US Economy

 

The US economy continues to grow at a lackluster pace. Indeed, since Q3-2009, when the recovery started, through Q3-2012, real GDP is up just 7.2%, weaker than all of the previous six recoveries, which had an average gain of 15.8% over the comparable 13-quarter period. Real consumer spending is up 7.4% during the current recovery, also weaker than the previous six and well below their average gain of 14.5%.

 

The negative spin on this subpar growth from the Bear camp is that it’s very close to “stall speed.” So they’ve been predicting a “double-dip” recession ever since the bull market started in March 2009. Now they are licking their chops about the fiscal cliff, which will certainly cause a recession, if it isn't averted.

I have spotted a few “soft patches” in the economy during the latest recovery, but insisted that GDP would continue to grow. Now I am predicting a “Second Recovery” for the US in 2013, led by housing and autos. I see lots of pent-up demand that could boost growth next year. I think this could happen no matter who wins next Tuesday.

Admittedly, I feel more strongly about this outlook if Romney beats Obama. As discussed on Monday, I think this is a likely outcome despite the neck-and-neck polling results. However, in either case, the lame-duck Congress will probably pass an omnibus bill postponing all aspects of the fiscal cliff for one year. Postponing it for a shorter period would pose a nightmare for the IRS and for taxpayers having to prepare their 2013 returns with two different tax rates. For now, the fiscal cliff is already weighing on the economy.

The 2.0% (saar) increase in real GDP during Q3 was better than Q2’s meager gain of 1.3%. However, the latest quarter’s growth was boosted by a 9.6% increase in federal government spending, mostly on defense. Without that contribution, real GDP would have been up only 1.3%. Needless to say, the stall-speed crowd was fast to make this point when the numbers were reported on Friday.

Today's Morning Briefing: Income Issues. (1) Greetings from MiFi. (2) Will next jobs report help or hinder Obama’s bid? (3) GDP still growing at “stall speed” without stalling. (4) Regional business surveys weak in October. (5) Household and median incomes stagnating, while pay per worker rising. (6) There’s no standard to the standard of living. (7) Can Washington really help the middle class? (8) Unintended consequences of government support. (More for subscribers.)

Stocks & Politics

The S&P 500 is up 10.5% since June 1. Some commentators say that this rally predicts that Obama will win. Presumably, higher stock prices reflect an improving economy, which should benefit the incumbent. September’s unemployment rate did fall below 8.0% to 7.8%, the lowest since Obama came into office. October’s employment report will be released on Friday, and is expected to show a slight rebound in the jobless rate.

If Romney wins, will that be bullish or bearish for stocks? In the 10/25 issue of BloombergBusinessweek, Charlie Rose interviewed Jeremy Grantham, who sees trouble for stocks if Romney wins: “History speaks pretty clearly that the markets do better with Democrats. Republicans’ ideas of what constitutes fiscal responsibility simply are not good for the stock market. Democrats have many tendencies, but one of them is to look after the workers, and actually that tends to be good for demand and good for markets. These capitalists who are desperate to elect Republicans should study their history books.”

I’ve looked at the history of the stock market and the political cycle. I don’t see any reliable pattern relating the market’s performance to which party is in the White House or has majorities in both the House and the Senate at the same time.

Today's Morning Briefing: Big Storm Coming. (1) The storm before the cliff. (2) Will Sandy favor Obama or Romney? (3) Why Romney will win. (4) Why he might not. (5) Romney/Biden in 2013? (6) Grantham says Democrats are better for stocks than Republicans. (7) It ain’t necessarily so. (8) Après le deluge, la descente? (9) Charts for bulls. (10) Consumers didn’t get the memo about the cliff. (More for subscribers.)

Global Economy

The bottom line on the top line is that S&P 500 revenues didn’t grow during Q3-2012, but I predict that it will do so in coming quarters. I don’t expect it to fall off a cliff because I expect that the global economy will continue to grow through next year.

My “CliffsNotes” show that S&P 500 revenues are highly correlated with both the US economy and the global economy. That makes sense since S&P 500 companies derive more than half of their revenues from overseas. I’ve just examined some of the best domestic and global economic indicators for tracking revenues. Let’s briefly review the latest batch of them more broadly:

(1) US. New home sales jumped 5.7% during September, confirming that the month’s 11.0% pop in single-family housing starts wasn’t a statistical fluke. Especially encouraging is that home prices have stopped falling as the inventories of new and existing unsold homes have declined. Indeed, during September, median prices for new and existing single-family homes rose 11.7% and 11.4% on a y/y basis.

