Thursday, February 26, 2015

Confidence Belies Middle Class Distress Legend (excerpt)

The US middle class is reportedly still in distress, although the economic recovery is now 68 months old. Politicians on the left and the right share this view, and blame each other for causing this sorry mess. It’s not at all obvious that the middle class agrees. Consider the following:

(1) Monthly optimism. I derive the Consumer Optimism Index (COI) by averaging the Consumer Sentiment Index and the Consumer Confidence Index. My COI dipped during February to 95 from a cycle high of 101 last month. Both readings are consistent with previous cyclical highs in the index, with the exception of the blowout readings during the second half of the 1990s.

(2) Weekly comfort. The strength in consumer optimism surely can’t be attributed to the “Top 1%.” There aren’t enough of them to move the needle. Apparently, the “Bottom 99%” didn’t get the memo that they should be miserable, or at least pretend to be so. Bloomberg’s weekly Consumer Comfort Index corroborates the upbeat readings of the COI. The weekly components of the weekly Bloomberg measure--including the state of the economy, personal finances, and buying climate--all are back to the previous cycle’s highs.

(3) Misery Index. My COI is highly inversely correlated with the Misery Index, which is simply the sum of the core PCED inflation rate (on a y/y basis) and the unemployment rate. The Misery Index fell during December to 6.9%, the lowest since February 2008. It tends to fall during bull markets and rise during bear markets. The index is also highly inversely correlated with the S&P 500 forward P/E.

Today's Morning Briefing: Exuberance. (1) Is the middle class really distressed? (2) Consumer Optimism Index near previous cyclical highs. (3) Misery Index lowest since Feb. 2008. (4) Spending less on gasoline, more on health care. (5) Bullish sentiment is almost off the charts. (6) Energy and REITs inflate S&P 500 forward P/E. (7) Expensive sectors are the defensive ones such as Consumer Staples and Utilities, which makes them less defensive. (8) Financials & IT sectors are relatively cheap. (9) Focus on overweight-rated S&P 500 Health Care. (More for subscribers.)

Wednesday, February 25, 2015

Headwinds for US Consumers & Home Buyers (excerpt)

It’s possible that US consumers aren’t spending their petroleum windfalls as much as was widely expected because they are not convinced that the prices of the fuels they use won’t bounce right back up, as they often have in the past. Many of them have also seen their health insurance copays rise sharply. The same can be said about their deductibles, which always hit consumers hardest at the beginning of the year until they’ve spent the amounts required before insurance starts picking up the tab.

US consumers have always been very important to the global economic outlook. They may be even more important now given the secular stagnation that is troubling the economies of the Eurozone and Japan. American incomes have certainly been boosted by solid employment gains. Despite a small decline during February, their confidence remained strong. Indeed, 20.5% agreed that jobs are plentiful, barely changed from January's 20.7%, which was the best reading since February 2008. The problem is that when consumers ratchet up their spending, they also spend more on imports. But that’s good for the global economy.

Perhaps the biggest disappointment of the current economic expansion is that housing remains a significant laggard. Indeed, despite the renewed decline in mortgage rates, existing home sales have been weak in recent months. Home buying has been a huge booster of consumer spending in past expansions, especially the previous one. When one buys a home, lots of spending that is discretionary suddenly becomes obligatory to fix it, furbish it, and maintain it.

There are many good demographic reasons why there should be plenty of pent-up demand for houses. On the other hand, there are many that would explain why home sales aren’t booming. The number of singles in the adult population aged 16+ is equal to the number who are married for the first time ever. Singles are less likely to buy a house than married couples. Also, lots of Millennials prefer renting apartments in cities rather than living in the suburbs.

Today's Morning Briefing: Zero Sum Game? (1) The decoupling debate. (2) More integrated. (3) Redistributing growth. (4) Oil: More winners than losers? (5) Negative vibes from oil shock. (6) US consumers using oil windfalls to pay health insurance deductibles? (7) Housing recovery still lagging. (8) Net Earnings Revision Indexes up in EMU and Japan, down in US. (9) Yellen sprinkles her fairy dust. (10) Yellen still worrying much more about labor market than financial bubbles. (11) Earnings: One more time. (More for subscribers.)

Tuesday, February 24, 2015

US Revenues: Running Out of Energy (excerpt)

In the Quant Center of our website, we update, on a weekly basis, tables showing analysts’ consensus expectations for annual revenues growth rates. As of February 12, here is the performance derby for S&P 500 revenues growth rates this year for the sectors: IT (7.3%), Health Care (6.2), Consumer Discretionary (4.7), Consumer Staples (4.0), Telecom Services (2.9), Financials (2.4), Industrials (1.9), Utilities (1.2), S&P 500 (-0.2), Materials (-1.0), and Energy (-24.3). Clearly, Energy is a huge drag on revenues.

