Greece: Gauging Potential Market Impacts

June 30th, 2015

Negotiations between Greece and its creditors over the weekend of June 27 ended without a deal, which will lead Greece to default on its 1.6 billion euro loan payment due to the International Monetary Fund (IMF) today (June 30). The decision by the Greek government to reject the latest offer by the so-called Troika—comprised of the IMF, European Central Bank (ECB), and European Commission—of reforms in exchange for fresh rescue funds or a bailout extension has made a Greek exit from the Eurozone a real possibility. In response, the Greek government has instituted capital controls, closed banks and stock exchanges, and limited ATM withdrawals to keep deposits from leaving the country. However, this unfortunate development leaves Greece’s future in the Eurozone currency union in question, something that is understandably of concern to investors and markets.

The financial woes of Greece are not a new development, as the country has been the epicenter of Europe’s debt crisis starting with the Great Recession in 2008. Since then, efforts have been made to mitigate Greece’s financial problems: Private bank holders of Greek debt agreed to a 50% reduction in the face value of that debt in 2011 and the Troika created two sizable bailout programs. These bailout efforts required Greece to make meaningful fiscal and monetary structural changes, including deep budget cuts and steep tax increases. After years of harsh austerity measures and a troubled economy, Greece appeared to be reversing course in January 2015 when Greek voters elected an anti-austerity party led by Prime Minister Alexis Tsipras. The recent stalemate, which caused negotiations to fall apart and the consequent default, has unfolded primarily as a result of Greece still requiring bailouts and financial relief, and its new political leadership being unwilling to accept the terms of austerity and responsibility upon which that financial aid is contingent.

A referendum has been called for July 5 to allow the Greek people to have their voices heard. This could ultimately provide clarity if the will of the people is to stay in the Eurozone and accept the conditions that come with that decision. Regardless, there is no easy or quick path to a resolution here. Bottom line: The situation in Greece is tenuous and, at this point, the odds that the country can find a way to stay in the Eurozone may be no higher than 50/50.

The most important question is: What does this mean for markets? Stock and credit market volatility is likely to be elevated this week and potentially next, depending on how the Greek people vote and how European policymakers react. Regardless of which direction the referendum goes, the impact from Greece defaulting is expected to be relatively short term and manageable. Over the years, the market has had to digest other default scenarios by countries such as Cyprus and Argentina, which have typically resulted in short-term spikes in market volatility and a modest pullback in stocks.

The good news about all of the Troika’s efforts to prop up Greece since its initial wave of significant debt downgrades in December of 2009, is that the market, and more importantly, private sector banks, are more prepared to handle the impacts of a default or even Greece’s exit from the Eurozone. There are better central bank safeguards and the private market exposure to Greek debt has been reduced dramatically over the years. Due to a combination of the modest size of the Greek economy (less than 2% of Eurozone gross domestic product as of March 31, 2015), a meaningful improvement in the overall health of the global economy, and bold monetary policy actions by the ECB—including its willingness to “do whatever it takes” to keep the Eurozone together and its aggressive bond buying programs—it’s expected there will be limited market impact because of Greece over the intermediate to long term.

In other words, regardless of which path Greece takes, its default, or potential exit from the Eurozone, is not likely to lead to the end of the U.S. economic expansion or the bull market. Greece is not another Lehman Brothers moment; simply put, Greece’s problems remain Greece’s problems. A default by Greece or even its exit from the Eurozone will potentially have limited ripple effects given the years that central banks, regulators, private business, and investors have had to prepare for this drawn-out, but inevitable, outcome.

The situation in Greece is a fluid one and could offer markets continued concern over the short run. But it is times like these that showcase the value of a sound, disciplined, and diversified investment strategy.

Westside Investment Management

Market Week: June 30, 2015

June 29th, 2015

The Markets

Bolstered by very favorable housing news and heightened consumer expectations, the economic news was generally good for the week ending June 26. Unfortunately, the markets, which had experienced gains the prior week, can be described as mundane at best. Both large-cap benchmarks dipped this week, while small caps were not immune to a slight skid as the Nasdaq and Russell 2000 closed in negative territory. Possibly influencing the weak domestic market returns is the situation involving Greece and its creditors, who have not yet reached an accord regarding terms of a bailout. However, on Friday Greek Prime Minister Alexis Tsipras called a referendum for July 5 on bailout terms proposed by the country’s creditors as deadlines loom.

