Stay focused on the fundamentals

Posted by on Jan 26, 2015

The European Central Bank finally announced the beginning of its version of quantitative easing last week, causing global stock markets to rise, the euro currency to fall to an eleven year low v. the US dollar (plan your trips now!) and bond market yields to fall to all-time lows…with the 10 year Swiss treasury note even dropping to negative yields.

Our markets put together a positive week-over-week result after the dust settled – and before the snow started. Oil prices were lower again – though settling at levels we’ve seen recently.

Gold and silver have risen since year-end and have been getting touted again as a “safe haven” by the usual suspects who have been promoting them all along during the bear market the metals have been in since 2011. It’s important to remember that, contrary to the myths around them, these are simply commodities. And, like all commodities, they trade primarily on supply and demand and are also subject to sharp, sentiment-driven swings. All the factors we’re hearing about why to buy gold and silver today are pretty much the same as when they were getting hammered…

With all the volatility and confusion in the markets recently, I thought a look at basic investing fundamentals would be helpful to provide a perspective.

US economy

Short story – the fundamentals driving our economy haven’t changed. Monetary policy remains loose, in spite of ill-advised rhetoric to the contrary, tax rates aren’t going up and our entrepreneurs are still innovating.

Contrary to what seems to be a highly misguided consensus view, our manufacturing sector is doing quite well – and is definitely not withering away. Dr. Mark Perry notes that, according to a recent report by IndustryWeek ranking the 500 largest publicly traded US manufacturing firms, that the revenue of just these companies would make it the third largest economy in the world! Further, based on their projections, it appears that 2014 profits for the US manufacturing sector will set another new record high. If that’s withering, I’m a big fan.

Job openings rose to their highest level in nearly 14 years at the end of November, according to the Labor Department. So, if, as some suggest, falling energy prices were really so bad for the economy, why has employment growth then been accelerating since oil prices started falling last summer?

The University of Michigan released a report showing consumer sentiment at its highest level in more than a decade, thanks to our currently low gasoline prices and job gains. This has already translated to record car and light truck sales last year and this year is off to a fine start in that sector as well.

From the big picture view, the World Bank, while lowering global growth forecasts somewhat, said that the lower oil prices have helped our recovery by giving our consumers more money to spend. This caused the bank to raise its US growth projection to 3.2% for this year.

About the oil price

The new Saudi king has said he’s maintaining his country’s oil policies – whatever that means. However, Abdullah al-Badri, the Secretary-General of the Organization of the Petroleum Exporting Countries (OPEC) has also said, “Now the prices are around $45-$55 and I think maybe they reached the bottom and will see some rebound very soon.”

Trilby Lundberg, publisher of the twice monthly Lundberg Survey of gas station pricing – a service that’s been around since the 50s – seemed to reinforce that view when she said, “The street price crash is either coming to an end or is already at its bottom.” Lundberg said. She bases that on the data showing the drop in pump prices was less steep this last time than it had been in previous periods and that the price many wholesale customers paid for gasoline rose in the past 10 days.

Based on my daily market tracking, that leveling that both refer to seems to be happening. By the way, bottoming is not synonymous with turning higher…

Investing sectors

There’s a good reason why stock valuations have risen and that’s due to the continued historically low interest rates. The yield comparison provides a natural tailwind for stocks.
According to S&P Capital IQ, 51% of the S&P500 companies now have a dividend yield higher than that on the 10 year US Treasury note. Relative to bonds, stocks may be about as cheap as they’ve ever been. This doesn’t hardly ever happen but, when it does, history says stocks end to do very well.

Noting that assets like stocks are valued based on their expected cash flows v. the risk-free rate offered by US Treasuries, Convergex chief market strategist Nicholas Colas wrote that with Treasury yields “falling like a stone, discount rates are lower than all but the most crisis-ridden periods of the last 100 years. So yes, the US stock market carries a high multiple to earnings relative to history. But that’s not magic or mania; that is just math.” That’s right, Nick.

When you consider that we’re still a net importer, rather than exporter, of oil and gas, it becomes clear that there are going to be a lot of industries that benefit from low oil prices including airlines, railroads, truckers, chemical and other industrial companies. The money that consumers save on energy costs likely won’t show up in earnings immediately, but eventually will start filtering out into the market.

Consumer-staples companies, ones that sell everyday consumer goods, and the consumer-discretionary sector, made up of companies such as retailers that most directly benefit from stepped-up consumer spending, are expected to show earnings growth, even in spite of their exposure to foreign currencies. Jerome Peribere, the CEO of Sealed Air, which makes packaging products, said, “The low oil costs will help us offset negative currency swings.”

The technology and industrials sectors, which also do a great deal of business overseas, also are expected to show strong growth. So too is the materials sector, which includes many companies that are exposed to weakening commodity prices.

Let’s not forget that energy infrastructure continue to enjoy healthy growth and, in my opinion should continue to expand over time.


The major beneficiaries of lower oil prices and the rising dollar are us – the US consumers. We’ll be able to use the money we save on gas and imported goods to buy more elsewhere.

BlackRock chair and CEO Larry Fink observed that he’s surprised “how the narrative has turned everything to the negative…All the actions I see will lead to a higher equity market by year-end.”

The fundamentals would seem to support what Mr. Fink says.



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Past performance is not indicative of future returns.

Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.

Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.