World MSCI Earnings & Revenues (excerpt)

Yesterday, I noted that S&P 500 forward earnings rose to another record high last week. That’s quite an accomplishment given that the forward earnings of the World MSCI (W-MSCI) stock composite reached a cyclical peak during the week of August 11, 2011, and has been flat-lining slightly below that peak ever since.

W-MSCI consensus earnings forecasts for 2013 and 2014 have been falling for well over a year, yet analysts are still projecting growth rates of 8.4% this year and 11.1% next year. In any event, I believe that forward earnings drive stock markets. World forward earnings is likely to remain flat given that the latest estimate for 2014 is only 4.2% above the latest value of forward earnings.

Earnings have stalled because revenues have been flat since early 2011. Estimates for this year and next year continue to be cut, yet revenues are expected to grow 3.4% this year and 4.7% next year.

Today's Morning Briefing: Small World. (1) The global index project. (2) World MSCI forward revenues and earnings flat-lining. (3) World forward profit margin below previous peaks. (4) Big drop in profit margin of emerging markets reflects rising labor costs. (5) The upside case for Europe. (6) Europe has weak revenues, weak margins, and a low P/E. (7) Another manufacturing index is looking up in Europe. (8) Germany is slowly, but surely, improving. (More for subscribers.)

Forward Earnings Flying High (excerpt)

Once again, I can report that S&P 500 forward earnings rose to yet another record high of $118.26 per share last week. The forward earnings of the S&P 400 and S&P 600 also rose to new record highs last week. Forward earnings are flying with the hawks.

In recent weeks, the 2014 earnings estimate for the S&P 500 has remained remarkably stable around $123 per share. Forward earnings is converging toward the 2014 estimate, whatever it might be at yearend. In other words, 2013 earnings are becoming increasingly less important than 2014 earnings.

The Q2 earnings season is about half over, as 52% of the S&P 500 companies have reported. So far, the $0.43 increase in the quarter’s blend of actual and estimated results is on the weak side, a surprise given that estimates were lowered significantly coming into the earnings season.

In addition, the Q3 estimate has been lowered by almost as much as the upside surprise to the Q2 blend. Now analysts are expecting Q3 earnings to grow 6.1% y/y, down from 10.7% at the start of the year. On the other hand, they still project an 11.9% y/y growth rate for Q4, but that is down too, from 18.1% at the start of the year, and also likely to be cut further.

As I said, none of this matters if the 2014 estimate remains so high. Increasingly, that will be the number that the market discounts.

Today's Morning Briefing: Doves vs. Hawks. (1) 700 predictions. (2) Hawk-eyed prognosticators. (3) Lonesome hawks. (4) Not much growth in H1’s GDP. (5) Capitalizing R&D and “Star Wars.” (6) Consumers are still driving the economy. (7) Business spending on equipment, structures, and inventories is flat-lining. (8) Trade is a drag. (9) Federal spending gets sequestered. (10) Forward earnings flying with the hawks. (More for subscribers.)

Aging Bull Still Raging (excerpt)

The aging bull has turned into a raging bull so far this year. The S&P 500 is up 18.6% ytd, well ahead of last year’s 13.4% gain. Not bad for a bull that has been charging forward with only a few stumbles since March 2009. It hasn’t stumbled this year. There has been only one mini-correction, with the S&P 500 down 5.8% from May 21 through June 24.

Fears that the current bull market (2009-?) might be tracking the previous one (2003-2007) have abated as stock prices rose to new record highs this year, surpassing the previous record peak on October 9, 2007, rather than starting a bear market, as they did after the market peaked on that day in 2007. However, the year isn’t over, and there are some hurdles that could trip the bull during the fall. More likely is that stock prices will move sideways for a while before resuming their climb to new record highs in 2014. Nevertheless, let’s look forward at the upcoming challenges starting with the Fed.

The FOMC meets this week on Tuesday and Wednesday. Odds are that the statement released after the meeting will signal that the Fed will start to phase out QE following the next meeting, scheduled for September 17-18. To minimize adverse market reactions, the statement is likely to ease “forward guidance” some more. I wouldn't be surprised if the 6.5% threshold for the unemployment rate is lowered to 5.5%.