The bad news is that October’s regional business surveys available for the Fed districts of New York City, Philadelphia, and Richmond are weak. The average composite index was -2.5, with the average orders index negative for the fifth straight month at -5.2. The employment index dropped to -5.6, the weakest since September 2009.

Yesterday, Bloomberg reported that as a result of the sales slump, “North American companies have announced plans to eliminate 62,600 positions at home and abroad since Sept. 1, the biggest two-month drop since the start of 2010, according to data compiled by Bloomberg. Firings total 158,100 so far this year, more than the 129,000 job cuts in the same period in 2011.”

(2) Europe. There isn’t much good news coming out of Europe other than that real GDP pole-vaulted by 1.0% during Q3-2012 in the UK, helped by the Olympic Games. The country had been in a recession for the previous three quarters.

There’s plenty of bad news in the latest flash estimates for the PMIs in the euro zone reported yesterday by Markit. Yesterday, the news about Germany’s October Ifo business survey was also grim. This morning we learn that loans to euro zone companies dropped significantly during September, i.e., €20 billion below the previous month's level, the biggest drop since December last year. Italy was among the countries reporting weak lending. Over the past three months, loans to nonfinancial corporations are down €144 billion at an annual rate. Loans to consumers are down €44 billion over the same period and on the same basis.

Today's Morning Briefing: Earnings Cliff? (1) Revenue cliff? (2) Revenue growth is down to zero. (3) If the profit margin has peaked, must it fall? (4) CliffsNotes. (5) US business sales are mildly encouraging. (6) The ugliest chart shows orders falling. (7) Purchasing managers are mostly subdued. (8) Commodity prices and the dollar are neutral for revenues. (9) Industry analysts expecting 4% revenues growth in 2013. We're at 6%-8%. (10) The bottom line on the top line. (More for subscribers.)

Germany’s Ifo Survey

It was a bad day for stocks yesterday, with investors focusing on the latest batch of disappointing earnings reports for the third quarter. Actually, investors seem to be more upset about disappointing revenues. So far, the misses have been greater and more widespread for revenues than for earnings.

I’ve been monitoring the situation in recent weeks by closely analyzing the global economic indicators, which have been mostly on the weak side. So I haven’t been surprised by the proliferation of negative revenues surprises. The question is, Where do they go from here? I estimate that S&P 500 revenues fell 0.7% y/y during Q3, reflecting slower global economic growth and strength in the dollar.

I think that will be a cyclical low because I don’t expect further weakness in the global economy, though growth is likely to remain slow. Admittedly, this morning’s weaker-than-expected German Ifo survey doesn’t support my relatively optimistic view. German business confidence index fell for the sixth straight month from 109.7 in April to 100.0, the lowest reading since January 2010. The current situation component declined for the fifth time in six months (by 10.1 points) to a 28-month low of 107.3. The expectations component was unchanged at 93.2, the lowest since May 2009. The expectations component correlates closely with German factory orders and production, and currently suggests further downside in both. The overall index tracks exports more closely; it indicates foreign demand slowing to a near standstill. An advance estimate of October’s purchasing managers’ index (48.1), measuring activity in manufacturing and services, showed Germany’s private sector contracted for a sixth straight month.

In addition, the global economy will be in bad shape in 2013 if the US falls off the fiscal cliff. I still expect that after the elections, Congress will postpone it until mid-2013. Contributing to yesterday’s drop in the stock market were stories in the financial press that Fed Chairman Ben Bernanke has told close friends that he won’t seek another term once his current one expires at the start of 2014. In any event, if Mitt Romney wins, it’s obvious he won’t be asked to stay. Can the bull market survive without Bernanke? I think so.

Today's Morning Briefing: Energizing the US. (1) Lots of industrial revolutions in the US thanks to the one in high tech. (2) Yergin says cheap energy is the real stimulus. (3) Nat gas output up 33% since 2006. (4) Electric utilities using almost 50% more gas. (5) US producing 1.0 mbd more oil than four years ago. (6) Fuel efficient. (7) Volatile gasoline prices plunging again. (8) Disappointing revenues. (9) Addicted to Bernanke. (More for subscribers.)

