US Consumer Confidence Measures

The Thomson Reuters/University of Michigan final Consumer Sentiment Index dropped in August to the lowest level since November 2008. It fell to 55.7 this month from 63.7 in July. The index of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, decreased to 68.7 from 75.8 the prior month. The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, dropped to 47.4, the lowest since May 1980, from 56.0.



US consumer confidence slumped in August to its lowest level since April 2009, according to the latest monthly Conference Board report. Its closely watched consumer index sank to 44.5 this month, from a downwardly revised 59.2 in July. The survey’s labor market indicators were especially weak. The percentage of respondents agreeing that “jobs are hard to get” rose from 44.8% in July to 49.1% in August, the highest reading since November 2009. The percentage who expects that there will be fewer jobs available in six months jumped from 22.2% to 31.5%, the highest since April 2009. These latest figures suggest that the US labor market is deteriorating again.



US Economic Indicators

Hooray, we are still in the soft patch! That seemed to be the stock market’s reaction to yesterday’s personal income and consumption report for July. The 0.8% increase in personal consumption expenditures (PCE), which beat expectations, was led by a 10.0% increase in spending on new cars and a 5.2% increase in spending on household utilities. Excluding these two categories, spending rose 0.5%. It’s also up 0.5% excluding gasoline sales. Proponents of the soft patch scenario, including yours truly, anticipated that auto production and sales would improve right about now as Japanese car parts became more available following the disruptions caused by Japan’s earthquake.

At the start of this month, real GDP growth reports for the US, the UK, Germany, and France during Q2 all were disappointingly close to zero. The plunge in stock prices during the first four weeks of the month suggested that investors no longer believed that the soft patch would be followed by better growth, but rather by a recession. We also gave up on better growth during Q4, but we remain in the soft patch camp.

There has been no soft patch in capital spending. That’s because capital spending is driven by corporate profits, which have been very strong, as discussed in yesterday’s Morning Briefing. Indeed, while Q2 real GDP growth was revised downwards slightly from 1.3% to 1.0% (saar), nonresidential fixed investment was revised upwards from 6.3% to 9.9%. Spending on equipment and software was revised higher from 5.7% to 7.9%, and structures rose 15.7% rather than the preliminary estimate of 8.1%. During July, nondefense capital goods shipments rose for the third straight month, up 0.2% and 12.9% over the past three months, at an annual rate. That’s the best pace in a year.

European Stocks & IFO

The DAX is down 22.6% so far this month and 19.9% ytd. It is down 26.4% since it peaked on May 2. And this happened in the strongest economy in Europe, and maybe in the world. It hasn’t been quite as bad in the US, where the S&P 500 is down 8.9% mtd, 6.4% ytd, and 13.7% from its April 29 peak. The DAX is now near its lowest level since February 2010. The S&P 500 is still 15.1% above last year’s low on July 2. The DAX tends to be highly correlated with Germany’s IFO Business Climate Index, and suggests that the financial crisis in Europe may be depressing Germany’s economy.

 

Why has the S&P 500 outperformed the DAX so far this year? In 2008, the US was the epicenter of the financial crisis. This time, it is Europe. The FTSE Eurofirst 300 banks euro index is down 26.6% mtd, 31.6% ytd, and 41.1% since it peaked this year on Febuary 17. The S&P 500 Bank stock index is down 15.2% mtd, 23.2% ytd, and 28.5% since it peaked this year on February 14. Clearly, there isn’t likely to be much upside for stocks, in general, until bank stocks start to perform better, especially in Europe but also in the US. So what are top policymakers doing to avert another financial meltdown and to shore up the banks? That’s what we discuss in Monday’s Morning Briefing.



Manufacturing Surveys



There are six regional Feds that survey manufacturers in their districts every month. We update their findings in our US Business Surveys chart book. We also show the results of surveys conducted by five regional purchasing managers’ organizations for manufacturing. So far, there are three surveys available for August. They are the Fed surveys conducted for the Richmond, Philadelphia, and New York districts.

