7/25/14 – U.S. Jobless Claims fell to lowest since 2006

Jobless claims fell by 19,000 to 284,000 in the week ended July 19, the fewest since February 2006 and lower than any economist surveyed by Bloomberg forecast. It is not unusual for applications to be volatile in July because of auto plant shutdowns.  However, state data showed nothing inconsistent with prior years.  Fewer claims signal employers are reluctant to let go of staff as the talent pool shrinks and sales improve. A tightening labor market could lift wages and spur consumer spending, which accounts for about 70 percent of the economy.Federal Reserve economists said they see a “number of reasons to be optimistic” about improvement in the U.S. labor market after a “sizable decline” this year in long-term joblessness. Since December, the number of people out of work for more than 26 weeks has dropped from 3.9 million to 3.1 million and the unemployment rate for these long-term unemployed has dropped 0.5%. That accounts for 88% of the overall decline in unemployment.  Reversing prior trends, the drop was largely due to people getting jobs, not because they’re dropping out of the labor force. The Fed economists said they find cause for optimism from signs that the long-term unemployed aren’t losing a connection to the labor force and their ability to find jobs doesn’t differ significantly from those out of work for shorter periods.

U.S. consumer prices increased 0.3% in June, led by a jump in gasoline prices. June’s gain, which matched consensus forecasts, followed a 0.4% gain in the prior month. Gasoline costs jumped 3.3% last month, the biggest gain since June 2013, accounting for two-thirds of the increase in total prices. Core prices, which exclude volatile food and energy components, increased only 0.1% – the smallest monthly increase since February. Consumer prices rose 2.1% in the 12 months ending in June, while core prices climbed 1.9% during the same period. Inflation is getting some headline attention lately but we feel the slack in the labor market and supply surplus in many industries will keep inflation under control for the foreseeable future.

The government will release second quarter GDP figures next week which will offer a glimpse on pace of the economy after the sluggish first quarter.

The Eurozone’s Economic Recovery Improves in July:

The Eurozone’s economic recovery appears to have regained some lost momentum in July, as surveys of purchasing managers pointed to an increase in private-sector activity. The composite purchasing managers index for the Eurozone unexpectedly jumped to a three-year high of 54 in July from a prior reading of 52.8.  It’s the 13th month that the gauge has exceeded the 50 mark which signals expansion. The pickup in activity comes after ECB policy makers introduced negative deposit rate as well as additional liquidity measures to boost growth in the Eurozone.

Second Quarter Earnings:

With nearly one third of companies having reported, we are seeing continued strength in corporate revenues and earnings.  A few highlights from this week were:

Apple (AAPL) posted $1.28 per share, beating the analyst expectations of $1.23 as iPhone revenue rose 9% year-over-year to $19.75 Billion (they sold 35.2 Million iPhones).  Sales are up 55 percent in BRIC countries and up 48 percent in China.  iPad and iPod revenues declined however Tim Cook suggested that the decrease “is not something that concerns us.”  Gross margin was 39.4 percent from 36.9 percent a year earlier.

Microsoft (MSFT) posted EPS of $0.55, missing analyst estimates of $0.61.  Revenue did beat expectations, but profit was hurt by Nokia’s $700 Million drain from operating profit.  The company announced it is cutting 18,000 jobs, majority of which will be related to Nokia acquisition.  The other portions of its business were strong, with total revenue up 18%.

PepsiCo (PEP) earnings per share were $1.32, beating analyst estimates of $1.23 per share. The global beverage and snack food company raised its full year profit outlook after organic revenue in the snack food segment grew by 5 percent.

Emotional Investor Behavior Reduces Returns:

According to a recent study by the St. Louis Fed, the tendency for investors to chase returns has a significant and tangible cost. Consider the chart showing quarterly equity mutual fund flows (blue line) and their past quarterly return (orange line) from 2000 to 2012. The two data series are positively correlated (they move in tandem), with a correlation coefficient of 0.49. This shows that when past quarterly returns have been high, mutual fund flows tend to increase as investors pile into the funds that have registered gains. Conversely, when past returns have been low, mutual fund flows tend to decrease as investors abandon these funds. Ultimately, such investor behavior (chasing performance) results in buying high and selling low – the exact opposite of a prudent investment strategy. Researchers have quantified this costly investor behavior, comparing the realized performance of return-chasing behavior with a simple buy-and-hold strategy, over a 5-year timeframe. According to their analysis, the return-chasing investor leaves nearly 2% of annual return on the table compared to a buy-and-hold investor. From a longer-term perspective, this cost is magnified and represents a significant drag on overall performance.

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