inflation. Since 2000, the following components if the CPI showed the biggest increases: College Tuition and fees +137.2%, Energy +87% and Medical Care +73.1%
13.) Strange times for European borrowers. Eva Christiansen of Germany is a 36 year old entrepreneur who was just approved for a small-business loan. Her interest rate was -0.0172% – -less than zero. While there would be fees to pay, the bank would also pay her interest at just a little over 1 euro per month.
14.) New York’s Baccarat Hotel has just been built and has yet to check in a single guest, but it has become the most highly valued hotel in the U.S. after a Chinese insurer agreed to buy it for more than $230 million. That works out to $2 million per room!
15.) A painting of two Tahitian women by Paul Gaugin has reportedly been sold by a Swiss family foundation to a group of state museums in Qatar for $300 million, new record for a single piece of art.
16.) What has the price of oil done to the appetite for exploration? Get a load of these numbers. Right now the Bakken in North Dakota only has a 1% return on investment vs. just last October when it had a 39% return on investment. The giant Permian shale in Texas is giving you a 3% return on investment down from 40%, the Niobrara in Colorado is at 0% vs. a 37% return and the Eagle Ford in southwest Texas is at -3% vs. a 37% return in October.
17.) According to oil field service provider Baker Hughes, 1,609 rigs were drilling in mid-October of last year. As of last week, there were 1,056 rigs still working which represents a 34% drop in just 4 months.
18.) Unless demand picks up or supply diminishes, the nation’s largest oil storage facility at Cushing, Oklahoma will be completely full by the end of the 2nd quarter of this year.
19.) One-sixth of all office space currently under construction in the U.S. today is in the energy dependent city of Houston, Texas. At $50 per barrel, I say ouch!
20.) Mr. Jones of Carrizo Springs, Texas owns a group of motels and has been renting rooms to the oil and gas industry for 2 ½ years at $420 per week with a constant six month waiting list. Today he is lucky to be ¼ full at best. To quote Mr. Jones, “What the hell just happened?”
Sources: Oppenheimer, Seeking Alpha, Blaine Rollins at 361 Capital, CNBC, Real Money Pro, New York Times, Wall Street Journal, First Trust and @GoogleFacts.
Ken Beach, President of Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.