Crude Oil

The rally in crude oil seems to be running out of gas. That’s good for the US economy. Stable or even lower fuel costs should fuel consumer spending, which cruised along surprisingly well at the beginning of this year despite the surge in fuel prices. Stable or even lower crude oil prices should reduce inflationary pressures around the world. This is especially important in emerging economies since fuel costs account for larger shares of budgets than in developed economies. This would allow the central banks in China, India, and Brazil to continue to ease their monetary policies, as they have been in recent months. Let’s review the latest developments in the oil patch:

(1) Petroleum prices are sagging. The spot price of a barrel of Brent has dropped from this year’s peak of $128.31 on March 9 to $119.09 this morning. The price of WTI crude peaked at $109.77 on February 24 and has edged down to $104.31 this morning. The nearby futures price of a gallon of gasoline has dropped 26 cents from $3.42 on March 26 to $3.19 this morning.

(2) Supply disruptions remain a problem. Petroleum prices are weakening despite the worsening conflict between Sudan and South Sudan, which contributed to rising oil prices earlier this year. The two nations have been drawing closer to a full-scale war in recent weeks over the unresolved issues of oil revenues and their disputed border. Sudan’s output has plunged by 285,000 bpd to only 110,000 bpd over the past three months through March.

Over the same period, Iran’s oil production has plunged by 250,000 bpd. A week ago, malware discovered at an Iranian oil terminal forced Iran to disconnect key oil facilities. Authorities said a data-deleting virus prompted them to disconnect the main oil export terminal on Kharg Island in the Persian Gulf.

(3) A US pipeline goes from north to south. Yet despite these supply disruptions, oil prices have sagged rather than continued to surge as they did earlier this year. Last Tuesday’s WSJ identified two important reasons why petroleum prices are falling. First, the flow of oil in the Seaway Pipeline will be reversed sometime during the second half of May. That will free up crude oil bottled up in landlocked storage in Cushing, Oklahoma, giving refiners in the Gulf Coast region greater access to cheaper crude. This should continue to narrow the spread between the prices of Brent and WTI. It has already declined from a record $29.50 on October 13, 2011 to around $13 recently.

(4) Refineries may be restarted. Second, according to the WSJ, ConocoPhillips may reopen its Philadelphia-area refinery, which was closed last year. In addition, Sunoco said it is in talks with Carylye Group about a possible joint venture to keep open the 330,000-barrels-a-day Philadelphia refinery it had planned to shut this summer if it couldn't sell the facility.

(5) Usage is down in the US, while inventories are plentiful. Total petroleum supplied, on a 52-week average basis, fell to 18.7 mbd during the week of April 20, slightly below the previous cyclical trough in late 2009. Gasoline usage on this basis is down to 8.8 mbd, the lowest since January 24, 2003. Oilfield production rose to 5.7 mbd during the week of April 20, the most since February 20, 2004. As a result, US crude oil inventories are at a record high for this time of the year. Finally, the price of natural gas is so low that there is growing interest in bottling it up as a liquid and exporting it to countries where it fetches much higher prices.

(6) What about Iran’s bid to acquire nuclear weapons? That’s still the wild card. I’m inclined to believe that the sanctions imposed on Iran will force the Mullahs to stop their program. However, predicting developments in the Middle East is hazardous work. Last week, Israel’s top general said Iran is led by "very rational people" and doesn’t appear poised to build a nuclear bomb that would threaten his nation. Is he setting the Iranians up for a surprise attack?

Today’s Morning Briefing: Prosperity vs. Austerity (1) Fiscal Pact vs. Growth Pact. (2) Europe’s Party Party. (3) Only way to grow Europe isn’t under discussion. (4) LTRO-3 is coming, and it will be a Ponzi scheme. (5) Read her lips. (6) Globalization driving the bull market in earnings and stock prices. (7) Brinks and Apple. (8) Plenty of new record highs in the S&P 500. (9) Staying sector-neutral, on a tactical basis, for now. (10) US economy’s boom-to-bust sectors still down and out. (More for subscribers.)