Global Oil Demand & Supply

Most of the earnings disappointments so far during the current earnings season are attributable to the weakness in the global economy. I don’t expect it to get weaker over the remainder of the year, and I do expect some improvement next year. I track world oil demand as another useful way to monitor the global economy. Here is what the latest data, compiled by Oil Market Intelligence (OMI), show:

 

(1) World crude oil usage rose to a record high of 89.5mbd over the 12 months through September. While “Old World” demand remains depressed, “New World” demand rose to a fresh record high. The latter now exceeds the former by 39%; March 2005 was the inflection point where New World began to exceed Old World demand.

(2) The y/y growth rate of world crude oil demand fell to a recent low of 0.3% during March, but has edged up to 0.8% as of September. The growth rate of oil demand among the non-OECD economies has stabilized recently around 2.5%, while the growth rate for the advanced economies of the 34 members of the OECD is up from -1.7% y/y during March to -0.8% during September. That’s mildly encouraging and suggests that the recent weakness in the OECD’s Leading Economic Index may be short-lived.

(3) I previously have noted that data collected by OMI on world oil demand and supply are estimated using different methodologies and aren’t strictly comparable. However, the ratio of the OMI’s demand and supply series (based on the 12-month averages of each) is positively correlated with the yearly percentage change in the price of a barrel of Brent crude oil. The normalized ratio fell to 0.99 in September, the lowest since June 2009. That's bearish for oil prices, suggesting that only fears of a war in the Persian Gulf are propping them up.

Today's Morning Briefing: Muddy Earnings & Crude Oil. (1) Bad, but not so bad. (2) Comps fruit salad. (3) Guidance is downbeat. (4) Adjusting for Debt Valuation Adjustment. (5) Earnings are down with Financials, but flat without them. (6) Another record high for S&P 500 forward earnings. (7) Q4 earnings revised up for Energy and Financials. IT and Materials down. (8) World crude oil demand at record high. (9) Demand/supply ratio still bearish for oil price. (More for subscribers.)

US Financials

So far this month, S&P 500 Financials is up 3.3%, and 23.8% ytd. It is the best performing sector so far this year. Leading the way have been Other Diversified Financial Services (40.8%) and Consumer Finance (33.0). Regional Banks are up 22.0% ytd, but have lost 3.1% since the start of the month.

 

The big story here is that revenue expectations and profit margin projections have bottomed out in recent weeks. Another big story in this sector is that more banking regulators are starting to talk about breaking up the big banks.

For example, Fed Governor Daniel Tarullo, in a speech on October 10, advocated the following: “The idea along these lines that seems to have the most promise would limit the non-deposit liabilities of financial firms to a specified percentage of U.S. gross domestic product, as calculated on a lagged, averaged basis. In addition to the virtue of simplicity, this approach has the advantage of tying the limitation on growth of financial firms to the growth of the national economy and its capacity to absorb losses, as well as to the extent of a firm's dependence on funding from sources other than the stable base of deposits.”

On 10/18 Bloomberg reported that Ohio Democratic Senator Sherrod Brown is proposing to limit non-deposit liabilities to 2% of GDP. That would certainly force the big banks to slim down: “JPMorgan has more than $982 billion in noncore liabilities (about 6.3 percent of GDP), according to data compiled by Bloomberg Industries. Bank of America Corp. has $889 billion (5.7 percent) and Citigroup Inc. has $816 billion (5.2 percent). Goldman Sachs and Morgan Stanley are at roughly 5.2 percent and 3.9 percent, respectively.”

Today's Morning Briefing: Tech Wreck & Breaking Banks. (1) “Stay Home” still beating “Go Global.” (2) Financials beating Tech in October. (3) Disruptive technologies. (4) YRI App coming soon. (5) “Bye-Bye PCs.” (6) Face Time is calling. (7) Computer Hardware takes a hit. (8) Revenues bottoming for Financials. (9) Fed Governor wants to downsize big banks. (10) Lots of “Stay Home” winners in the Winners Circle for S&P 500 industries. (More for subscribers.)

Global & Local Inflation

Where in the world is inflation? I’ve asked the question many times before. Despite the enormous amount of liquidity pumped into the global economy over the past few years by numerous central banks, inflation remains remarkably subdued around the world. Maybe governments are tampering with their measures of inflation so it is understated. If so, then it must be a widespread global conspiracy since so many inflation rates are so subdued.

