November 10, 2014 (Chinavestor) This is a 3 month delay release of our monthly Newsletters. Receive 12 issues by signing up for Basic Membership on the Premium page.
We argued in the latest Newsletter that we didn’t see a reason to alter an overall bullish sentiment for the rest of the summer. We continue to believe in an overall positive market sentiment for August and the fall for the same reason as before. There is not any major development on the horizon that would stop overall bullish momentum. There are going to be hiccups on the way, no doubt about that. Such derailment was evident in the last week of July when the Dow recorded the biggest weekly loss since January. But the overall trend is expected to be modestly bullish due to prolonged low interest rates and lack of major policy change from the FED.
Let’s take a look what has happened in last month. The Dow Jones Industrial Average fell 1.6% in July, erasing most of the earlier gains of the year. The index is up a mere 0.7% YTD.
The NASDAQ composite fared better, falling just 0.9% in July. The index is still up 5.5% YTD, a positive development. Interestingly, the Hang Seng Index surged 6.8% in July and is now back in the black for the first time in 2014. The China ADR Index, tracking the performance of NYSE and NASDAQ listed Chinese stocks, was in-line with the Hang Seng up until the last week of July when a broad sell-off in New York took a toll on the index. All told, the China ADR index advanced 4.4% in July and is up 1.7% YTD. Historically low valuation and strong earnings helped propel Chinese stocks in Asia and some of that momentum carried over to the NYSE and NASDAQ listed Chinese stocks as well.
The month of July has been historically a low profile month for traders, reflected in low volume and lack of major price changes. Even though July is a month when earnings season is back in town, traders go on holidays and equities don’t usually react as vividly as in October or in January. This low profile trading doesn’t change except when abrupt economic data appears. And this was exactly the case this time in July.
US economic growth for the second quarter came out to 4%, far better than expected after a 2.1% decline for the first three months of the year. Equity markets don’t always like good economic news though. Sound growth usually results in interest rate hikes and other tightening measures. Such reaction was expected from the FED but reaction was muted from the FED at best. FED chairman Mrs. Yellen pointed to disappointing jobs growth in July, saying that there is a significant slack in American labor market warranting a prolonged low interest rate environment. Low interest rates were the mantra stocks needed and while major indexes haven’t recovered fully yet, my anticipation is that they will. And this ties back to the beginning of this Newsletter where we argued that lack of major policy change is going to keep equity prices high.
July is also a time when second quarter earnings announcements start to come out. Earnings are always a mixed bag, some companies do better than others, but altogether a catalyst for growth stocks. Just because inflation exists, companies with no growth report higher sales and profit numbers due to increasing product/services prices. This is why earnings season is a potential catalyst even for virtually no growth companies.
Other factors in the field driving stock prices relate back to the FED. The hotly debated quantitative easing took another cut in July. The FED cut treasury and asset backed securities buying from $35 billion a month to $25 billion a month starting in August. That’s $300 billion a year, a significant cut from the $1 trillion a year when the program started out. Remember, low interest rates combined with quantitative easing have started to lift depressed stock prices and any change in the mix is expected to have an adverse effect on the improvement.
Good news is that virtually all economic sectors show improvement, from the labor market to housing and consumer confidence just to name a few. Curtailing the quantitative easing by $10 billion a month will not spoil the party on Wall Street. This explains our overall bullish sentiment for the rest of the summer and the fall.
When it comes to the labor market, July’s 205,000 new jobs were blown out of proportion. Many journalist and the FED argued that this number is far worse than forecasted 235,000 thus warranting a low interest rate environment for the rest of the year. This we find just as an excuse to keep interest rates low. We think that any number above 200,000 a month is very healthy and should not be a concern. In fact, July’s 205,000 new jobs is higher than the average for all of 2014 and is in-line with the overall trend of 200,000 or more a month required to make up for all jobs lost in the 2008-2010 melt down. Altogether we see a creation of 9.19 million new jobs since January 2010 vs. a 9.03 million jobs loss in 2008-2010.
Last week of July gave us an opportunity to find stocks that fell too hard and present the best upside potential. We looked at all 30 Dow components for the July 21—August 1, 2014 period and found that most Dow components fell with some exception. All told, only two Dow components managed to stay in the black for the second part of July. These are Intel Corp. (NASDAQ:INTC) and Hewlett-Packard (NYSE:HPQ). Obviously, tech stocks fared better than financials and industrials. Caterpillar (NYSE:CAT) fell 8.8%, the most among all 30 components with United Technologies (NYSE:UTX) being second. UTX was followed closely by American Express (NYSE:AXP) and The Coca-Cola Co. (NYSE:KO). All these “big losers” fell hard following disappointing earnings earlier the month, and as such a quick rebound is unlikely.
Wish you successful investing, Blaze Fabry