Global Market Commentary

July 10, 2014

Market Summary

Economics, U.S. and Global

U.S. employment numbers are positive for the last few months, and U.S. industrial production is increasing as we have predicted in these pages. The unemployment rate has fallen to 6.1 percent, and the U6 — often called the underemployment rate — has fallen to 12.1 percent. Meanwhile the number of those leaving the labor force due to retirement, discouragement, or for other reasons has leveled off.

We expect that U.S. economic growth and corporate profits will be as anticipated, with real GDP in the 2.5 to 3 percent range. After inflation, GDP growth will come in at over 4.5 percent. Q2 corporate profits should be in the 8 to 9 percent range, beating the 7+ percent increase in Q1 2014. All of these data argue for a continued strong stock market. A 5 to 10 percent market correction could take place at any time, and the bull market will remain intact, in our opinion.

Global economic growth continues with industrial production up in all of the major economies. Emerging market exporters are doing well if they export manufactured goods, and poorly if they are reliant on raw materials exports. China is discouraging excess housing construction, and growing in other areas. Thus China’s imports of raw materials will be less than expected for the next year or two.


Grains continue to decline in price. Crop plantings were substantial and the Midwestern weather has been good for growing. Big holders of grains are liquidating and going short, so there will probably be lower grain prices ahead. This is bullish for cattle and chicken producers, whose feed costs should decline. Lower cotton prices also bode well for apparel manufacturers. We see lower inflation pressures from grains but we see continued oil price pressures and continued increases in demand for protein products as the emerging world increases their protein intake.


Gold continues to be in a base-building pattern. Gold appears on target for a cycle bottom in the July to September period. Watch gold stock prices — shares may perform better than bullion.


We continue to be bullish on Europe, the U.S., and Asian countries who export manufactured goods. We are avoiding emerging countries which export raw materials. For clients, we continue to hold positions in Taiwan and India, and we are closely watching several Asian and eastern European exporting nations for potential investment.  At least for the near future, world stock and other markets are supported by the Federal Reserve’s intention to focus on employment rather than worry about bubbles in world markets.

In a recent speech, Fed Chair Janet Yellen made it very clear that she was not concerned about stock market or other asset bubbles that may form. She declared that she believes further gains in employment, higher wages, and more labor force participation are important to engender at this time. Her attention is not on the fact that inflation has reached the Fed’s goal of 2 percent, or that unemployment has, at 6.1 percent, reached the Fed’s previously stated target.

Does this mean that the U.S. is destined to repeat some of the mistakes of the 2005 to 2009 period? We certainly hope not, but we are monitoring global economic activity and central bank behaviors closely. A major objective of ours is to identify emerging problems before they are reflected in the markets. Over the past 40 plus years, we have striven to be early in identifying crises that could lead to market panics, such in 2008, 2000, 1987, and 1973–4. We believe that this orientation has helped us do better than most money managers in avoiding large market declines. Going forward, we will continue to strive to notify our clients and readers well in advance of future problems.

Thanks for listening; we welcome your comments and questions.

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