The WSJ’s ace Fed watcher, Jon Hilsenrath, confirmed this possibility in a 7/25 article titled, “Up for Debate at Fed: A Sharper Easy-Money Message.” He observed that Fed Chairman Ben Bernanke “suggested at his June press conference that the Fed might lower that 6.5% threshold for unemployment, which was set in September. Such a move would drive home to markets that short-term interest rates will be low for a long time.” Another option would be to state that “short-term rates won't rise if inflation falls below some threshold, perhaps 1.5%. Mr. Bernanke has already suggested as much.”

Bernanke and other Fed officials have argued that the official unemployment rate isn’t measuring extensive “underemployment.” The number of people working part-time for economic reasons remains very high at 8.2 million.

Today's Morning Briefing: Looking Forward. (1) From aging to raging bull. (2) Challenges during the fall season. (3) Tighter QE and easier forward guidance? (4) Sequester II-X ahead. (5) Threatening to shut down the government again. (6) Obamacare needs lots of young and healthy members, who don’t want it. (7) For some employees, working part time is as good as full time. (8) Draghi’s OMT could be challenged in Germany. (9) China MSCI is cheap for lots of good reasons. (10) “Fruitvale Station” (+). (More for subscribers.)

“Second Recovery” Unfolding in US (excerpt)

Markit’s flash M-PMI for the US rose from 51.9 in June to 53.2 in July, the highest in four months. There were gains in the following components: output (from 53.5 to 54.0), new orders (53.4 to 55.1), and employment (49.9 to 52.6). There was an especially big jump in new export orders (46.3 to 52.3), which is impressive given the strength of the dollar and the slower pace of global economic growth.

My “Second Recovery” scenario is playing out nicely this year as rising auto and new home sales boost manufacturing and the overall economy. Railcar loadings of motor vehicles rose to another cyclical high in mid-July. This series is highly correlated with auto sales. The same goes for railcar loadings of lumber and wood products, which is highly correlated with housing starts.

Today's Morning Briefing: Brave New World Update. (1) From the High Tech Revolution to the New Industrial Revolution. (2) Santa Claus coming to Santa Clara. (3) Meet Baxter, the hard-working robot. (4) Income inequality could worsen unless everyone MOOCs. (5) High-priced higher education is about to deflate. (6) Compute this: A master’s degree for $6,600. (7) Everything can be done in 3-D. (8) Trucks without drivers. (9) China is getting weaker. (10) Europe is getting stronger. (11) The US is chugging along as railcars haul more autos and lumber. (12) Focus on overweight-rated housing-related industries. (More for subscribers.)

S&P 500 Forward Earnings At Record High (excerpt)

I am a big believer in the notion that the stock market discounts forward earnings, which is the time-weighted average of consensus expected earnings for the current and coming years. Forward earnings is an excellent 12-month leading indicator of actual earnings when the economy is growing.

However, it doesn’t provide any advance warnings of recessions. If you agree with me that a recession is unlikely over the next 12-24 months, then the record high in forward earnings is a good omen for profits, the economy, and stock prices. It tends to be a good leading indicator of the Index of Coincident Economic Indicators too.

Today's Morning Briefing: Global Tour de Force. (1) Rolling out our global perspective on earnings. (2) Four starters: S&P 500, MSCI-Japan, DAX, & MSCI-China. (3) Forward revenues and earnings data confirm global slowdown. (4) OECD leading indicators show some life in Europe, but not in BRICs. (5) Abeconomics gives big boost to earnings expectations in Japan. (6) Revenues are surprisingly good in Germany as earnings mark time at record high. (7) Revenue growth down sharply over the past two years in China. (8) China’s leaders want fewer “glitzy” government buildings. (9) FRB-SF study says Fed policy may be boosting unemployment! (More for subscribers.)

Stocks & the Misery Index (excerpt)

During the Q&A session following Fed Chairman Ben Bernanke’s prepared congressional testimony on monetary policy last Wednesday, he said, “I think the market is beginning to understand our message, and the volatility has obviously moderated.” Apparently, the message is that Bernanke & Co. wants stock prices to rise and bond yields to fall. That seems to be the Fed’s “shadow” mandate. This is the one lurking behind the Fed’s official dual mandate, which according to the FOMC statements since December 12 of last year is to lower the unemployment rate to 6.5% and to boost inflation back to 2%.