On the other hand, a few of those governments, particularly the central banks of the United States and Japan, have said that they would like their policies to boost inflation in order to reduce the risk of deflation. The most plausible explanation for why inflation remains so low is that the central banks so far have succeeded in offsetting, but not eliminating, some very powerful deflationary forces.

On our website, we regularly update our Global Inflation chart book. August’s core CPI inflation rate on a y/y basis was only 1.6% among OECD advanced economies with the G7 rate down to only 1.4%. In September, this inflation rate was only 2.0% in the US and 1.6% in the euro zone.

Inflation is higher among many of the emerging economies. However, many of them have a history of chronically high inflation. In other words, it’s hard to pin the blame for their inflation rates on the monetary easing of the past few years. The latest headline CPI inflation rates are high in some of the major emerging economies, like India (10.1%), Indonesia (4.5%), Brazil (5.6%), and Mexico (4.8%). On the other hand, it is only 1.9% in China.

If you are looking for out-of-control inflation in the US, look no further than the college and hospital next door. The CPI data show that college tuition and fees have increased 1,036% since January 1979 vs. 546% for Medical Care Goods & Services vs. 238% for the overall CPI. In other words, college costs have more than quadrupled relative to the CPI over this period, while Medical Care has more than doubled relative to the CPI.

 

We all have explanations for why health care costs are out of control. I’ve talked to lots of doctors about it, and they all agree that tort reform could lower those costs by 25%! Just ask your doctor.

What about college costs? I blame Elizabeth Warren, who is running as a Democrat against Sen. Scott Brown in Massachusetts. She is a professor at Harvard University. She gets paid $350,000 for teaching one course, and has a lucrative consulting practice. She is not unique in this respect, as reflected in the CPI for college tuition and fees.

Today's Morning Briefing: (1) F. Scott. (2) The end of first recoveries. (3) Here comes the first Second Recovery. (4) The “old normal” is making a comeback for housing and autos. (5) Home builders are upbeat. (6) Consumer sentiment is driving auto sales higher. (7) Bull/Bear Ratio is correcting, not the market. (8) Bernanke & Draghi: Don’t bet against the two richest men in the world. (9) Professors are highly inflationary. (More for subscribers.)

Weekly Economic Indicators

The proprietors of the Weekly Leading Index (WLI) at the Economic Cycle Research Institute (ECRI) have been insisting for several months that a recession is imminent. The problem is that their index has risen sharply from a recent low of 121.3 during the week of June 15 to 127.7 during the week of October 5. I don’t know how they calculate their index because the components are top secret even for subscribers.

I do know how we calculate our Fundamental Stock Market Indicator (FSMI), which is highly correlated with both the S&P 500 and the ECRI-WLI. Our open-source formula is the average of the weekly Consumer Comfort Index (plus 100) and Tuesday’s readings of the CRB raw industrials spot price index divided by the four-week average of initial unemployment claims. Our FSMI has gone nearly vertical over the past seven weeks, significantly reducing its recent divergence with the S&P 500 and confirming the recent surge in stock prices.

My strong suspicion is that the ECRI-WLI includes two rather volatile financial variables, namely the S&P 500 and the yield spread between high-yield corporate bonds and 10-year Treasuries. Sure enough, it is highly correlated with the former as well as the inverse of the latter. In other words, the ECRI-WLI is providing the same information as can be gleaned gratis from these two financial variables. Neither one is signaling that a recession is imminent.
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Today's Morning Briefing: Buybacks. (1) Weekly leading indicators are upbeat. (2) Fed’s policies distorting market-based signals. (3) More buybacks and more upside for stocks. (4) Record dividends boosting inflows into stocks. (5) Lots of cash in corporate income statements and balance sheets. (6) Why are corporations borrowing so much in the bond market? (7) Is Tech getting commoditized again? (8) Global demand for chips dropping. (More for subscribers.)

 

S&P 500 Retailers

Not surprisingly, the recovery in retail sales since 2009 has been mirrored in the stock price index, forward earnings, and valuation multiple of the S&P 500 Consumer Discretionary Retailing Group:

(1) The group’s stock price index is up 182% since March 9, 2009, when the bull market began. It has significantly outperformed the S&P 500, which is up 111% since then.

(2) The group’s forward earnings rose to a fresh record high during the first week of October. Industry analysts are expecting that the group’s earnings will rise 16.1% next year following a 10.2% gain this year.

