Thursday, July 30, 2015

Explaining the Stock Market’s Zen (excerpt)

The S&P 500 has been trading in a remarkably narrow range since mid-February between 2040 and 2130. As I’ve noted before, since the start of 2013--when the “fiscal cliff” calamity was averted at the very last minute with a deal struck between Vice President Joe Biden and Senate Majority Leader Mitch McConnell (R-KY)--investors have been impervious to the sorts of anxiety attacks that caused significant corrections during the first four years of the bull market. This year, the major concerns have centered on falling commodity prices, a third bailout plan for Greece, and the meltdown in Chinese stock prices. Yet the market has been Zen-like.

This calm has been reflected in the trend of the 52-week average of the Bull/Bear Ratio compiled by Investors Intelligence. It is up from 1.77 at the end of 2012 to 3.36 at the end of July of this year. The series, which starts in 1988, is in record-high territory. That’s because the sentiment survey’s percentage in the correction camp is also at a record high. In other words, when troubles mount, sentiment doesn’t turn bearish. Rather, it turns mildly defensive, betting that any selloff will be just a correction in a bull market. Ironically, that helps to explain why corrections have been missing in action since the start of 2013.

Today's Morning Briefing: Zen & the Art of Investing. (1) Stocks are calm despite agitated commodities. (2) Why has the Bull/Bear Ratio been trending higher since 2013? (3) Goldman sees a negative feedback loop. (4) The super-cycle hype. (5) Are commodities really an asset class? (6) From the people who brought us BRICs and the GSCI. (7) The surface is calm. (8) Everything you want to know about “Silk Road.” (9) Potentially lots of positive feedbacks. (10) The Zen of freer trade. (More for subscribers.)

Wednesday, July 29, 2015

Is US Economy Getting Soft Again? (excerpt)

The US economy skidded on an ice patch at the start of the year. It seemed to be stuck in a soft patch during the early spring. However, May retail sales blew that notion away: It increased 1.2% following upwardly revised increases of 0.2% (from 0.0%) in April and 1.5% (from 1.1%) in March. Where are we now? On the soft side, again. Consider the following:

(1) Retail sales. The soft patch was back when June’s report showed retail sales fell 0.3%, while there were downward revisions to both May (from 1.2% to 1.0%) and April (0.2% to 0.0%).

(2) Consumer confidence. Yesterday, we learned that the Consumer Confidence Index (CCI) fell sharply during July to the lowest level since last September. Oddly, there was a huge 22-point drop in the index for consumers under 35 years old during July. Millennials may finally be moving out of their parents’ basements and renting their own apartments. They might be depressed that Mom isn’t there to cook dinner for them and do their laundry.

(3) Job openings. Given that initial unemployment claims are the lowest since November 1973 and that job openings are the highest on record, it’s hard to worry about the job market, though Fed Chair Janet Yellen always seems to find something troubling there. Jobs remain relatively plentiful, according to the CCI survey. However, the widening gap between job openings and the perception that jobs are plentiful may reflect the skills mismatch problem.

(4) Durable goods. The financial press mostly put a positive spin on yesterday’s report of a 3.4% increase in durable goods orders. I wasn’t as impressed. It was boosted by a big jump in the volatile civilian aircraft category. Excluding transportation, orders advanced for only the second time in nine months by just 0.8%.

Nondefense capital goods orders excluding aircraft (a proxy for future business investment) rose 0.9% in June after declines of 0.4% and 0.7% the prior two months, and are down 4.0% ytd. These orders contracted 5.4% (saar) in the three months through June (based on three-month average).

Today's Morning Briefing: Room To Grow? (1) Curbing enthusiasm on revenues growth. (2) The dollar remains strong, and oil remains weak. (3) Industry analysts still cutting 2015 and 2016 revenue estimates. (4) Weak growth rates. (5) Forward earnings rebounding and diverging from stalling forward revenues. (6) Forward profit margin at record high. (7) Mixed sector picture. (8) On the soft side, again. (9) Odd decline in consumer confidence. (10) Widening gap between job openings and perception of plentiful jobs reflects skills mismatch. (11) Durable goods orders not so durable. (12) Regional surveys lack luster. (13) Focus on major global MSCI stock indexes. (More for subscribers.)

