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The Citi Economic Surprise Index tracks actual economic data relative to consensus expectations. When the index is above zero, economic data releases are coming in better than expected, and conversely, readings below zero signal economic data releases are below expectations. Since mid-January, the index has been falling and is now in negative territory, indicating a slowdown in economic activity relative to expectations. Some, but not all, of this weakness can be attributed to the harsh winter weather. However, we could be near a low in this measure as economists begin to incorporate new information into their forecasts.

(Source: Citigroup)

This graph shows why Deflation is a bigger worry in Europe right now.

While it’s difficult to distinguish cause from effect between these two monetary indicators they both point towards deflation in Europe. The latest reading from February showed that the 3-month average of M3 money supply growth in the Eurozone remained 1.2% Y/Y. Ostensibly the Germans oppose balance sheet expansion because it is inflationary in nature. Conversely, balance sheet contraction is deflationary in nature; it’s just a matter of picking your poison.

(Source: Bloomberg & GBI)

It is possible if history repeats itself like in the past from 1994 to 1999, when both the markets and the “fear gauge” moved higher together. Are we entering a similar period again?

(Source: Schwab and Business Insider)

Throughout the early 2000s, the median valuation of companies at IPO was approximately three times larger than it was for companies that were acquired, according to PitchBook data. The difference has been even wider in recent years—greater than 5x each year since 2008 and sitting at 6.5x in 2013.

There are obviously manifold reasons for this development, including that publicly traded stocks have been trading at higher multiples in recent years. Importantly, the increasing discrepancy between the two exit strategies’ valuations cannot simply be attributed to investors pursuing fewer but larger offerings. In fact, the median valuation at IPO has actually declined since 2011 as investors have capitalized on the recent strength in the markets to take more companies public; the 85 IPOs of U.S.-based VC-backed companies in 2013 is the most since the dot-com boom.

Another important consideration when comparing exit valuations is that many mergers & acquisitions will involve struggling companies, and some transactions may not even allow investors to recoup their entire investment. While there are exceptions, companies that go public tend to boast strong performance and strong future growth prospects, which naturally leads to higher valuations.

One notable outlier when it comes to valuations at exit comes in 2009, when the median valuation for VC-backed IPOs came in at a whopping $802 million. This may seem odd, given the low regard investors had for public equities during this period. However, considering that only top-notch companies would risk going public in those conditions, the lofty level of valuations seems more reasonable.

(Source: Pitchbook)

High-yield bond spreads have tightened significantly from the record-wide levels reached during the 2008 financial crisis. However, spreads are still wider than the lows reached in the 2005-2007 period. We believe that high-yield spreads may have some room to tighten further as credit is improving, economy continues to grow, there is a lot of cash on corporate balance sheets and defaults remain low.

(Source: Bloomberg)

(Source: Strategas)

Investors who are worried about the market’s parabolic rise in the past five years and whether we are at or near a top, can use the above table to judget where we are in the cycle and whether the tide is about to turn the other way.

Businesses struggled to squeeze much more out of their workers last year.

A downward revision to fourth-quarter productivity lowered the gain for all of 2013 to just 0.5%, the Labor Department said Thursday. The small increase ties with 2011 for the weakest annual improvement since 1993.

Labor productivity, or output per hour, strengthened early in the economic recovery as businesses grew more efficient. The measure increased 3.1% in 2009 and 3.3% in 2010, to mark the best annual improvement since 2003. But gains have slowed considerably since, measuring 0.5% in 2011 and 1.5% in 2012.

The recent weakness was most pronounced in nondurable manufacturing, a sector that includes the processing of food, chemicals and petroleum, as well as textile and paper production. Sector productivity slipped 0.1% last year because output improvements were more than offset by increased hours worked.

The easing of productivity is a bit of a double-edged sword. The weak gains hold back the economy’s potential to grow. But it also could signal that businesses are finding it more difficult to meet demand with their existing workforce and equipment.

If companies can’t squeeze more out of current workers, they might need to ramp up hiring and capital investment.

(Source: Wall Street Journal)

The Bloomberg U.S. Financial Conditions Index, which is an overall gauge of the health of the financial and credit markets, reached an all-time high in late 2013 (the index started in 1994). This is a positive sign that financial markets have returned to solid ground after the shock of the financial crisis. Stable financial conditions help support economic growth.

(Source: Bloomberg)

The U.S. unemployment rate fell to 6.6% in January, the lowest level since October 2008. The unemployment rate has been steadily falling since it peaked at 10% on October 2009. The rate of unemployment has been significantly different depending on the education level of the labor force participant. College graduates currently have an unemployment rate of 3.2%, while those with less than a high school diploma still struggle to find work.

(Sources: Strategas Research Partners, LLC, BLS)