US Housing

The latest housing indicators are mixed. I’m inclined to believe that the mild winter weather did exaggerate the strength of the single-family housing market earlier this year. On the other hand, the strength in multi-family housing construction is more fundamental. Let’s have a closer look at the latest data:

(1) There are a few motivated buyers in the housing market. When I visited with our accounts in Toronto last week, I was surprised how often I was asked about the US housing market. Along the way, I realized that Canadians are intensely interested in this subject because many of them have been buying second homes at bargain prices in Florida and Arizona, where they like to spend their vacations during the winter. I’ve also heard that US investors are buying houses in bulk and renting them out because the yield on such investments is very attractive.

(2) However, single-family housing is still struggling to recover. Canadian snowbirds and American landlords have been cherry-picking undervalued properties in the US. They’ve helped to put a floor under the housing market. However, it isn’t obvious yet that the fundamental demand for year-round, owner-occupied, single-family homes by Americans is making a sustainable comeback. Single-family housing starts, building permits, and new home sales remain depressed through March. While single-family existing home sales edged down in March, they remain on a slow uptrend that may be driven by some bargain hunters, landlords, and snowbirds.

(3) Multi-family starts and building permits are leading the housing recovery. Such permits rose in March to the best pace since August 2008, signaling that multi-family starts should continue to recover. The former is up 231% since October 2009, while the latter is up 169% since July 2009.

(6) Home prices are still on the weak side in lots of places. As a result, would-be homebuyers aren’t rushing to buy in advance of price increases as they did so often in the past before the housing bubble burst. According to the S&P/Case-Shiller survey for February, home prices fell to new cyclical lows in Atlanta, Charlotte, Cleveland, Chicago, Las Vegas, Los Angeles, New York, Portland, Seattle, and Tampa. They’ve been flat over the past year in all the other cities monitored by this survey. (See our Analyst’s Handbook: Real Estate.)

Today’s Morning Briefing: Go With the Flow (1) So crude? (2) Doing a world of good. (3) Oil prices sagging despite supply disruptions. (4) All it takes is reversing the flow in a pipeline. (5) Narrowing the spread between Brent and WTI. (6) Firing up some refineries. (7) Hard to be bearish with so many expecting a correction and all the positive earnings surprises. (8) Technology is bearing fruit. (9) Industrials have earnings momentum. (10) Austerity is falling out of fashion in Europe. (11) Moving the goal line in Europe. (12) The Fed’s latest forecast and next meeting. (More for subscribers.)

European Industrial Orders

Given Europe’s deteriorating economic outlook, it is a bit odd that Eurostat plans to discontinue its monthly series on Industrial New Orders in the region and has already started phasing it out. The statistical agency no longer issues a press release on the data, but will still update the series through mid-2012. Maybe the best way to deal with bad news is not to publish it.

February’s data were released on Monday. They aren’t pretty. Industrials orders in the euro area fell 1.3% during the month to the lowest reading since September 2010. Actually, they held up surprisingly well in Germany and France in recent months following big declines last summer. The recent weakness has been concentrated in Italy and Spain.

Today Morning Briefing: Progress Report (1) Jobs are more available. (2) Another batch of strong regional job surveys. (3) Canadian snowbirds and American landlords are buying houses. (4) Multi-family housing construction rebounding, while single-family remains depressed. (5) Home prices still down and out. (6) The stock market and leading indicators. (7) Forward earnings at new record high. (8) The profit margin story. (More for subscribers.)

S&P 500 Earnings

Industry analysts are curbing their enthusiasm about the outlook for Q2-Q4 despite the positive surprises reported so far for Q1. They’ve barely raised their estimates for the next three quarters, although the actual/estimate blend for Q1 is already up by 80 cents since the start of the earnings season. That’s because only about a third of the companies that have reported so far raised their guidance for Q2, while 40% lowered it.

During the week of April 20, they forecasted that the S&P 500 earnings per share will be $106.32 and $119.34 this year and next year, respectively. That’s up 8.7% and 12.2% in 2012 and 2013. That optimistic outlook is driven by their latest estimated revenue growth rates of 6.0% and 5.3% this year and next year, with the profit margin rising from 9.3% in 2011 to 9.5% in 2012 and 10.2% in 2013. I’m skeptical that the profit margin is likely to rise as they expect.

We’ve updated our Earnings Month with April data for the S&P 500 along with its 10 sectors and numerous industries. Among the more interesting findings is that the Net Earnings Revisions Index (NERI) turned flat after a seven-month string of negative readings. Three sectors turned solidly positive, namely Consumer Discretionary (9.6%), Financials (6.9), and Information Technology (6.3).

