Wednesday, September 2, 2015

US Economy: Homeward Bound (excerpt)


There are clearly enough recessionary indicators around the world to feed investors’ concerns about a global recession. While they were fretting about this scenario yesterday, they ignored solid numbers coming out of the US suggesting that real GDP, which rose 3.7% during Q2, could be revised higher and followed by another solid gain during Q3. Consider the following:

(1) The value of construction put in place rose 0.7% m/m during July, and 13.7% y/y, to the highest pace since May 2008. Leading the way over the past year has been nonresidential construction (up 18%), with particular strength in manufacturing (73), amusement & recreation (60), and lodging (41). Construction of factories has been soaring into new record-high territory since January of this year.

(2) Motor vehicle sales jumped to a new cyclical high of 17.8 million units (saar) during August. Leading the way have been light truck sales. The former is up 2.8% y/y, while the latter is up 9.0%.

Today's Morning Briefing: Breaking China. (1) Looking for support. (2) “Dudley Bounce” has petered out. (3) Good times for pessimists and bears. (4) The decoupling question. (5) No question that commodity producers can’t decouple from China. (6) China is weighing down global M-PMI. (7) Manufacturers in Canada, Brazil, Indonesia, and South Korea are in a world of pain. (8) China’s service economy isn’t serving as well as it should. (9) US and Eurozone M-PMIs remain solid, with just a few tiny cracks. (10) Let’s go home to the USA. (11) Construction spending on factories, lodging, amusement & recreation is booming. (12) Pickup trucks are on the fast track. (More for subscribers.)

Tuesday, September 1, 2015

Drop In Oil Prices Stimulating Demand (excerpt)

Our monthly analysis of global oil demand shows that the plunge in oil prices is stimulating usage, which suggests that the windfall is boosting economic growth around the world. Over the past 12 months through July, world oil demand rose to a record 94.6mbd, and is up 1.9% y/y, up from just 0.8% a year ago.

The growth rebound can be seen in both advanced and emerging economies. Oil demand was up 5.4% in China during July, from 0.2% a year ago, to a new record high. India’s usage is up 5.6%, the fastest pace since May 2008.

So why are oil prices so low? There’s too much supply. Our ratio of global oil demand to world oil supply fell to 1.01 during July, the lowest since February 2007.

Today's Morning Briefing: Back to Basics. (1) Neither boom nor bust. (2) Secular stagnation caused by several structural problems. (3) Why secular stagnation might be ideal for a secular bull market. (4) The correction camp is crowded with former bulls. (5) Basically another flash crash. (6) Lots of S&P 500 sectors showing good earnings performances. (7) Pockets of strength in Europe. (8) China is a black box with lots of zombies crawling around. (9) India’s PM Modi isn’t delivering on his reform promises. (10) Global oil demand confirms that lower prices are boosting usage and stimulating economic activity. (11) The Fed is confused and confusing. (More for subscribers.)

Monday, August 31, 2015

Is US Gross Domestic Income 'Scary?'

Let’s face it: Bad news sells. Doomsday scenarios often capture widespread popular attention particularly well. We live in an age of insatiable demand for content from the financial press. I’ve noticed that many of their websites have adopted a very breezy style that increasingly features headlines aimed at grabbing attention by arousing fear, so that the reader will be motivated to read the often-much-less-alarming story. Even BloombergBusiness seems to be adopting this approach, which I believe was pioneered by Henry Blodget’s Business Insider website. A case in point is an 8/27 BloombergBusiness article titled "The Scary Number Hiding Behind Today’s GDP Party." Here are the first two paragraphs:

“The federal government today released two very different estimates of the U.S. economy’s growth rate in the second quarter. The one that got all the attention was the robust 3.7 percent annual rate of increase in gross domestic product. Not many people noticed that gross domestic income increased at an annual rate of just 0.6 percent.

“That’s a big discrepancy for two numbers that should theoretically be the same, since they’re two ways of measuring the same thing: the size of the economy. If you believe the GDP number, you’re happy. If you believe the GDI number, you’re thinking the U.S. is skating close to a recession.” A closer inspection presents a much less worrisome view:

(1) Small tracking error. The quarterly GDP and GDI numbers tend to be volatile and prone to significant revisions. Indeed, Q2’s growth rate for real GDP was revised up from the preliminary 2.3% (saar) to 3.7%. The growth trends in both real GDP and GDI are more stable on a y/y basis. The former was up 2.7% y/y during Q2, while the latter was up 2.2%. That’s not much of a difference and is consistent with the tracking error that the two have had for years. Since 2010, both of these growth rates have been around 2.5%. Since the recovery began in Q3-2009, real GDI is actually up slightly more than real GDP, i.e., 15.3% vs. 13.7%.

(2) Statistical discrepancy. In current dollars, the quarterly difference between the GDP production and the GDI income measures of overall economic activity has been very small, rarely exceeding +/-2.0% of GDP. This statistical discrepancy tended to be mostly positive from the late 1940s through the mid-1990s, and mostly negative since then.

(3) The big driver. Labor compensation has the biggest share of National Income (i.e., GDI plus net income receipts from the rest of the world less depreciation), accounting for 61.9% of it during Q2. It includes wages, salaries, and supplements. On a y/y basis, inflation-adjusted compensation rose 3.8% y/y during Q2, with real wages and salaries up 4.0%. These are solid growth rates in real income earned by workers, which is the main driver of consumer spending and the overall economy.