(3) Last week, the group’s forward P/E rose to 18, a level that has proven to be a lid on valuation since the start of the bull market. However, that doesn’t mean that the stock price index can’t continue to move higher as long as retail sales and forward earnings continue to do the same. It just might not continue to outperform the overall market by as much.

Today's Morning Briefing: Instant Gratification. (1) Market math for bulls. (2) Global revenues growth of 6% would be just right. (3) More upside for earnings. (4) Analysts see higher margins in 2013, but are lowering their estimates. (5) Can P/E break through 13 jinx? (6) Born to shop. (7) A dollar earned is a dollar spent. (8) All good for Q3’s real GDP. (9) Earnings outlook remains bright for retailers. (10) Beware of Chucky. (More for subscribers.)

Global Economy

As an investment strategy, “Stay Home” has mostly outperformed “Go Global” this year. It may continue to do so in 2013. However, I’m starting to get cabin fever. It may be time to get out a little bit and see the world. Here is what I am seeing:

(1) China. China’s new leaders, who will be formally appointed at the Communist Party Congress during November, are likely to spend lots of money to revive economic growth when they take charge in March. Before then, the People's Bank of China is likely to avert a hard landing by continuing to ease monetary policy.

The latest data out of China suggest that the country’s economic growth may be bottoming. M2 rose 14.8% y/y during September, up from a recent low of 12.4% during January 2012. The CPI inflation rate, which recently peaked at 6.5% during July 2011, seems to be stabilizing around 2% over the past three months. Exports edged up during September, but have stalled in recent months. On the other hand, September's PPI for industrial products fell 3.6% y/y, the weakest since October 2009.

(2) India. Over the past month, India’s government unveiled a series of reform initiatives long demanded by investors and business leaders frustrated by years of policy inaction in New Delhi. They include lifting the bar on foreign investment in the airline, insurance, pensions, and retail sectors. That’s already pumping up the financial markets. The next step is expected to be a roadmap for cutting the fiscal deficit.

The Bombay Sensex stock price index has rallied smartly on the government’s reform announcement. It is now up 20.8% ytd, about twice as much as the 9.9% increase in the MSCI World index. During September, India’s M-PMI remained flat at 52.8, while the NM-PMI rose to 55.8.

(3) Indonesia. In Southeast Asia’s largest economy, September car sales jumped 28% y/y back to near-record monthly numbers, driven by a rising middle class and low interest rates. Carmakers are expanding their Indonesian production. Their exports surged 58% on an annual basis in the year through August. On the other hand, exports and imports fell the most in three years in August, suggesting weakening third-quarter growth. Yet the World Bank forecasts that Indonesia’s real GDP will grow 6.1% in 2012 and 6.3% in 2013.

The Jakarta Composite stock price index is at a record high and up 12.8% ytd.

(4) Brazil. The Brazilian central bank reduced interest rates for the 10th straight time Wednesday to spark local growth amid concerns about a prolonged global slump. The bank cut its benchmark Selic interest rate by a quarter of a percentage point to a record low 7.25% and signaled the end to a cycle of cuts that started in August 2011. The central bank's rate-setting committee was divided, with five directors in favor of the cut and three directors voting to hold interest rates steady.

(5) Mexico. The IMF estimates Brazil has an economy twice the size of Mexico's at $2.4 trillion, but Nomura’s economists predict that the gap could disappear by 2022 if Mexico grows at the top end of their forecast range and Brazil at the low end. New Mexican President Enrique Pena Nieto aims to lift annual economic growth to 6% by overhauling Mexico's labor market, state-run oil sector, and tax base. Mexico’s IPC stock price index is up 12.4% ytd, well ahead of Brazil’s 3.3% gain.

Today's Morning Briefing: Beantown. (1) The weather in Boston. (2) Blankfein says avoiding fiscal cliff would be very bullish. (3) Second Recovery is underway. (4) Foreclosures at five-year low. (5) Earned income at record high. (6) Rising stock and home prices boosting confidence. (7) Lots of applications to export US oil and LNG. (8) Tax receipts at cyclical high. (9) Time to Go Global? (10) China may be bottoming. (11) “Argo” (+ + +). (More for subscribers.)

