Last Wednesday, we pointed out that the economic data coming in wasn't exactly painting a picture of an increasingly robust economy that would warrant the Fed tightening rates.
Last Thursday, we learned that initial jobless claims rose again in the last week of February to 320,000, significantly above expectations of 295,000. We also learned that U.S. factory orders fell 0.2% vs. an expected increase of 0.2%. Friday we received impressive headline jobs data, but that didn't exactly jibe with much of the rest of what we are seeing in the economy, and upon a closer look, the fall in the unemployment rate was driven more by people leaving the workforce than by new jobs, and those newly filled jobs were skewed toward lower-paying industries.
In fact, yesterday The Wall Street Journal ran an article titled "Recession's Impact Lingers for Many States," which pointed out that 30 states are still below their peak, pre-recession tax revenue receipts. The states that are actually above their last peak include North Dakota and Texas, which are likely to suffer going forward with the impact of plummeting oil prices. We've also seen U.S. GDP expectations for Q1 tanking, with many forecasting in the 1.5% range -- which, given the increasingly soft data coming in, seems wise. Prior forecasts were north of 2% at the beginning of the year.
Additionally, inflation expectations remain firmly muted, with yields indicating that investors expect U.S. consumer prices to rise in the neighborhood of 1.7% a year for the next 10 years, dropping from 1.9% just last week -- more of that dropping price thing. In addition, consumer credit growth is moderating, auto sales appear to be topping out and the Case-Shiller 20-city price index shows home price inflation has slowed to 4.5% year over year from 13.4% last year. So far, nothing screams out a need for tightening, particularly in light of the de-facto tightening resulting from the rising dollar. In fact, if the Fed did tighten in June, it would be the first time in the past 30 years that it has done so with a rising dollar. We do see tightening also occurring on the fiscal side where the federal deficit is shrinking significantly.
The euro has dropped below $1.06 for the first time in about 12 years and is down around 33% from its highs against the dollar, last seen in April 2008, and down around 12% since the beginning of the year.
As the ECB gets cranking on its 10-year sovereign debt purchases, yields have once again hit record lows yesterday in Germany, Belgium, the Netherlands, Italy, Ireland and Spain. The 10-year U.S. Treasury rate at 2.2% is over 9.5x the 10-year bund, a phenomenon never before seen. With the U.S. one of the few places to get any kind of yield on sovereign debt, it is unlikely that dollar strengthening will cease. So not only do foreign investors get better yields in the U.S., the dollar is most likely strengthening against their currencies, jacking up returns even more.
Diverging monetary policies are continuing to affect domestic equity markets, as we see the U.S. materially underperforming Europe and Japan in 2015, which is a complete reversal from 2014. Monetary policy clearly continues to dominate equity markets post-financial crisis. We believe this is likely to continue further into 2015, making international market indices more attractive. Investors can access these markets easily through ETFs such as the relatively new Recon Capital DAX Germany (DAX), iShares MSCI France Index (EWQ) or MAXIS Nikkei 225 Index ETF (NKY).
Earlier this week, two titans, Qualcomm (QCOM) and General Motors (GM), announced plans to repurchase shares of their own stocks. They join the ever-growing ranks of such companies, including Apple (AAPL), IBM (IBM), Exxon Mobil (XOM), Cisco Systems (CSCO), Intel (INTC), Home Depot (HD), Microsoft (MSFT) and more S&P 500 companies than you can shake a stick at. The corporate view on such programs is to keep shareholders happy by improving earnings per share (EPS) through reduced outstanding shares.
General Motors took the step to quell a potential proxy fight with an initial share repurchase program of $5 billion coupled with a 20% increase in its quarterly dividend, which will put the company's dividend yield around 4%. In the future, the company has pledged to return all excess free cash flow to shareholders. While we believe this is a good move for the company's existing shareholders, we think the stock is currently rather richly priced and are concerned to see that EPS on an annual basis has consistently been falling; as of December 2014 it was $1.65, which is 35% of its December 2011 high of $4.58.
Qualcomm shares rose 3.5% after it announced it will buy back up to $10 billion of its own shares within the next 12 months and will increase dividends by about 14%, resulting in a yield of around 2.6%. The company has authorized repurchases of up to $15 billion overall and intends to finance the capital returns primarily by issuing debt. While General Motors' EPS has been falling year over year, Qualcomm has been rising since its 2009 lows. However, shares of the company have been taking a beating in the past year, down over 21% by the end of January 2015 from their June 2014 highs, but have regained significant ground to sitting down around 10% from those highs.
Now this is where the dichotomy of two authors becomes evident. While Hawkins sees Qualcomm shares as reasonably priced, Versace is looking at the bumped-up annual divided against historical peak and trough dividend yields. Keeping in mind that Qualcomm is becoming a "dividend dynamo" thanks to its IP licensing business, even after discounting those historic yields, Versace sees comfortable upside to $83-$85 over the coming 12 months, with modest downside from current levels. That said, we do expect market volatility, and in such instances it pays to wade in slowly, building ones position opportunistically.