Tuesday, July 28, 2015

Global Economy Needs Restraining Order (excerpt)

Economic growth can be like a drug. It can produce a real high, especially if it is laced with lots of debt. Fast growth justifies taking on more debt, and it also postpones the bad side effects of too much debt in the economy’s blood stream. It’s all one big rush. The withdrawal pains can be severe once too much debt no longer stimulates the economy. Excessive debt can worsen the economic slowdown, which worsens the pain. The problem is that policymakers tend to respond to this turn of events by providing more doses of debt, hoping to make the pain go away.

It all reminds me of Eugene Landy. In 1983, he was employed as the psychologist for Brian Wilson of the Beach Boys. According to the movie “Love & Mercy” (2014), Landy treated Wilson for psychiatric issues with lots of drugs, which made Wilson more disturbed and dependent on his therapist. A 1992 restraining order barred Landy from treating or contacting Wilson ever again. The global economy may need that kind of restraining order imposed on the major central banks and central planners. All of their meddling is resulting in bad vibrations for the global economy. Consider the following:

(1) Eurozone debt. Loans outstanding at Monetary Financial Institutions (MFIs) in the Eurozone rose €3.75 trillion to a record €10.87 trillion from January 2004 through January 2009. That borrowing binge helps to explain why loans have been essentially flat since then.

The 7/22 FT reported: “Across countries that use the euro, average debt to gross domestic product reached 92.9 per cent in the first quarter of 2015, up from 92 per cent in the previous quarter and 91.9 per cent in the same period last year, according to figures from Eurostat, the EU’s statistical agency.”

On 7/14, the Central Bank of Italy reported that Italian public debt has risen upwards of 2.2 trillion euros in May, a new record for the Eurozone’s second-most indebted country after Greece. Italy’s debt is now at 132% of GDP, compared to Greece’s 175%. Both countries find themselves far from the 60% debt-to-GDP ratio target set by the European Commission.

(2) Chinese debt. China’s bank loans rose to a record $14.5 trillion during June, up a whopping $9.8 trillion since the start of 2009. They exceeded US bank loans for the first time ever during September 2010, and now are 76% greater.

The 7/15 BloombergBusiness reported: “While China's economic expansion beat analysts’ forecasts in the second quarter, the country’s debt levels increased at an even faster pace. Outstanding loans for companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008, data compiled by Bloomberg show.”

(3) Japanese debt. Japan’s gross debt is equivalent to 234% of its GDP. Its public debt was equal to about 85% of its GDP during Q1, up from 23% 20 years ago. A country report released by the IMF this month on Japan warned, “Japan’s public debt is unsustainable under current policies.” It projected that the debt ratio will rise to 290% by 2030.

Today's Morning Briefing: Bad Vibrations. (1) Making the pain go away with more debt. (2) Landy and the Beach Boy. (3) Getting some bad vibrations. (4) Eurozone may be binged-out. (5) China still on borrowing binge. (6) IMF says Japan’s debt is unsustainable. (7) The next Five-Year Plan. (8) Profits are deflating in China. (9) China sneezes. (10) Draghi still waiting for banks to lend to SMEs. (11) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)

Monday, July 27, 2015

When Will the Next Recession Start? (excerpt)

I have previously shown that based on the past five business cycles, the next recession might not start until March 2019. I examined the Index of Coincident Economic Indicators (CEI) for some historical guidance on the longevity of economic expansions. Let’s update our analysis.

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 within a range of 19-33 months. The good news is that the average increase in the CEI following each of those recovery periods through the next peak was 18.6%, over an average period of 65 months within a range of 30-104 months. If we apply this average to the current cycle, then the CEI would peak in 45 more months, during March 2019, with a substantial gain from here.

For now, let’s just enjoy the fact that the CEI is at a record high, and 4.7% above its previous cyclical high during January 2008. All four components of the CEI (payroll employment, real personal income less transfer payments, industrial production, and real manufacturing and trade sales) are at or near their recent record highs. The Index of Leading Economic Indicators rose 0.6% during June, very close to its record high in March 2006.