Today’s Morning Briefing: Dutch Treat (1) Europe needs supply-side economics... (2) … and to hire Luca Brasi to collect taxes. (3) Dutch boy has a solution. (4) Austerity is losing elections and toppling governments. (5) No vote of confidence in European stock and bond markets. (6) Nudging up our earnings forecasts. (7) Net earnings revisions improving, especially for Consumer Discretionary, Financials, and IT. (8) Euro area industrial orders take a turn for the worse led by Italy and Spain. (More for subscribers.)

Earnings Season

With nearly 24% of the S&P 500 companies finished reporting, the Q1-2012 earnings season is off to a great start. Of the 119 companies that have officially reported Q1-2012 results, 80.7% have exceeded industry analysts’ estimates and 76.1% beat sales estimates. In contrast, in Q4-2011 only 62.7% beat consensus earnings estimates and 55.7% beat sales forecasts. Earnings for these 119 companies are up 10.4% y/y on sales growth of 4.3%, ahead of forecasted growth of 2.1% and 2.1%, respectively, for the same companies. Instead of the 3% earnings growth that analysts currently expect, I think final Q1-2012 earnings growth for the S&P 500 will be slightly short of 10% for a second straight quarter.

Today’s Morning Briefing: Waiting for the Other Shoe to Drop (1) Triple-E: Earnings, Economy, and Europe. (2) The case for remaining bullish. (3) Earnings are impressive. (4) The US economy is OK on average. (5) Europe isn’t OK, but IMF members pledge more bailout cash. (6) The other shoe is made in China. (7) Neutral for now, but next stock rally should favor Consumer Discretionary, Financials, Industrials, and IT, with Energy and Materials lagging behind. (8) Canada’s condo mania. (9) Europe's PMI. (10) Opting for optimism on US economy. (More for subscribers.)

 

Bank Stocks in Europe & the US

    

The economists tasked with writing the IMF’s latest Global Financial Stability Report (GFSR), which was released on Wednesday, were quite alarming about the prospects for Europe. Here are a few of the grim highlights of their report:

(1) IMF projects huge asset sales by banks: Over the next 18 months, in order to restore their capital ratios, European banks will have to reduce their balance sheets by a staggering €2 trillion, or roughly 7% of their assets. The banks are expected to sell securities and decrease lending to businesses and households

(2) IMF says EBA estimates are too low: The GFSR’s assessment of the likely retrenchment of European banks is much more severe than the one provided by the European Banking Authority (EBA) in December. Back then, the EBA estimated that European banks needed €115 billion to bolster their capital ratios. The EBA projected that only 3% of the recapitalization would come through shrinking the banks’ balance sheets.

(3) Bank deleveraging can’t be good for economic growth: The GFSR warns that the risk of a “synchronized and large-scale deleveraging” could spark financial instability and depress economic growth.

(4) Who is going to buy those bank assets? The GFSR warned: "Such a large-scale deleveraging would have consequences well beyond the euro area. The fire sale of bank assets could have a significant impact on asset prices and market liquidity.” In other words, it could cause another global credit crunch if the banks have a tag sale and no one shows up. Of course, the buyers of last resort could be the ECB and other central banks.

One of the best ways to monitor how this is all shaping up is to track the FTSE Eurofirst 300 Banks Euro Index. Despite the dire scenario for European banks discussed in the latest GFSR, it has been relatively flat around its 200-day moving average this week. However, it is down 13.9% from this year’s high on March 19, after having rallied there very impressively by 39.7% from last year’s low on November 23. The good news is that the S&P 500 Bank Composite Index is holding up much better than the Euro banking index. This suggests that investors are less concerned about another global financial contagion. Maybe what happens in Europe will stay in Europe. I’m inclined to agree with that view.

Today’s Morning Briefing: Different Views (1) Lots of economists and views at the IMF. (2) Can there be more growth ahead if there is more financial instability? (3) Banks facing capital shortfalls will need to sell assets. (4) Guess who might be the buyer of last resort. (5) Hollande sauce. (6) From auction to auction. (7) Worth watching European bank stocks to see what they are worth. (8) Anxiety in Cleveland. (9) On balance, earnings season is a happy distraction so far. (10) When central bankers start to worry about inflation, expect another easing move. (More for subscribers.)

