Granite Group Advisors

Over the last week, the housing environment has weakened here in the US.  Last week’s June housing report was not pretty:  there was a surprise 8.1% drop, and building permits fell to 4.2%.  (Both May readings were revised lower as well). This morning we received another report that pending home sales fell 1.1% while the market expected a gain of 0.5%.  We have reiterated in past commentaries that housing would not do well because of demographics, hence housing prices will continue to stall even with historically low rates. Traditionally, housing is one of the biggest industries to lead us in and out of recession. The last few years has seen a rebound in prices and sales from its dismal bottom, but the current data suggests that housing will not help us further in our hunt for sustainable economic growth.

You can follow Granite Group Advisors on LinkedIn and learn more about our Corporate Retirement Services and Wealth Management on our  Website.

This morning the equity markets are taking a major leg down. This is in response to a Portuguese bank missing a coupon payment on a short term piece of debt. If you add in that Israel is putting thousands of ground troops at the border, this is an excuse for the markets to come down from high valuations. Europe’s problems, while getting better, have obviously not gone away. What is apparent, as we have discussed in previous blogs, is that the market has just moved too far too fast. The continued slow growth in the economy, and a premium P/E ratio of 17 times this year’s earnings, is hard to justify. From our perspective: the market needed a pullback to get back down to a reasonable valuation. The additional fear of war between the Palestinians and Israel certainly does not help people feel safe. Granite Group believes this news will bring an opportunity to put equity money to work at more reasonable valuations.

You can follow Granite Group Advisors on LinkedIn and learn more about our Corporate Retirement Services and Wealth Management on our  Website.

This morning the second revision for 1^st quarter GDP came in at a dismal -2.9%.  Most of the revisions came on healthcare spending and exports.  As they have in the previous few years, the Fed projected a 3% growth rate for the year. Based upon what Granite Group is seeing, there is no way that projection will come to fruition.  The economy picked up a bit in the second quarter, but the type of growth we need is still nowhere in sight.  Spending makes up roughly 66% of GDP and second quarter GDP numbers are looking like sub 3% for the second quarter.  While the economy is slowing moving forward, the stock market has continued its trajectory. The markets are at a point of fair value, but Granite Group believes that the melt up only has a little further to go in the short term.  Let’s hope that the economy can grow like gangbusters in the 3^rd quarter and show a brighter light at the end of the tunnel.

You can follow Granite Group Advisors on LinkedIn and learn more about our Corporate Retirement Services and Wealth Management on our  Website.

Granite Group has been stating all year that subpar growth will be persistent. Today, the IMF lowered it’s 2014 growth forecast from 2.8% to 2%. They are still maintaining a 3% global growth rate for 2015. Global Growth rates are important because they help determine market valuations. If the historical valuation is 14.1% times earnings and the economy is growing well below normal growth rates, how do does the market justify a premium valuation of 16.5 times 2014 and 15.25 2015 earnings?

Market pundits are touting 17 times earnings because of low interest rates and “there is no where else to go”. That would bring the 12 month S&P 500 target to 2150, 11% upside from today. That may happen, but we believe that the longer term might be fraught with headwinds as interest rates climb and China continues to slow. Have patience, be careful and wait for opportunities.

You can follow Granite Group Advisors on LinkedIn and learn more about our Corporate Retirement Services and Wealth Management on our  Website.

After the writing of the blog, the ISM manufacturing index was revised for the second time, today.  The new number is 55.4, which closely matches the original expectation.  The newest information does not change Granite Group’s forecast.

This morning we had an interesting error in the first published  ISM manufacturing index (a leading indicator).  The first report showed a slowing to the previous month with a reading of 53.2 but roughly an hour later they revised the number due to an error in the seasonal adjustment and the actual reading came in at 56. The expectation of 55.5 was now a beat and the market turned positive on the news of the reversal.

