Economic releases this week showed strength, which helped to balance the softer U.S. Employment Report released in the previous week. Most equity markets finished the week on a positive note. Falling interest rates and little-changed credit spreads gave a boost to the bond markets. The U.S. dollar strengthened. Except for Brent Crude, commodity prices increased on the week.

Perspective:

With recovery finally starting to take shape in the U.S. economy, what could go wrong? This week's Bloomberg Business week article, The Next Big Threat to the U.S. Economy, warns that student loans "...are one of the only deteriorating pockets of consumer credit, with balances and delinquency rates rising to record highs even as a strengthening economy allows Americans to reduce total borrowing." The BW article cites total outstanding student debt of $1 trillion in the third quarter of 2013 and a 90-day delinquency rate of 11.8%. BW in the September 2013 issue cited that student debt surpassed credit card debt in 2010 and auto debt in 2011. The share of 25-year-olds with student debt ballooned from 25% in 2003 to 43% in 2012; during that time the average loan balance almost doubled to $20,326. For many the debt is for life; 4% of the debt, or $36 billion, is owed by people 60 years and older; this loan balance for seniors will increase as the current debt holders age.

How could this be a threat to the U.S. economy? First, these graduates are entering the building phase of their life-cycle, when they would be buying houses, cars and appliances to go with them. The overhang of debt will be a drag on consumer spending. Second, student loan default rates can hit the financial markets just as the sub-prime loans defaults sparked the Great Recession of 2008. Finally, the "Government guaranteed" debt means that taxpayers will feel the additional burden of student-loan defaults.

On a personal note, I have great admiration as well as concern as our kids put themselves through their own graduate studies.

Economic Releases:

U.S. Industrial Production (blue in the graph) increased +0.3% in the final month of 2013. Capacity Utilization (red in the graph) increased a tick to 79.2%. Both measures followed significant increases in November and were supported by a +0.4% increase in Manufacturing.

The headline U.S. Retail Sales (blue in the chart) increased only +0.2% in December, but without the more volatile automobile sector, Retail Sales posted a robust +0.7% gain. The combination of strong finishes in Industrial Production and Retail sales balanced the weaker December Employment Reports to suggest a stronger Q4 GDP than previously expected.

Other Economic Releases

U.S. Housing Starts slipped to 999,000 in December after a 23% increase in November to 1.107 million. Similarly, Permits also slipped to 986,000 from 1.017 million in November. Adverse weather conditions may have contributed to the housing declines in December.

In the start of the new year, the University of Michigan Consumer Sentiment Index slipped two points to 80.4 for mid-January. The Empire State Manufacturing Survey jumped 10 points to 12.51 and the Philadelphia Fed Survey increased 2 points to 9.4 in January. The National Assoicaiton of Home Builders slipped a point to 56 in January. For the week of Jan. 11, New Jobless Claims dropped 2,000 to 326,000; the four-week average of Claims dropped to 335,000.

Industrial Production in the European Union rose 1.8% in November. Inflationary pressures in the EU picked up in December, but remained well below the 2% target for the year; German Consumer Price Index gained +0.4% in December, but rose only 1.4% for the year; French CPI gained +0.3% for December, but only +0.7% for the year. The UK CPI rose +0.4% for December, but 2.0% for the year; UK Producer Prices for Output were flat and PPI for Input rose only +0.1% in December; Output PPI rose 1.0% year-over-year while Input PPI fell -1.2% year-over-year.

Japan's Corporate Goods Price Index rose +0.3% in December, and 2.5% YOY. Japan's Machine Orders surged 9.3% in November.

Equities Markets:

Most equity markets bounced back in the second full week of 2014; only the S&P and the Nikkei were down on the week; yet, the Dow did not rise enough to provide a positive quarter-to-date return.

Bond Markets:

Government bond yields declined, but credit spreads were little changed on the week. Bond markets generated positive returns for the week and quarter-to-date across the globe; only the Swiss yield were higher than they were at year-end.

Currencies & Commodities:

The U.S. dollar gained against the other four currencies in the table. The price of Brent Crude Oil declined, the the price of WTI Oil, Natural Gas and the metals commodities gained on the week.

Who is John Davidson?

John W. Davidson, CFA, started writing these Comments more than a decade ago as a personal discipline when he was promoted to from portfolio manager to chief investment officer and CEO.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.