Wednesday, August 20, 2014

A Good Year for Emerging Markets So Far (excerpt)

There was a 6.1% drop in the Emerging Markets MSCI stock price index (in dollars) at the beginning of this year, from January 22 to February 5, on fears of another emerging markets crisis. I didn’t buy this latest “endgame” scenario. On the other hand, I didn’t expect that the index would rebound by 17.5% through yesterday’s close. It has been highly correlated with the CRB raw industrials spot price index, which I use as a sensitive indicator of global economic growth. I don’t see enough of it to drive EM stock prices higher on a sustainable basis. The CRB index is back down to its lowest reading since February 13 after a brief and small rally.

There have been impressive rebounds in lots of EM stock price indexes since February 5. Among the so-called “Fragile Five,” there are ytd gains in the MSCI indexes (in dollars) for Indonesia (29.8%), India (24.2), Turkey (14.2), Brazil (13.1), and South Africa (11.0). The China MSCI (in dollars) has also rallied sharply by 20.0% since March 20, with a ytd gain of 6.4%. However, this rally hasn’t been confirmed by the price of copper, which has become a sensitive indicator of China’s economy in recent years.

By the way, there has also been a high inverse correlation between the EM MSCI and the trade-weighted dollar. Maybe that’s because the dollar tends to be strong when the global economy is relatively weak compared to the US. A strong dollar tends to depress commodity prices, confirming the relative weakness in the global economy. Weak commodity prices aren’t good for EMs that produce them. The trade-weighted dollar has been strong recently, and relatively flat since the start of the year. It hasn’t confirmed the rally in EM stocks.

The attraction of EM stocks has been their relatively low valuation. They are currently trading at a forward P/E of 11.0, which is up from the year’s low of 9.7 during the week of February 6. That’s still below the forward P/E of the MSCIs for the US (15.6), Japan (13.5), UK (13.3), and EMU (13.0).

Today's Morning Briefing: Staying Close To Home. (1) All the comforts of home are at home. (2) Eurozone may still have some upside. (3) Missing out on Abenomics, which may be striking out. (4) Emerging markets rally not confirmed by weak industrial commodity prices and strong dollar. (5) Nevertheless, EMs are still relatively cheap. (6) US MSCI still leading the pack this year, and since March 9, 2009. (7) Might easy money be deflationary? (8) Low inflation allows central banks to delay normalizing their ultra-easy policies. (9) US CPI gives Yellen more time to create more jobs. (More for subscribers.)

Tuesday, August 19, 2014

Dips Rather Than Corrections (excerpt)


There were some hair-raising corrections in the current bull market during 2010, 2011, and 2012. They were triggered by fears of a double dip in the US, the disintegration of the Eurozone, and a hard landing in China. The one during the summer of 2011 was exacerbated by the debt ceiling crisis in Washington, DC. The last correction occurred during the fall of 2012 as investors dreaded going over a “fiscal cliff” in the US, which was averted at the last minute at the start of 2013. However, the selloff wasn’t an “official” correction since the S&P 500 fell 7.7%, short of the 10% decline that is deemed to be a bona fide correction.

Since the start of 2013, there have been 10 dips that have retested the 50-day moving average of the S&P 500, as I’ve noted previously. They were mostly triggered by similar concerns as the ones that triggered the earlier corrections. The dip at the beginning of this year was caused by fears of an emerging markets crisis. It lasted just eight trading days, from January 22 to February 3, with the S&P 500 falling 5.6%, the worst dip since the start of 2013.

The latest dip started on July 24, when the S&P 500 peaked at a record 1987.98. It seems to have ended on August 7, with the S&P 500 down just 3.9% from its recent peak. After yesterday’s big rally, the stock composite is now only 0.8% below the peak. I have been in the dip camp rather than the correction camp. This downdraft was unusual because it was triggered mostly by geopolitical risks, which have been mostly ignored during the current bull market.

Often in the past, I’ve noted that the current bull market has been marked by a series of “endgame” corrections followed by relief rallies to new cyclical highs, and then new record highs since March 28, 2013. I also noted that at the start of 2013, when the widely dreaded fiscal cliff was averted, our accounts showed symptoms of anxiety fatigue. They were tired of worrying about endgame scenarios. That might explain why there have been dips rather than corrections since early 2013.

Today's Morning Briefing: Another Relief Rally. (1) Corrections followed by dips. (2) Averted “fiscal cliff” led to anxiety fatigue. (3) Ten dips since start of 2013. (4) Good buying opportunities at the 50-dma line. (5) The latest dip was on rising geopolitical risks. (6) Some relief on Ukraine, Gaza, and ISIS sparks latest relief rally. (7) “Fairy Godmother” will speak on Friday. (8) Yellen said it all in 2009 speech: Premature tightening would be a mistake. (9) Broken record: Forward earnings does it again. (10) Q2 had lots of positive earnings surprises. (More for subscribers.)

Monday, August 18, 2014

Global Economy Has Some Issues (excerpt)

Last week, there certainly was lots of bad news about the global economy. The Eurozone’s latest production and GDP numbers suggest that the lackluster recovery of the past year isn’t just stalling but may be turning into a recession. I think that the Ukraine crisis explains this downbeat turn of events. If it passes, as we expect it will soon, then the region’s weak recovery should resume. In addition, starting next month, the ECB will inject more funds into the Eurozone’s banking system with its “targeted longer-term refinancing operations” (TLTRO), as I discussed last week. (The details of the program were outlined in June 5 and July 3 press releases.)