Most economists expect to see our economy pick up steam this year, but the evidence so far is mixed and that expectation does not seem to be bearing out  in the numbers.  GGA believes that the economy will not hit the 3+ GDP number in the 2^nd quarter unless May’s retail sales dramatically improve.  We still have some time to pick up the pace for the rest of the year, but we need better data to support the expected growth.  Even if the economy  picks up in the second half of the year,  it would have to be an enormous number to reach the key 3% growth rate as the fed predicted and make up for the 1% decline from the 1^st quarter.  This will be the 5^th year in a row the Feds have predicted a better growth rate, and once again GGA believes the economy will be shy of this  goal.

You can follow Granite Group Advisors on LinkedIn and learn more about our Corporate Retirement Services and Wealth Management on our  Website.

                Since the financial crisis of 2008, we have seen interest rates come down and stay down.  The fed, with their continuous stimulus programs have had much to do with keeping the long term interest rates at record lows, but one day this will all come to an end.  As of this writing, the 10 year treasury is yielding  2.5%.   

Economic growth is the first step towards the interest rate cycles move up.  While we all want our economy to improve, this will eventually lead to higher interest rates.  Why higher interest rates? Because roughly 70% of core inflation is wage inflation.  The only way for us to get wage inflation is for the economy to start growing to the point where employment demand increases the costs.  Additionally, there should be a wage blip coming due to the fact that minimum wage is being pushed up around the country, however we see this as a one-time inflation move. 

Granite Group’s expectation is that we will not see the big growth this year that is expected by the big Wall Street firms as well as the Fed.  However, with the fed continuing to pare back and eventually stop stimulus, interest rates have nowhere to go but up!  Our best guess is that interest rates on the 10 year treasury should be in the 3% range by year end. As yields to go up, prices on fixed income instruments will have to come down.

You can follow Granite Group Advisors on LinkedIn and learn more about Corporate Retirement Services and Wealth Management on our Website.

First quarter’s GDP report came in at 0.1% growth which was not expected to be that low, but all the pundits blamed the weather.  Investors looked past the GDP report and are hoping for a second quarter rebound.  The positive reports seen last week illustrated that the US economy is improving.  Jobs, ISM and Chicago PMI are all showing the economy expanding, however they are not gangbuster growth numbers.  The market is looking for a catalyst to propel itself higher but we have not seen that kind of evidence yet.  The old expression is three positive or negative reports makes a trend;  if this data continues, Wall Street will get that catalyst.  Any decent dips would translate into good entry points for cash on the sidelines.

You can follow Granite Group Advisors on LinkedIn and learn more about Corporate Retirement Services and Wealth Management on our Website.

Granite Group has discussed market valuations and earnings driving this market forward many times this year. According to RBC, approximately 28% of the companies have reported earnings and the S&P 500 ex-financials surprised to the upside by 1.9%.  However, revenues missed by 0.3%.  Including financials paints an uglier report.  As GGA has stated before in our previous commentaries, for the market to make any dramatic move higher, the S&P would need a better earnings season.  As the S&P stands now we are trading at roughly 16 times this years  earnings and 14.5 times next years. Unless earnings start picking up, in our humble opinion, this would make the markets fairly to slightly over valued.  The lack of real earnings growth in the S&P 500 should translate into just plugging along. We are still looking for slightly higher markets at the end of the year, but we are well below the rest of the Street

You can follow Granite Group Advisors on LinkedIn and learn more about our Corporate Retirement Services and Wealth Management on our  Website.

On March 17^th,  with the stock market up strong, we predicted a pullback would be coming soon.  On Thursday and Friday of last week we saw the markets fall by roughly 3%.  The  S&P 500 total return index is now down 1.19% for the year.  Granite Group Advisors has been consistent with our “fully valued” opinion based upon our sub 3% growth environment. 

Retail sales came in better than expected this morning with a rise of 1.1%. The markets should move back up again but it is earnings that always drive markets on a go forward basis.  If results come in mixed, the markets will probably see a repeat of first quarter.  At this valuation, if good corporate earnings persist, markets will have a chance to rise.  One thing for certain is that the markets will continue to be volatile. 

You can follow Granite Group Advisors on LinkedIn and learn more about our Corporate Retirement Services and Wealth Management on our Website.