Market/Index

2014 Close

Prior Week

As of 6/26

Weekly Change

YTD Change

DJIA

17823.07

18015.95

17946.68

-0.38%

0.69%

Nasdaq

4736.05

5117.00

5080.51

-0.71%

7.27%

S&P 500

2058.90

2109.99

2101.49

-0.40%

2.07%

Russell 2000

1204.70

1284.66

1279.79

-0.38%

6.23%

Global Dow

2501.66

2565.76

2577.80

0.47%

3.04%

Fed. Funds

0.25%

0.25%

0.25%

0%

0%

10-year Treasuries

2.17%

2.26%

2.47%

21 bps

30 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· The housing market continues its upward trend as existing home sales in May rose 5.1% to 5.35 million, according to the National Association of Realtors®. New home sales also were up 2.2% in May, as reported by the Census Bureau. Compared to April, the median existing home selling price jumped 4.2% to $228,700, however new home prices dropped 5.1% from $297,300 to $282,800.

· According to the Census Bureau advance report, orders for manufactured durable goods (products intended to last three years or longer, such as appliances, trucks, aircraft, and computers) fell 1.8% in May–the third such decline in the last four months. Nevertheless, excluding transportation equipment, new orders actually rose 0.5% in May, possibly signifying some positive movement in the manufacturing sector.

· The third estimate of the gross domestic product for the first quarter (based on more complete source data) revealed that the economy wasn’t quite as bad as initially projected. According to the Bureau of Economic Analysis, first quarter real gross domestic product–the value of the production of goods and services in the United States–decreased at an annual rate of 0.2% (compared to the previous estimate of -0.7%). The improved GDP projection reflects stronger consumer spending, increased inventory, and greater exports than first estimated. All in all, the more favorable report could be a precursor to a stronger economy in 2015.

· Consumers had more money to spend and invest in May and they did just that, according to the Bureau of Economic Analysis. Compared to the prior month, personal income increased $79.0 billion, or 0.5%, while consumer spending increased to $105.9 billion, or 0.9% ahead of April.

· While claims for unemployment insurance are still at historic lows, both the number of new claims and the total number of claimants receiving unemployment insurance ticked higher for the week ending June 20. Initial claims increased by 3,000 from the previous week’s revised level, as did the number of unemployment insurance claimants, which grew from 2.225 million to 2.247 million–an increase of 22,000.

· Consumers are as confident in the economy as ever, according to results from the University of Michigan’s latest survey of consumers. The index of consumer sentiment for June increased by 6.0% to 96.1 compared to May and is 16.5% higher year-on-year. This is the largest and most sustained increase in economic optimism since 2004, according to the survey’s chief economist, Richard Curtin.

Eye on the Week Ahead

The stock market has been generally trending upward and will likely continue to do so with the Supreme Court’s decision to uphold Obamacare and a possible Greece/creditor resolution. New information on manufacturing may indicate whether that sector is ready to pick up steam. As jobless claims have increased lately, will there be more claimants again next week?

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Market Week: June 24, 2015

June 23rd, 2015

The Markets

The markets responded favorably following the Federal Reserve’s announcement that interest rates would not be raised next month. Both the large-cap Dow and S&P 500 closed ahead of last week. But the biggest weekly gainers were the Nasdaq, which gained 1.3%, and the Russell 2000, which closed the week 1.55% better than last Friday’s close. The national average for gas prices was $2.835–up $0.055 from last week. Gold finished the week up $21 from last week, selling at $1,200.20.

Market/Index

2014 Close

Prior Week

As of 6/19

Weekly Change

YTD Change

DJIA

17823.07

17898.84

18015.95

0.65%

1.08%

Nasdaq

4736.05

5051.10

5117.00

1.30%

8.04%

S&P 500

2058.90

2094.11

2109.99

0.76%

2.48%

Russell 2000

1204.70

1265.02

1284.66

1.55%

6.64%

Global Dow

2501.66

2566.43

2565.76

-0.03%

2.56%

Fed. Funds

0.25%

0.25%

0.25%

0%

0%

10-year Treasuries

2.17%

2.39%

2.26%

-13 bps

9 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

·
Economic activity has been “expanding moderately” according to the statement from the latest Federal Open Market Committee meeting. But short-term interest rates will remain as is, at least through the next monthly meeting. The FOMC noted that the “pace of job gains picked up while the unemployment rate remained steady,” there has been growth in household spending, and the “housing sector has shown some improvement; however, business fixed investment and net exports stayed soft.” Inflation continued to run below the committee’s longer-run objective (2%). Ultimately, the committee determined that the current federal funds rate is appropriate pending progress “toward maximum employment and price stability.” Before federal fund rates will be increased, the committee “would like to see more decisive evidence that moderate pace of economic activity can be sustained,” according to Federal Reserve Chairwoman Janet Yellen.

