Download Your Vacation Risk Management Strategy Is…?

Your Vacation Risk Management Strategy Is…?
Key economic indicators and capital market events for August 2014 by Joe Terranova, Chief Market Strategist
July’s calendar focus was corporate earnings and whether the S&P 500’s strong second quarter performance would be extended. Disappointment was not present as earnings per share and
revenue growth powered the SPX toward 2000. August presents a different dynamic for investors as the most popular vacation month. With volatility levels at multi-year lows, investors
should feel comfortable heading for the beach to enjoy summer’s final weeks before school is back in session. However, before doing so, please trace out a quick risk management strategy
just in case the unexpected does arise while you are away. My vacation risk management strategy consists of keeping a close eye on three things: 1) credit spreads for high yield debt,
which displayed some modest widening in late July; 2) a SPX selloff below 1950, which would be concerning from a technical perspective; and 3) earnings commentary and guidance until
reporting season has ended. Be watchful for signs of an exhausted market that can no longer advance despite continued good news from earnings commentary or accelerating economic data.
August 2014
Sunday
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
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2
Market Reaction to
China July PMI
8:30 AM: U.S. Nonfarm
Payroll Report
10:00 AM: U.S. ISM Mfg.
3
4
5
6
S&P 500 Earnings
Season Continues*
10
Central Bank Day
11
12
S&P 500 Earnings
Season Concludes*
17
7
9
China Trade Data
13
14
15
16
20
21
22
23
8:30 AM:
U.S. Retail Sales
18
19
Jackson Hole
Economic Symposium
8:30 AM:
U.S. CPI
24
8
25
26
27
28
8:30 AM:
U.S. Q2 GDP
31
Times shown are Eastern Time.
*Expected earnings release date; may be subject to change.
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August indicators / events of note:
You should be watching:
China PMI
China PMI (purchasing managers’ index) provides a monthly gauge of China’s
manufacturing sector, which, when combined with the monthly U.S. ISM Manufacturing
Index value, gives a clear picture of global manufacturing health. A PMI value above 50
indicates growth, below 50 contraction.
Markets will respond Friday morning to Thursday’s late night release of July’s China
PMI. May’s reading was 51.0, a six-month high. There is also plenty of optimism
ahead of the July figure based on June’s HSBC Manufacturing PMI released on
June 23. That figure posted at 52.0, well above the consensus estimate of 51.0
and last month’s 50.7.
Nonfarm Payroll Report
Private, nonfarm payroll data is part of the Labor Department’s monthly U.S. Employment
Situation report. This data gives the true employment story, is the best gauge of the
economy’s direction, and has the power to move markets.
Expect some payback for last month’s surprisingly strong gain of 288,000 jobs.
Consensus estimates are for a headline figure ranging from 220,000 to 240,000,
and for private payrolls ranging from 215,000 to 235,000. The somewhat
“confusing” unemployment rate is expected to remain unchanged at 6.1%, but
that’s because it is dependent on the labor force participation rate, the portion of
adults employed or looking for a job, which hovers at a multi-decade low of 62.8%.
ISM Manufacturing
The ISM Manufacturing Index, issued by the Institute of Supply Management, gives a
monthly measure of the health of U.S. manufacturing based on an in-depth survey of 300
manufacturing firms. An index value of 50 is the dividing line between an expanding or
slowing economy. Data released is for the previous month.
The economic evidence continues to point toward a “goods over services”
investment strategy. A prime example has been the strength of this report over
the last two months. Last month’s 55.3 was the second highest reading for 2014.
Consensus estimates for the upcoming report are for a strong jump toward 56.0,
which, if achieved, would be the best figure since the end of 2013.
S&P 500 Earnings Season Continues*
Earnings season moves into the final couple of weeks for S&P 500-listed companies.
In the first week of August, 73 S&P 500 companies will report second calendar
quarter earnings. Included among them will be 12 utility, 11 energy, and 11
consumer discretionary companies. Keep in mind, the energy and utilities sectors
have positively surprised markets year to date, while consumer discretionary has
disappointed.
Central Bank Day
The Bank of Japan (BOJ), European Central Bank (ECB), and Bank of England (BOE) hold
their respective monetary policy meetings and release official statements on this date.
Of the three global central bank announcements, the BOE’s just might be the
most interesting. The BOE’s next expected monetary policy shift—a 25-basis-point
hike from 0.50% to 0.75—could be enacted before the end of the year. The ECB
already had its 2014 moment back in early June. For the BOJ, there is not enough
evidence to act in any fashion. Stay focused on the BOE!
China Trade Data
China’s monthly trade report provides important import, export, and interest rate data on
the Chinese economy.
China’s monthly trade data report has not been on this calendar in quite some time.
The time has come to add it back as the report resumes its importance. Recent
data points suggest China’s growth is accelerating. Confirmation is needed from
the July trade data. Last month, exports rose 7.2% year on year, and imports rose
5.5%. In the past 12 months, imports have only posted a double-digit gain once
and exports only twice. Double-digit gains were posted on a consistent basis before
the Chinese growth slowdown. It is time for double-digit gains once again if growth
is, in fact, accelerating in China.
Return to Page 1
*Expected earnings release date; may be subject to change.
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August indicators / events of note:
You should be watching:
S&P 500 Index Earnings Season Concludes*
Earnings season moves into the final couple of weeks for S&P 500-listed companies.