Stock Market Sentiment

Industry analysts are not the only ones who’ve been lowering their expectations and curbing their enthusiasm for stocks. The Bull Bear Ratio compiled by Investors Intelligence declined to 1.86 this week, down from a recent high of 2.45 during the week of April 3. It’s the lowest since mid-March. The change in sentiment has been even more noticeable in the Bull Bear Ratio reported by the American Association of Individual Investors. It plunged to 0.68 during the week of April 11, down from a recent high of 2.86 during the week of January 11. You know what that means: Sentiment is bearish, which is bullish for stocks.

Today’s Morning Briefing: Bonjour (1) The wrong monsieur for the season? (2) Sarkozy, Hollande, and Trotsky. (3) The Socialist’s speech. (4) Everyone likes QE better than austerity. (5) A small bill auction goes well in Spain. The next test is a bond auction on Thursday. (6) French banks are deep in PIIGS. (7) ECB’s Operation Twisted. (8) Great vs. not-so-great expectations for earnings. (9) Sentiment is bearish, which is bullish. (10) Globalization hard to catch in earnings models. (11) IMF nudges up global growth. (12) IT stocks should meander along with rest of market before a summer rally. (More for subscribers.)

Revenues

When the bull market first started in 2009, the bears growled that the rebound in earnings was all attributable to cost cutting. So it wasn’t sustainable, in their opinion. They didn’t believe, and couldn’t imagine, that revenues might actually have a normal recovery too. I track three measures of business revenues, which are all at record highs now:

(1) Manufacturing & Trade Sales is a monthly series compiled by the US Bureau of the Census. It combines manufacturing shipments, wholesalers’ sales, and retail sales. During February it rose to a new record high of $14.8 trillion (saar), exceeding the previous cyclical high by 1.7%. It isn’t comprehensive because it includes revenues from the sale of all goods, but not services. While the comparable GDP measure is limited to final sales of goods, business sales includes intermediate sales as well.

(2) S&P 500 Revenues is available quarterly. During Q4-2011, it rose to a record high of $2,468 billion. The four-quarter sum was $9,571 billion, slightly exceeding the previous cyclical peak of this series during Q3-2008.

(3) S&P 500 Forward Revenues is a weekly series that I calculate on an aggregate basis in billions of dollars. It is a time-weighted average of industry analysts’ consensus revenue expectations for the current and coming years. It is a proxy for 52-week expected forward revenues, and it rose to a record high of $10,026 billion during the week of March 16.

Today’s Morning Briefing: America’s Consummate Consumers (1) The US is still the greatest show on earth. (2) This year won’t be 2010 and 2011 if US economy performs well. (3) Consumer Discretionary leading bull market’s shopping spree. (4) Earnings driving consumer cyclical stocks. (5) Retailers are getting a bit pricey. (6) S&P 500 revenues have fully recovered. (7) Consuming is more fun than retrenching and deleveraging. (8) Lots of pent-up demand. (9) Slicing and dicing retail sales and Retailing earnings and valuation.  (More for subscribers.)

 

US Fiscal Policy

We have the best government money can buy. New Jersey Governor Chris Christie explained it all rather nicely last Tuesday in a speech he delivered at the George W. Bush Institute Conference on Taxes and Economic Growth in Manhattan. He observed that politicians have a great need to be loved: “That’s why we run up these deficits we run up. That’s why we can’t say no to anything, because we care too much about being loved.” In other words, politicians show their love for the voters by running huge deficits and the voters return the love by voting for them.

The result, according to the Governor, has been a “paternalistic entitlement society” with “a bunch of people sitting on a couch, waiting for their next government check.” He thinks this is wrong because it “will not just bankrupt us financially, it will bankrupt us morally…” He is right, of course.

Our constitutional system of checks and balances was supposed to guard against such fiscal recklessness. However, the Founders forgot to include a balanced budget requirement in our founding document. Without it, there was nothing to check and balance the spending excesses of our politicians once they realized that they could finance the resulting deficits in the credit markets. What are the odds of Congress passing a balanced budget amendment? Less than zero given that Congress can’t agree on any of the many deficit reduction plans that have been proposed recently. Here are some of the unsettling impacts on our nation's financial situation so far:

(1) The federal deficit over the past three fiscal years through September 2011 totaled $4.0 trillion, averaging $1.3 trillion per year. This fiscal year, which is the third full year of the economic recovery, the deficit is likely to be around $1.0 trillion again.

