The Econ­omy and Bond Mar­ket Radar (Feb­ru­ary 6, 2012)

Employ­ment data released on Fri­day, which put the cur­rent unem­ploy­ment rate at 8.3 per­cent, showed strong improve­ment. This is the lat­est in a series of data points that show the U.S. econ­omy is con­tin­u­ing to make strides in the right direc­tion. ISI Group says that this was the 18th straight week of stronger eco­nomic data in the U.S. We’ve recently seen upticks in vehi­cle sales, same store sales, home­build­ing and manufacturing.

Man­u­fac­tur­ing PMI rose dur­ing the fourth quar­ter of 2011 and ISI Group thinks that it will rise another 3 per­cent to the 54 level dur­ing the first quar­ter of 2012. ISI says that over the past two years employ­ment in the man­u­fac­tur­ing sec­tor has posted its strongest increase in almost three decades. But it’s not just the U.S. Man­u­fac­tur­ing PMI on the rise, data from Europe and China also exceeded most fore­casts and global PMI has jumped con­sid­er­ably since November.

One other fac­tor that is likely dri­ving bet­ter eco­nomic results is the year-over-year increase in U.S. money sup­ply, which is grow­ing at a robust 10 per­cent pace. Nom­i­nal GDP growth in the fourth quar­ter was 3.7 per­cent com­pared with the pre­vi­ous year and the cur­rent rate of money sup­ply growth greases the wheels for America’s eco­nomic engine. Ade­quate money sup­ply is the lubri­cant that allows the wheels of com­merce to accelerate.

An arti­cle in the Wall Street Jour­nal this week high­lighted that in 2011 U.S. cor­po­rate tax receipts as a share of prof­its were at their low­est level in at least 40 years. Cor­po­ra­tions paid a tax rate of 12.1 per­cent on prof­its dur­ing the fis­cal year that ended Sep­tem­ber 30, 2011, less than half the aver­age rate com­pa­nies paid from 1987 to 2008. Those fig­ures grabbed a lot of head­lines in the press, but they don’t tell the whole story. In addi­tion to putting aside more than $2 tril­lion in cash over the past five years, many cor­po­ra­tions have employed a tax incen­tive known as “bonus depre­ci­a­tion” that allows com­pa­nies to deduct from their taxes the cap­i­tal that they invest back into their businesses.

The incen­tive has worked. Cap­i­tal expen­di­tures for Amer­i­can com­pa­nies reached $1.5 tril­lion in 2011, up 10 per­cent from 2010. We believe this increase in capex has been a sig­nif­i­cant dri­ver of the U.S. eco­nomic recov­ery. Cor­po­rate pur­chases of new fleet vehi­cles, machin­ery and data sys­tems have cre­ated and main­tained thou­sands of jobs for Amer­i­can cit­i­zens. It is unlikely the U.S. gov­ern­ment would have achieved the same return on invest­ment and mul­ti­plier effect on the economy.

Strengths

• The Jan­u­ary employ­ment report was much bet­ter than expected, with the strongest job gains since April and the low­est unem­ploy­ment rate since Feb­ru­ary 2009.
• The ISM man­u­fac­tur­ing index rose to 54.1 and the new orders com­po­nent rose to a strong 57.6. JP Morgan’s Global PMI Index also con­tin­ued to move higher, hit­ting 51.2 in January.
• U.S. auto sales rose 12 per­cent in Jan­u­ary sup­port­ing the uptick seen in man­u­fac­tur­ing data.

Weak­nesses

• The Case-Shiller 20-city home price index hit the low­est level since Feb­ru­ary 2003. Prices have fallen 3.7 per­cent year-over-year.
• Con­sumer con­fi­dence fell sharply to 61.1 in Jan­u­ary; expec­ta­tions were for an increase.
• Fourth quar­ter pro­duc­tiv­ity rose a very mod­est 0.7 percent.

Oppor­tu­ni­ties

• If the weekly oscil­lat­ing trad­ing pat­tern over the past cou­ple of months is any indi­ca­tion of mar­ket direc­tion, bonds could see a mod­est sell-off next week.

Threats

• Eco­nomic data has been strong and appears to be gain­ing momen­tum. This could be a threat to bond prices if the pat­tern continues.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

Comments

Comments are closed.