John Davidson's Economic Comments: Week ending Oct 13
For the second week in a row, many of the economic releases from the U.S. government have been AWOL due to the shutdown. Capital market participants took their cue from the rhetoric in Washington. Thursday, when a breakthrough appeared, the U.S. markets had the best one-day advance of the year. Evidence of a "synchronized global expansion" but no acceleration of growth were revealed elsewhere. Bond yields were mostly higher, but credit spreads narrowed on the week. The spread between U.S. and European oil prices widened; WTI fell and Brent prices rose. Metals commodity prices fell on the week. The U.S. dollar rose on expectations for a breakthrough in negotiations in Washington.
Perspective:
"Buy on the rumor, sell on the news" was the saying when I joined my first investment management firm in 1976. I suspect that the saying was not new then and it is not new now. It suggests that by the time the rumor becomes news, the public information is already reflected in the stock price. The process is incremental or analog, not digital or instantaneous. As more of the rumor is believed and rumor approaches news, the more that the stock price approaches the news price. If the rumor does not become news (because the rumor does not come to fruition) the incremental price change is reversed. One cost of this process is increased volatility of equity prices.
For now, the equity price changes are indicators of progress or lack of progress in Washington; until these issues are resolved, valuation and economic conditions have very little influence over equity prices. Even if the continuing resolution and debt ceiling issues are resolved, the increased volatility and uncertainty will have exacted its penalty.
Economic Releases:
In the U.S., the weekly Initial Jobless Claims surged to 374,000 in the week of Oct. 5; most of the increase was due to backlog of Claims that were a result of computer conversion in California; about 15,000 of the Claims were due to non-federal workers hit by the shutdown. The four-week average of Claims (blue in the chart) rose to 325,000. Continuing Claims (red in the chart and reported on a one-week lag) fell 16,000 to 2.905 million. The weekly Claims reports were more important because the Labor Department's failure to produce the September Employment report, but difficult to read because of the two special factors — California and the shutdown.
Other Economic Releases
The University of Michigan Consumer Sentiment slipped two points to 75.2 in October. Reports on Business Inventories and Retail Sales were not released due to the shutdown.
The final European Union second-quarter GDP remained unchanged at +0.3%, Q-over-Q. Germany's Industrial Production increased 1.4% in August, better than expected; on the other hand Manufacturers' Orders decreased -0.3%, driven by lower overseas sales. The Bank of England chose not to change interest rate or purchase levels when it met last week in the face of increasing evidence of economic growth. Contrary to other releases, UK Industrial Production and Manufacturing Output fell -1.1% and -1.2% respectively in August.
In China, the HSBC PMI Composite and Services slipped less than a half point to 51.2 and 52.4 respectively in August. Both indices remained in the expansion zone.
Equities Markets:
After weeks of decline, most equity markets advanced this past week on news that there might be a breakthrough in the negotiations to avert default on U.S. debt and re-open the government. This advance included the biggest one-day advance in the U.S. markets this year.
Bond Markets:
Bond yields rose in most markets, but credit spreads narrowed on the week.
Currencies & Commodities:
The U.S. dollar gained against the other four currencies below on the week, when many investors had high hopes for a breakthrough in Washington. WTI Oil prices declined while Brent Crude gained, widening the spread between oil prices in the U.S. and Europe. Metals commodity prices declined on the week.
Who is John Davidson?
John W. Davidson, CFA, started writing these Comments more than a decade ago as a personal discipline when he was promoted to from portfolio manager to chief investment officer and CEO.
Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.
He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.
His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.
His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.
Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.
Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.
In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.
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