Thursday, September 18, 2014

Inflation Remains a No-Show (excerpt)

Despite all the liquidity provided by the major central banks since 2008, inflation remains remarkably subdued around the world. On September 2, I wrote: “If we knew six years ago about the extraordinary rounds of ultra-easy monetary policy that the major central banks were about to pursue, most of us would have predicted hyperinflation. Instead, the widespread worry is about deflation. Over the past five years, Milton Friedman’s dictum that ‘inflation is always and everywhere a monetary phenomenon’ hasn’t played out.”

I also observed that in the US there is clearly less slack in the labor market and in the overall economy than a year ago. Yet both wage inflation and price inflation remain remarkably low. I noted that there are lots of reasons why this is happening and may continue to do so. Globalization continues to keep a lid on wages. Easy money has financed excess capacity around the world, which is keeping a lid on prices. There have been lots of technological innovations, which tend to be deflationary. Low price inflation is keeping a lid on wage inflation.

So inflation isn’t always and everywhere a monetary phenomenon. Furthermore, deflation may be a monetary phenomenon if ultra-easy monetary policy boosts production capacity more than it does demand.

According to the IMF, the world CPI down-ticked to 3.2% during July. The inflation rate for advanced economies was just 1.6% y/y. That’s the 27th consecutive month of readings under 2%. The inflation rate for emerging economies fell to 5.3%, the lowest since October 2009.

Today's Morning Briefing: Yellen’s Theory of Relativity. (1) Fed is in no rush to hike rates. (2) What is the meaning of time? (3) Yellen says “considerable time” is data dependent, not date related. (4) So time is relative, or simply irrelevant. (5) Don’t watch the clock, watch the game. (6) PBOC stealthily injecting liquidity? (7) Inflation remains a no-show. (8) Friedman’s phenomenon remains a phantom. (9) Nonmonetary explanations for lowflation. (10) Europe is on the edge of deflation, while Japan edges away from it. (More for subscribers.)

Wednesday, September 17, 2014

Another Earnings Season Ahead with Positive Surprises (excerpt)


Here we go again. As the Q3 earnings season approaches at the start of October, industry analysts are scrambling to lower their forecasts. They seem to do so just prior to every earnings season. It happens because companies guide analysts to lower their numbers to avoid reporting negative surprises. For some reason, analysts willingly accommodate their wishes.

Their collective downward revisions rarely depress stock prices because investors have come to expect that the analysts once again are setting the stage for more positive earnings surprises. Besides, while they are lowering their numbers for the coming quarterly earnings season, they rarely do so for the following quarter until a few weeks before its earnings season begins, and so on and so forth.

Since the start of Q3 during the first week of July through last week, the consensus forecast for the quarter has dropped by 4.1% to $29.12, which is below Q2’s $30.10. The latest estimate is up 5.4% from last year’s result for the same quarter. However, we can probably count on upside surprises to bust Q3’s growth. That’s what happened during Q2 when the pre-season forecast of 6.0% y/y turned out to be actually 9.9%.

Today's Morning Briefing: Bear Necessities. (1) Is the bull market aging or maturing? (2) A stealth bear market in the Nasdaq. (3) Internal correction of speculative SmallCaps is bullish for overall bull market. (4) Some wise guys are bearish. (5) Bears are MIA. Do we really need them? (6) Fed may issue hawkish statement, but Yellen should remain dovish. (7) Some things to fear. (8) Bulls don’t die from old age. They are killed by recessions. (9) Recession scenarios not compelling right now. (10) Nothing to fear but a melt-up? (11) Earnings roundup. (More for subscribers.)

Tuesday, September 16, 2014

US Is Gushing Oil (excerpt)


The weakness in the price of crude oil in the face of all the turmoil in the Middle East is extraordinary. It certainly suggests that global economic growth remains subpar. Despite a sharp drop in Libyan output recently, OPEC production continues to hover between 36mbd and 38mbd. Non-OPEC output rose to a record 54.8mbd during July.

Contributing to that record high is US oil field production, which is soaring and reached almost 9.0mbd in early September. The US is now exporting 3.7mbd of crude oil and petroleum products.

Today's Morning Briefing: Losing Energy. (1) Interesting week. (2) Separatists are agitating in Scotland & Spain. (3) Draghi throwing more spaghetti on the wall to see if it sticks. (4) Oil and gasoline prices plunging. (5) Oil at $75 would be bad news for Ras-Putin. (6) A timely call to underweight Energy. (7) US oil output close to 9.0mbd. (8) Industrial commodity prices also losing altitude. (9) China has too much debt, corruption, and capacity. (10) Chinese output fell in August m/m. (11) Railways freight traffic on slow track in China. (12) China’s shadow banks are getting squeezed. (13) Focus on overweight-rated S&P 500 IT. (More for subscribers.)

Monday, September 15, 2014

Retail Sales Revised Higher (excerpt)

Preliminary data showed that retail sales stalled during June (0.2% m/m) and July (0.0). I wasn’t surprised that June and July were revised up to 0.4% and 0.3%, respectively, last week when the Commerce Department also reported a 0.6% gain in August to a new record high. Maybe last month’s gain will be revised higher too.

I wasn’t surprised because the retail sales series is now even more closely in line with our rising Earned Income Proxy, which tracks the private sector’s wages and salaries in personal income. In addition, forward earnings for the S&P Consumer Discretionary Retailing Industry rose to yet another record high in early September. Furthermore, the Consumer Sentiment Index rose in mid-September, led by a 4.3-point jump in the expectations component to a 14-month high of 75.6. The present situation component eased a bit to 98.5, remaining near August’s cyclical high of 99.8.

Today's Morning Briefing: A Brief History of Considerable Time. (1) Fed will normalize once the economy has escaped. (2) Are we there yet? (3) Charles Evans saw it coming last year. (4) “Considerable time” has been around for a considerable time. So has NZIRP. (5) Time to drop time? (6) The case for 2.5%-3.0% bond yields. (7) Hilsenrath’s take. (8) Yellen will soften the blow. (9) How can we measure escape velocity? (10) Another solid batch of US economic indicators. (11) Upward revisions give retail sales a boost. (12) Focus on market-weight-rated S&P 500 Consumer Discretionary Retailers. (13) “The Drop” (+ +). (More for subscribers.)

Thursday, September 11, 2014

Australian and Canadian Dollars Rolling Over Again (excerpt)

The currencies of countries that are major exporters of commodities tend to be highly correlated with the CRB raw industrials spot price index. This is especially so for the Australian and Canadian dollars. It’s not a perfect correlation, but they both do reflect the major trends in industrial commodity prices. Both currencies were especially weak last year. They regained some ground earlier this year, but seem to be rolling over again.

Today's Morning Briefing: Decoding Currencies. (1) Interesting times. (2) When dollar goes up, commodities go down, and vice versa. (3) That’s especially true for industrial commodities, crude oil, and gold. (4) Fundamental driver of dollar and commodity prices is relative strength of US economy. (5) Dollar should strengthen as US becomes less dependent on oil imports. (6) Draghinomics and Abenomics boil down to currency depreciation policies. (7) Scots free? (8) Australian and Canadian dollars remain commodity currencies. (9) Focus on underweight-rated S&P 500 Materials. (More for subscribers.)