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Monthly Macro: Baby It’s Cold Outside

Posted on March 4, 2014

“Right now people are thinking that 80% of this weak data is due to weather.” - David Woo, BOA Merrill Lynch 

Our Monthly Macro is a recurring post that appears on the first Tuesday of every month and recaps the high level macro developments of the previous month. We highlight the global themes that we believe are the most important and discuss why they matter for investors. This month’s piece will focus on the impact cold weather in the US is having on economic data, gold's strong start to the year, and the political instability enveloping Ukraine.

Economic Deep Freeze

The media has been infatuated with the weather lately, so we were reticent to make this a central theme of our Monthly Macro. That said, there has been a plethora of economic data points taking a dip, and the polar vortex is almost certainly to blame. Industrial production, mortgage lending, nonfarm payrolls and retail sales have all taken a hit, and the Citigroup Economic Surprise Index has turned negative for the first time since November. Housing data has been the most alarmingly weak. The NAHB Housing Market Index posted its largest monthly decline on record in January, and existing home sales fell to the lowest level in 18 months. The latest reading from the S&P Case/Shiller Home Price Index even showed a month-over-month decline in prices.

WHY IT MATTERS: Has the rollover in economic data over the past two months been a result of frigid temperatures and deep snow? If so, we can expect a sharp rebound from the unleashing of pent up consumer demand once warm temperatures return (see chart). However, if the data is less influenced by weather and is revealing of a real and sustained downturn in economic activity that would have a lot of ramifications for expected fundamentals underpinning financial assets. We believe the former is the more likely scenario, but it’s something to keep an eye on nonetheless.

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Golden Opportunity

The price of gold crossed above its 200-day moving average for the first time in over a year. This is only the fifth time since 1975 that gold has crossed back above the trend line after being below it for more than 12 months, with the other four instances showing strong average returns in the ensuing weeks and months for the yellow metal. After being down 27.3% in 2013, gold is now up over 10% through the first two months of this year. The bounce in price has occurred as the flood of selling in gold-based exchange-traded products has subsided even as demand for physical gold has remained robust and continued growing. This theme is referenced in the latest report from the World Gold Council which states, “Gold flooding onto the market as a result [of large-scale ETF selling] was used to feed the voracious appetite for physical metal among consumers in India, China and numerous Asian and Middle Eastern markets.” 

WHY IT MATTERS: The major selloff in gold was driven almost exclusively by investors reducing exposure to “paper gold” (the exchange-traded products) in their managed portfolios. If that theme has indeed subsided, then future price action will be driven by more traditional demand sources such as jewelry, technology and physical bar and coin demand. Performance thus far this year has been great to see for us given our slight overweight to the yellow metal in client portfolios, and the fact that the price has now broken through the important 200-day moving average will hopefully portend more upside momentum in the coming weeks.

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Ukraine

2014-03-04_crimea_map.gifThe country of Ukraine is at risk of being torn apart over a clash of ideologies. Some in the country want to see a move towards a European style democracy and membership in the European Union, while others remain more loyal to Russia and its interests. Sadly, demonstrators on the pro-European side clashed with Ukrainian police resulting in over 25 lives being lost towards the middle of last month. Shortly thereafter the country’s parliament formally dismissed the Russian-friendly president Viktor Yanukovych, replacing him with Oleksandr Turchynov who promised he would lead the country towards strengthening ties with the European Union. Russia has since responded by moving troops across the border into the Crimean peninsula (see map) under the auspice of wanting to protect Russian citizens residing in Ukraine. More likely, however, is that Putin intends to assist Crimea in seceding from Ukraine and remaining under direct Russian influence. 

WHY IT MATTERS: Often times geopolitical events like the current situation in Ukraine have marginal to no direct impact on financial markets. The prospect of worst-case situations, however, can cause extreme short-term volatility as the situation escalates. We’ve seen this happen over the past week of trading. Vladimir Putin is an extremely controversial international character, and he seems set on doing whatever he deems advantageous to the increased influence and power of Russia. We hope and pray that more bloodshed is avoided and the various international contingents can arrive at a peaceable solution to this territorial dispute.


david_headshot_bw.jpgAuthor David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.


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