Today's Morning Briefing: Alphabet Soup. (1) GDP, GDI, EIP, ETFs, HFTs, & UFOs. (2) Pure air and water. (3) Iceland, Ice Age, and the Ice Man. (4) The financial press is going Blodget. (5) BloombergBusiness finds a scary number. (6) A small statistical discrepancy. (7) Consumer incomes and spending growing robustly. (8) The role of ETFs and HFTs in last week’s market mayhem. (More for subscribers.)

Thursday, August 27, 2015

Black Holes & the Stock Market (excerpt)

According to an 8/25 Newsmax article titled “Stephen Hawking: Black Holes May Have Exits After All,” the famed physicist now believes that black holes may not be the no-exit-ever spaces they’re thought to be. In his latest mind-bending theory, Hawking postulates that unfortunate space travelers could escape from black holes after all, but they won’t be able to go home to their own universe. That’s a bummer. On the other hand, Hawking reassuringly concluded: “If you feel you are in a black hole, don’t give up. There’s a way out.” He presented his views in a lecture on Monday at Stockholm University.

Stock investors are fretting that they fell into a black hole starting last Thursday, with the S&P 500 plunging 10.2% in an almost vertical line through Tuesday’s close. Looking at the chart on Monday, I concluded that the market should find support at 1862.49, which was the low on October 15, 2014, the day before the “Bullard Bounce” commenced. On Tuesday, the market closed on the day’s low at 1867.80. Yesterday, it rebounded 3.9% to close at 1940.51. This could be the beginning of the “Bullard Bungee Rebound.”

Falling below the October 15, 2014 low would be bad, but not as bad as entering a black hole. So far, the market’s selloff looks more like a wicked correction. Yesterday, I attributed it to algorithms and unfair trading tactics used by high-frequency trading (HFT) firms rather than to panic selling by individual and institution investors. Today, I would add that ETFs contributed to the recent debacle. There were mini flash crashes in many ETFs because liquidity dried up as market makers and broker-dealers had no idea what a fund’s holdings were really worth.

The current correction won’t turn into a potential black hole unless the S&P 500 drops to 1704.66, which would mark a 20% bear-market decline from the record high of 2130.82 on May 21 this year. That would be the lowest level since October 15, 2013. That might feel like a black hole, but the S&P 500 would still be up 151.0% since the start of the bull market on March 9, 2009. It would still exceed its previous cyclical high on October 9, 2007 by 8.5%.

That would be cold comfort for most investors who would feel lost in space, believing that Mission Control at the Fed and at the other major central banks can no longer revive the bull market. The 8/26 BloombergBusiness included an article titled “Investors’ Central Banking Saviors Caught Naked as Stocks Slide.” The key point was: “Where have all the heroes gone? The central bankers who saved the global economy in 2008 and kept its anemic recovery from stalling now increasingly lack the tools to respond if the worldwide slump in equities gets much worse.”

Maybe so. But there’s more to the global economy than meddlesome central bankers. There’s also the underlying resilience provided by aspirational consumers, hard-working employees, and innovative entrepreneurs around the world. They’ve done remarkably well for themselves in recent years, with lots of benefits accruing to our economies, despite the meddling of all the central bankers and central planners. Maybe the market bottomed on Tuesday.

Today's Morning Briefing: Black Hole Theories. (1) Stephen Hawking says there’s a way out of black holes. (2) Bullard Bungee Rebound. (3) We blame HFTs and ETFs for exacerbating the recent unpleasantness in the US stock market. (4) Can stock prices move higher if the central banks have lost their magic powers? (5) Dow Theory and Death Crosses. (6) Our mantra: “USA, USA, USA.” (7) Gasoline windfall literally driving the economy. (8) Dudley and his chums are in a black hole without an exit. (9) Fed’s space-age jargon full of “escape velocity” and “lift off.” (10) Reality is probably distorted in black holes. (11) Focus on market-weight-rated S&P 500 Energy industries. (More for subscribers.)

Wednesday, August 26, 2015

Can US Economy Weather the Global Storm? (excerpt)

The latest batch of US economic indicators certainly looks upbeat. The Consumer Confidence Index (CCI) rose sharply during August, led by its present situation component to the highest reading since November 2007.

Most impressive is that the percentage of respondents to the CCI survey who agreed that jobs are hard to get plunged from 27.4% during July to 21.9% this month, the lowest percentage since January 2008. This series is highly correlated with the unemployment rate, which was 5.3% during July. The CCI series suggests that the jobless rate could soon fall below 5%.

By the way, this also suggests that the Misery Index, which is the sum of the unemployment rate and the inflation rate, will continue to fall to new lows for this cycle. In the past, bear markets were associated with a rise in the Misery Index. On the other hand, cyclical lows in the Misery Index marked the tail ends of bull markets.

If you need a couple more indicators to restore your confidence in the US economy, take a look at the ATA trucking index. It rebounded smartly during July, and is almost back to its record high during January of this year. Intermodel railcar loadings rose to a record high in mid-August. “Choo-choo” isn’t the sound of China sneezing.

Today's Morning Briefing: The Iceman Cometh. (1) Albert Edwards is the Iceman. (2) Global freezing. (3) Another 2008 crisis is imminent eventually. (4) Cold summer followed by warm winter for stocks? (5) Blame HFT robots, since most humans are at the beach. (6) It’s good to be plugged in, to front-run everyone else. (7) VIX soars, while Treasury yields meander. (8) Must be getting close to a bottom for commodities. (9) People say US labor market improving significantly. (10) Transportation activity indicators rolling along. (More for subscribers.)