Thursday, October 30, 2014

Trick or Treat? (excerpt)


As I’ve often observed, the current bull market has been a series of panic attacks followed by big relief rallies. Last year and this year, the panic attacks were less severe and shorter than those from 2009-2012. That’s until October’s severe, but short panic attack. Just this year alone, the list of anxiety-provoking events has been a long one: Emerging markets mini crisis (January 23), Crimea invasion (February 28), Yellen rate-hike scare (March 19), momentum stocks meltdown (April 3), ISIS invasion of Iraq (June 10), Portuguese bank panic (July 10), Malaysian jet crisis (July 17), sanctions imposed on Russia (July 29), and the global growth and Ebola scares (September 30). And the year isn’t even over yet. So far, the trick to this bull market is not to panic. Investors who haven’t panicked have had quite a treat, with the S&P 500 up 193% since March 9, 2009.

Today's Morning Briefing: Mission Accomplished. (1) No surprises. (2) QE gets credit from its proud conceivers. (3) The right message. (4) Is inflation back on right track as Fed claims? (5) Harry Truman and the Fed’s two-handed economists. (6) Does forward guidance make sense, or is it nonsense? (7) Running out on “considerable time” on March 18, maybe? (8) Gradual normalization ahead or “one and done?” (9) Sentiment roller coaster, panic attacks, dips, and relief rallies. (10) Lots of earnings weakness across most MSCI sectors overseas. (11) Focus on overweight-rated S&P 500 Health Care. (More for subscribers)

Wednesday, October 29, 2014

Happy Days Are Here Again (excerpt)

All of a sudden, everyone seems to be bearish on oil and bullish on its implications for the economy. That’s fine with me since I started to speculate about a big downside move in the price of a barrel of Brent crude oil to $75 in mid-September. It was around $95 back then. On Monday, with the price around $85, I discussed some reasons why it might not have much more downside. Lower prices might be even too painful for the Saudis, who might reduce their output. The Chinese have been bargain hunting at these prices.

In any event, the drop in the price of gasoline and heating oil is a nice and early holiday present that could boost holiday retail sales. The national average pump price of gasoline has dropped 53 cents from this year’s peak of $3.70 a gallon during the week of July 2 to $3.17 in mid-October. The futures price suggests it will fall below $3.00 in the next couple of weeks.

That’s certainly helping to boost the Consumer Confidence Index. I average it with the Consumer Sentiment Index to derive our Consumer Optimism Index. My derived index rose during October to the highest reading since September 2007.

Interestingly, the Consumer Confidence Index among respondents under 35 years old soared during October to the highest since December 2006. This group’s confidence typically exceeds that of the older groups. I’m not sure why it surged so much for the younger crowd. Maybe they drive more. Maybe they are happier than others that jobs are less hard to find. In any event, they tend to form households. They buy houses, furniture, and cars, especially when they are optimistic.

Today's Morning Briefing: Considerable Time. (1) FOMC likely to treat rather than trick. (2) Fed officials were probably spooked by recent market turmoil. (3) QE has been terminated, until further notice. (4) FOMC has to fear stoking current melt-up. (5) Fed policy is market dependent. (6) Rosengren denies Fed’s role in wealth and income inequality. (7) No exit for central banks from ultra-easy monetary policy for a considerable time. (8) The “one and done” scenario. (9) Long expansion scenario would justify higher P/Es until it doesn’t. (10) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)

Tuesday, October 28, 2014

Eurozone Remains Challenged (excerpt)

In a 10/10 statement, ECB President Mario Draghi noted that the results of a stress test of the Eurozone banks would be released on October 26. This “year-long exercise” has strengthened their capital base, in his opinion. In my opinion, it also explains why banks haven’t been lending. However, Draghi hoped that the banks will finally be in a position to transmit the ECB’s easy monetary policies (including TLTRO and ABS purchases) by lending more soon.

The results are in, as noted in the 10/26 NYT: “The bulk of Europe’s biggest banks would be able to survive a financial crisis or severe economic downturn, the European Central Bank said on Sunday, concluding a yearlong audit of eurozone lenders that is potentially a turning point for the region’s battered economy.” Only 13 of 130 big banks failed the test. The hope is that the others will find it easier to raise money that they can lend out.