China vs. Japan

China's 12th Five-Year Plan for 2011-2015 aims to transform the economy from export-led growth to consumer-led growth. The problem is that China’s exports have been hard hit by the slowdown in the global economy. As a result, China’s leaders are in a panic as they realize that they have much less time for making the transition from export-led growth to consumer-led growth than they expected. Their immediate response has been to raise minimum wages, which is worsening the weakness in exports by raising labor costs.

Tokyo's recent decision to buy contested islets in the East China Sea infuriated Beijing, prompting widespread demonstrations in China and a boycott of car and other brands made in, or by, Japan. Nationalists in both countries are inflaming the tensions between the two nations. Over the past 12 months through August, China exported $153.1 billion of goods to Japan and imported $186.7 billion.

Those trade flows are already getting hit by the dispute as Japanese auto sales are plummeting in China. Last month, a Chinese driver of a Japanese car was left partially paralyzed after being beaten by an anti-Japanese mob. People have been debating over social media the risks of purchasing a car from Japan. Toyota said it sold 44,100 vehicles in China in September, down 49% y/y. Nissan said its sales in China fell to 76,066 vehicles last month, down 35%. Honda reported a 41% drop to 33,931 vehicles.

This is also depressing the production of Japanese companies that assemble cars in China. As a result of the political tensions, the three biggest Japanese car makers temporarily closed their factories in China during September. Production remains below pre-crisis levels, with Nissan saying it is operating plants "flexibly" to respond to changes in demand.

Today's Morning Briefing: Panel Discussion. (1) Gabriel on Washington and Hardy on China. (2) Assessing the Fiscal Cliff in the US and China’s soft landing. (3) China declares war on Japan. (4) Senator Schumer is either killing a deal or making one. (5) Washington: Let the games begin. (6) Future shock for China’s plan. (7) Bad news for Japan’s auto makers and their Chinese employees. (8) Hardy sees another round of big spending in China. (More for subscribers.)

 

The Global Economy

The IMF recently lowered its outlook for global real GDP for this year and next year. It’s been doing so all year. But now, the IMF sees an “alarmingly high” risk of a deeper global slump. That’s alarming, especially since the open-ended QE policies of both the Fed and the ECB were just recently implemented. Apparently, the IMF is skeptical that these programs will do much to stimulate global economic growth. I’m no fan of QE, but I have to believe they’ll provide some lift to the global economy by reducing the risk of a Lehman-style meltdown.

While the IMF is downgrading the outlook for global economic growth and fretting about the downside risks, especially in Europe, did you hear that Germany’s merchandise exports rose to a new record high during August? That doesn’t jibe with the weakness in German foreign orders for manufactured goods, or the sluggishness in German industrial production. It does jibe with the strength in the DAX. This morning, we learn that Italy’s industrial production rose unexpectedly by 1.7% during August.

Even the Baltic Dry Index is turning higher just as the IMF is ringing the alarm bell. It is up 33.6% since September 12. It’s been weak all year after plunging during January. It’s had a couple of false recoveries since then. Maybe this one is too. We’ll see. Meanwhile, as I noted yesterday, the CRB raw industrials spot price index, which bottomed this year on August 2, remains on a solid upward trend, though it did dip a bit the past couple of days.

Today's Morning Briefing: The Silly Season. (1) Start spreading the news. (2) Attention-grabbing headlines. (3) Bombing the bomb. (4) The White House is leaky. (5) Have you heard about the “fiscal cliff?” (6) Signing up for Jack’s tweets. (7) Small business owners have more jobs to fill. (8) They also have plenty of complaints about taxes and regs. (9) IMF growth forecast doesn’t give much credit to QE. (10) German exports at record high! (More for subscribers.)

 

S&P 500 Revenues & Earnings

Industry analysts raised their S&P 500 revenues estimates at the end of September for both 2012 and 2013. Their estimate for next year peaked at $1161 per share during the week of April 26, falling to a low of $1124 during the week of August 16. It then stabilized over the past six weeks around that low, and hooked back up to $1131 at the end of September. Could it be that S&P 500 revenues, with more than half coming from abroad, are bottoming despite the IMF’s increasing caution about the outlook for the global economy?

Furthermore, S&P 500 forward earnings rose to a new record high last week of $112.82. In recent weeks, industry analysts continued to lower their Q4-2012 estimate, but at a slower pace, and it also might have bottomed last week. They’ve recently stopped lowering their estimates for all four quarters of next year.