The Fed’s official goal is, in effect, to lower the Misery Index--the sum of the official unemployment rate and the inflation rate (using the y/y percentage change in the core consumption deflator)--down to 8.5% and to rebalance it. It was already down to 8.6% in May, but the jobless rate is too high at 7.6% and the inflation rate is too low at 1.0%.

In the past, bull markets in stocks tended to occur when the Misery Index was falling, or at least not rising. The index is down from a cyclical peak of 11.8% during March 2010. Odds are it will remain around 8.5% through the end of next year. If so, then it suggests that the current bull market may last at least until then, if not longer.

Today's Morning Briefing: Less Miserable. (1) Bears are the bull market’s Les Misérables. (2) Tracking misery during good times and bad. (3) Falling (rising) unemployment is unambiguously good (bad) for stocks. (4) Fed’s 6.5% target for jobless rate is bullish for stocks. (5) Relationship between stocks and inflation is more ambiguous. (6) Fed’s goal of boosting inflation is also bullish for stocks. (7) Drop in Misery Index since 2009 could boost P/Es some more. (8) Earnings season is a bore so far, yet forward earnings are exciting stocks. (9) Global oil demand confirms slow pace of global growth. (10) Focus on underweight-rated S&P 500 Energy. (More for subscribers.)

The Fed & Unemployment (excerpt)

In his Q&A session following his congressional testimony last Wednesday, Fed Chairman ben Bernanke said that “the difference between 7.6 [the current jobless rate] and 5.6 is cyclical and the rest of it is what economists would call frictional or structural." Interestingly, FRB-Minneapolis President Narayana Kocherlakota posted a 6/24 note proposing that the threshold level for even just discussing raising the fed funds rate should be lowered to 5.5% from 6.5%.

In his prepared testimony, Bernanke said that “if a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the Committee would be unlikely to view a decline in unemployment to 6-1/2 percent as a sufficient reason to raise its target for the federal funds rate.”

Wow, that’s an important statement! It’s not hard to see that all of the drop in the unemployment rate so far can be attributed to the decline in the participation rate. I constructed three hypothetical time series showing the total number of unemployed workers by subtracting actual employment from the civilian working-age population multiplied by labor force participation rates of 63%, 65%, and 67%. This analysis shows that nearly all of the 3.6 million drop in unemployment from the peak at 15.4 million during October 2009 through June of this year can be explained by the drop in the participation rate from 65.0% to 63.5%. The same can be said for the drop in the unemployment rate from its most recent cyclical peak. Currently at 7.6%, it would be at 9.7% if the participation rate were 65%.

Today's Morning Briefing: The Misery Index. (1) The latest version of the Fed’s message. (2) Fed’s “shadow” mandate is to boost stock prices. (3) Financial stability is at the bottom of the Fed’s mandate list. (4) Avoiding bubbles is hard to do, says Fed governor. Bernanke agrees. (5) Misery Index has too much unemployment, not enough inflation. (6) Falling misery is bullish for stocks maybe for another four years. (7) Will Fed lower the jobless threshold to 5.5% from 6.5%? (8) Labor force dropouts account for all of the drop in jobless rate. (9) Lots of part-time jobs. (10) Good news out of Europe. (11) Raging bull sectors within the aging bull market. (12) “The Way, Way Back” (+). (More for subscribers.)

The Fed’s Message: One More Time (excerpt)

When Fed Chairman Ben Bernanke outlined the FOMC’s plan for phasing out QE at his press conference on June 19, the S&P 500 dropped 1.4% that day and 2.5% the following day. When he repeated the plan yesterday during his congressional testimony, the market rose slightly, remaining near its recent record high.

Bernanke said that the FOMC will start tapering QE “later this year” if the economy continues to improve and inflation moves back toward 2%: “And if the subsequent data continued to confirm this pattern of ongoing economic improvement and normalizing inflation, we expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear. At that point, if the economy had evolved along the lines we anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward our 2 percent objective. Such outcomes would be fully consistent with the goals of the asset purchase program that we established in September.”

However, that’s not a “preset course.” In any event, he reiterated that the Fed’s forward guidance pledges to keep the federal funds rate near zero “at least as long as” the unemployment rate remains above 6.5%. If inflation remains persistently below 2%, then the federal funds rate will remain near zero even if the jobless rate is down to 6.5%.

