Yellen: Sooner and slower is more prudent than later and abrupt. - Alaska Permanent Capital Management


Yellen: Sooner and slower is more prudent than later and abrupt.

Pantages“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy,” Janet Yellen chairwoman of the Federal Reserve said in her semiannual testimony to Congress on Wednesday. She made the argument to Congress for tightening policy sooner rather than later. Sooner means smaller incremental tightening moves, while waiting too long may mean larger more abrupt hikes in rates.

The markets took the comments in stride. The global equity markets were better this week and Europe is near its pre-Greece-crisis-highs. The S&P 500 was up over 2% to 2,127. The Euro Stoxx 50 index was up 4% in local currency, but only 1% in dollars owing to a weak euro, which traded down to $1.08. The Shanghai index stabilized gaining 2% on news that China’s GDP was reported up 7% YoY. Ten year Treasury bond yields dropped a nickel to 2.35%.

“Agreekment”: Greece has agreed to a financing plan that could make €86 billion available in loans, but not without first getting past issues dividing the legislature, voters and international creditors. The ECB has stepped in to provide emergency funding to the Greek banks. There is still a long way to go here, but no “Grexit” for now.

Second quarter US corporate earnings are still forecast to be down -3% YoY, but some analysts believe the actual numbers will come in closer to +3% YoY. Often companies low ball earnings and then “beat” them generating a “positive surprise.” We will see.

Bank earnings look pretty good so far with earnings “beats” or in line numbers. The two biggest – JP Morgan and Wells Fargo – reported solid results.

APCM Portfolio manager Jason Roth notes: “Most of the Money Center Banks have reported second quarter results with similar themes.  Litigation expenses fell while credit quality improved allowing for the release of loan reserves.

Having put the drag of litigation expense largely behind them the focus now turns to their NIM (Net Interest Margin or the difference between the cost of deposits and the return on investments and loans). With the FOMC poised to begin raising rates each banks’ asset/liability management will determine its impact.  Higher rates will generally benefit banks over the longer run.”

The Keefe Bruyette bank index was up 3.2% over the week and 7.8% ytd. That compares to the S&P 500 that was up 3.2% this week and 4.4% ytd.

Iran and six world powers reached a nuclear agreement. The accord aims to prevent Iran from producing nuclear weapons in exchange for relief from sanctions that have hobbled the Iranian economy. It will take some months to be fully implemented, at which point Tehran will receive the first batch of major sanctions relief, possibly around year-end. Investment implications foreshadow more oil on the global markets. Oil dropped $2 bucks to end the week near $51, a 3 month low.

Inflation MIA. Low oil prices keep a lid on inflation. And check out these headlines from ISI which show that competition and globalization keep downward pressure on prices.

Jul 13 (Fortune) – Walmart takes on Amazon “Prime Day” with its own huge sale.

Jul 13 (WSJ) — Search for Cheaper Labor Leads to Africa. Ethiopian factories pay as little as $21 a month, in contrast to China where garment workers earn $225.

Jul 14 (FT) — Foxconn plans up to 1m jobs for India as it battles rising wage costs in China.

July 17 (USA Today) – Ford slashes price of F-150

EVENT: Ed Hess of the University of Virginia Darden School of Business is leading a workshop on “Grow to Greatness: smart growth for businesses”

  • DATE:   Tuesday, July 28, 2015
  • TIME:   11:30 am to 5:30 pm
  • LOCATION:  BP Energy Center –  900 E. Benson Blvd., Anchorage
  • REGISTRATION: $125 (includes lunch buffet) register here

The Alaska Baseball League Major League Scouts Showcase games are this Friday/Saturday in Anchorage with Sunday reserved for the all-star game. I will see a bunch for sure, rain or shine.

Jeff Pantages, CFA®
Chief Investment Officer


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