Today's Morning Briefing: Global Bust, Boom, or Blah? (1) The latest gloomy memo from the IMF. (2) Are industry analysts turning more upbeat? (3) Questioning the pessimism about China. (4) Are China plays bottoming? (5) Intermodal railcar loadings are chugging along. (6) Second Recovery scenario for the US. (7) Mortgage refis are up. (8) Less imbalance in euro area’s TARGET2. (9) The DAX is on a tear. (10) China’s woes trigger more monetary easing. (More for subscribers.)

Employment

According to September’s controversial household survey data, employment rose by a whopping 873,000, with the labor force up 418,000 and unemployment down 456,000. Monthly gains of 500,000 or more in household employment are rare, but there have been eleven of them in this volatile series since 2000. They are often followed by sharp reversals in the next monthly report.

The employment gain was attributable to an increase of 838,000 in full-time employment, while part-time employment fell 26,000. What’s odd is that among those working part-time (which edged down slightly), there was a 582,000 increase in those working part-time for economic reasons. In other words, lots of people found full-time jobs, and lots of people who wanted to work full time could only find part-time jobs. Got that? Even odder is that the payroll survey showed that employment in the temporary help industry edged down by 2,000 in September.

While I doubt that anyone at BLS tampered with the household data for political motives, I’m certain no one even thought to bother with the payroll employment numbers. September’s increase was a measly 114,000. I give much more weight to the revisions to the previous two months, which tend to be upwards when the economy is expanding. They totaled 86,000 during July and August, raising their monthly average gain to 161,500. The oddity here was that upward revisions occurred at the local-government level--mainly the hiring of school teachers (up 77,000)--which nearly matched the revision to overall payrolls.

The really good news in Friday’s report was that aggregate weekly hours in private industries rose 0.4% during September to 3.85 billion hours, the highest since November 2008. In addition average hourly earnings rose 0.3%. As a result, our YRI Earned Income Proxy, which is highly correlated with the private sector’s wages and salaries in personal income, jumped 0.7% to a record high. This augurs well for the holiday shopping season. There are only 77 days left before Christmas!

The debatable question is whether the Obama administration’s policies are creating jobs. The answer, of course, is they didn’t create them. Mitt Romney says he’ll create 12 million jobs if he is elected to be the next president. Presidents don’t create jobs. Profitable companies expand and create jobs, especially small ones that turn into big ones.

Today's Morning Briefing: Apocalypse Postponed. (1) Apocalypse Now or Not? (2) The difference between bull and bear markets. (3) Record high earnings expectations. (4) Huge relief rally in European bourses. (5) Economic surprise index heading higher. (6) Drop in Brent’s war premium as Iranians protest inflation. (7) Jack the Tweeter. (8) Earned income at record high. (9) Politicians didn’t create those jobs. (10) Lots of charging bulls among S&P 500 industries. (11) “Searching for Sugar Man” (+ + +). (More for subscribers.)

Stock Market Indicators

The global economy continues to weaken, while the US continues to grow at a lackluster pace. Our Fundamental Stock Market Indicator (FSMI) gauges the combined impact on the stock market of developments in our domestic economy and the one abroad. The FSMI includes two weekly components that are US-centric (i.e., initial unemployment claims and consumer confidence) and a third one that is very sensitive to global economic developments (i.e., industrial commodity prices).

The FSMI has been very highly correlated with the S&P 500 since 2000. They have diverged occasionally, most recently this summer as stocks rallied since June 1 while the FSMI sank. The FSMI has rebounded during each of the past five weeks through the week of September 22, which is providing some fundamental support for the recent rise in stock prices. By the way, our FSMI is highly correlated with the ECRI’s Weekly Leading Index, which has also rebounded recently.

Today's Morning Briefing: Game Changer vs. Endgame. (1) The empty chair. (2) Still hoping for change. (3) High and low energy. (4) Back in the game. (5) Romney’s $17,000 solution to the Fiscal Cliff. (6) Fully invested bears in the Big Apple consider raising cash. (7) The market loves postponed apocalyptic scenarios. (8) Nice numbers. (9) What about ETFs? (More for subscribers.)