The market’s reaction to Bernanke’s “Can you hear me now?” testimony suggests that the answer is “Yes, now we can!” The Fed may or may not taper QE depending on the performance of the economy. In any event, highly accommodative monetary policy will persist for the foreseeable future.

For now, the Fed will continue to buy $40 billion per month in agency MBS and $45 billion per month in Treasuries.

Today's Morning Briefing: Mixed Signals. (1) Useful vs. useless information. (2) Paul Newman & Ben Bernanke. (3) Fed: Clearer message, but weaker signal. (4) Is the labor market really improving? (5) Dropouts. (6) Housing indicators are blowing hot and cold. (7) Outlook for earnings looks better than for revenues. (8) Here comes another sequester. (More for subscribers.)

Fed’s Second Mandate (excerpt)

In his Q&A last Wednesday, Fed Chairman Ben Bernanke reiterated that he is concerned that inflation may be too low. That along with high unemployment explains why he pledged to maintain “highly accommodative monetary policy for the foreseeable future.” The Fed’s inflation target is 2%, based on the personal consumption deflator (PCED) excluding food and energy.

This core rate was actually down to 1.1% y/y during May from a recent high of 2.0% during March 2012, matching its record low. The core CPI, reported yesterday, was down to 1.6% in June, the lowest since June 2011.

Why is this bad? Bernanke is convinced that “low inflation is not good for the economy because very low inflation increases the risks of deflation, which can cause an economy to stagnate. It raises the real cost of investing, and the evidence is that falling and low inflation can be very bad for an economy.” He noted that “transitory factors” might explain the recent bout of disinflation, but he didn’t provide any details. He said that he expects that inflation will “come back up.” But if it doesn’t, then “that would be a good reason to remain accommodative and to try to achieve that objective.”

In a speech on June 28, FRB-SF President John Williams identified one factor that may be temporarily depressing inflation: “This partly reflects temporary factors, such as a decline in Medicare reimbursement prices forced by sequestration.” Sure enough, there has been a significant decline in both CPI and PCED inflation measures for medical care. The former fell to 2.1% in June, the lowest since September 1972. Prescription drug prices were unchanged in June. Hospital costs rose 3.5% in June, the lowest since December 1998. Physician fees have been hovering between 2% and 3% recently in the CPI, but have plummeted close to zero in the PCED.

Today's Morning Briefing: The Second Mandate. (1) Inflation is below Fed’s target. (2) Core PCED inflation at record low. (3) Bernanke says low inflation is not good. (4) CPI’s critics say it understates inflation. (5) Weak global growth depressing CPI inflation in advanced economies. (6) Is inflation only a monetary phenomenon? (7) Maybe the Fed isn’t the only inflation game in town. (8) Good vs. bad deflation. (9) Disinflation in medical care, used cars, furniture, and airline fares. (10) Tenant rent inflation rising. (11) Focus on market-weight-rated IT. (More for subscribers.)

Great Rotation? (excerpt)

What is the likelihood of a “Great Rotation” out of bonds and into stocks? Weekly data estimated by the Investment Company Institute show that $66.7 billion poured out of bond mutual funds during the past five weeks through July 3, while only $0.3 billion flowed into equity mutual funds. So far, the evidence suggests more of a Great Liquidation out of bonds and into cash than a Great Rotation into equities.

Today's Morning Briefing: Questions & Answers. (1) Off-the-cuff. (2) No imminent threats. (3) Four more years for expansion and secular bull? (4) Retail sales making new highs along with earned incomes. (5) Will consumers drive right past latest pump price spike? (6) The IMF’s global economic forecast is subdued. (7) Might Europe surprise to the upside? (8) Less bang per yuan of borrowing in China. (9) Analysts see rising profit margins for Consumer Staples, Financials, Industrials, and Utilities. (10) Not so Great Rotation, so far. (11) Bernanke says Fed policy will remain ultra-easy even if QE is tapered. (12) Focus on overweight-rated Retailers. (More for subscribers.)

