SCM Market Strategist Journal

The SCM Market Strategist Journal blog is economic data and analysis used by Simpson Capital to present our opinion of the current investment environment for clients and the general public.

Components

market strategy commentary
US economic forecast surveys
industrial sector analysis
quarterly newsletters
special reports
major market indices tables

It is updated weekly so bookmark this spot and return regularly for the latest market information.

The economic forecast surveys are gathered quarterly by SCM from public sources from institutions such as the Federal Reserve and commercial banks.The industrial sector survey is compiled from personal observations and sources such as Charles Schwab, Morningstar and Standard and Poor’s. The newsletters are written for our client’s benefit and mailed to them quarterly.

SCM uses traditional analysis on the economic data and seeks to develop an outlook for various asset classes in terms of expected risk and return. SCM does not use technical analysis as there is very little empirical evidence published to support its validity.

Wall Street Braces for Expected Clinton Adinistration

Published on October 26, 2016 by David Simpson, CFA

An investment advisor’s duty is to form an opinion about the future to make decisions in the present. However unpleasant this task appears, given tenor of the presidential race, we’ll soldier on. White House policies modestly influence capital markets in the short-term, but have little effect on economic fundamentals in the long-term.

Hilary Clinton has the best chance to win the White House, despite her disfavor with the general public. The House will probably remain GOP. The Senate is a toss-up but neither side will be able to gain a filibuster-proof majority. Thus, a gridlock scenario lends itself to a terrific bipartisan cooperation opportunity.

Pursuing a divisive agenda with bitter debates only makes Clinton’s reelection chances worse. Her best bet is to get substantive things done in her first term. Areas of consideration include narrowing the deficit, fixing the tax code, repairing infrastructure, rebuilding the military, reforming immigration and shoring up entitlement programs.

The good news is Speaker Ryan is eager to tackle the big problems and Senate leaders Schumer and McConnell are action-oriented, in touch with their base.

The finance sector will probably be hit with further regulatory pressures but the big banks won’t be broken up. Insurers and ‘price gouging’ bio-tech firm will experience pain from needed healthcare reform, but hospitals will feel fine with an expanding patient base.

Fossil fuel firms will fizzle in light of Clinton’s alternate energy mandates while solar and electric cars will have their day in the sun through subsidies. Industrials benefit from a infrastructure push, though Obama’s plan didn’t work.

One big issue which won’t see much progress is tax reform, due wide differences in the parties’ world view. We may see the hedge fund manager’s ‘loophole’ closed, but not much more.

Entitlement reform will also have a difficult time working through each side’s differences, but the yawning deficit could force their hand.Trade may be the surprise, although she has tacked away from reform. A wide swath of the electorate stands to gain.

Fortunately, the underlying economy is in good shape with stable labor markets and prices while the consumer continues to spend. No matter what happens, we expect markets to be OK for 2017.

4Q Economic Forecast Survey Highlights

Published on October 19, 2016 by David Simpson, CFA

SCM’s Quarterly Consensus Survey, conducted at the beginning of the fourth quarter. It found real GDP forecast consensus slide further to 1.7 percent for 2016 and 2.3 for 2017. The continued below average GDP growth is disappointing. On the other hand, chances of recession are still low due to strong consumer spending and solid labor markets.

Production

Industrial production is expected to dip –0.8 percent in 2016 and 2.0 percent in 2017. Capacity utilization estimates trended slightly lower to 75.6 percent for 2016 and 76.6 percent for 2017, not helpful to capital spending on Tech products.

Positive housing trends remain in place. Starts are set at 1.2 million units for 2016, and may rise to 1.3 million units in 2017. Unemployment rate forecasts held steady at 4.8 percent in 2016 and should be 4.6 percent in 2017, giving a boost to the recovering housing market and, along with plummeting gas prices, buoying auto sales.

Inflation

Inflation expectations remain low, held down by soft energy prices and restrained global demand. Below average money supply turnover should keep a lid on prices near term. Continued easy monetary policy is contingent on low inflation. One more interest rate hike is expected in 2016.