The average of the overall indexes for the three fell to -16.2 during August from -0.5 last month and from the most recent cyclical peak of 25.6 during March. It is now the lowest since April 2009. The average of the new orders indexes dropped to -15.2 in August from -3.5 in July and from the most recent cyclical peak of 21.2 during February. It too is now the lowest since April 2009.

There was a comparable soft patch in these averages last summer, with the overall average falling to a 2010 low of -1.8 during August. The new orders average fell to a low of -6.1 during August. However, this time, the averages are already lower than their lows of last year.

The plunge in the Philly index during August was shocking. It has been more volatile than the other surveys recently. However, both the Richmond and New York surveys are confirming that manufacturing turned weaker in August. During the month, the overall indexes fell to -30.7 in Philadelphia, -10.0 in Richmond, and -7.7 in New York. These are all new lows for this year and below their lows of 2010. The new orders indexes fell to -26.8, -11.0, and -7.8 in the three aforementioned districts, following the same pattern as the broader indexes.



S&P 500/400/600 Earnings & Valuation



The bull market in the S&P 500 from March 2009 through April 2011 was driven by strong earnings that more than offset the slight (though volatile) downtrend in the valuation multiple. Industry analysts never flinched during this period. They remained consistently bullish and consistently overcame the worries of investors, who were reassured by the fact that earnings beat even the analysts’ upbeat forecasts for the past nine quarters.

  

It all fell apart during August when valuations plunged, as I reviewed in yesterday’s Morning Briefing. The consensus forecast of industry analysts for the S&P 500 held up remarkably well through last week. But their forecasts for the S&P 400 and S&P 600 may be starting to fray at the edges. Investors seem to have concluded that a recession is coming. They know from experience that if a recession is coming, industry analysts are likely to be among the last to throw in the towel. The analysts tend to do a much better job of forecasting earnings during expansions than during recessions.

Of course, if instead of another recession, we get a protracted period of slow growth in both the US and global economies, as we currently expect, then there may not be much more downside in valuation multiples. On the other hand, there is downside in analysts’ consensus expectations for earnings given that we are now forecasting $100 a share for 2012, while the bottom-up forecast is around $113.



Leading Indicators



Leading and coincident indicators have recently been pointing in the negative direction for the US and global economies.

Stock prices are leading indicators, and they are falling around the world. The MSCI World Stock Price Index is down 14.5% ytd and 19.2% from this year’s peak on February 18. The S&P 500 is down 10.7% ytd and 17.6% from its 2011 peak on April 29. The S&P 500 found some support above last year’s range of lows on August 8 and again last Friday. (If it breaks below 1119, the next support is likely to be at last year’s low of 1022.58 on July 2.)

Industrial commodity prices are coincident indicators, and they are also falling. The CRB raw industrials spot price index hasn’t dropped by as much as stock prices around the world, but it is heading in the same direction and could catch up fast if recession fears turn into reality. The index is down 11.2% from its record high on April 11 through August 19. It does not include crude oil, which has declined 15.9% from the most recent peak of $126.47 a barrel on April 8 to $106.35 this morning, using the Brent benchmark.



The Philadelphia Fed’s survey tends to be volatile, but it was especially so on the ugly side during August. The survey’s indicators for activity, shipments, and new orders all declined sharply from their readings in July. The diffusion index of current activity decreased to -30.7 in August from 3.2 in July. That was the lowest reading since March 2009. Given its volatility, we put more weight on its three-month average, which is also down sharply to the lowest reading since June 2009. The current employment index fell 14 points to -5.2, recording its first negative reading in 12 months



CNBC Appearance

The New Homestead Act: Update

President Barack Obama recently promised that he has a plan to create jobs, which will be disclosed in September, after he takes 10 days off in Martha’s Vineyard. I certainly hope he comes up with a good plan. If he needs one, how about the one that Carl Goldsmith and I proposed at the beginning of August? [1] I met with my congressman, Gary Ackerman, last Tuesday to pitch the plan. He liked it well enough to issue a press release on Wednesday of this week endorsing it and promising to introduce the “Homestead: Act 2” when Congress returns from its August recess.[2]

The Act aims to reduce the huge overhang of unsold homes by offering a matching down payment subsidy of up to $20,000 for homebuyers, who do not currently own a home, and exempting newly acquired rental properties from taxation for 10 years. The cost of these incentives would be offset by the tax revenues collected by lowering the corporate tax rate on repatriated earnings to 10%.