(2) Total public debt outstanding, including nonmarketable securities held by federal trust funds, rose to a record $15.6 trillion during March. It’s up $1.3 trillion over the past 12 months and $6.1 trillion over the past four years.

(3) Dividing all this debt by the labor force in the US shows that American workers each owe a record $100,720. That’s double what they owed during 2004.

(4) The Federal Reserve has enabled this fiscal recklessness by pegging the federal funds rate near zero and buying lots of US Treasuries. That’s emasculated the Bond Vigilantes. The Fed’s holdings of US Treasuries rose $1.1 trillion over the past four years through the week of April 4.

(5) The social welfare state in America is set to grow faster than the economy as the Baby Boomers retire. From 1993 through 2010, outlays per beneficiary for Social Security and Medicare more than doubled from $10,459 to $22,319. Over this same period, total wages and salaries in compensation and nominal GDP did about the same. Because Americans are living longer, the number of Social Security beneficiaries rose 88% over this period, and will increase at a faster rate as the Baby Boomers now start to retire.

(6) The number of people claiming disability has soared. It rose to a record 8.7 million during March, doubling since February 1997. Over this period, their numbers have increased by 4.3 million. This helps to explain some of the drop in the labor force participation rate, which fell from 66.9% to 63.8% over this period.

Today’s Morning Briefing: Here We Go Again? (1) Buying time and running out of it. (2) Pass the sangria. (3) Four plausible scenarios for stocks. (4) In the first, Europe has a meltdown, the US falls off a fiscal cliff, and Iran gets bombed. (5) In the second, central banks pour more Kool Aid. (6) In the third, the US shines. (7) In the fourth, sangria makes everything better. (8) Asset allocation: Going sector-neutral in US. Still underweighting European stocks, especially banks. (9) So what is the US economy doing? (10) Globalization for bulls. (More for subscribers.)

US Federal Tax Revenues

I remain optimistic about the US labor market. Over the past two days, I explained why I am not changing my view despite the government’s disappointing report for March. The weight of the evidence suggests that the pace of employment gains remains strong. However, I have to provide a balanced analysis, and the latest data on individual tax receipts is tipping the balance in the wrong direction.

The 12-month average of individual income tax receipts reported yesterday by the US Treasury has flattened out around $1.1 trillion over the past 11 months, after rebounding from a cyclical low of $846.8 billion during January 2010. On the other hand, overall federal tax revenue tends to be highly correlated with the Index of Lagging Economic Indicators, which continues to rebound. I expect that the recent improvement in the labor markets will soon show up in better individual tax receipts.

Today’s Morning Briefing: In Government We Trust. (1) The Governor’s speech. (2) Politicians want to be loved. (3) Couch potatoes with benefits. (4) The Founders floundered on balancing the budget. (5) The Fed’s fiscal policy. (6) Starve Grandma. Feed Goldman. (7) Why are so many workers disabled? (8) Individual income tax receipts are lagging. (9) Global economy is growing. (10) Lots of yuan in China. (11) Worldwide chip sales are down. (12) Still market weighting Semiconductors. (More for subscribers.)

The Euro Mess Again



The Bond Vigilantes are restless in Europe. They are threatening to do to the euro zone what the barbarians did to the Roman Empire. It could get uglier in Europe if the Bond Vigilantes decide to take no prisoners. They seem to be running out of patience with Europeans who refuse to accept that their social welfare state is bankrupt.

Of course, the Bond Vigilantes weren’t very vigilant when they financed European government deficits all too willingly and too easily following the introduction of the euro at the beginning of 1999. Yields on the bonds of the most reckless governments quickly fell toward German yields and remained there until the Greeks admitted in late 2009 that they had fibbed about how much they really owed.

Now the Bond Vigilantes are losing their interest in providing more funds to reckless European governments. That was obvious when Spanish and Italian bond yields rose above 7% last summer. Those yields plunged down to 5% early this year after the ECB flooded the European banking system with liquidity through the LTRO. However, also earlier this year, the Bond Vigilantes were forced to accept a huge "voluntary" haircut on their Greek bonds.