My extrapolation of the business cycle based on the recent and limited history of the CEI is meant simply as a benchmark for thinking about potential events that could cause a recession sooner, or later, than March 2019. In the past, economic expansions tended to crescendo into booms with rising inflation. The Fed would respond by raising interest rates. Tighter monetary conditions often caused a credit crunch, which then would cause a recession.

This time may not be different, but it has been different so far. Inflation has remained remarkably subdued, not just in the US but globally. Central banks have been flooding financial markets with liquidity in an attempt to boost inflation closer to their 2% targets. So far it hasn’t worked, and instead of a global boom we have global secular stagnation, with China slowing, the Eurozone barely recovering, and Japan stumbling. The CPI headline and core inflation rates among the major industrial G7 economies were only 0.2% y/y and 1.4% during May. The volume of world exports rose just 1.0% y/y during May, while the value of those exports is down over 10% through April.

I doubt that the business cycle is dead, though I suspect that inflation may be dead. As inflation remains subdued and central banks continue to provide ultra-easy monetary policies, the next recession may very well be a long ways off. If inflation makes a sudden comeback, a possibility I can’t dismiss, then all bets are off. A meltdown in China’s financial markets and economy might also trigger a global recession, which is why I am concerned about the renewed weakness in commodity prices, as I discussed last week.

Today's Morning Briefing: The Great Diversification. (1) Deep in the heart of Texas. (2) Lone Star State has lots of stars. (3) Healthy industrial mix around the country. (4) A long time till the next recession? (5) What might cause the next bust? (6) After the Great Moderation and the Great Recession. (7) Business has learned self-control. (8) Similar to the 1990s with more diversification? (9) Can the US decouple from a global recession? (10) Another round of “shock and awe?” (11) Curbing exuberance. (More for subscribers.)

Thursday, July 23, 2015

More “Selfie” Households Who Rent (excerpt)

On a year-over-year basis, household formation hovered mostly below 1.0 million units from 2007 through mid-2014. Over this period, the growth rate in household formation fell below the growth of the civilian noninstitutional working-age population. The direct impact and the lingering effect of the Great Recession clearly depressed household formation. This may be finally about to change, as household formation has exceeded 1.0 million on a y/y basis every month for the past six months through March.

Many of the new households are likely to be seniors living alone or young unmarried adults living either alone or together to share living expenses. These “selfies” are more likely to rent than to buy homes. The percentage of the adult population 16 years or older who are singles has been running around 50% since June 2014. That’s up from 37% in the mid-1970s.

Since 1994 and through 2013, the percent of households with one person rose from 24% to 28%, while the percent with three or more persons fell from 43% to 39%. Since 1970, the percent of households with married couples living with their children dropped from 40% to 20% during 2012. Apparently, young selfies tend to get married later in life. During 2013, the median ages of first marriage for men and women were 29 and 27, up from 26 and 23 thirty years ago.

The homeownership rate for persons under 35 fell from a peak of 44% during Q2-2004 to 35% during Q1-2015. The rate for 35- to 44-year-olds fell from 69% to 58% over this period.

Since 2004, on balance, the number of households who rent jumped by 9 million, while the number who own fell 2.5 million since 2006. As a result, the percent of households who rent rose from a low of 30.8% during Q2-2004 to 36.3% during Q1-2015, the highest reading since Q2-1995.

Today's Morning Briefing: Build & They Will Come. (1) Is housing’s subpar recovery on a good foundation? (2) Demographic profile still favors renters over owners. (3) Household formation is picking up. (4) More younger and older “selfies.” (5) Getting married later. (6) More renters. (7) Millennials and Gen Xers are stuck. (8) Baby Boomers don’t want to cut the grass. (9) Student loan burden. (10) Affordability and availability of credit still hurdles for would-be homeowners. (11) Field of dreams and nightmares. (12) High-end buildings with sky-high rents. (13) Focus on market-weight-rated S&P 500 housing-related industries. (More for subscribers.)