CPI estimates dipped to 1.4 percent for 2016 and 2.3 percent for 2017. Other indices, such as GDP Price Deflator and Personal Consumption Expenditures (PCE), show a similar path, trending toward continued moderate inflation.

Interest Rates

The yield curve will elevate but retain a flat shape in 2016, with T-bill rates rising to 0.53 percent and 0.8 percent in 2017. Ten-year Treasury yield expectations are 1.7 percent in 2016 and 2.0 percent in 2017.

4Q Industrial Sector Summary

Published on October 19, 2016October 19, 2016 by David Simpson, CFA

The 4Q Industrial Sector Summary is a highlight of the sector’s performance and outlook.

US equity indexes are within the summer’s range. A bullish rotation within equities may be taking place as third quarter earnings season are announced. Expectations have been downgraded over the past couple of months. Thus, it sets up the likelihood of a good quarter relative to expectations.

However, some improvement was present in economic data and higher inflation readings. Accordingly, this leaves the possibility of tighter monetary policy from the Fed and even other central banks.

Winners

The financial-services sector remains somewhat undervalued and recently traded at a reasonable valuation while awaiting a stricter Clinton regulatory environment but holding out hope for rising interest rates.

Firms with exposure to the smart phone market have faced some tough times, but the strong secular shift away from feature phones and toward more-advanced smartphones is still intact.

Losers

Telecom is fairly valued at price/fair value. It is somewhat immune to geopolitical changes and Brexit will have little effect on cross-border transfers of voice or data.

As central banks around the world continue to experiment with ultra-loose monetary policy, utilities continue to hold their place as tone of he best-performing sectors in 2016.

On Par

Consumer Discretionary, Consumer Staples, Energy, Healthcare, Industrials, Materials and Real Estate are expected to match market pace.

Quarter End Market Happy Dance

Published on October 1, 2016October 10, 2016 by David Simpson, CFA

US equity markets shook off a rough patch to finish October in the black. Also, third quarter end market results also showing similar gains after recovering nicely from Brexit, The Dow Jones Industrial Average was up 2.1% while the S&P was up .8%. Small caps were also up in the quarter with the tech laden Nasdaq up 0.8%.

The ten year Treasury finished at 1.61%. Crude oil settled in at $48.24 / barrel and gold ended at $1,313/oz. The dollar bought 101.34 yen while the euro cost $1.12, both strengthening further against the dollar. The UK pound closed at $1.29 up slightly against the dollar.

For the third quarter, the Dow Jones Industrial Average was up 2.1% and the S&P 500 up 0.8%. The Nasdaq was also up 0.8%. .

The results indicate the Brexit was not sustainable and fears of a financial meltdown are premature. The stock markets seem to be saying recession is still a few quarters out.

For more insight to markets, visit our home page.

Quarter End Market

Gold Investment TV Pitches: Just Say No

Published on September 23, 2016October 2, 2016 by David Simpson, CFA

Investing in gold is not wise for a non-professional’s portfolio. TV commercials targeting unsuspecting investors, particularly senior citizens, promote an asset class where only professional investors should trod. And most professionals aren’t into gold investment due to gold/silver’s lack of liquidity and riskiness.

False Claims

Throughout history gold has been held in high esteem and promoted as a hedge against inflation and world collapse. The gold peddlers warn about the troubling nature of fiat paper money, not backed by anything real. They claim paper money isn’t be worth anything if it can printed in unlimited quantities.

While they may have a point on the downsides of paper money, it does not lead to gold investment as the answer. Other asset classes such as stocks, bonds cash and real estate have more favorable risk/return profiles. Let’s take a further look at gold.

Poor Returns

In his book Invest with the Fed, Robert R. Johnson, wrote gold trails equities in all Conditions, despite its celebrated popular status as a hedge against inflation. He says, “From 1972 through 2013, common stocks returned 14.68 percent in falling rate environments while gold futures returned 7.85 percent. In rising rate environments, stocks returned 8.47 percent while gold only returned 4.86 percent. When rates were flat, stocks provided a gain of 10.61 percent and gold returned 8.61 percent.”

Gold not only doesn’t yield cash flows like stocks. It has a negative return because it costs money to store and insure it. It is very difficult to value. Its price is set by supply and demand instead of discounting cash flows. This feature makes it difficult to predict and subject to irrational factors such as fear and greed.