The y/y growth rate of S&P 500 revenues is highly correlated with the comparable growth rate of manufacturing and trade sales. The former was up 4.9% during Q3, while the latter was up only 0.9% during December. Excluding petroleum products, business sales rose 5.5% y/y during December

Today's Morning Briefing: More Fairy Dust? (1) Something in common with Yellen. (2) Shades of grey. (3) “Patient” may still be the word after first rate hike. (4) “Patient” is the new “measured.” (5) Will Fed's report update valuation view? (6) Hilsenrath’s take. (7) Earnings erosion may be spreading beyond Energy. (8) Is a P/E of 19.0 irrationally exuberant? (9) Energy is weighing down revenues growth for S&P 500. (More for subscribers.)

Monday, February 23, 2015

Why Have Bond Yields Rebounded? (excerpt)

The 10-year Treasury bond yield is up from this year’s low of 1.68% on February 2 to 2.13% on Friday. It started the year at 2.17%. What happened to trigger such a fast and nasty reversal? Here is a partial list:

(1) Payroll employment data were released on February 6, showing not only another solid gain in January payrolls but also big upward revisions to the previous two months. The federal funds futures market immediately discounted a Fed rate hike around midyear and another by the end of the year. The FOMC minutes cited above seemed relatively dovish, as I discussed last week, but the meeting occurred the week before January’s robust data were released. Subsequently, several Fed officials have said that they favor starting liftoff at midyear.

(2) German yields fell early this year on weaker-than-expected new orders data for November, released on January 8. This year, the German 10-year yield fell to a record low of 0.31% on January 30 in response to mounting fears of a Grexit and the worsening of the Ukraine crisis, along with deflationary CPI readings and anticipation of QE.

However, on February 5, we learned that December factory orders rose 4.2% m/m, led by a 4.8% increase in foreign orders. This augurs well for exports, which rose to a record high during December. Eight days later, Germany’s latest real GDP release showed a gain of 2.8% (saar) during Q4-2014. On Friday, Markit reported that the Eurozone’s Composite Output PMI rose from 53.5 during January to 54.3 during February, the highest in seven months. The German bond yield is now back up to 0.36%.

(3) Japanese yields also have risen recently on better-than-expected economic data, and expectations of more to come. The 10-year government yield fell to a record low of 0.21% on January 19. Real GDP rose 2.2% (saar) during Q4-2014, according to the February 15 release. On February 18, we learned that exports rose 1.8% m/m and 17.0% y/y during January. The 10-year bond yield is now up to 0.37%.

Today's Morning Briefing: Bad Jokes. (1) Bag of monetary tricks. (2) Two-handed economists tend to be data dependent. (3) On the third hand: Market dependence. (4) Financial stability is another concern of the FOMC. (5) Forward guidance: Thanks, but no thanks. (6) Did ECB corner itself into QE? (7) Eight reasons why bond yields have risen this month. (8) Currency depreciations lifting German and Japanese exports. (9) Foreign bond buying in US surprisingly weak. (10) Keep the euro, pass the ouzo. (11) Yellen likely to sprinkle more fairy dust this week. (12) Is Yellen still short Biotech and Internet stocks? (More for subscribers.)

Thursday, February 19, 2015

Eurozone Bonds Ignoring Greece This Time (excerpt)

When the Greek drama unfolded during 2010 and 2011, the 10-year Greek government bond yield soared to peak at a high of 43.92% on March 8, 2012. That triggered a divergence among Eurozone bond yields, with peripheral yields moving higher while core yields trended lower. In the latest act of the Greek drama, the 10-year Greek yield rose from last year’s low of 5.57% on September 5 to 9.66% currently, still well below the prior peak. The yields of comparable bonds in Italy and Spain remain relatively subdued at 1.62% and 1.60%, though still higher than in France at 0.69% and Germany at 0.38%.

Helping to keep a lid on bond yields in the Eurozone is the perception that the financial uncertainty and turmoil triggered by a Grexit might worsen deflation, and would be minimized by the ECB, which will start its QE program in March.

Today's Morning Briefing: Greece or Dare? (1) Germany asks Greece: “Yes or no?” (2) They invented math. (3) Three reasons why Greece doesn’t matter, so far. (4) From nothing to fear to fearing nothing. (5) Eurozone stocks and bonds remain calm, except in Greece. (6) QE is coming to Eurozone. (7) Some stocks are relatively cheap in Eurozone compared to US. Some are not. (8) US stocks aren’t cheap, but they are cheaper than bonds. (9) Contrarians beware: Four times more bulls than bears. (10) Dovish FOMC minutes support one-and-done scenario for Fed rate hiking. (11) So does federal funds outlook implied by futures. (More for subscribers.)