The big backup in Spanish bond yields in recent days suggests that the LTRO liquidity is already drying up, or at least it certainly isn’t holding down Spanish yields. Spain’s 10-year yield jumped more than one percentage point since March 2, when the government announced that Spain will miss its 2012 budget-deficit goal approved by the EU. It rose 20bps just yesterday to 5.94% despite the government’s efforts to calm the Bond Vigilantes with €10 billion of budget cuts in education and health. This morning, it is down to 5.79%. Spain may be the fourth euro member to need a bailout.


Today’s Morning Briefing: Déjà Vu All Over Again? (1) Yogi Berra again. (2) The US is in better shape. (3) China has lots of customers outside of Europe. (4) Spain is this year’s pain. (5) The Bond Vigilantes are touring Europe. (6) The Euro Mess is trashing stocks again. (7) Our Fundamental Stock Market Indicator at new cyclical high. (8) Dr. Copper sees slower growth in China. (9) Still underweighting Europe. (10) US is a safe haven for global stock investors. (More for subscribers.)

US Employment

   

The government’s disappointing employment report for March supports the notion that seasonal factors and mild winter weather boosted employment during January and February, so that March was the payback month. If that is so, then why not simply average the three months to see what’s really happening in the labor market? The results suggest that the labor market is improving. Consider the following:

(1) The three-month average gain of payroll employment remains solid. Payrolls rose 211,700 per month on average during Q1-2012 vs. 164,000 during Q4-2011 and 127,700 during Q3-2011. Private-sector payrolls rose 210,300 on average during Q1 according to the official tally, in line with the 207,000 average gain for the payrolls tracked by ADP.

(2) The index of aggregate weekly hours worked for total private industries rose at a solid pace during Q1. It was up 3.7% (saar), following increases of 2.5% during Q4-2011 and 1.1% during Q3-2011.

(3) The household employment survey is up 414,700 per month on average over the past three months. That compares to gains of 227,700 during Q4-2011 and 240,700 during Q3-2011.

(4) According to the household survey, full-time employment rose 882,000 during March! That’s not a typo, and that’s after it rose 563,000 during February. On the other hand, part-time employment fell 664,000 during March after falling 163,000 during February. Full-time employment is up 4.8 million since its latest cyclical trough during December 2009 to the highest level since the start of 2009.

Also consider the latest batch of other employment indicators:

(5) During March, initial unemployment claims averaged 361,750, falling steadily from September’s average of 410,500. That’s a clear sign that the pace of firing is continuing to decline.

(6) A monthly employment index, which can be constructed from the available regional surveys conducted by the Fed districts and purchasing managers associations, remains strong. So far for March, data are available for the regions around the following cities: Chicago, Dallas, Kansas City, New York, Philadelphia, and Richmond. The average of these regional indexes fell from 14.5 during February to 12.2 last month. That’s still a relatively high reading.

 

(7) On Wednesday, Gallup reported a four-point jump in the polling firm’s Job Creation Index from 14 in February to 18 in March. That’s the best reading since August 2008. The latest poll also found that the pace of hiring is picking up: “The March Job Creation Index reflects 35% of U.S. adult workers saying their employers are hiring and expanding the size of their workforces, and 17% saying their employers are letting workers go and reducing the size of the workforces. While the percentage letting go matches what Gallup found in January, the percentage hiring is at a 42-month high, last seen in September 2008.”

(8) The employment component of the national manufacturing purchasing managers index (M-PMI) jumped from 53.2 in February to 56.1 in March, the best reading since last June. The nonmanufacturing survey’s employment index increased from 55.7 in February to 56.7 in March. The average of the M-PMI and NM-PMI employment indexes rose to 56.4 in March, the highest since last June.

(9) Wednesday’s ADP report also confirmed that the labor market remained strong during March. During Q1, the average gain was 207,000, little changed from Q4’s 211,700 and considerably above the 99,000 average during Q3 of last year.

Today’s Morning Briefing: A Positive Spin

(1) Employment looks good, on average. (2) Full-time employment soaring! (3) The weight of the employment evidence is upbeat. (4) What should we be rooting for: QE3 or jobs? (5) Goldilocks on ice. (6) The déjà vu scenario for 2012. (7) Central banks are running out of ammo and into inflation flak. (8) What if the Republicans take it all? (9) Is little guidance bullish or bearish? (More for subscribers.)