Congressman Gary Ackerman is presently serving his fifteenth term in the US House of Representatives. He represents the Fifth Congressional District of New York, which encompasses parts of the New York City Borough of Queens and the North Shore of Long Island, including west and northeast Queens and northern Nassau County. Ackerman serves on the powerful Financial Services Committee, where he sits on two Subcommittees: Financial Institutions and Consumer Credit as well as Capital Markets and Government-Sponsored Enterprises (of which he is the former Vice Chairman). The stock market rose sharply after March 12, 2009, when Mr. Ackerman, during a congressional hearing, leaned on Robert Herz, the head of FASB, to suspend the mark-to-market rule. FASB did so on April 2. I had brought this issue to the congressman’s attention in a meeting we had during November 2008.

[1] Carl Goldsmith & Ed Yardeni, “The New Homestead Act” (August 16, 2011 update)
[2] Congressman Gary Ackerman, Press Release on “Homestead: Act 2” (August 17, 2011)

High Yield Bond Spread

Yesterday, I was happy to report that industrial production rose sharply in July, led by a big increase in auto production. This is the scenario I sketched out in early May in which a shortage of parts from Japan causes a temporary soft patch, followed by better economic growth as the parts become more available. Industrial production is one of the four components of the Index of Coincident Economic Indicators. Also encouraging is that the Index of Leading Economic Indicators (LEI) rose to a new cyclical high during June.

The yield spread between junk bonds and 10-year Treasuries is also a leading indicator. It isn’t an official one. But it should be. It is highly correlated with weekly initial unemployment claims. The monthly jobless claims series is a component of the LEI. The inverted yield spread is also highly correlated with the ECRI Weekly Leading Index.

The problem is that the yield spread has widened sharply in recent days, suggesting that the risks of a recession are rising. The spread between the Merrill Lynch High Yield Corporate Composite and the 10-year Treasury jumped from 413bps in late July to 633bps on August 11. It edged back down slightly to 608bps yesterday.

 

 



Industrial Production

Are we starting to come out of the soft patch just as investors are discounting a double dip recession? I think so. The latest evidence is in July’s industrial production report for the US. Let’s review:

(1) Industrial production rose 0.9% in July, while manufacturing production increased 0.6%. There was a 2.8% surge in the output of utilities, as extremely hot weather increased demand for electricity. Manufacturing is at a new cyclical high and at its best level since October 2008.

(2) Industrial production was disrupted in the US by a shortage of parts made in Japan following the devastating earthquake and tsunami over there in March. It fell 0.3% during April, followed by increases of 0.2% in May and 0.4% in June. (Both May's and June’s increases were double the preliminary estimates.)

(3) Auto assemblies were hard hit by the shortage of parts. They fell from 8.8 million units (saar) during March to 7.9 million units during April, remaining at that level through June. They jumped 10.6% during July to 8.7 million units. They are likely to make new highs for 2011 over the rest of the year.

(4) Excluding auto assemblies, manufacturing output rose only 0.3% during July. The problem seems to be that the IT industry still had some parts shortages in July. The total output of selected high-tech industries was little changed in July. Computer hardware production did rebound 1.1% in July to a record high. However, communication equipment output declined 0.4%, and semiconductor output fell 0.5%.

Transportation Stocks & Railcar Loadings

The plunge in the S&P 500 Transportation stock price index has been extraordinary and reminiscent of the plunge following the collapse of Lehman during September 2008. This year, the index peaked at a record high of 361.72 on July 7 and dropped 19.5% by the close on Monday, August 8. It has rebounded 6.9% since then, but remains 13.9% below its recent record high. This index was a leading indicator for the sharp decline in railcar loadings that started at the end of 2008 and continued through mid-2009. That’s possible again, however not very likely unless the economy is about to fall into a recession.

 

Instead of a recession, the latest 26-week moving average of railcar loadings confirms that the economy may actually be coming out of its soft patch following the disruption in production as a result of the Japanese parts shortage problem during the spring. This measure of economic activity has rebounded back to the best reading since the week of December 18, well before Japan’s earthquake hit.

