Permanent Value

Week In Review – 1/23/15

Bruce Doole
January 23rd, 2015

First Quarter 2015 Global Outlook

  • The euro area and Asia should benefit most from lower oil prices, while the US should benefit but less so than in the past given recent energy investments. The impact on emerging economies should be mixed.
  • We have reduced our US inflation forecast for 2015 as the labor market tightens. The Fed should begin gradual rate hikes in the second half of the year.
  • The euro-area economy should enter a renewed recovery phase in the first half of 2015 thanks to low oil prices, low interest rates, and easing credit conditions.
  • Following the December elections in Japan, structural reforms should continue. The Bank of Japan may have to begin tapering bond purchases in 2015.
  • After several years of out performance by the US equity market, conditions may be in place for improved fundamentals leading to better relative equity performance in both Europe and Japan.
  • Lower oil prices should at least partly offset a tightening of monetary policy in the US, helping to support US equities.
  • Concerns about low developed-world inflation have intensified into worries about disinflation, and even outright deflation, as a result of tumbling oil prices.
  • The Fed appears prepared to initiate rate hikes in 2015, while the European Central Bank and Bank of Japan, more sensitive to the threat of deflation, seem headed for increased policy stimulus.

- Source: Hartford Funds


  • China Merchandise Trade Balance: December unadjusted merchandise trade surplus was $49.6 billion, down from $54.47 billion in November. Exports were up 9.7% on the year after increasing 4.7% in November. Imports slumped 2.4% after increasing 6.7% the month before. For 2014, the trade surplus jumped to $382.5 billion from $259.75 billion in 2013.
  • U.K. CPI: Consumer prices were slightly softer than expected in December. An unchanged level versus November was weak enough to shave fully 0.5% off the annual inflation rate, which now stands at just 0.5%.
  • U.K. Producer Price Index: Manufacturers’ input costs and factory gate prices fell again in December. December followed a shallower revised 0.7% drop in November with a monthly 2.4% decline at year-end. Annual input price inflation now stands at -10.7% and its factory gate equivalent at -0.8%.
  • EMU Industrial Production: Industrial production (ex-construction) eked out a third consecutive monthly rise in November. A marginally firmer than expected 0.2% increase followed an upwardly revised 0.3% gain in October.
  • U.S. Retail Sales: December sales fell 0.9% after posting a 0.4% gain in November and a 0.3% rise in October. Expectations were for a 0.1% decline.
  • U.S. Jobless Claims: Claims jumped sharply the week of January 10, up 19,000 to 316,000.
  • U.S. PPI-FD: Inflation at the producer level continued to decline in December on lower energy costs. The PPI for total final demand fell 0.3%, following a decline of 0.2% in November. The consensus expected a 0.4% decrease.
  • U.S. Consumer Price Index: Inflation fell another 0.4% in December after falling 0.3% in November.
  • U.S. Industrial Production: Slipped 0.1% in December following a jump of 1.3% in November.

- Source: Ivy Funds

Week In Review – 1/16/15

Bruce Doole
January 16th, 2015

Remodel (Your Thinking About the US Labor Market)

The US labor market added 252,000 net, new nonfarm payroll employees in the month of December and the unemployment rate fell to 5.6%. December’s data caps off a year in which an additional 3 million Americans found their way onto the payroll. Other parts of the report were weaker than expected, including a disappointing deceleration in wage growth and falling labor force participation. In total, today’s report offers up important clues about how we ought to think about the US economy in 2015, but doesn’t give the Fed much of a reason to change the trajectory of monetary policy.

As we look forward to 2015, we think analysts and investors would do well to heed the lessons learned in 2014. Standard economic models tell us that as the labor market strengthens, employers have to pay employees more (driving up wages,), more people are able to find employment (the participation rate rises), and the increased aggregate employment brings about rising prices (inflation, particularly as the unemployment rate falls below the so-called “natural rate” which was viewed to have moved higher in the aftermath of the recession).

The only problem: none of those things happened. After a year in which Americans saw the strongest growth in nonfarm payroll employment since 1999, the pace of wage growth slowed, participation remained stable and inflation held at its depressed level. Job growth arrived without the much-feared inflation.

We would just ignore the entire episode and chalk it up to another failure for macroeconomic forecasting, but there’s one problem: investors believed the story. Fears that inflation was “just around the corner” inspired forecasts for higher interest rates in 2014 and frightened some fixed income investors. As we now know, interest rates in the US rallied throughout the year—the 10-year Treasury began the year with a yield to maturity of 3.04% and ended the year at 2.17%—in large part because of lackluster inflation.