No Current Income

Retirees, dependent on an income to cover expenses, should avoid investments which don’t yield current income. Also, the compounding factor of normal investments, earning interest on the interest, is missing.

There aren’t many uses for gold investment. It’s either made into jewelry or coins or locked up in a safe. Precious metals has to be constantly hidden from thieves. From a tax standpoint, it is not wise to hold it in an IRA because it will be taxed at ordinary income rates.

If you are still unconvinced, the best way to get gold exposure is to buy an ETF (exchange traded fund) or buy stock in a gold miner with cash flow.

As you can see from an investment standpoint, gold investment has

poor long-term returns
zero current yield
is inefficient

Besides, those past -their-prime celebs aren’t experts and only appealing to your heart. For more on stocks and bonds investing and more reasons for avoiding gold investment, visit our Simpson Capital Management website

Markets Walk Back July Record Highs

Published on July 30, 2016October 1, 2016 by David Simpson, CFA

Amid the political conventions of the last weeks, the markets hit record highs but slid back to end the month, still in favorable territory.. Economic news was mixed and political developments didn’t seem to have a material effect.

Record Highs

The Dow was up 2.8% for July after reaching a record 18,622 on July 26. The S&P was up 3.6% for the month. These highs were in contrast to the 20% plunge in oil prices. This is seen by some as bearish on the stocks.

Real GDP was up a mere 12.2% for the second quarter which was better than the prior quarter’s .8% but no where near the historical 3.2%. The short fall from expected 2+% was blamed on inventory liquidation and weak oil prices.

Modest Sales

Retail sales were healthy but businesses are not spending. Its cheaper for them to hire workers and then firing them when things slow than investing in expensive equipment and then having it sit idle.

Odds slightly favor the Dems retaining the White House, GOP holding onto the House and the Senate is a tossup. Implications for the economy and markets are not favorable but recession is not expected in the nex year. The Fed may hike rates in December but a lot could happen between now and then.

For more information on markets, visit our Home page.

3Q SCM Market Review

Published on July 30, 2016August 10, 2016 by David Simpson, CFA

Here the latest client newsletter. For a PDF version, click here Newsletter16Q3.

Newsletter 16Q3 Newsletter 16Q3p2

3Q Forecast Survey Summary

Published on July 19, 2016August 2, 2016 by David Simpson, CFA

SCM’s Quarterly Consensus Survey, conducted at the beginning of the third quarter, saw real GDP forecast consensus slide further to 2.2 percent for 2016 and 2.3 for 2017. The continued below average GDP growth is disappointing but chances of recession are still low due to strong consumer spending and solid labor markets.

Industrial production is expected to rise 0.1 percent in 2016 and 2.0 percent in 2017. Capacity utilization estimates trended slightly lower to 76.2 percent for 2016 and 76.7 percent for 2017, spurring capital spending on Tech products.

CPI estimates dipped to 1.3 percent for 2016 and 2.2 percent for 2017. Other indices, such as GDP Price Deflator and Personal Consumption Expenditures (PCE), show a similar path, trending toward continued moderate inflation.

The yield curve will elevate but retain a flat shape in 2016, with T-bill rates rising to 0.5 percent and 1.1 percent in 2017. Ten-year Treasury yield expectations are 2.0 percent in 2016 and 2.4 percent in 2017.

