What is Big Money Thinking?

Greetings! ,

Dr. Quincy Krosby spoke at our broker dealer's annual conference last weekend. As the chief economist for Prudential, she gave the advisors at our broker dealer insight into what the big money is thinking. Prudential is the third largest bond manager in the world.

She believes, as we do, that the largest driver in the markets is quantitative easing. The single largest reason why things are so good in the markets is that central bankers continue to buy bonds, keeping interest rates low, and providing banks and companies with large amounts of money. She explains that this creates a "wealth effect" for consumers, corporations, and small business owners.

Today, bond managers have to get creative to get yield. Many of them have created products with leverage, using derivatives. The perceived risks are low until the music stops playing. Just as we say in the crash of 2008, "everything works until everything stops working." Gold, as many of us recall, recently declined dramatically. She believes it's largely due to the actions of a single, or a few, traders using highly-leveraged derivative products.

Watch out, says Dr. Quincy Krosby, because right now there is plenty of liquidity but "liquidity is something that is not there just when you need it." In other words, when you want to sell you may not be able to sell because all of us will be selling at the same time.

After that sobering comment, she says she believes in quality and that when the data gets "less bad," true investors start buying. Thus, they are, believe it or not, getting excited about investing in Europe again. Watch for homes and autos to pick up, she says, because their multiplier effects ripple through our economy and help us all.

Weekly Economic Update

Q1 GDP COMES IN AT 2.5% UNEMPLOYMENT EDGES DOWN TO 7.5%

April brought a rebound in hiring. Employers added 165,000 jobs, and so the unemployment rate reached a four-year low. (The Labor Department also revised March's job gains upward to 138,000.) Payrolls have now expanded by an average of 189,000 jobs a month during the last six months.1

CONSUMER SPENDING, OUTLOOK IMPROVE

Household spending increased 0.2% in March, the Commerce Department noted - part of a broader 3.2% advance for the first quarter. The Conference Board's April consumer confidence index soared 6.2 points to 69.1, far exceeding the 61.0 consensus forecast of economists polled by Bloomberg.2

STRONG SIGNALS OF A HOUSING COMEBACK

Home equity is definitely being restored: the latest 20-city S&P/Case-Shiller Home Price Index (February) shows a 9.3% year-over-year increase, the largest annual gain recorded in six years. The National Association of Realtors reported a 1.5% March gain in its pending home sales index, with the yearly gain at 7.0%.2,3

IS MANUFACTURING COOLING DOWN?

The Institute for Supply Management's April factory index came in at 50.7 last week, the weakest reading in nine months and down from 0.6 from March. ISM's April service sector index also declined 1.3 points off the March reading of 53.1,4

S&P TOPS 1,600, FED REASSURES INVESTORS

Last week brought major gains for the Dow (+1.78% to 14,973.96), S&P 500 (+2.03% to 1,614.42) and NASDAQ (+3.03% to 3,378.63). On May 1, the Federal Reserve said it would keep buying $85 billion in bonds per month for the near future, noting that the pace of asset purchases could even increase if needed.5

Market Summary

% ChangeY-T-D1 Yr Chg5-Year Avg
DJIA +14.27 +13.38 +2.93
NASDAQ +11.89 +11.72 +7.28
S&P 500 +13.20 +16.01 +2.84

Source: cnbc.com, usatoday.com, treasury.gov, treasurydirect.gov -05/03/13). Past performance is no guarantee of future results. Indices are unmanaged, and investors cannot invest in them directly.

Create a beautiful week!

karl signature

Karl Frank, MBA, MSF
Certified Financial Planner (R)
A & I Financial Services LLC
303.690.5070

Citations:

  1. bloomberg.com/news/2013-05-03/payrolls-in-u-s-rise-165-000-as-unemployment-drops-to-7-5-.html [5/3/13]
  2. bloomberg.com/news/2013-04-30/consumer-confidence-in-u-s-rose-more-than-forecast-in-april.html [4/30/13]
  3. csmonitor.com/Business/Paper-Economy/2013/0429/Pending-home-sales-climb-1.5-percent-in-March [4/29/13]
  4. ism.ws/ISMReport/NonMfgROB.cfm [5/3/13]
  5. cnbc.com/id/100704308 [5/3/13]

Securities offered through Geneos Wealth Management, Inc., member FINRA/SIPC. Investment advisory services offered through A & I Financial Services LLC, registered investment advisor.

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