·
Initial claims for unemployment insurance fell to 267,000 for the week ending June 13, which is a decrease of 12,000 from the previous week. The advanced seasonally adjusted insured unemployment rate was 1.7% for the week ending June 6, while the total number of insured unemployment claimants was 2.22 million, a decrease of 50,000 from the previous week. Evidencing signs of consistent job creation, new claims have remained under 300,000 over the past 15 weeks–the longest such stretch since 2000, according to the Wall Street Journal. Nevertheless, “at 5.5%, we have an unemployment rate that still exceeds the (Federal Reserve) committee’s best attempts to estimate what is a normal unemployment rate for this economy,” according to Chairwoman Yellen.

·
The Federal Reserve reported on Monday that industrial production decreased 0.2% in May after falling 0.5% in April. Manufacturing output decreased 0.2% in May and was little changed, on net, from its level in January. Meager industrial production is likely due to weak exports and a relatively strong dollar, which could further strengthen if interest rates are raised later this year.

·
Housing starts dropped off in May, but the number of residential building permits soared according to the latest report from the Census Bureau. Privately owned housing starts (e.g., the actual start of construction of a new building) in May were 11.1% below the revised April estimate, but are 5.1% above the May 2014 rate. On the other hand, building permits for housing units were 11.8% above the revised April rate, and 25.4% higher than May 2014. This increase in anticipated new construction is cause for builder optimism according to the National Association of Home Builders. Their housing market index rose 5 points to a reading of 59 for June.

·
The Consumer Price Index rose 0.4% in May over April, which is its largest monthly increase since February 2013. According to the Bureau of Labor Statistics, the largest cost increase belonged to energy, particularly gasoline, which increased 10.4%. The index for all items less food and energy increased 0.1% in May following a 0.3% increase in April.

Eye on the Week Ahead

How will the markets respond to results of the FOMC meeting and Chairwoman Yellen’s speech? Will Greece and its creditors reach a bailout resolution? Throughout the second quarter of 2015, the housing market has been consistently trending upward. Will this week’s reports on new and existing home sales show continued growth?

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver);
Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Research Brief: Employment

June 10th, 2015

Broad-Based May Job Gains Highlight Economic Strength;
Rising Momentum Raises Potential of Fed Tightening

  • Hiring in May spotlighted a U.S. economy that is finding its footing and gathering momentum following the weather-induced lackluster results of the first quarter. With the jump in job creation last month and upward revisions to prior months, growth in U.S. payrolls is back on track to align with last year’s robust pace. Higher employment levels, evidence of a more substantial pace of wage growth and broadening economic strength are converging to keep the Federal Reserve on course to raise its benchmark short-term interest rate by the end of 2015.
  • EmploymentU.S. employers added 280,000 positions last month, including 262,000 new hires in the private sector. With these gains, total employment is 3.3 million jobs above the pre-recession peak. Not all employment sectors have contributed to the growth, however, as construction payrolls are still 1.1 million lower than their pre-downturn peak, but new residential and commercial projects have begun to pick up. Government and manufacturing jobs also face substantial deficits from prior levels, whereas education and health services expanded throughout the economic downturn, adding nearly 3.1 million positions. The shale oil boom lifted natural resources and mining staffing, but so far this year the sector has lost 68,000 jobs due to lower oil prices.
  • The unemployment rate ticked up to 5.5 percent last month, but the tightening in labor market slack over the past year is supporting the Federal Reserve’s intent to raise interest rates. While slack has been absorbed by the overall labor market, disparities between specific segments of the population have sharpened. The unemployment rate for 20- to 24-year-olds, for example, jumped to 10.1 percent last month, underlining the persistent difficulties young workers face in starting careers. At the other end of the age scale, older workers are remaining in the workforce longer to build retirement savings, as evidenced by growth in the labor force participation rate of the 65-years-plus segment and this group’s unemployment rate of 3.2 percent.
  • The continuing inability of the youngest parts of the population to find work and form households represents a source of untapped demand for rental housing. Despite the modest contribution from 20- to 24-year-olds, the U.S. apartment sector is nonetheless flourishing. Demand is growing, but with completions rising to 250,000 units this year, the national vacancy rate will increase 10 basis points to 4.8 percent.
  • Among the employment sectors that have far surpassed their prior peak, professional and business services payrolls are 1.6 million workers above the previous high point in U.S. employment. Further growth in payrolls, plus a greater contribution from financial services employment, is beginning to translate into more significant reductions in the U.S. office vacancy rate. This year, minimal completions and growing demand will slice the U.S. vacancy rate 80 basis points to 14.5 percent.

