On Monday, the Nasdaq closed above 5000 for the first time since 2000, while the S&P 500 and the Dow Jones Industrial Average also reached new record highs, which would lead one to think that things are going pretty darn well. According to Chris Verrone of Strategas Research Partners, 70% of U.S. stocks are in an uptrend. In comparison, at the Nasdaq's previous March 2000 peak, only 25% of stocks were in an uptrend.
Unfortunately, outside the U.S., central bankers don't look like they are feeling quite as rosy as American equity investors. So far in 2015, at least 21 central banks have lowered their key interest rates. China surprised the markets with a rate cut over the weekend, after making a systemwide cut to bank reserves in early February. India cut its main interest rates just yesterday for the second time in less than two months, followed by Poland, which cut rates today. So much for a growing global economy, and our view is if the guys in the center of it all think the punch bowl needs to be spiked, perhaps we need to look deeper.
Last week, Fed Chair Janet-I'm-not-tellin'-Yellen reported the domestic economy is looking better -- not great, but better. We're wondering just what data she was looking at, because so far this week alone we've seen the following:
- Monday, we learned that personal income rose less than expected (0.3% vs. expectations of 0.4%), while personal spending came in below expectations (-0.2% vs. expectations of -0.1%) in January. That's two in a row where spending whiffed it.
- Markit Manufacturing PMI beat expectations, up from 53.9 to 55.1 vs. expectations of 54.3.
- ISM manufacturing index fell in February to 52.9 from 53.5, for the fourth consecutive monthly decline.
- ISM non-manufacturing index beat expectations at 56.9 in February vs. 56.5 estimates.
- Construction spending unexpectedly fell 1.1% in January.
- Six of the top seven auto manufacturers on Tuesday reported year-over-year sales increases in February, but all fell short of expectations.
- This morning we learned private-sector job creation for February was below expectations, with companies adding 212,000 positions vs. expectations of 220,000, while also dropping from the 250,000 in January.
- U.S. crude oil supplies rose to yet another record high last week, with crude oil stocks at their highest level since 1982 on a weekly basis. Stockpiles rose by 46,000 barrels during the week vs. expectations of a 1.8 million-barrel drop; keep in mind we've already seen operational oil rigs drop by about a third.
What about prior reports? From the economic data released during the month of February, 42 were below expectations (the aforementioned personal spending, construction spending, factory orders, retail sales, business inventories, housing starts, building permits, industrial production and capacity utilization) while only six beat expectations (including nonfarm payrolls, Case-Shiller home prices and Markit Manufacturing PMI). Kinda makes one wonder exactly what Yellen was looking at, let alone feeling good about.
Oh wait, there's the love! Turns out there is no lack of (at least) self-love in the markets, as companies last month announced a record $104.3 billion in planned repurchases, which is the most since TrimTabs Investment Research began tracking the data in 1995 and nearly twice the $55 billion from last year. To put that number in context, buybacks will amount to about $5 billion in purchases every day, which is about 2% of the value of all shares traded on U.S. exchanges, according to Bloomberg, which also estimates that earnings from S&P 500 members will decline by at least 3.2% this quarter and next, with full-year growth at 2.3% vs. 5% in 2014. With executive pay often linked to share price, it shouldn't come as a surprise that companies in the S&P 500 spent about 95% of their earnings on repurchases and dividends in 2014 ... oh, did we just say that out loud?
In the bond market, negative bond yields currently account for about $2 trillion of debt issued across Europe. Just this week, Germany sold five-year bonds at a negative rate for the first time. Why would anyone buy bonds with negative yields? The European Central Bank is set to begin rather large purchases of sovereign bonds in the coming months, which will likely push yields even lower. That could allow a negative-yielding bond to actually experience a capital gain as bond prices are pushed lower. The ECB's move is also likely to push the euro even lower against the dollar, and as we discussed at the opening of this piece, central banks around the world are lowering their rates, which devalue their currencies ... at least relative to currencies that aren't lowering rates, which right now is basically the dollar. All this is a surreptitious form of monetary tightening, of which we are sure the Fed is well aware.
Back in the U.S., this is becoming more and more a stock-picker's market, where getting the specific themes right is much more important than playing major averages. One such theme emerges from the increasing dissatisfaction with police conduct that has led to a presidential task force calling for increased accountability in the form of body cameras, among other technologies and community-strengthening efforts. One company at the forefront of this trend is Taser International (TASR), which is a Hawkins favorite that provides body cameras designed for police coupled with an upload/archiving system called Evidence.com, which protects the video and creates subscription-style revenue flows.
For those who prefer to avoid company specific risk, the health care sector is likely to remain relatively robust in the face of a strengthening dollar and benefits from the demographic trend of an aging baby boomer generation as well as the Affordable Care Act, assuming of course that today's Supreme Court hearing of King v. Burwell doesn't materially change its implementation. The iShares U.S. Healthcare ETF (IYH) provides a fairly low-cost way to access the health care sector while, ProShares Ultra Health Care ETF (RXL) is a two-times leveraged ETF for those who want to really ramp up exposure.
Those looking for direct stock plays on health care should consider HCP (HCP), a hefty dividend-paying REIT, whose shares Versace sees rebounding once the market realizes it will be some time before the Fed hikes rates. For those concerned with a potential market downturn, like Versace is, given the mismatch between the market valuation and real earnings growth (ex-that buyback mumbo jumbo), Turner Medical Sciences Long/Short Fund (TMSFX) could provide some downside protection relative to long-only options.