SCM Forecast Survey Summary

Series Name	15 Ann	16 Ann	17 Ann
Nominal GDP	17953.50	18554.75	19348.75
Nominal GDP Chg %	3.46	3.66	4.25
Real GDP	16433.66	16805.33	17222.00
Real GDP Chg %	2.44	2.18	2.34
Industrial Prod Index	107.30	106.00	108.10
Industrial Prod %	1.45	0.12	2.00
Capacity Utilization	77.90	76.15	76.70
Housing Starts	1.11	1.19	1.29
Total Vehicle Sales	17.43	17.33	17.06
Real Disposable Inc	12219.00	12572.00	12861.00
Real Dispos Inc Chg %	3.43	2.93	2.30
Unemployment Rate	5.10	4.80	4.56
Corporate Profits	1538.70	1424.10	1498.00
Corp Profits Chg %	-0.70	2.45	1.70
Consumer Price Index	237.05	240.60	245.95
CPI Chg %	0.24	1.26	2.24
GDP Price Index	109.63	111.03	113.05
GDP Price Deflator	1.02	1.45	1.90
Personal Consump Exp	109.30	111.00	113.00
PCE Chg %	0.58	1.20	1.94
PPI Chg %	-0.90	0.60	2.20
Crude Oil WTI	48.70	37.00	45.15
Prime Rate	3.32	3.60	4.20
Fed Funds Target	0.20	0.49	1.01
Treasury Bill	0.06	0.45	1.11
LIBOR 3 mo	0.31	0.69	1.12
2 Yr Treasury Note	0.69	0.71	1.14
5 Yr Treasury Note	1.52	1.13	1.43
10 Yr Treasury Bond	2.16	2.04	2.39
Aaa Corp Yields	3.91	3.95	4.27
Baa Corp Yields	4.99	5.16	5.50

Sources: BMO Capital, Congressional Budget Office, Federal Reserve, PNC Economics and Wells Fargo

3Q Economic Forecast Survey

Published on July 19, 2016August 2, 2016 by David Simpson, CFA

The following is a more detailed quarterly version of the annumal US forecast survey published above.

US Forecast Consensus

Series Name	Q1 16	Q2 16	Q3 16	Q4 16	Q1 17	Q2 17	Q3 17	Q4 17	15 Ann	16 Ann	17 Ann
Nominal GDP	18297.00	18481.75	18676.50	18881.00	19005.50	19217.00	19451.00	19641.00	17953.50	18554.75	19348.75
Nominal GDP Chg %	2.72	4.36	4.44	4.30	4.33	4.20	4.15	4.05	3.46	3.66	4.25
Real GDP	16590.66	16696.66	16836.00	16914.33	16872.00	16973.00			16433.66	16805.33	17222.00
Real GDP Chg %	1.86	2.70	2.52	2.52	2.13	2.15	2.05	1.95	2.44	2.18	2.34
Industrial Prod Index	105.35	105.70	106.25	106.70	105.60	106.20			107.30	106.00	108.10
Industrial Prod %	-0.12	0.32	1.97	2.30	2.45	2.20	2.25	2.30	1.45	0.12	2.00
Capacity Utilization	76.10	76.05	76.15	76.30	75.90	76.20	76.60	76.80	77.90	76.15	76.70
Housing Starts	1.13	1.16	1.20	1.23	1.28	1.31	1.32	1.59	1.11	1.19	1.29
Total Vehicle Sales	17.30	17.43	17.33	17.26	16.90	16.80	16.75	16.70	17.43	17.33	17.06
Real Disposable Inc	12466.00	12538.00	12607.00	12677.00					12219.00	12572.00	12861.00
Real Dispos Inc Chg %	3.53	2.76	2.56	2.50	2.25	2.30	2.25	2.30	3.43	2.93	2.30
Unemployment Rate	4.96	4.30	4.26	4.18	4.66	4.60	4.55	4.50	5.10	4.80	4.56
Corporate Profits	1513.00	1415.10	1432.50	1440.90	1466.40	1495.40			1538.70	1424.10	1498.00
Corp Profits Chg %	0.05	1.45	1.60	4.20	4.65	1.40	1.50	1.50	-0.70	2.45	1.70
Consumer Price Index	238.90	239.95	241.20	242.50					237.05	240.60	245.95
CPI Chg %	0.44	1.82	1.96	2.10	2.06	2.00	1.95	1.85	0.24	1.26	2.24
GDP Price Index	108.43	110.77	111.22	111.69	112.40	112.98			109.63	111.03	113.05
GDP Price Deflator	1.00	1.47	1.75	1.82	2.20	2.00	2.00	1.90	1.02	1.45	1.90
Personal Consump Exp	110.30	110.70	111.25	111.70					109.30	111.00	113.00
PCE Chg %	0.90	1.42	1.60	1.76	2.06	1.96	2.00	1.95	0.58	1.20	1.94
PPI Chg %	-0.10	0.00	0.60	1.70	2.20	2.30	2.20	2.20	-0.90	0.60	2.20
Crude Oil WTI	31.90	37.65	38.45	39.95	49.30	51.00	54.00	57.70	48.70	37.00	45.15
Prime Rate	3.50	3.52	3.62	3.77	3.75	4.00	4.00	4.25	3.32	3.60	4.20
Fed Funds Target	0.41	0.43	0.49	0.62	0.69	0.85	0.94	1.10	0.20	0.49	1.01
Treasury Bill	0.29	0.37	0.48	0.66	0.62	0.80	0.79	0.96	0.06	0.45	1.11
LIBOR 3 mo	0.62	0.64	0.68	0.84	0.92	1.08	1.16	1.33	0.31	0.69	1.12
2 Yr Treasury Note	0.73	0.58	0.67	0.85	0.90	1.13	1.17	1.36	0.69	0.71	1.14
5 Yr Treasury Note	1.21	1.01	1.08	1.21	1.25	1.40	1.49	1.56	1.52	1.13	1.43
10 Yr Treasury Bond	2.05	2.02	2.07	2.17	1.85	1.94	1.76	1.82	2.16	2.04	2.39
Aaa Corp Yields	3.93	3.75	3.90	4.10	4.19	4.30			3.91	3.95	4.27
Baa Corp Yields	5.31	5.00	5.15	5.25	5.42	5.48			4.99	5.16	5.50