The second calendar quarter earnings season concludes this week with only 15
S&P 500 companies reporting earnings. Consumer discretionary names dominate
the week, which is not an ideal condition to close out earnings season since the
sector has clearly been a 2014 laggard. By the week’s end, the market’s focus will
quickly shift to anticipating Fed Chair Janet Yellen’s keynote speech at the Jackson
Hole Economic Symposium.
U.S. Retail Sales
U.S. retail sales data is released monthly by the Department of Commerce. Retail sales
measure total receipts for sales of durable and nondurable goods. Consumer spending
accounts for two-thirds of GDP and is therefore a key element in economic growth.
In June, core retail sales, which exclude automobiles, gasoline, building materials,
and food services, rose 0.6%, offsetting the headline disappointment of overall
retail sales rising only 0.2% in May. That miss was due to auto sales declining
0.3%. This report will be critical for second quarter GDP estimates. Expect
revisions to second quarter GDP once the retail sales report is released. The core
sales figure is the key metric to monitor.
U.S. Consumer Price Index (CPI)
The U.S. consumer price index measures the prices of goods and services paid by
consumers, and is considered to be a key indicator of U.S. inflation.
Last month’s CPI reading calmed markets and alleviated concerns that the cost of
living was rising faster than the FOMC has acknowledged. Headline CPI rose 0.3%
month on month and 2.1% year on year. The core CPI reading, which excludes food
and energy prices, moderated to only a 0.1% month-on-month gain from May’s
figure. However, energy prices did rise 1.6% last month, dictating that investors
should pay close attention to this month’s reading. I suspect we are not out of the
woods yet for rising energy and food costs. The combined 1.7% gain from February
to May is still fresh despite June’s 0.1% modest food cost rise.
Jackson Hole Economic Symposium
The Kansas City Federal Reserve Bank hosts its annual symposium in Jackson Hole,
Wyoming.
Federal Reserve Chair Janet Yellen will deliver the keynote address on what will not
be just another summertime Friday. Kansas City Federal Reserve Bank President
Esther George is the conference host and has strongly suggested that the Fed
should be raising rates already. Last year’s meeting quietly messaged the need to
hold back from lifting rates too quickly to assist the emerging markets with riding
out the volatility occurring at the time. This year will be different. In fact, investors
should watch for Dr. Yellen to trace out the FOMC’s exit strategy.
U.S. Gross Domestic Product (GDP)
The quarterly U.S. GDP report, released by the Commerce Department, tracks the
purchases of all U.S. goods and services in all sectors and is the broadest measure of
the economy.
This will be the second look at second quarter GDP, which is arguably the
most relevant as it is the confirmation of the first glance we got in late July.
With expectations for a second quarter bounce back above 3%, possibly as
high as 3.5%, the late August report should set the tone and confirm growth
expectations for the remainder of 2014.
Return to Page 1
*Expected earnings release date; may be subject to change.
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JOSEPH M. TERRANOVA, Chief Market Strategist, Virtus Investment Partners
Joe Terranova is chief market strategist for Virtus Investment Partners, a position he was elevated
to in 2009, after having started with the company as chief alternatives strategist. In his current
role, Mr. Terranova works with Virtus’ regional sales teams and the financial advisors who sell
the company’s investment products, providing insight into the domestic and global investing
landscape and has represented Virtus as a keynote speaker for several financial institutions. He
is a member of the Virtus Investment Oversight Committee.
Prior to joining Virtus in 2008, Mr. Terranova spent 18 years at MBF Clearing Corp., rising to the position of
director of trading for the company and its subsidiaries. In this capacity, he managed more than 300 traders
and support staff for MBF, one of the New York Mercantile Exchange’s largest firms. His work was highlighted
as the feature story in the June 2004 issue of Futures magazine.
Mr. Terranova is perhaps best known for his risk management skills, honed while overseeing MBF’s proprietary
trading operations during some of the most calamitous times for the U.S. markets, including the first Gulf War,
the 1998 Asian Crisis, 9/11, and the collapse of Amaranth Advisors. In 2003, he was one of the first Wall Street
professionals to make an early call for higher energy, natural resources, and commodity prices. In June 2008,
he cautioned investors to move to the sidelines in commodities and, in March 2009, he encouraged investors
to ignore the global “embracement of pessimism” and overweight equities. Before joining MBF, Mr. Terranova
held positions at both Swiss Banking Corp. and JP Morgan Securities.
Mr. Terranova has been an ensemble member of the CNBC Fast Money franchise since 2008. He also frequently
contributes exclusively to CNBC’s other business programs. He is the author of “Buy High, Sell Higher” (Business
Plus, 2012), a book about the “new rules” of investing based on his years as a professional trader.
Mr. Terranova is strongly committed to charitable causes benefiting children. He founded and funds the 501(c)
South Nassau Rock organization, which provides specialized athletic experiences for children, and works with
Nassau County to sponsor the improvement of baseball and outdoor ice rink facilities. In 2007, he established
“Bossy’s Bunch,” a program that rewards academic excellence among elementary school students, with New
York Islanders Hall of Fame hockey player Mike Bossy. In 2013, he expanded his charity work with the Islanders,
creating and sponsoring the “Courier of Courage” program, which acknowledges children who have overcome
hardships, disabilities, or illness.
Mr. Terranova earned a bachelor’s degree in finance from the Peter J. Tobin College of Business at St. John’s
University in New York.
For more information, visit Virtus.com
This commentary is the opinion of Joe Terranova. Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the
author and not necessarily the opinions of Virtus, its affiliates, or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and
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