Irrational Exuberance Again? (excerpt)

Last week late in the day on Wednesday, Fed Chairman Ben Bernanke answered several questions from the audience after presenting a speech. His response to one of them sent stock prices soaring on Thursday: “Highly accommodative monetary policy for the foreseeable future is what’s needed in the US economy.” The S&P 500 rose 1.4% on Thursday, and 3.0% last week. It is now up 6.8% since the recent low on June 24 to another new record high of 1680.

The S&P 500 remains among the world’s best-performing stock indexes this year. On Friday, the forward P/E of the S&P 500 rose to 14.3, almost matching the year’s high on May 21. It was 16.5 for the S&P 400 MidCaps, also just under the previous recent high. It was 17.7 for the S&P 600 SmallCaps. The current bull market’s highs for all three were recorded during 2009 or 2010: S&P 500 at 15.1 on October 14, 2009; S&P 400 at 17.3 on April 23, 2010; and S&P 600 at 18.9 on September 18, 2009.

The market’s reaction to Bernanke’s comment suggests that the Irrational Exuberance scenario is back in play. I still assign it a 30% probability. However, it is certainly looking more credible again now that the S&P 500, S&P 400, and S&P 600 are all at record highs. Valuation multiples remain rational, and record highs in forward earnings suggest that the fundamentals continue to support those valuations.

We may be in for another four years of this bull market if it doesn’t melt up over the rest of the year.

Today's Morning Briefing: World Tour. (1) Cleveland’s economy is healthy. (2) Detroit’s Greek tragedy. (3) Consensus: Earnings growth likely to be low. (4) Global growth remains subdued. (5) China’s growth slowing toward 6.5%? (6) Euro zone crawling along bottom of current recession. (7) Despite weak exports and fiscal drag, US economy remains resilient. (8) Federal outlays drop, while revenues soar. (9) Update on some submerging economies. (10) Back to melt-up? (More for subscribers.)

Fed’s Message: ‘It Depends’ (excerpt)

June’s solid employment report was released last week on July 5. So far, none of the FOMC’s participants have discussed whether it influenced their view on what to do about QE. It should have leaned them toward starting to taper at their next meeting on July 30-31. More likely, they will wait to see if the July and August employment reports are also solid, which would allow them to start tapering at the September 17-18 meeting. Meanwhile, let’s have a closer look at the labor market and how it might influence the FOMC's deliberations:

(1) Fed hawks can stress that payrolls are on a roll with one exception. Payroll employment has increased 201,833 per month, on average, during the first six months of the year. Private payrolls as measured by the Bureau of Labor Statistics (BLS) and ADP are up 205,666 and 162,500 per month over the same period.

Household employment is up 125,000 per month since the start of the year, while the household measure compatible with the BLS payroll measure is up 204,500 per month.

Those are mostly solid gains, across the board. There is only one important discrepancy in this happy story. The Job Openings and Labor Turnover Survey (JOLTS) conducted by the BLS tracks hirings and separations. The difference between them hasn’t diverged much from the monthly payroll change reported by BLS. However, the JOLTS data, which are available through May, show payrolls up 145,200 per month during the first five months of the year, or 58,000 less than the official payrolls data over the same period.

(2) Fed doves can stress that too many people remain out of work. While the employment news is encouraging, there remain plenty of discouraged workers. The number of unemployed workers did fall to 11.8 million during June from a peak of 15.4 million during October 2009. However, that’s still above all previous cyclical peaks since the early 1950s. The number of workers employed part-time for economic reasons was 8.2 million. The average duration of unemployment remains elevated at 35.6 weeks.

Lots of people have simply dropped out of the labor force. The labor force participation rate--i.e., the percentage of the working-age population that is in the labor force--was at 63.5% during June, among the recent lows not seen since the early 1980s. While employment has been increasing as rapidly as the working-age population during most of the current economic expansion, the ratio of the former to the latter is also at the lowest since the early 1980s.

The percentage of the working-age population that has dropped out of the labor force--i.e., the nonparticipation rate--was 36.5% in June, up from a record low of 32.7% during February 2000.

Today's Morning Briefing: Fed’s Message: ‘It Depends’. (1) The difference between FOMC members and participants. (2) Many members not ready to taper. (3) Half of participants ready to terminate QE by yearend! (4) Knickers in a twist. (5) Bernanke says pay no attention to what we said before today. (6) Swapping sideways summer scenario for summer rally. (7) Fed hawks can find plenty of strength in employment. (8) Fed doves (led by Bernanke) can find plenty of soft spots in labor market. (9) Winners and losers in the mini-melt-up since June 24. (More for subscribers.)