The recent rebound in railcar loadings has been led by intermodal container loadings, which is approaching the record high at the end of 2010. These loadings tend to carry lots of imported goods from the ports to distribution centers. This suggests that retailers are expecting that consumers will be in a buying mood during the holiday season.

The New Homestead Act

In the August 1 issue of the Morning Briefing, I started to float an idea for fixing the economy that was suggested to me by Carl Goldsmith, the chief investment strategist at Delta Management in LA. We believe that our “New Homestead Act” would quickly revive the US housing market and our economy (1). It turns out that Puerto Rico already implemented such a program with great success. According to this weekend’s WSJ (2), “A stimulus program on the island, long ripe with vacant houses and condos, has sent sales of new homes surging 80% and sales of existing homes up 24% in the past 10 months from a year earlier, even as the market in much of the U.S. mainland is dead.” The program includes a bunch of tax breaks for both buyers and sellers of residential and commercial properties. It was rolled out by Gov. Luis Fortuño as part of his effort to revive the Commonwealth’s economy.

Here are the key elements of the Fortuño initiative: “One of the incentive program’s popular provisions offers qualified buyers down-payment assistance for homes purchased with a mortgage, as well as a second mortgage of as much as $25,000 that can be used to make down payments and pay closing costs. Buyers of new homes also pay no transfer taxes when a property changes hands, escape paying property taxes for five years and future capital-gains taxes, and pay no taxes on rental income for 10 years. Sellers don’t have to pay capital-gains taxes on profits.” This is very similar to the plan Carl and I have been promoting for the US mainland.

Last Wednesday, the Obama Administration announced it is seeking input from investors on how to rent homes owned by Fannie Mae, Freddie Mac, and the Federal Housing Administration (3). The goal is to turn thousands of government-owned foreclosures into rental properties to help boost falling home prices. Carl and I have proposed a 10-year tax exemption for rental income, which is one of the features of Gov. Fortuño’s program.

The WSJ embraced the Administration’s initiative this weekend (4): “This is positive news if the Administration is finally ready to accept market-based solution to our housing problems. The Wednesday document encouraged ‘investment of private capital’ and welcomed input from market participants with ‘the technical and financial capability to engage in large-scale transactions.’ Could it be that the Administration is courting hedge funds and private equity to scoop up foreclosed homes? We can only hope so.” The Journal recommends setting up a new Resolution Trust Corporation, similar to the one set up by George H.W. Bush, which worked so well to clear out the overhang of real estate in the early 1990s. Carl and I second the motion.

(1) Carl Goldsmith & Ed Yardeni, "The New Homestead Act" (August 16, 2011)
(2) Puerto Rico Fires Up Housing Market," WSJ (August 13, 2011)--requires subscriptions
(3) "FHFA, Treasury, HUD Seek Input on Disposition of Real Estate Owned Properties," US Treasury Press Release (August 10, 2011)
(4) "Foreclosure Brainstorm," WSJ (August 13, 2011)--requires subscription

S&P 500 Sectors & Valuations

While there are lots of good reasons to panic, in Monday’s Morning Briefing (for subscribers), we listed some reasons not to panic. Most importantly, profits remain impressively strong and valuations are very cheap. Forward earnings rose to new record highs for five of the S&P 500 sectors during the first week of August: Consumer Discretionary, Consumer Staples, Health Care, Materials, and Information Technology. They were at or near cyclical highs for Energy, Industrials, and Telecommunication Services.

Forward P/Es, on the other hand, have plunged dramatically in recent days. Here are the latest readings as of yesterday’s closing prices: Financials (8.7), Energy (8.7), Health Care (10.0), Materials (10.3), Information Technology (10.5), Industrials, (10.7), Consumer Discretionary (12.1), Utilities (12.3), Consumer Staples (12.9), Telecom Services (14.3).

Stocks are cheap, but only if earnings remain strong. The reason they are cheap is because many investors are now starting to believe that a recession is imminent and that will be very bad for profits. That’s not my forecast, but the bears have their own compelling list of reasons to panic.