Europe's Recession

On Monday, March 26, I downgraded Europe to an underweight among global stock markets. The latest batch of economic indicators confirms that the region is in a recession. M2 money supply growth rates are plunging in Greece (down -16.8% y/y through February), Spain (down -4.7%), and Portugal (-3.8% through January). It is up only 1.3% through February in Italy.

Germany’s M2 is up 7.5% y/y through February. Some of that growth is coming from Greece, Portugal, and Spain, where money supplies are falling as depositors move their funds to banks they deem to be safer in Germany. That’s not helping the German economy.

This morning, we learn that German industrial production fell 1.3% in February to the lowest level since January 2011. It is down 4.6% from last year’s cyclical high during July. German manufacturing orders edged up 0.3% during February, but also remain well below last year’s high. Foreign orders for German capital goods and consumer goods from the Euro Area are down sharply in recent months.

TODAY’S BULLET POINTS: (1) Wobbling around 1400. (2) Overbought. (3) Bears wanted. (4) Goldman’s call of the mild. (5) FOMC says economy improving, maybe. (6) Are falling commodity prices bullish? (7) Continuing to underweight Europe. (8) Why do analysts expect big jump in earnings growth? (9) A happy bunch of US employment indicators. (10) Europe is falling into a recession. (More for subscribers.)

Mutual Fund Net Inflows & Capital Gains

 

Over the past 36 months through February, net inflows into bond mutual funds totaled $1.0 trillion, while net inflows into equity funds were close to zero. Unfortunately for bond investors, the equity funds enjoyed capital gains of $2.7 trillion over this period, while the bond funds had gains of only $437 billion. Now that bond yields are starting to move higher, those gains are likely to decline. That might convince individual investors to move back into equities.

TODAY’S BULLET POINTS: (1) When good news is not bad. (2) Twisted Fed policy. (3) Consumers and businesses are loaded with liquidity. (4) Banks holding record $3.34 trillion in cash, Treasuries, and Agencies! (5) Do we really need more QE? (6) A classic liquidity trap? Not! (7) Monetary policy is really fiscal policy. (8) FSMI still bullish. (9) Warm weather slows railcar loadings of coal. (10) Railcar loadings of autos at cyclical high.  (More for subscribers.)

Weekly Leading Index

The ECRI’s Weekly Leading Index may be about to defy its bearish handlers. It rose for a fifth consecutive week on March 23 back to its early August high. The compilers of this index at the Economic Cycle Research Institute have been adamantly predicting a recession despite the rebound in their index. In their opinion, it has been distorted by seasonal factors, so they focus on its y/y growth rate. They may have to change their forecast if this growth rate continues to rebound from a recent low of -6.7% at the end of last year to -3.3% during the latest week.

TODAY’S BULLET POINTS: (1) Bullfighting in Spain. (2) Kohler in China. (3) Covering up the Euro Mess. (4) Stocks tend to rise in April. (5) Expectations are not great for Q1 earnings season. (6) Profits from abroad slowing along with global economy. (7) Profits growth for Financials positive, but subdued. (8) Nonfinancial domestic profits should be good. (9) Mixed picture for the sectors. (10) Expecting positive surprises among Consumer Discretionary and IT. (11) Mixed picture for global economy. (12) Services are red hot in Red China. (More for subscribers.)

US Regional Business Surveys

If today’s national purchasing managers index (PMI) for March confirms the strength of the economy, the naysayers will remind us how warm the weather was last month. If it is weak, they will score some points.

They claim to have done so with all the downticks in the March readings of the regional business surveys conducted by the Fed districts. I track the average of the composite indexes for the Fed districts around Dallas, Kansas City, New York, Philadelphia, and Richmond, along with a comparable Chicago PMI. It declined from an 11-month high of 17.2 during February to 13.8 during March. The average new orders index for these six regions fell from 14.7 in February to 11.6 in March. Their average employment index fell from 14.5 to 12.2. All of those are relatively high readings, with all well exceeding zero.

TODAY’S MAJOR BULLET POINTS: (1) Let the games begin! (2) Is the US economy’s winning streak over? (3) Bernanke is the bull’s cheerleader. (4) Record bond calendar pumping up stocks. (5) The Persian Gulf games. (6) Chinese workers unchained to buy iPads. (7) Europeans fighting not to lose. (8) After great Q1, fight or flight in Q2? (9) Do the odds favor US economy? (10) The districts continue to perform well. (11) “The Hunger Games” (+ +). (More for subscribers.)