FUNDAMENTALS

  

 

So may I suggest a new pre occupation in which we can all indulge:  "Fed Watching".

 

Just like many who line up to photograph the returning birds here in New England, so too do journalists line up to both photograph and record every gesture and word from Janet Yellen who heads the Federal Reserve.

 

Recently she removed the word "patient" when talking about rate hikes.  This has left every pundit in the universe with the opportunity to toss out an opinion on when rate hikes will occur and what they will mean.  And just like everything else we have multiple schools of thought.  So, hating to be left out, let me give you my two cents.

 

As you know, I don't believe the economy is cruising along.  There are two many weaknesses currently in housing etc. for me to believe the economy is cranking on all cylinders.  Some may jump on me to look at the low unemployment rate but I would retort those same people should look at the labor participation rate and at 2014's GDP of 2.4%.  In my opinion we are operating below capacity.  Higher GDP (over 3%) and increases in the hourly earnings would help change my mind.

 

With this template I don't believe the Fed, despite removing the word "patient", is looking to bump interest rates any time in the next few months.  Without people making more money (wage improvement), higher interest rates could hurt weak economic areas such as the housing market.  I know that we read from time to time about the skyrocketing home prices in places like New York City but that is the exception and not the norm nationally.

 

Also working against the Fed right now is the fact that many of our international buddies are lowering their interest rates and doing their own level of "quantitative easing" (buying back their bonds) in the hopes of weakening their currencies.  When the value of their currencies drops (note the drop in the Euro value relative to the dollar over the past year or so) it means that consumers can get more stuff from them for their dollar.  To see just what kind of affect this will have you can watch the numbers coming from the Institute for Supply Management.  To make it simple, over 50 good, under 50 bad.  Right now - as of early March - the number stands at 52.5 down .4 from January (source ISM report release 3/2/2015)

 

On the good side of a rate hike, you should know that financials have an awful time when rates are this low (I know, stop crying).  They make very small margins on their loans and so are sometimes unwilling to lend.  During these periods you will see banks work to subsidize their earnings using more fees (note JP Morgan's recent decision to start charging clients for certain deposits)

 

Higher rates will help these groups operate more profitably and, perhaps, allow them to take a bit more risk in their loans etc.

 

So given these inputs (and a few more that I won't bore you with )I figure the following:

1. The Fed is going to hold on the rate hike right now for the next few months.
2. Removing the word "patient" simply let's everyone know that a rate hike is coming and to begin preparation.
3. The Fed is going to be data driven.  They have no set time in mind but they likely have a couple data points that they are considering.  Chief among them, in my opinion, is wage growth and the manufacturing indexes

 

TECHNICALS

 

Right now the technical picture to me is mixed.  There are a couple sectors showing strength but the weakness in the oil stocks is continuing, as supply pressure still exists.

 

I do a quick exercise of reviewing daily the charts in the S and P 100.  Right now the group of stocks that are moving higher is becoming a smaller number.  This means there is stealth sell off going on out of the weaker stocks.  Shortly we will know if this money will be redeployed into the stronger stocks or whether the investors/institutions will be content to sit on some cash for a bit.

 

So how does all this affect my thinking on my portfolio?

 

Here are some thoughts for you on your investments

 

1. Rates are going up at some point.  If you have money in open ended bond funds make sure you know how higher interest rates can hurt your bond fund values.  You might decide to pare back some exposure to this interest rate risk.
2. As a sector, watch the financials.  The way they react as a group - especially the banks - could indicate possibly higher rates and more profitability (for them) on the way.
3. The oil sector stinks right now.  At some point it will be a buying opportunity but I think it is still early.  What it does mean is that as long as oil and gas costs remain low it will possibly benefit the consumer with some extra pocket money.  Think about retailers and consumer discretionary stocks.
4. Down the road, as rate hikes take hold, begin to think about those sectors that might benefit from inflation.  I won't get specific here right now but will draw your attention to some of these sectors shortly in the next few newsletters. 

 

As always, have an awesome day, week, month, year and I will be back at you shortly.

 

Cheers,

 

Tim