Corporate managers may be in a panic to buy their very cheap shares. Bloomberg reports this morning: “More executives at Standard & Poor’s 500 Index companies are buying their stock than any time since the depths of the credit crisis after valuations plunged 25 percent below their five-decade average. Sixty-six insiders at 50 companies bought shares between Aug. 3 and Aug. 9, the most since the five days ended March 9, 2009, when the benchmark index for U.S. equities reached a 12-year low, according to data compiled by Bloomberg.”



S&P 500 & Nasdaq

Was that the low on Monday, August 8 when the S&P 500 closed at 1119.46? I think so. I base this on the Da Vinci Code. When the S&P 500 bounced off its intra-day low of 666 on March 6, 2009, I knew that was the low. On March 16, I wrote: “We’ve been to Hades and back. The S&P 500 bottomed last week on March 6 at an intraday low of 666. This is a number commonly associated with the Devil. The market soared from Tuesday’s low to close up 13.6% last week at 756.55. … The latest relief rally was sparked by lots of good news for a refreshing change, which I believe may have some staying power.” On April 7, I wrote: “I think THE low for the S&P 500 was made on March 6 at 666.”

So what is it about Monday’s close that’s bringing out the Tom Hanks symbolist in me again? The S&P 500 dropped 6.66% on that day! Yesterday morning, my friend Don Hayes, a triple-A rated technician, observed that the S&P 500 and the Nasdaq both had fallen to the top of last year’s panic ranges. He suggested that they might both find support at those levels and rebound. Sure enough, the S&P 500 rose 4.74% and the Nasdaq jumped 5.29% yesterday.

Valuations & Earnings

As I discussed last Thursday, we are witnessing a significant rerating of valuation multiples in the stock market. S&P’s downgrades accelerated the downward adjustment of P/Es that has been underway since April. The questions are how much lower can we go, and how soon can valuations reverse course? One more important question: Will earnings hold up despite the sharp drop in valuations? The risk, of course, is that the recent plunge in stock prices turns into a self-fulfilling prophecy by depressing confidence and economic activity. First, let’s review how much forward P/Es have declined since the final week of April through yesterday:

(1) The S&P 500’s P/E dropped from 13.2 to 10.4. That’s the lowest since March 6, 2009. At the end of 2008, it bottomed at 11.3.

(2) The S&P 400’s P/E dropped from 16.5 to 12.0. That’s the lowest since March 20, 2009. At the end of 2008, it bottomed at 11.0.

(3) The S&P 600’s P/E dropped from 17.3 to 12.7. That’s the lowest since March 13, 2009. At the end of 2008, it bottomed at 12.8.

Why is this happening now? As I discussed last Thursday, there has been a secular decline in the market’s forward P/E since the beginning of the previous decade. It seems to coincide with the decline of America’s geopolitical stature and the steady erosion of fiscal discipline in Washington.

The stock market crashed on Black Monday, October 19, 1987. The DJIA dropped 508 points to 1738.74 that day. That was a 22.6% collapse in just one day. The stock market recovered a few months after the 1987 crash as industry analysts continued to raise their 1988 earnings estimates for the S&P 500.

Apparently, industry analysts received and read my Don’t Panic Memo of yesterday. The S&P 500 forward earnings rose to a fresh record high on August 5 as they raised their 2012 estimate to a new high. I am certainly concerned about the possibility that the latest crash could depress the economy and earnings. However, I am inclined to believe that it won’t be a self-fulfilling prophecy: More like 1987 than 2008.

Super PMIs

When the monthly manufacturing and non-manufacturing purchasing managers indexes (M-PMIs and NM-PMIs) are released, we average them together for the US, the UK, and the EU. These series have the most history going back to the late 1990s.

The Super M-PMI fell every month since its most recent cyclical peak of 60.6 during February. It was down to 50.1 during July. That may be a harbinger of a global manufacturing recession. More likely is that it is a soft patch mainly attributable to the disruptions caused to global manufacturing by the shortage of Japanese parts following the March 11 earthquake. There was a mid-cycle slowdown during 2005, when the Super M-PMI dropped to a low of 48.7. It then recovered and remained above 50.0 during the final months of 2005 through early 2008. The Super NM-PMI remained relatively strong at 53.2 during July, though that was down from a recent peak of 57.2 during March.



