Thursday, July 31, 2014

Why Are Japan and Eurozone Abnormal? (excerpt)

Japan and the Eurozone have abnormally low bond yields because investors aren’t convinced that their governments’ ultra-easy monetary policies and debt-bloated fiscal policies will revive their economies. These policies are propping up their social welfare states, but aren’t stimulating their private sectors.

Near-zero government bond yields certainly allow the governments of Japan and the Eurozone to keep borrowing to fund their social welfare spending. Yet bank credit remains tight for other borrowers, particularly in the Eurozone. The accommodative monetary policies of the BOJ and ECB remove all the pressure on their governments to rein in their fiscal excesses. Consider the following recent developments:

(1) In Japan, Abenomics, which is simply a bigger dose of the same stimulative policies that didn’t work in the past, isn't working now. Industrial production plunged 3.3% in June (the steepest decline since March 2011), and 6.9% from the recent peak during January. It is back down to the lowest level since June 2013. The outputs of both consumer and capital goods industries are down.

(2) In the Eurozone, the Economic Sentiment Indicator recovered smartly last year, but has stalled over the past four months through July. Most of the region’s survey-based economic indicators have been upbeat for the past year. However, the actual economic recovery has been extremely weak. This is confirmed by the flat trend in the forward earnings of the EMU MSCI over the past year as analysts’ consensus earnings expectations for 2014 and 2015 continued to plunge through the week of July 17.

Today's Morning Briefing: New Abnormal? (1) New abnormal for bonds. (2) Old normal for stocks. (3) From endgame fears to anxiety fatigue, and now complacency. (4) The Bond King’s word games. (5) Old vs. new normal (or neutral). Good morning or good evening? (6) Greenspan and Yellen are investment strategists now. (7) Should the Fed have an investment opinion on biotechs? (8) Japan and Eurozone are abnormal. (9) Old normal GDP in US. (10) Fed in no rush to normalize interest rates. (More for subscribers.)

Wednesday, July 30, 2014

US Confidence Is Heating Up (excerpt)

While the latest batch of US economic indicators has been mixed, as I observed on Monday, consumers seem to be saying that the economy is heating up. That’s according to July’s consumer confidence survey conducted by the Conference Board. This survey is especially sensitive to labor market conditions, which are clearly continuing to improve. Let’s review the latest survey results:

(1) The Consumer Confidence Index (CCI) jumped this month to 90.9, the highest reading since October 2007. Both the present and expectations components of the index moved higher.

The index is available for three broad age categories. July’s gain was led by rising confidence among 35- to-54-year-olds followed by the age cohort that is older than 54. Interestingly, while confidence among those who are under 35 has stalled in recent months, it is higher than for the older groups.

(2) The jobs-plentiful response rate rose to a cyclical high of 15.9 during July. That’s the highest reading since May 2008. The jobs-hard-to-get response rate remained at a cyclical low of 30.7. This series tends to be highly correlated with the official unemployment rate. It is also highly correlated with initial unemployment claims, which fell to the lowest reading since May 2007 in mid-July.

Today's Morning Briefing: Heating Up. (1) Consumers are upbeat. (2) Jobs are more plentiful, so they say. (3) Consumers also say jobs are less hard to get, as confirmed by jobless claims and jobless rate. (4) Underemployment may be depressing Yellen more than consumers. (5) Asia is hot. (6) Good news out of China. Not so good out of Japan. (7) Production at record highs in lots of Asian economies. (8) Asia is especially cheap compared to the Eurozone with its economic and geopolitical woes. (More for subscribers.)

Tuesday, July 29, 2014

Profits Continue to Provide Tailwind to Stocks (excerpt)

There are numerous measures of corporate profits. The National Income and Product Accounts (NIPA), which cover GDP, also include profits data on a pre-tax and after-tax basis. The NIPA data also show profits as reported to the IRS and on a cash flow basis, i.e., from “current production.” Of course, both tend to follow the trend in nominal GDP. Since 1960, profits and GDP have fluctuated around a long-term uptrend line growing at a 7% compounded annual rate.