Source

Market Week: June 2, 2015

June 1st, 2015

The Markets

After experiencing positive gains the past few weeks, the short holiday week closed with all the major indexes experiencing losses. Both the S&P 500 and the Dow ended the week in the red, as did the small-cap Russell 2000 and Nasdaq, although each of the latter performed a little better than their large-cap peers. Favorable economic news may have driven the market decline in response to fears that the Federal Reserve would be raising interest rates sooner rather than later.

Market/Index

2014 Close

Prior Week

As of 5/29

Weekly Change

YTD Change

DJIA

17823.07

18232.02

18010.68

-1.21%

1.05%

Nasdaq

4736.05

5089.36

5070.03

-0.38%

7.05%

S&P 500

2058.90

2126.06

2107.39

-0.88%

2.36%

Russell 2000

1204.70

1252.22

1246.53

-0.45%

3.47%

Global Dow

2501.66

2627.85

2586.18

-1.59%

3.38%

Fed. Funds

0.25%

0.25%

0.25%

0%

0%

10-year Treasuries

2.17%

2.21%

2.13%

-8 bps

-4 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· Instead of a marginal gain as previously estimated, real gross domestic product decreased 0.7% in the first quarter of 2015 according to the “second” estimate released by the Bureau of Economic Analysis. This is in contrast to an increase of 2.2% in the fourth quarter of 2014. The downturn primarily reflected a deceleration in personal consumption expenditures and downturns in exports, in nonresidential fixed investment, and in state and local government spending that were partly offset by a deceleration in imports and upturns in federal government spending and in private inventory investment.

· While the headline for durable goods orders in April may be negative, underlying figures show reason for optimism. The advance report of new orders for manufactured durable goods decreased $1.2 billion or 0.5% to $235.5 billion, which follows a 5.1% gain in March. However, excluding transportation, new orders actually increased 0.5%, while orders for nondefense capital goods–a measure of business investment–rose 1.0% from the prior month.

· The housing market is on the rebound. The S&P/Case-Shiller 20-City Composite Home Price Index for March increased 1.0%, continuing the rise in home prices over the last 12 months. New home sales also gained 6.8% in April, according to the Commerce Department. This is 26.1% above April 2014. The median price of a new home, $297,300, is also up 8.3% from last year.

· The Conference Board Consumer Confidence Index®, which had declined in April, increased moderately in May. The index now stands at 95.4, up from 94.3 in April. Consumer sentiment also rebounded to close at 90.7, up from a mid-month low of 88.6, according to the University of Michigan Survey of Consumers.

· More people filed new claims for unemployment insurance in the week ending May 23. The advance figure for seasonally adjusted initial claims for unemployment insurance was 282,000, an increase of 7,000 from the previous week’s revised level (revised up from 274,000 to 275,000).

· For the fourth straight month, pending home sales rose 3.4% in April–up 14.0% year-on-year, far ahead of year-on-year final sales of existing homes, which are up 6.1% (following a decline of 3.3% in April).

· For the week ending May 22, the Energy Information Administration’s weekly report noted that U.S. commercial crude oil inventories decreased by 2.8 million barrels from the previous week. Yet at 479.4 million barrels, U.S. crude oil inventories are at the highest level for this time of year in at least the last 80 years. The national average retail regular gasoline price increased for the fifth week in a row to $2.744 per gallon on May 25, 2015, $0.030 per gallon above last week but $0.900 under a year ago.

Eye on the Week Ahead

The week kicks off with the Bureau of Economic Analysis report on consumer income and spending. There are also major updates in manufacturing, housing, and international trade. Business production will be in the news as well with the ISM Manufacturing Index and the productivity and costs report.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy
Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.