The Super-Duper PMI, which averages the Super M-PMI and the Super NM-PMI, fell to 51.7 in July. That is down sharply from the most recent cyclical high of 58.5 during February, and the lowest reading since September 2009. But it is still north of 50.0. The July level matches the low during the 2005 mid-cycle slowdown. The next couple of months will determine whether the soft patch is turning into a mud pit or into a hard patch. We remain in the soft-patch camp. We think that the recent weakness is a mid-cycle slowdown. It is possible that the soft patch was extended by all the crazy political turmoil in Europe and in the United States during July. The resulting crisis of confidence, which was reflected in last week’s market plunge, might have prolonged the slowdown. The downgrade of US government debt by S&P may also prolong the soft patch.



Valuation & Gold




America is starting to have a problem that long dogged comedian Rodney Dangerfield, who often complained: “I don’t get no respect.” On Monday according to Reuters, Vladimir Putin had the following to say about the recent debate in Washington between the Democrats and Republicans about raising the debt ceiling and reducing the deficit: “Thank god that they had enough common sense and responsibility to make a balanced decision.” He added, “They are living beyond their means and shifting a part of the weight of their problems to the world economy.” To add insult to injury, he complained: “They are living like parasites off the global economy and their monopoly of the dollar.”

China’s official news agency, Xinhua, which often voices the true feelings of the country’s political elite, described the recent battles over the Washington debt deal as a “madcap farce of brinkmanship.” The commentary, published in many Chinese newspapers, went on to warn the US that it must implement more responsible policies if it is going to solve its problems. And it warned that the emergency debt bill thrashed out between Democrats and Republicans “failed to defuse Washington’s debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer.”

It has been my view for some time that the stock market’s valuation multiple is directly related to the geopolitical stature of the United States. The US certainly wasn’t standing tall during the late 1970s when Jimmy Carter was the President. The P/E of the S&P 500 hovered between 7 and 8 times forward earnings as inflation and interest rates soared during the second oil crisis. In Iran, the Shah was deposed by Islamic revolutionaries who held 52 Americans as hostages for 444 days from November 4, 1979 to January 20, 1981.

The P/E rose during the 1980s under President Ronald Reagan, who supported Paul Volcker’s tough anti-inflationary monetary policies, while stimulating economic growth with lower tax rates. President Reagan along with President George H. W. Bush pursued foreign policies that led to the collapse of the Soviet Union, marked by the removal of the Berlin Wall during 1989, when the P/E was over 10.

The US won the Cold War and emerged as the world’s sole superpower during the 1990s. The P/E spiked up to 15 after the end of the first Gulf War in early 1991. It then soared under President Bill Clinton to finish the 1990s around 25. America was the epicenter of the high-tech revolution, and had an entrepreneurial economy that was widely admired. Inflation was low and so were interest rates. Congress held a hearing in February 2001 to discuss what to do about huge projected federal government surpluses!

Then the tech bubble burst. Enron imploded in late 2001. Terrorists attacked the US on 9/11, and the P/E was down to 22.1 by the end of 2001. During July 2002, Worldcom filed for bankruptcy, and the P/E fell to 15.3 by the end of that month. These companies and others were brought down by accounting scandals. The federal budget outlook deteriorated rapidly when President George W. Bush pushed for tax cuts to stimulate the economy while launching wars in Iraq and Afghanistan. That was the beginning of the end of Pay-Go and fiscal discipline in Washington.

The P/E continued to decline during the bull market from 2003 through 2007, led by a steady drop in the valuation multiples of large-cap tech stocks. Investors learned from the 1990s tech bubble to pay less for rising earnings. Then, the financial crisis hit. Lehman blew up during September 2008. The P/E dropped to a low of 9.3 during October 2008. It was back up around 14 during the second half of 2009 and the first four months of 2010, as the economy recovered from a very severe recession. It then dropped again to just below 12 on mounting concerns about a double dip in the US and a sovereign debt crisis in Europe during the spring and summer of 2010, before rising back up to 13.

