Today, much of the market is keeping an eye open for events unfolding across the pond as Germany and Greece play a global game of chicken.
If you look at the history of Greece, it is no stranger to sovereign debt crisis. Its economy had contracted by 26% by the end of 2013, with the public sector accounting for 40% of GDP. It is a veritable economic disaster that simply cannot continue like this. Germany, on the other hand, has the largest trade balance in its history and an unemployment rate half that of the Eurozone as a whole, thanks in part to the exchange-rate suppression effects of countries like Greece in the Eurozone.
How this whole thing plays out over the coming weeks, months and years is anybody's guess. It really comes down to the dynamics of a group of bureaucrats all trying to negotiate for the best outcome for their own constituency. Investors experiencing a year of volatility should look for opportunities when they arise while being cautious of taking major positions that depend on a particular outcome with respect to political events ... as they can easily evolve in a very different manner from the consensus viewpoint.
One such opportunity for the long run is with Qualcomm (QCOM), a longtime favorite of Versace's, who recently explained to Charles Payne during a Fox Business special at last week's World MoneyShow in Florida, "Why buy the gun when you can buy the bullets?" For Versace, Apple (AAPL) is more the gun when looking at the explosion in mobile technology, while Qualcomm is all about the bullets, providing a plethora of technologies that make the mobile revolution possible. Monday, Qualcomm announced it had agreed to pay China a fine of $975 million to end a 14-month government investigation into anti-competitive practices, resolving a long-running dispute with regulators.
Our appreciation for Qualcomm, however, isn't an endorsement of strong economic growth overall, as we see warning signs aplenty. One canary in the economic coalmine could be air travel. American Airlines Group (AAL) reported yesterday that in January its capacity declined 0.2%, while its load factor (the percentage of seats filled) also fell, down 2.1% year over year. Southwest Airlines (LUV), Hawaiian Airlines -- a subsidiary of Hawaiian Holdings (HA) -- and United Continental (UAL) did see traffic uptrends. This has us scratching our heads and wondering if American Airlines is a portent of things to come.
Despite all the talk, the 2014 GDP growth rate will likely end up being between 2.1% and 2.4%, still materially below the long-term average of 3%. Recently, both retail sales and durable-goods orders failed to show any solid signs of acceleration. Many are still in shock that December retail sales actually dropped during the holiday season. Others, some of whom are banking on the drop in oil prices to spur spending, are wondering how soon and how fast it will get better.
Looking at several indicators, the picture remains a tad blurry. The Baltic Dry Index (see chart below), which measures the demand for shipping capacity vs. the supply of dry bulk carries, has reached an all-time low of 554, significantly below its previous record low of 663 on Dec. 5, 2008, in the depths of the financial crisis.
Looking at the Cass Freight Index (see chart below) for shipments, which serves as a good indicator of national shipping activity, we still find sufficient cause to be skeptical that the domestic economy is ready to accelerate.
What we do see are signs of tightening in the labor market, although as we mentioned last week the quality of jobs isn't exactly stellar. However, the tightening here coupled with the uptick in hours worked means businesses will be facing pressure on margins. Also remember, the upward minimum-wage moves also start to weigh on margins. Warning signs for slowing global demand -- see recent PMI and ISM data -- may make businesses hesitant to increase capacity, putting downward pressure on improvements in the labor market. Meanwhile, the Federal Reserve continues to forecast material improvements in the domestic economy, but its track record is about as impressive as Hawkins' estimates on the required number of Home Depot (HD) trips for her weekend home improvement projects.
To be honest, both face similar pressures that affect accuracy, including overestimating ability and underestimating time for completion. The Fed faces a pressure bias to overestimate growth, as underestimating could well become a politically undesirable self-fulfilling prophecy while Hawkins' eternal optimism that this time she'll have figured it out just right ensures consistent underestimation of project complexity relative to acquired skill set -- she's forever punching above her weight class.
Despite our belief that the U.S. will not experience the kind of growth the Fed forecasts, we do think it is likely to continue to outperform many of its G20 counterparts and will see the dollar appreciate materially against many of the other major currencies. With all the central bank and sovereign debt machinations, volatility is likely to remain heightened, which makes ETFs such as AdvisorShares Gartman Gold/Euro (GEUR, which gives investors exposure to gold against the euro) or AdvisorShares Gartman Gold/Yen (GYEN, which gives investors exposure to gold against Japanese yen) attractive for those investors seeking to combine potential flights into the safety of gold coupled with any potential dollar appreciation.