Week of July 27, 2015

Markets were walloped this week by a string of disappointing earnings releases, poor manufacturing data out of China and a clerical mistake at the Federal Reserve that leaked data showing internal forecast for slower domestic growth. The S&P 500 fell 2.2%, the Dow Jones Industrial Average was clipped by 3% and the Nasdaq Composite lost 2.3%. International markets were not spared either. The MSCI World Index fell 2%.

Collapsing Commodities

Commodities also took a beating this past week. Oil prices fell 6% to just over $48 a barrel, a four-month low. Copper lost almost 5% to $2.38 a pound, its lowest level since mid-2009. And, the gold price shrunk to $1,085 an ounce, capping an 8% decline year-to-date. A confluence of factors came to a head this week and accelerated downward momentum for the entire asset class. First, global growth has been disappointing since the financial crisis, averaging just 3.3% compared to 4.7% in the six years prior. The IMF has been lowering expectations for 2015, which now stand at 3.3%. Second, a slowdown in China has many worried about ongoing demand for commodities since that country’s infrastructure build has been the bulk of demand over the past several years. Lastly, the Federal Reserve accidentally leaked internal growth forecasts to its website that showed the economists at that institution are expecting a slower pace of growth over the coming years than have been disclosed by the Open Market Committee meeting minutes.

^{Source: http://www.wsj.com/articles/global-growth-worries-pummel-commodities-1437783027}

Existing Homes Prices At Record Level

Data released last week showed that existing home prices in the U.S. climbed to a record high in June, besting a mark established in 2006. According to the National Association of Realtors, the median price of a previously owned home jumped 6.5% to $236,400. Meanwhile, the pace of sales is increasing also. This grew 3.2% month-over-month to a seasonally-adjusted rate of 5.49 million homes, the strongest since February 2007. Burned by the financial crisis, some worry that the real estate market is getting too hot to handle. But, it’s worth noting that adjusted for inflation, the home price data would need to rise another 20% from current levels to top the previous record.

Pulling Back on Buybacks

A notable tailwind for per share earnings growth over the past several years has been the rapid pace of share repurchases. Corporations who had been sitting on piles of cash after the great recession began deploying it to repurchase shares, many times due to the influence of activist shareholders. This helped reduce the supply of equities as investor demand grew thanks to low yields on fixed income securities. BCA Research estimates the number of available shares on the U.S. stock market has fallen 6% over the past five years. But, enthusiasm for buy-backs is beginning to wane. Through the first quarter of 2015, corporations deployed $144 billion on share repurchases, down from nearly $160 billion in the same period a year earlier. Some argue that lower corporate profits (induced by oil price deterioration and the rising dollar) have managers reining in buybacks. This could create a downward spiral since fewer buybacks in turn slows earnings per share growth. On top of this, equity supplies may soon begin growing. After a six year bull run, private equity firms have been harvesting investments to the tune of $73 billion through the first half of 2015. This is a record for a six month period.

^{Source: https://www.economist.com/news/finance-and-economics/21658946-supply-equities-may-soon-stop-shrinking-losing-tailwind?fsrc=scn/tw/te/pe/ed/losingatailwind}

Fun Story of the Week

We’ve all done it. When a piece of food falls to the floor, whether we say it out loud or just think it, the “5 second rule” comes to mind. The general consensus is that food left on the floor for a relatively short period of time is safer to consume, and anything less than five seconds can eaten without recourse. But, is this really a thing? The short answer is: yes. When bacteria come in contact with a surface they produce an oozing substance called biofilm. This wet coating helps bacteria grow and makes it easier to stick to other things, like food. However, studies have shown that food left on the ground for 30 seconds contains ten times as much bacteria on it as something left on the ground for three seconds, lending some credit to this adage. It’s worth noting though that the transfer of bacteria is almost instantaneous, and you are still playing Russian roulette with the “5 second rule.” Some bacteria like E. coli and salmonella need thousands of bacterium to cause problems in the human body. However, others like shigella can cause violent vomiting with as few as ten microscopic organisms. So, while there is some truth to the adage, you might want to think twice before picking up that dropped slice of cheese, so you don’t become one of the 16% of Americans afflicted by food borne illness each year.

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