Monday, November 24, 2014

Is a Strong Dollar Bullish or Bearish for US Stocks? (excerpt)

Of course, a major concern among investors is that slower global economic growth outside the US and a stronger dollar will weigh on S&P 500 earnings per share. That’s why I lowered my forecasts last week to $125 in 2015 and $135 in 2016, down from $130 and $140 previously. On the other hand, it is interesting to note that US stocks tend to outperform stocks in the rest of the world when the dollar is strong. That’s because this generally happens when the US economy is outperforming the overseas economy. On a ytd basis, the US continues to outpace the other major MSCI stock prices indexes (in dollars): US (11.4%), All Country (4.1), Emerging Markets (0.2), Japan (-3.9), UK (-5.6), and EMU (-7.3).

Today's Morning Briefing: London Days. (1) Tour of London. (2) Taxi vs. limo drivers. (3) “The Knowledge.” (4) Attack of the socialized students. (5) Worrying about both high P/Es and a melt-up in the US. (6) The new consensus on bonds. (7) Secular stagnation overseas, and no global recession in sight. (8) PMIs flashing global slowdown. (9) Waiting for wage inflation and Fed normalization. (10) Putin needs higher oil prices. (11) Is a strong dollar bearish or bullish for US stocks? (More for subscribers.)

Wednesday, November 19, 2014

Wage Inflation Remains Abnormally Low (excerpt)


Wage inflation remains abnormally low although the labor market has clearly tightened. The short-term unemployment rate fell to 3.9% during October, the lowest reading since November 2007. Back then, wage inflation was 3.3%. Today, it is only 2.0%. Fed Chair Janet Yellen has said that she believes that wage inflation is too low. She would prefer to see it rise to 3%-4% before starting to normalize the federal funds rate.

I monitor wages in various key industries and am hard-pressed to see any signs of mounting inflationary pressures. During October, here were the y/y increases for the ones we monitor from highest to lowest: leisure & hospitality (3.6%), information services (3.3), mining & logging (2.9), construction (2.6), professional & business services (2.4), retail trade (2.3), financial activities (2.0), manufacturing (1.9), utilities (1.7), transportation & warehousing (1.2), education & health services (1.1), and wholesale trade (1.1).

Today's Morning Briefing: The New Abnormal. (1) Tower of London. (2) From London to Zurich. (3) Is the normal business cycle dead? (4) Volcker was never in the put business. (5) Greenspan and Bernanke Puts. (6) The consequences of minimizing pain. (7) Abnormalities in this cycle. (8) Waiting for Godot and wage inflation. (9) New forces keeping a lid on price inflation. (10) Secular stagnation over there depressing bond yields over here. (11) Producers misjudged Chinese demand. (12) Profit margins still aren’t reverting. (13) Tour of London. (More for subscribers.)

Tuesday, November 18, 2014

Russia’s Catastrophe (excerpt)

Last Friday, Bloomberg reported that “President Vladimir Putin said Russia's economy, battered by sanctions and a collapsing currency, faces a potential ‘catastrophic’ slump in oil prices.” Nevertheless, he claimed that Russia’s reserves, at more than $400 billion, would allow the country to weather such a turn of events. Russia is the world’s largest energy exporter. So Putin’s assurances that Russia can absorb the oil shock are hard to believe.

Russia’s non-gold international reserves have dropped from $457 billion at the start of this year to $383 during October. The ruble has plunged 30% since the start of the year. To stem the drop in reserves, Russia’s central bank on November 10 allowed the ruble to float freely in the market. I wouldn’t rule out a debt default crisis if the price of oil continues to fall. In that event, Russia might have to spend more of its reserves to stop the crisis. In other words, catastrophic outcomes are still possible for Russia.

Today's Morning Briefing: Oil Bubble Bursting. (1) Bullish or bearish for global economy and equities? (2) Drilling deeper. (3) Zero-sum game? (4) Russia’s catastrophe. (5) No props from next OPEC meeting. (6) The Saudis’ game plan. (7) Wolf on Wall Street says it was all a big bubble. (8) Drilling money into the ground. (9) Transports on speed. (10) Subsidize frackers! (11) Cutting earnings estimates for next two years. (More for subscribers.)

Monday, November 17, 2014

Bubble in the Oil Patch (excerpt)

When the price of a barrel of Brent crude oil peaked at a record $145.40 on July 3, 2008, there was lots of talk about “peak oil.” Industry experts were speculating about whether the price might continue to rise to $200 or even higher. Global oil demand was growing faster than global oil supply. It was widely believed that global oil reserves were likely to dwindle because all the cheap stuff had been found. The remaining reserves would require higher prices to develop. Now that the price has plunged from this year’s high of $115.15 on June 19 to Thursday’s $76.13, the focus is on how low can it go, what I called “trough oil” in late October.

In a matter of a few months, the world suddenly recognized that the world is awash in oil. That’s largely because of the extraordinary surge in US oil field production, which soared 3.6mbd over the past two years to a high of 9.4mbd during the week of September 12. Easy money in the US sent lots of investors searching for better returns in the oil patch. They fueled the oil boom. In many ways, it was a bubble that may be starting to burst. Over the past eight weeks through the first week of November, US output has dropped by 0.4mbd to 9.0mbd. As they say in the commodity pits: “The best cure for falling commodity prices is falling commodity prices.”

Today's Morning Briefing: The Great Deflators. (1) The New Abnormal. (2) Nostalgia about normalizing monetary policy. (3) Monetary policy affects both demand and supply. (4) Awash in liquidity and oil. (5) Easy money fueled the oil bubble. (6) Secular stagnation specter haunting Europe. (7) China remains on soft-landing course. (8) Specter of deflation in Asia. (9) Durable goods prices are falling everywhere. (10) How the Great Moderators became the Great Deflators. (11) Central bankers keeping zombies alive. (12) Governments are the biggest zombies of all. (13) Meet the Selfies. (14) “Whiplash” (+ + +). (More for subscribers.)

Thursday, November 13, 2014

Small Business Owners Confirm Improving Jobs Market (excerpt)

October’s NFIB survey of small business owners continued to show an improving trend in almost all categories. The data can be volatile on a monthly basis, so I track various monthly averages. October’s Small Business Optimism Index (on a 12-month basis) rose to 94.6, the best reading since April 2008. The percentage of respondents reporting “poor sales” (on a six-month basis) fell to 12.8% last month, down sharply from the cyclical peak of 33.2% during March 2010. (By the way, this series is highly correlated with the unemployment rate.)

The survey corroborates lots of other positive labor market indicators. On a 12-month basis, the percentage of firms with one or more job openings rose to 23.4%, the highest since February 2008. The percentage expecting to increase employment rose to 9.4%, the best reading since May 2008. Capital spending plans aren’t as strong, though more owners say it is a good time to expand.

Today's Morning Briefing: Still Decoupling. (1) Standing out. (2) The benefit of slower global growth. (3) US small business survey showing lots of cyclical highs. (4) Citigroup Economic Surprise Index positive in US. Not so much in G9. (5) JP Morgan global composite index confirming global growth. (6) OECD Leading Indicators especially weak in Japan and Germany. (7) Maersk sees shipping slowdown. (8) Lower fuel costs should benefit EMs. (More for subscribers.)