With central bank policy remaining as the single factor that trumps all geopolitical turmoil, earnings guidance from the private sector and all other risk factors in global markets, today will be a day of waiting for investors. Federal Reserve chair Janet Yellen’s speech tomorrow on the first day of the Jackson Hole symposium will be carefully parsed for any signal that the Fed may adjust course as the U.S. economy improves at a pace too slow to provide the full job market recovery targeted by the central bank. Minutes from the Federal Market Open Committee’s most recent meeting, released yesterday afternoon, indicated growing dissent within the Fed’s policymaking group regarding the risk-adjusted value of remaining in its present ultra-accommodative mode. The wait continues for those looking for reassurance that the doves still have control of the liquidity purse strings.
PMI in China disappoints. The preliminary HSBC China manufacturing purchasing manager index (PMI) level registered at 50.3, significantly softer than consensus forecasts and much weaker than July’s final 51.7. Growth in new orders, export demand and output all contracted for the month in the latest signal of moderating momentum for the nation. Unlike the official NBSC/CFLP PMI indexes, the HSBC survey focuses on smaller, privately held factory operators that, as they are more immediately reactive to demand shifts, may provide a better pulse on near-term trends. In the wake of recent disappointing credit and production data releases, the question is whether activity will deteriorate to a point justifying further stimulus measures by the central government.
Europe continues to struggle. Initial PMI data from primary European Union economies also fell short of forecasts. The composite euro zone index registered at 52.8, versus consensus forecasts of 53.4. Industrial-specific indexes shows particular cause for alarm: The Germany specific index came in at 52, falling from 52.4 the previous month, while French factory level activity fell deeper into negative territory at 46.5 compared to 47.8 in July — the fastest decline in more than a year. Taken as a whole, this data set suggests euro zone growth is continuing to flat line, bolstering the European Central Bank’s case for intervention.
U.S. jobless claims numbers released today. The theme of this year’s Jackson Hole symposium is specifically dedicated to the labor market, so this week’s release of first-time unemployment claims numbers, due out this morning, stands to get special attention. Although consensus forecasts call for an improvement in this week’s claims data, from last week’s 21,000 first-time jobless claims, slackness in the employment situation will remain a significant argument for a dovish policy stance as investors await Yellen’s Jackson Hole speech tomorrow.
More earnings announcements on deck. San Francisco–based Apparel retailer Gap, Mountain View, California–headquartered financial software company Intuit and San Francisco–based cloud computing company Salesforce.com are among the U.S. public companies announcing quarterly results today. In an announcement this morning, Hoffman Estates, Illinois–headquartered Sears Holdings Corp., operators of department store chains Sears and Kmart, reported a second-quarter 2014 decline of $5.39 per share — its ninth consecutive quarterly loss — a sign of the company’s struggles to regain market share from big-box competitors.
Portfolio Perspective: Closed-End Funds Provide a Chance for Investors Who Missed the MLP Boat — Erik Herzfeld, Thomas J. Herzfeld Advisors
The revolutionary expansion of the U.S. oil and gas industry in recent years, combined with ultra-low yields in bond markets, put a spotlight on master limited partnerships (MLPs) as income-generating investment vehicles. Energy-sector MLPs have provided some of the hottest returns this year. One example is the Alerian MLP index, which tracks large- and mid-cap energy companies, up nearly 20 percent year-to-date. Consequently, many investors who hesitated to take positions in the sector are now feeling that they may have missed out on an opportunity. Ironically, closed-end fund (CEF) MLP’s are currently at some of the cheapest levels relative to net-asset value in years. These instruments essentially create an actively managed, diversified portfolio of MLPs such as Kinder Morgan and Williams Companies and can be purchased at discounts to NAV near 10 percent. As a point of comparison, just two years ago, the average CEF MLP fund traded at a premium just over 6 percent. Nearly half of the CEF MLPs are trading at discounts greater than 8 percent as of yesterday’s close. We feel buying top managers in the space at a discount to the market value of the underlying portfolio provides the opportunity to invest and capture any narrowing of the discount, as well as future capital appreciation.
Erik Herzfeld is a portfolio manager for the Virtus Herzfeld fund at Thomas J. Herzfeld Advisors, a Miami-headquartered firm specializing in closed-end fund investments.