For now, the Eurozone’s economy remains challenged. Consider the following:

(1) Business surveys. It was mildly encouraging to see the uptick in the Eurozone’s flash M-PMI during October to 50.7 from 50.3 the month before. It was led by Germany’s flash M-PMI, which rose from 49.9 (the first reading below 50.0 since June 2013) to 51.8. However, France’s M-PMI fell to 47.3 from 48.8. That was the sixth consecutive month below 50.0 for France.

The bad news is that Germany’s M-PMI is highly correlated with the country’s Ifo business expectations diffusion index, which fell below zero during September for the first time since January 2013. The overall Ifo business confidence index dropped to a 22-month low of 103.2 during October from this year’s April peak of 111.2.

(2) Money and credit. While the Eurozone’s M2 growth rate has picked up lately, loans to the private sector continue to fall. During September, M2 rose 3.0% y/y, up from the year’s low of 2.0% during April. However, loans are down 1.7% y/y.

Deflationary pressures are mounting in the Eurozone, with the CPI up just 0.3% y/y during September. The Markit news release on the Eurozone’s composite PMI noted: “Prices were increasingly being cut in order to help boost sales. Average prices charged for goods and services showed the largest monthly fall since February 2010, having now fallen almost continually for just over two-and-a-half years.” Critics of the ECB’s bank stress test complain that it did not stress the risk of deflation.

Today's Morning Briefing: Earnings Swooning. (1) Upside hook missing for Q3 earnings. (2) Oil is weighing more on earnings than the dollar. (3) Energy’s NERI drops sharply this month. (4) Big cuts in S&P 500’s Q4 and 2015 estimates last week. (5) Forward earnings losing some mojo. (6) Will ECB bank stress test results lead to more lending, or more stress? (7) Two Eurozone skeptics. (8) Italy’s economic suicide movement. (9) Germany’s Ifo vs. M-PMI. (10) Corruption is officially forbidden in China. (11) Power to the People, or the Party? (More for subscribers.)

Monday, October 27, 2014

Long Recovery, Long Expansion in US (excerpt)

Despite the steady improvement in the Index of Coincident Economic Indicators (CEI) since the end of the last recession, there continue to be lots of downbeat assessments of the performance of the US economy during the current expansion. But there is potentially an important upside. Consider the following:

(1) A very long recovery. It has taken 68 months--from January 2008 through October 2013--for the CEI to fully recover from its severe decline during 2008 and early 2009. The previous five recovery periods averaged 26 months with a range of 19-33 months.

(2) Looking forward to a long expansion. The good news is that the average increase following each of those recovery periods through the next peak was 18.6% over an average period of 65 months with a range of 30-104 months. If we apply these averages to the current cycle, then the CEI would peak in 54 more months during March 2019 with a substantial gain from here.

By the way, also looking forward to a long expansion are manufacturing companies, as evidenced by soaring new orders for industrial machinery. They jumped 5.9% during August, and 28.4% during the past three months. They’ve been in record-high territory since March. Also rising to a record high were new orders for metalworking machinery.

Today's Morning Briefing: Bottom of the Barrel? (1) From “Peak Oil” to “Trough Oil.” (2) Oiling the secular bull market in equities. (3) Transports at record high as Energy loses energy. (4) Raising Energy sector back to market-weight because stocks are cheap. (5) Downside of oil prices is a known unknown. (6) Saudis can inflict only so much pain on others before it hurts them too. (7) China is bargain hunting. (8) Technology could reduce breakeven for shale oil producers. (9) More upside for US economy following long recovery. (10) Industrial machinery orders soaring. (11) “St. Vincent” (+ + +). (More for subscribers.)

Thursday, October 23, 2014

US Economy Is on the Right Track (excerpt)


The strength of the US economy is reflected in the S&P 500 Transportation index. It edged down yesterday along with the broad market, but remains above its 50-day moving average and only 1.8% below its record high on September 18.

The fundamentals are just as strong. Railcar loadings of intermodal containers rose to a record high in early October. The ATA Trucking Index did the same during September. The railroad and trucking industries are running on cheaper fuels. Both forward revenues and earnings are rising rapidly to new highs.

Today's Morning Briefing: Earnings World. (1) Is the strong dollar depressing Q4 earnings estimates? (2) Not much impact so far on S&P 500/400/600. (3) US forward earnings remains on uptrends in record territory. (4) Sector search shows Energy weighing most on S&P 500 earnings. (5) Cyclical sectors showing earnings resilience despite strong dollar. (6) Overseas, the earnings picture is less bright. (7) S&P 500 Transportation index is on the fast track. (8) Railcar loadings and trucking freight index at record highs. (More for subscribers.)