The budget situation only got worse under President Barack Obama as he resorted to a massive Keynesian fiscal stimulus program to revive economic growth. It didn’t work. In July of this year, the P/E was back down to 12. After Monday’s selloff, it was down to 11.7. Investors are fretting that the economy is stalling and that Washington is too politically paralyzed and too deep in debt to help. Washington may actually worsen the situation as the Republicans push for spending cuts, while the Democrats push for tax increases.

Could the P/E drop back below 10? Unfortunately, it could if more investors see more similarities between Jimmy Carter and Barack Obama. Thirty-two years ago on July 15, 1979, Carter delivered his depressing “crisis of confidence” speech, in which he berated the way of life of Americans and questioned our values. In his mind, the oil shock of that year and soaring inflation were our fault. The speech was later dubbed the "malaise speech," even though Carter never used that word. Here is a link to a “remix,” showing the extraordinary similarities between Carter’s speech and numerous similar preachy statements made by Obama in some of his speeches to the nation.

In the chart above, you can see that there is a long-term inverse correlation between the P/E versus the inflation-adjusted price of gold, which is approaching the record high of $866 per ounce during January 1980, when Carter was President. This does not bode well for the valuation multiple. The real price of gold was $682 during June. To match the 1980 peak on an inflation-adjusted basis, it would have to rise over $2,500 in current dollars. If it gets there, odds are that the P/E will be lower.

 

US Consumer Indicators

Thomson Reuters/University of Michigan final index of consumer sentiment fell to 63.7, the weakest since March 2009, from 71.5 in June. The Michigan survey’s index of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, decreased to 75.8 from 82.0 the prior month. The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, dropped to 56.0 from 64.8.

The Conference Board Consumer Confidence Index, which had declined in June, improved slightly in July. The index now stands at 59.5 (1985=100), up from 57.6 in June. The Present Situation Index decreased to 35.7 from 36.6. The Expectations Index rose to 75.4 from 71.6 in June. There was certainly plenty of bad news during July that explains why consumers were so depressed.

While Q2 corporate profits have been very strong, the markets have focused on all the weak macroeconomic news. It’s hard to find much good news among the pile of bad macro news, as discussed in today’s Morning Briefing. Until yesterday, all we had was the drop in initial unemployment claims below 400,000 during the last week of July. This morning, we have July’s motor vehicle sales, which rose to 12.2 million units (saar) from 11.5 million units during June.

The gain was led by light-truck sales, which increased from 5.9 million units in June to 6.5 million units in July, back at February’s pace, which was the best since the summer of 2008. Overall sales should continue to improve as the shortage of imported models is relieved in coming months. The share of imports in total sales dropped to 22.4% during July, the lowest since March 2006.

S&P 500 Earnings & Valuation

Why is the stock market holding up so well? Corporate revenues and profits continue to fly despite the weakness in US economic growth. That’s because companies are finding lots of both around the world. While nominal GDP was up only 3.7% y/y during Q2, the revenues of the 337 S&P 500 companies that have reported their Q2 results are up 13.1%. They are up 16.0% excluding the Financials (and Bank of America's big hit during the quarter).

Industry analysts seem to be tuning out the bears. There’s no sign of any stalling in bottom-up earnings forecasts. The S&P 500 consensus estimate for 2012 actually rose during the last week of July to a new high of $113.78 per share, up 15.0% from the latest estimate for 2011, which edged up last week and continues to hover around $100. As a result, S&P 500 forward earnings, which is a time-weighted average of the current and coming years’ earnings estimates, also rose to a new record high last week of $107.50.

Let’s say that the economy doesn’t stall during the second half of the year and that forward earnings converges with the 2012 estimate at $115 by the end of the year. That would put the S&P 500 at 1380 if the forward P/E remains at last week’s 12.0. If the P/E rises to 13.0, the S&P 500 would finish the year at 1495, very close to my “1500 for the 500” target. Of course, if the soft patch is turning into a mud pit rather than a hard patch, as suggested by the latest GDP and ISM reports, then earnings would tank and so would the P/E. That’s not my forecast, but it certainly is a credible risk given the latest data.