Sources: BMO Capital, Congressional Budget Office, Federal Reserve, PNC Economics and Wells Fargo.

3Q Industrial Sector Review and Outlook

Published on July 18, 2016July 18, 2016 by David Simpson, CFA

The Brexit vote caught the market off-guard and though recovered nicely, Brexit left more questions than answers with resolution far in the distance.

Business in Britain will not come to a complete stop and the exposure of most US firms appears to be limited.

It’s too early to make sector changes so investors should stay diversified. Any realignment depends on the political decisions of UK and EU policymakers which are impossible to predict.

Sector Summary

S&P Wgt%	Name	Tilt	Comment
6.60	Energy	Market	Declining U.S. oil production over the next several quarters will help reduce global oversupply, but wont fix the imbalance before 2017. Reduced investment translates to output declines and helps markets rebalance. Energy sector valuations are high.
2.80	Materials	Market	Optimism continues to reign in Materials year to date, but investors are overestimating the sustainability of recent commodity price rallies, leaving the sector severely overvalued. The reasons for rallies differ, but won't stick.
10.10	Industrials	Market	Industrials outperformed the broader market since early February but remains undervalued. U.S. manufacturing data has turned slightly positive in recent months, while manufacturing across the rest of the world has been challenged.
12.90	Consumer Discretionary	Market	The market seems to be underestimating longer-term revenue growth and margin expansion opportunities in this volatile group as measured by relative PEs, especially with its healthy high-end consumer sentiment.
10.70	Consumer Staples	Market	Consumer Staples valuations have continued to trend higher over the past several months, leaving the sector slightly overvalued. In light of slowing growth prospects around the world, sluggish revenue growth are expected.
14.70	Health Care	Market	Market valuations in healthcare have improved over the last quarter. Strong drug launches and excellent rapidly progressing clinical data in specialty-care areas are supporting increased productivity at drug and biotech companies.
15.60	Financials	Over	Brexit effects on interest rates, currency exchange rates, asset price levels, and capital market volatility will likely be more material to earnings than problems caused by relocating operations out of the UK to EU countries.
20.40	Information Technology	Over	Overall, we view the tech sector as fairly valued though we continue to see opportunities in smartphone related vendors. Microsofts evolution will yield long-term success. When the chips are down, bet on capital equipment firms.
2.80	Telecom Services	Under	Brexit fears have pushed down most European Telecom stocks which is an overreaction. Telecom is somewhat immune to geopolitical changes and Brexit will have little effect on cross-border transfers of voice or data.
3.40	Utilities	Under	Utilities have kept its foot on the gas during the second quarter. The spread between U.S. utilities 3.6% average dividend yield and 1.6% 10-year U.S. Treasuries suggests utilities have a long way to run.