A History of Corrections (excerpt)

Corrections are typically defined as declines of 10% or more. Bear markets are defined as declines of 20% or more. There have been three corrections in the S&P 500 so far during the current bull market, in 2010 (-16.0% lasting 69 days), in 2011 (-19.4% lasting 154 days), and in 2012 (-9.9% lasting 59 days). That means that since the start of the bull market, there have been four relief rallies that more than offset the corrections along the way, with the S&P 500 still up a whopping 144%. Last year’s correction troughed on June 1. There have been a few downdrafts since then, but no corrections.

During bull markets, corrections aren't necessarily frequent occurrences. Indeed, there was only one correction during the previous bull market, but only if the start date is pegged at October 9, 2002 rather than March 11, 2003. Between the bear market of 1987 and 2000-2003, there were just two corrections. Between the bear markets of 1980-1982 and 1987, there was only one. (See our Bear Markets & Corrections Since 1929 and the companion table.)

Today's Morning Briefing: The Latest Relief Rally. (1) Despite three corrections totaling 45%, bull is up 144%. (2) No correction since June 1, 2012. (3) The latest mini-correction was a drop of 5.8%, followed by a gain of 5.0%. (4) If phasing out QE is our only problem, then life is good. (5) Backup in bond yields almost over thanks to NZIRP. (6) Obamacare may be in intensive care. (7) Insurance exchanges not ready for show time? (8) Fears allayed again. (More for subscribers.)

Forward Earnings & Revenues at New Highs (excerpt)

In the next few days, the IMF will release its latest estimate for global economic growth. Yesterday, at an economic meeting in the southern French city of Aix-en-Provence, IMF Chief Christine Lagarde warned that the estimate is likely to be revised down a bit.

She noted that the global economic recovery was advancing at mainly three different speeds from an average 5.5% in emerging economies, to 2.0% in advanced countries like the US and Australia, to no growth in the dead-in-the-water economies of the euro zone. Lagarde said, “We therefore had a [global] growth forecast which was about 3.3%. But I am afraid when taking into account what we are currently seeing in the economies of the emerging countries in particular ... I am afraid that we are perhaps a little bit below.”

So why did S&P 500 forward expected revenues rise to another record high at the end of June? Those expectations drive analysts’ estimates for forward earnings, which is also at a record high. These 500 companies generate at least half of their sales overseas.

A closer look at the revenues estimates shows that analysts are expecting relatively anemic growth of 2.3% this year and 4.3% next year. Those estimates actually are weaker than the IMF’s forecasts of nominal world GDP growth rates of 5%-6% this year and next year. Other global economic indicators confirm that record highs are being set, but at a relatively slow speed.

Today's Morning Briefing: Three Speeds. (1) IMF chief sending smoke signals: Slower growth ahead. (2) Fast-growing emerging economies are slowing. (3) US is in second gear. (4) Europe is dead in the water. (5) Global economic indicators rising to record highs at slow pace. (6) S&P 500 forward revenues and earnings at record highs again. (7) BRICs hit a wall. (8) Germany remains stalled. (9) US looking great by comparison. (10) Overweight-rated S&P 500 Transports beating S&P 500. (11) Trucking index cruises to new high. (12) Earnings season line-up. (More for subscribers.)

Employment Report Justifies Tapering QE (excerpt)

Needless to say, the strength in June’s employment report confirms that the US economy is showing more signs of self-sustaining growth, which certainly would justify phasing out QE. To keep focused on the bottom line of the employment report--which contains so much information about the labor market--I calculate the YRI Earned Income Proxy (YRI-EIP), which is aggregate weekly hours worked times average hourly earnings, both in the private sector. It is highly correlated with private-industry wages and salaries in personal income.

Our proxy jumped 0.6% during June to a new record high. It reflects the solid 0.4% increase in wages during the month--the best m/m increase since last November--and a 0.2% increase in aggregate weekly hours of private industry. Reflected in the YRI-EIP were a better-than-expected 202,000 increase in private payrolls during June and a 60,000 upward revision to April and May private payrolls. Private payrolls are up 205,700 per month on average during the first half of the year.