The drop in Japan’s Q2 real GDP wasn’t a surprise. Much of the stimulus of Abenomics was more than offset by the hike in the sales tax on April 1. There is already chatter that more stimulus will be required. There was a surprise in China’s July report on social financing. It plunged, suggesting a significant slowdown in China’s economy. I am not convinced. Let’s have a closer look at some of the key indicators in the major overseas economies:

(1) China. Social financing during July was remarkably weak. It fell from $321 billion during June to $44 billion last month. That was the slowest pace of lending since October 2008. Bank loans dropped from $175 billion during June to $63 billion during July. We think this is a one-month aberration. However, it may be that lending to residential property builders has hit a brick wall as a glut of housing units is depressing prices. In any event, on a y/y basis, bank loans are up 13.4% y/y, in line with M2 growth.

(2) Japan. Real GDP fell 6.8% (saar) during Q2 in Japan. That’s after increasing 6.1% during Q1. Despite Abenomics, real GDP was unchanged on a y/y basis, and up just 2% in nominal terms. Private consumption plunged 18.7% during Q2. It’s not obvious why it wasn’t obvious to the government that mixing massive monetary and fiscal stimulus with a major tax hike was akin to stepping on the accelerator and the brakes at the same time. It’s a sure way to wind up in a ditch. Even capital spending fell 12.3%. Despite the weaker yen, exports fell 1.8%. It’s dismal.

(3) Eurozone. It’s also dismal in the Eurozone. That’s evident in bond yields, which continue to fall to historical lows. The German 10-year government bond yield fell below 1.0% for the first time in history, down to only 0.97% on Friday. Perhaps the biggest shock last week was that Germany’s real GDP fell 0.6% (saar) during Q2. But that’s after it rose 2.7% during Q1, which was boosted by mild winter weather. However, weakness in the rest of the Eurozone is weighing on the region’s biggest economy and biggest exporter. So is the Ukraine crisis, which has been a slow-motion train wreck so far.

Today's Morning Briefing: State of the World. (1) America is exceptional. (2) US economy stands out. (3) Dismal news out of Eurozone and Japan. (4) Less bang per yuan in China. (5) Debt weighing down some major economies. (6) US economy is diversified with lots of world-class industries. (7) Many US industries remain relatively unregulated. (8) US news remains upbeat. (9) China’s social financing plunged in July. (10) Stepping on the accelerator and brakes in Japan. (11) German GDP drops after mild winter boost. (12) “Calvary” (+ + +). (More for subscribers.)

Thursday, August 14, 2014

S&P Revenues Growing Solidly (excerpt)

Bull markets are fundamentally driven by rising earnings, which are driven by rising revenues. Since more companies are doing more of their business on a global basis, the outlook for revenues depends on the outlook for the global economy. So far, so good: The global economy isn’t booming, but it is growing fast enough to drive revenues and earnings higher. It is likely to continue doing so over the rest of this year and next year too. Let’s first have a close look at the latest developments in the US before turning to the rest of the world:

(1) Business sales. US business sales rose 0.3% m/m to a new record high during June. This series tends to be highly correlated with S&P 500 revenues. Business sales--which includes manufacturers’ shipments and distributors’ sales--rose 4.7% y/y during June. S&P 500 revenues grew 5.8% y/y during Q2.

(2) Forward revenues. Not surprisingly, there is a good fit between S&P 500 actual quarterly revenues and S&P 500 forward revenues, which is available weekly. The latter has been rising rapidly this year to new record highs and is up 4.2% y/y through the first week of August. That’s because industry analysts’ consensus expectations for 2014 have stopped falling, while 2015 estimates have been rising in recent weeks. They now expect S&P 500 revenues to grow 3.9% this year and 4.2% next year.

Today's Morning Briefing: Revenues Looking Up. (1) Fundamentally, revenues drive earnings drive stocks. (2) Business sales, forward revenues, PMIs, and federal tax receipts all bullish for corporate revenues. (3) S&P 500 revenues up 5.8% y/y during Q2. (4) Europe is weighing on global revenues. (5) EM MSCI has outperformed since 2006 because revenues outperformed. (6) Latest Chinese indicators upbeat for China and for global economy. (7) Focus on market-weight-rated S&P 500 Retailers. (More for subscribers.)

Wednesday, August 13, 2014

Are Baby Boomers Weighing on Wages? (excerpt)

Aging Baby Boomers may be keeping a lid on wage inflation. They are currently 50-66 years old. Since the previous peak in employment during November 2007, employment has been little changed, yet workers who are 55 years old or older grabbed 5.6 million of the jobs. That means that all the younger workers lost about as many jobs.

Of course, what really happened is that simply by keeping their jobs during the Great Recession, Baby Boomers “aged out” of the stats for the younger workers and bloated the stats for the older ones. In any case, they’ve probably done well enough so that they aren’t likely to be pushing for significant wage gains.

Meanwhile, the younger workers may not be in a position to push for better pay either since they are competing with Baby Boomers who are likely to remain on the job well past the traditional retirement age of 65. This creates a new source of labor, i.e., elderly workers, which may keep a lid on wage inflation.

We can already see this tendency in the number of workers who are 65 or older. Since November 2007, this segment of the working-age population has increased by 8.5 million. The number of these folks who have dropped out of the labor force (mostly to retire) has increased 6.3 million over this period. The number who remained in the labor force rose 2.2 million. There are lots more older workers coming as the Baby Boomers age.

Today's Morning Briefing: Another Good JOLTS. (1) Fed Chair is no slacker, but worries a lot about slack. (2) JOLTS report and NFIB survey upbeat on jobs. (3) Ratio of unemployed to job openings down to 2.03. (4) More hires than fires, and plenty of quits. (5) Quitting is a good sign. (6) Yellen’s comfort zone for wage inflation is 3%-4%. (7) Wage inflation remains remarkably low around 2%. (8) Lots of Baby Boomers will retire. (9) Lots will keep working, providing a new source of labor, i.e., elderly workers. (More for subscribers)