For the Fed, we do not think today’s report changes much. Yesterday’s minutes from the December FOMC meeting confirmed that Yellen and Co. would be comfortable raising interest rates sometime this year even if inflation is below their 2% target (as it has been for 71 of the last 74 months), so long as inflation expectations stay anchored. Our suggestion for 2015: watch the survey measures of expected inflation closely. If they begin to decline, even despite the improvement in the labor market, the Fed may be more “patient” in hiking interest rates than the market currently expects

- Brenda J. O’Leary, Payden Mutual Funds


U.K. PMI Construction continued to expand in December. However, at 57.6, the sector PMI was below market expectations and November’s unrevised 59.4 mark and also touched its lowest level since July 2013.
China PMI Composite posting 51.4 in December, up from 51.1 in November. This signaled increased business activity for the eighth straight month.
E.U. PMI Composite for December was at 51.4, down 0.3 points versus its flash estimate 51.7. This final composite output index signaled a sluggish year-end for the Eurozone economy.
E.U. HICP Flash for December was at minus 0.2%. This yearly change in the flash HICP was down 0.5 percentage points from November and below market expectations.
U.S. International Trade balance narrowed more than expected due in part to lower oil prices. In November, the gap narrowed to $39.0 billion from a revised $42.2 billion in October. Market expectations were for the deficit to narrow to $41.5 billion.
U.S. jobless claims fell by 4,000 to 294,000 for the week of Jan. 3.
U.S. employment situation was somewhat stronger than expected as payroll jobs advanced 252,000 after jumping a revised 353,000 in November.

- Source: Ivy Fund

Week In Review – 1/9/2015

Bruce Doole
January 9th, 2015

6 Top Tax Changes for 2015

Except for the hub-bub over the Tax Extenders bill being passed by Congress, the biggest news of the fall concerning taxes turned out to be a story on a parody website claiming refunds would be delayed until Oct. 15. That didn’t stop the social media universe from obsessing over the idea that the Obama administration would do such a thing in an effort to save millions of dollars. The rumor was so persistent that a Forbes writer felt the need to debunk it.

The real changes to the tax code for 2015 are mostly incremental and were set by Congress as indexing to inflation. Even past nightmares like annual political wrangling over the Alternative Minimum Tax have at least been stabilized.

There are some changes that taxpayers and their advisors should be aware of, said Bernard Kiely, of Kiely Capital Management, based in Morristown, N.J. One concerns withdrawing money from one IRA to roll it into another.

“The IRS clarified a rule this year,” Kiely said. “After losing a court decision, they made a rule that a withdrawal could be made from only one account per year.”

The idea, Kiely said, was to ensure that people wouldn’t remove money earmarked for retirement from multiple accounts — a practice that, as Michael Kitces pointed out, could be abused by account holders needing a free, short-term loan.

Kiely advised that a trustee-to-trustee transfer be used instead of a 60-day IRA rollover. That sort of transfer can be done for multiple accounts in the same tax year.

For Kiely, the biggest change involves a program the IRS put in to certify tax preparers. Those who don’t complete 18 hours of continuing education each year won’t be allowed to represent clients at audits.

“There are too many people out there preparing taxes who don’t know what they are doing,” Kiely said, adding that the voluntary program is a good idea.
Here’s a rundown of 6 Top Tax Changes for 2015:

1. Alternative Minimum Tax
This exemption amount rises this year to $53,600 (up $800) for singles and $83,400 (up $1,300) for married couples filing jointly.
There was a time when fear of the expiration of this tax sent shockwaves through many taxpayers. Congress would delay and delay fixing it (doesn’t that sound familiar?) But now that it is indexed to inflation, the worry has been removed.

2. Estate Tax
The exclusion amount for those who die in 2015 rises to $5.43 million, up from $5.34 million the previous year.
The so-called death tax doesn’t affect most people, but an unusual tax levied by New Jersey, which starts at $675,000, might be a factor in upper income individuals wanting to leave the state. Kiely cited a white paper by Regent Atlantic Capital, based in Morristown, that supports the idea that New Jersey’s high taxes, including the estate and inheritance levies, are a drain on the state.

3. Top Tax Rate
The top rate of 39.6% will apply to singles who earn more than $413,200, up from $406,750 in 2014, and $464,850 for married couples filing jointly, an increase from $457,600.
Before tax brackets were indexed for inflation, Kiely said, “tax bracket creep” was a problem. Indexing keeps the brackets in pace with inflation.

4. Standard Deduction
Both single and married couples filing jointly will see a slight increase in the standard deduction. For singles, the increase is $100 to $6,300. For married couples it’s $12,600, an increase of $200. For heads of households, the deduction will be $9,250, up $150.
The rise in this is tied to inflation, which makes planning easier, Kiely said.

5. Personal Exemption
There’s a $50 increase in store from $3,950 in 2014. The personal exemption is phased out as adjusted gross incomes rise before being eliminated at $380,750 for singles and $432,400 for married couples.
Kiely noted that the phase out in upper income levels is automatic.

6. Itemized Deductions
The limitations start at adjusted gross income of $258,250 for singles and $309,900 for married couples filing jointly.
The automatic reduction was brought back for the 2013 filing season, leaving upper income earners with bigger bills from the federal government.

- Dan Bermna, ThinkAdvisor