Today's Morning Briefing: Stock Theory. (1) New Fed Center and Blog. (2) From Great Liquidation to Great Rotation. (3) Bernanke’s “stock theory” isn’t working too well. (4) Big outflows from bonds. (5) The new normal for bond yields. (6) From whatever it takes to as long as it takes. (7) From QE-to-infinity to NZIRP-to-infinity. (8) Self-sustaining growth at last. (9) Earned incomes soared in June. (10) Yet another relief rally for stocks on ObamaCare postponement. (11) CFI sectors outperforming again. (More for subscribers.)

New Fed Center and Fed Blog

The monetary policy of the Federal Reserve is a very powerful driver of financial markets around the world. The same can be said for the other major central banks. In The Fed Center, we’ve aggregated links to their home pages, policy statements, publications, research papers, tweets, and the speeches of their top officials. 

Also new is The Fed Blog, which chronologically monitors the latest developments at the Federal Reserve and the other major central banks.

Why Does PMI Move Stock Prices? (excerpt)

Stock prices have had a tendency to rise during the first trading day of every month. The S&P 500 has been up 0.3% on average during the 52 such days since the start of the current bull market on March 9, 2009. It was up 0.5% yesterday. The S&P 500 has been up 65% of those days with an average gain of 1.1%. The average decline during down days was 1.3%.

Before we are tempted to quit our daily jobs to play the odds of the one-day-a-month trade, we should try to explain the first-day-of-the-month pattern. The most obvious explanation is that the US manufacturing PMI is always released on that day. Bull markets tend to coincide with economic expansions, during which the M-PMI tends to remain above 50. In addition, surprises are more likely to be to the upside than to the downside when the economy is expanding than when it is contracting.

Why does the market seem to give so much weight to the M-PMI? It tends to be a good leading indicator for the y/y growth in S&P 500 revenues. M-PMI readings above 50 tend to be associated with positive earnings growth. However, the recent batch of readings suggests a continuation of low-single-digit revenues growth, which was only 1.3% during Q1-2013.

Of course, S&P 500 revenues are driven by global growth. So it was good to see improvements in European M-PMIs during June. The UK M-PMI increased to 52.5 in June from 51.5 in May. Spain’s index actually rose to 50.0, after spending the past 25 months mostly well below that level. Germany and France were both below 50, but getting closer.

I calculate a Super M-PMI using an equally weighted average of the indexes of the US, the UK, the euro zone, Japan, and China. It increased to 50.9 in June, the second consecutive reading above 50 and the highest since March 2012.

Today's Morning Briefing: Independence Day. (1) Great holiday in the US. (2) “Groundhog Day” in the rest of the world. (3) Greece again. (4) Another European Grand Plan. (5) Chinese property prices defy Chinese government. (6) Egyptians want a do-over. (7) QE could be Fed’s Groundhog Day. (8) US economy showing self-sustaining growth. (9) Will the Affordable Care Act be unaffordable? (10) The NFL takes a pass. (11) In America we trust. (12) Focus on market-weight-rated S&P 500 Health Care. (More for subscribers.)

Rising Mortgage Rates Boost Home Buying (excerpt)

During May, the sum of new and existing single-family home sales rose to 5.1 million units (saar), the best pace since November 2009, when tax incentives boosted sales. The four-week average of mortgage applications to purchase a house remains on an uptrend through the week of June 21 despite the rise in mortgage rates.

The index of pending existing home sales soared in May to a new cyclical high. This suggests that the initial reaction to rising mortgage rates is to prompt would-be homebuyers to close their deals pronto.

Today's Morning Briefing: Have a Nice Day Trade. (1) The first trading day of the month tends to be a winner. (2) The M-PMI is always released on that day. (3) Lots of good news in both ISM and Markit M-PMIs for US. (4) Good, but not great, for S&P 500 revenues. (5) Better, but not wonderful, news in M-PMIs out of Europe. (6) Plenty of other solid indicators. (7) Commodity prices holding up despite weakness in Chinese M-PMI. (8) New record high for US trucking index. (9) Rising mortgage rates boosting existing home sales. (10) Tax revenues at new highs. (11) Forward earnings at new highs. (More for subscribers.)