Spain

Yesterday’s Bloomberg reported: “Mario Draghi’s plan to save the euro is about to get a test run. Spanish Prime Minister Mariano Rajoy appears ready to accept--perhaps not immediately, but soon--the European Central Bank president’s offer of a deal, in which the bank would buy up Spanish government debt in exchange for promised austerity and economic reforms. … Even as the foundations of a rescue fall into place, though, it’s becoming clear that Europe’s fourth-largest economy is in worse shape than previously understood--and that ECB bond-buying won’t fix it. On Oct. 2, Madrid reported that unemployment rose for a second month in September to 24.6 percent, contradicting earlier government assurances that joblessness had peaked. The same day, Moody’s Investors Service…estimated that Spanish banks faced a capital shortfall of up to 105 billion euros ($135 billion), almost twice the figure reported to the government a few days earlier.”

 

Greece is a sideshow compared to Spain. The ECB is already propping up Spain’s banking system with 411.7 billion euros in MTRO and LTRO loans. That’s been necessary to offset massive deposit and capital outflows. Odds are that Spain will ask for help soon, and get it, but will continue to be a pain in 2013.

Today Morning Briefing: Crosscurrents. (1) Will the bull go over the cliff? (2) Retesting the record high before yearend? (3) Postponing persistent problems. (4) FSMI is rebounding. So is ECRI-WLI. (5) Forward earnings at new record highs again. (6) A scary study of widespread pain fiscal cliff would cause. (7) Feldstein and Thaler have a couple of good solutions. (8) Spain is in pain and a pain. (9) Persian carpet bombing postponed? (10) Happy and sad mix of economic indicators in the US. (More for subscribers.)

QE, Inflation, Stocks, & Gold

In addition to driving stock prices higher, the Fed’s QE policies have succeeded in boosting inflationary expectations as measured by the spread between the 10-year Treasury yield and the comparable TIPS yield. Indeed, this spread is highly correlated with both the S&P 500 stock price index and the forward P/E of the S&P 500. The spread peaked at a high so far this year of 2.64% on September 14, matching the QE2 peak on April 8, 2011. It dipped back down a bit to 2.42% yesterday.

This suggests that the market could make new highs over the rest of the year if expected inflation does the same. For this to happen, the lame duck session of Congress would have to pass legislation that would postpone the fiscal cliff for a few months and also raise the debt ceiling.

By the way, the price of gold has been tracking the debt ceiling for quite some time. In addition, the price of gold has been highly inversely correlated with the 10-year TIPS yield, which was down to a negative 0.78% yesterday. Presumably, the negative yield reflects strong demand for this bond because it provides inflation protection.

Today's Morning Briefing: The Fed & the Cliff. (1) Bernanke takes credit for the bull. (2) Bernanke’s Put. (3) QE and LDR (law of diminishing returns). (4) Inflationary expectations driving stock prices. (5) Fixing or postponing fiscal cliff problem would be bullish. (6) How does QE boost stock prices? (7) Retail stock investors have been MIA. (8) So have pension funds and foreign investors. (9) Fed’s policies have caused a bond buying panic. (10) Corporations have raised lots of money in the bond market and repurchased shares. (More for subscribers.)

  

Euro Mess

Will the Europeans ever get their act together? In last Thursday’s FT, James Mackintosh observed in his column: “Every time Europe’s leaders are given a breathing space by the European Central bank, they return to their petty disputes and progress stops.” While they ceaselessly debate about how to keep their monetary union from disintegrating, the stress on the euro zone’s economy is worsening.

On Thursday, the ECB released data showing that monetary aggregates continued to grow in the euro area, with M2 up 3.2% y/y through August. However, M2 growth was negative in Spain (-7.3%, August ), Greece (-15.0%, July), Portugal (-6.2%, July), and Ireland (-3,5%. July). The ECB’s data also showed that lending by monetary financial institutions (MFIs, excluding central banks) to the private sector plunged by €766 billion (saar) over the past three months through August. That was mostly attributable to a big drop in loans by MFIs to other financial institutions. Now we know why ECB President Mario Draghi felt compelled in late July to promise to do whatever it takes to save the euro.

Today's Morning Briefing: Debates. (1) Lots of hot topics to get heated about. (2) Soon there will be some winners and losers. (3) Obama vs. Romney: The undecided vs. the decided. (4) Fiscal cliff no matter who wins? (5) Euro zone remains stressed. (6) China’s landing is looking harder. (7) Did Bibi call off “October Surprise” for Iran? (8) Time for a debate about a US recession again. (9) Benchmark revisions show more jobs. (10) The next great debate. (11) “End of Watch” (+). (More for subscribers.)