S&P 500 earnings tend to fluctuate between long-term growth uptrend lines of 5% and 7%. That’s especially the case for actual four-quarter trailing earnings on both a reported and operating basis. Forward earnings tends to fluctuate around the 7% trend line. During 2009 and 2010, it rebounded back to this uptrend line following a steep drop in 2008. Since early 2011, it has been tracking the 7% uptrend line closely. In recent weeks, it’s been showing signs of faster growth.

As long as the economy continues to grow, forward earnings should continue to provide a good tailwind for the stock market. S&P 500 forward earnings tends to be a good leading indicator of actual operating earnings over the coming year when the economy is growing.

Today's Morning Briefing: Earnings Tuesday. (1) Earnings are still growing. (2) Another setup for positive earnings surprises. (3) All measures of profits on uptrends. (4) The magic long-term growth number is 7%. (5) Earnings providing tailwind for stock market. (6) Revenue estimates rising for S&P 500. (7) Broad-based upturn in revenues and earnings for the 10 sectors. (8) IT outperforming, while consumer sectors underperforming so far this year. (9) Financials are cheap. (10) Still recommending overweighting in Financials, Health Care, Industrials, and IT sectors. (More for subscribers.)

Monday, July 28, 2014

Something Is Off In Europe (excerpt)


The UK remains one of the few advanced economies that is advancing at a solid pace. During Q2, real GDP rose 3.1% y/y, the best since Q4-2007. The same can’t be said for the Eurozone. The region’s July flash PMIs look solid. The composite output index, which was 54.0 this month, has been hovering around that level since February. It has been looking good since last summer, yet the “hard” data, such as industrial production and retail sales, have been quite soft. (Click to add Markit PMIs to MyPage.)

Weighing on the Eurozone is that bank loans continue to fall in the region. They declined by €243 billion at an annual rate over the three-month period through June. While the ECB has been providing easy monetary policy, bank regulators (including the ones at the ECB) continue to subject the banks to stress tests that discourage risky lending.

Even Germany, the Eurozone’s strongest economy, is showing the negative effects of tough lending standards, particularly on its large trading partners in the region. The strong euro is another headwind. The uncertainty caused by the Ukrainian crisis, with the potential for shortages and higher prices of natural gas this coming winter, is also weighing on the Eurozone. No wonder that Germany’s Ifo business confidence index fell from a recent peak of 111.3 during February to 108.0 in July. Both its present and expectations components fell sharply this month.

Today's Morning Briefing: Mixed Signals. (1) Bond yields at historic lows, as credit spreads start widening. (2) LargeCaps up, while SmallCaps down. (3) Q2 GDP estimates weaken, as earnings improve. (4) PMIs in Eurozone and China overstating economic growth. (5) Easy monetary policy is coming and going. (6) US labor market improving, yet there’s still slack. (7) ECB is easy on monetary policy, but tough on banks. (8) Strongest economy in Eurozone is weakening. (9) China’s excess capacity is producing more. (10) Japan losing its growth and inflation mojo. (11) “Lucy” (+). (More for subscribers.)

Thursday, July 24, 2014

The Import of Chinese Imports (excerpt)

On July 15 we learned that China’s real GDP rose 7.5% y/y during Q2, up from 7.4% during Q1. The quality and accuracy of China’s economic data have always been questionable. That’s why I monitor all the available indicators to see when they are telling the same story, and when they are not doing so. One of the better sets of numbers is on Chinese imports. Currently, it isn’t confirming the improvement in real GDP growth.

Indeed, total imports (using the 12-month sum in US dollars) is down 0.7% in June from its record high in February. On a yearly percent change basis, it has been growing around 5% since late 2012, well below the double-digit pace of the previous three years.

I also track Chinese imports by country of origin. The recent slowdown in imports to China has been widespread among these countries, with the exception of the European Union, which is at a new record high. Australia and Brazil, the big commodity exporters to China, are flat-lining. So are Japan, South Korea, and Taiwan, which tend to ship capital equipment and technology goods to China. Chinese imports from emerging countries have been submerging a bit in recent months from February’s record high.

Today's Morning Briefing: Mad Dash. (1) A liberal labor market economist. (2) A dashboard with 19 labor market indicators. (3) The result is one index, which is posted on Fed’s website. (4) Different strokes for different folks. (5) Giving more weight to the slackers. (6) Yellen overweights wages. (7) Demographic shifts may be keeping a lid on wage inflation. (8) Easy come the bubbles. (More for subscribers.)