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One of the most interesting debates regarding monetary policy is emanating from the Federal Reserve members themselves. The Federal Reserve’s current monetary policy program includes an $85.0-billion monthly asset-purchase program. Recent comments made by many of the Federal Reserve members indicate that they are as unsure about the current monetary policy program as the rest of us.
Increasingly, it appears that more Federal Reserve members are leaning toward reducing and even eliminating the current aggressive monetary policy program of bond buying, and doing so sooner rather than later.
Conversely, there are still several Federal Reserve members who currently vote on monetary policy and want to continue the asset-purchase program, as they don’t see an economic recovery coming anytime soon.
This divergence makes it extremely difficult to predict the future of monetary policy. This is important, because when the Federal Reserve indicates that it will begin reducing its bond-purchasing program, it will have large ramifications throughout various markets.
Personally, I have been of the opinion that the Federal Reserve will begin to reduce its aggressive monetary policy program, or at least indicate that it plans to do so, later this summer or early fall. This shift in monetary policy, I believe, will cause many assets to decrease in price, with bonds being sold off and stocks getting hit as well.
Economically, there are many mixed and conflicting data points. Both vehicle sales and housing are strong points in the economy; however, manufacturing still continues to lag. As well, the recent survey by the Federal Reserve Bank of Philadelphia indicated that current manufacturing conditions are weak, but that business owners are optimistic … Read More
The housing market continues to vault ahead. We are seeing strong housing starts and the flow of building permits in the pipeline. Home prices are also steadily moving higher.
The S&P/Case-Shiller Home Price Index, comprising the 20 largest U.S. metropolitan cities, increased a better-than-expected 9.3% in February, representing the 13th straight up month for prices.
Looking at the chart below, notice the S&P/Case-Shiller index is currently at its highest point since late 2008, when the subprime credit crisis was in full bloom. Home prices remain well below the levels we saw in 2006, prior to the housing market meltdown.
You can thank the Federal Reserve for creating the ideal environment for the hot housing market via its strategy of record-low, near-zero interest rates and the continued buying of $85.0 billion monthly in bonds to drive down the financing rates.
Chart courtesy of www.StockCharts.com
You can feel the housing market is ready for a bubble, but the trend continues to point higher, albeit at a slower rate and with interest rates inevitably going higher. You need to be careful; but for the time being, the housing market is where it’s at.
I would be hesitant to touch the homebuilder stocks, due to their already massive gains. The chart of the S&P Homebuilders Index below shows the steady upward trend since December 2012, as indicated by the parallel blue lines. Yet also notice that prices have been rising higher without any major adjustment back to the bottom support line since late April. Look at the area marked by the red oval: this is the downside risk to which you are exposed. As … Read More
There continues to be mixed data regarding the strength of the economic recovery in America. This is creating an interesting divergence between the level of the S&P 500 and the growth rate of the economic recovery, which is far less than many had expected so far.
The Federal Reserve Bank of Philadelphia recently released its index of manufacturing activity, which dropped to -5.2 in May, versus a reading of 1.3 in April. (Source: “Business Outlook Survey,” Federal Reserve Bank of Philadelphia web site, accessed May 17, 2013.)
The survey shows no consistency over the past seven months regarding the current conditions of the economic recovery. The report indicates that the economic recovery has oscillated between positive and negative readings. Current demand for manufactured goods dropped substantially to -7.9 in May, from -1.0 in April. As well, the level of inventories increased to 4.1 in May, versus -22.2 in April.
This indicates that for the surveyed businesses during the month of May, there appears to be less demand for manufactured products, and inventories are piling up, which is clearly not a sign of strength. However, the S&P 500 continues to move higher. The question is: is this upward movement sustainable?
Obviously, no one can predict the future, but investors in the S&P 500 try to anticipate future shifts in the business landscape. While the economic recovery is currently weak, people who are now buying the S&P 500 believe that growth is close at hand. The current data do not support such a strong economic recovery; however, there is the possibility that such a recovery might occur.
One such data point that … Read More
All of the talk about the negative impact of the sequestration on consumer spending appears to have some validity.
While the rich consumers are continuing to spend on luxury items, those who are making less money and are influenced by the fragile jobs market and flat income levels continue to worry, which could likely impact consumer spending going forward. The effects of this, along with the widening gaps between the rich and the poor and the middle class are affecting consumer spending by Americans. In fact, we are seeing a widening income gap in many countries around the world, so it’s not just an American phenomenon—its impact on consumer spending is global.
Wal-Mart Stores, Inc. (NYSE/WMT) is a good barometer on the state of consumer spending around the world, especially with the lower- to middle-class consumers.
The company reported its results last Thursday, and it seems like Wal-Mart is facing some hesitation in consumer spending.
In the fiscal first quarter, the company’s net sales grew a mere one percent year-over-year to $113.4 billion, which was below the Thomson Financial consensus estimate of $116.4 billion. The sales reading was also shy of the low range of the estimate of $114.6 billion.
The low-cost retailer blamed the decline in consumer spending on a delay in tax refunds, adverse weather, and the rise in payroll taxes. The key comparable U.S. store sales fell 1.4% for the 13 weeks ended April 26, 2013, which represents the first contraction in this key metric in many quarters.
My concern is that Wal-Mart is facing sales pressure at a time when money is cheap. What will happen … Read More
We all know that the stock market has moved up significantly over the past few months. The real question is: is the move up based on the belief that there is enough economic growth available for corporate earnings to continue rising, or is it simply due to a flow of funds?
Let’s analyze this question by taking a look at Wal-Mart Stores, Inc. (NYSE/WMT). Wal-Mart just released its forecast for second-quarter corporate earnings, which was less than most analysts had expected. The company now forecasts corporate earnings on a per-share basis for the second quarter to be $1.22–$1.27, lower than the average estimate by analysts of $1.29. (Source: “Walmart reports a 4.6 percent increase for Q1 EPS of $1.14; U.S. businesses forecast positive comp sales for Q2,” Wal-Mart Stores, Inc. web site, May 16, 2013, accessed May 16, 2013.)
As a sign of the health of America’s economic growth level, Wal-Mart reported that comparable same-store sales dropped by 1.4% between January 26, 2013 and April 26, 2013. Internationally, Wal-Mart is doing better, with sales up 2.9% during the first quarter.
However, corporate earnings suffered during the first quarter due to several reasons, including very cold weather, continuing weak employment levels, and the payroll tax hike. Many businesses that cater to the lower- to mid-level consumer will most likely encounter similar problems due to these issues and general sluggish economic growth.
Recent data have been relatively mixed regarding the potential for economic growth to begin moving upward. However, for Wal-Mart’s corporate earnings, there is the potential for a slightly stronger second half because some of the company’s initial hurdles have been … Read More