Stock Prices & the Price of Crude (excerpt)

In the past, more often than not, the S&P 500 was positively correlated with the price of Brent. That’s because the price of oil is highly correlated with other industrial commodity prices. When the price of oil is rising along with other commodity prices, the global economy is growing at a healthy pace. That’s bullish for stocks.

This year, industrial commodity prices have been relatively weak. In this environment, rising oil prices aren’t necessarily bullish for stocks. On the contrary, they can be bearish if they spike up as a result of a geopolitical supply shock. This explains why the S&P 500 Energy sector has been a laggard this year, even though oil prices have been mostly rising since May 1.

Today's Morning Briefing: Large Speculators in Oil. (1) Middle East commotion pushing oil prices higher. (2) Large speculators have been hoarding crude oil futures contracts since start of Arab Spring. (3) They currently own equivalent of all US oil stocks. (4) From mini-correction to full-blown one? (5) Lots of investment advisors in correction camp, and much fewer bulls. (6) Tracking the relationship between stock and oil prices. (7) Time to overweight underweight-rated Energy? (More for subscribers.)

Emerging Markets Getting Squeezed (excerpt)

I don’t expect that yesterday’s anxiety attack over the deteriorating Middle East situation will turn into another panic attack for the US stock market. On the other hand, while US stock prices have been quite resilient this summer, the currencies, bonds, and stocks of emerging market (EM) economies have been getting clobbered. This has happened because global investors fear that the consequences of prospective Fed QE tapering will be more severe for the EMs than for developed economies.

That’s only part of the story. The fact is that the forward earnings of the MSCI Emerging Markets composite peaked at a record high during the week of August 4, 2011 and has been trending lower since then. Analysts’ consensus estimates for both 2013 and 2014 also are falling, and at a faster pace in recent weeks. Net earnings revisions have been negative for the past 30 months.

Revenues still are rising for the companies included in the MSCI EM index, but at a significantly slower pace since 2011 than during the global economic recovery of 2009 and 2010. The big story is the collapse of the forward profit margin since early 2011 from around 8.5% to 6.5% now. The likely cause of that is rising labor costs. The recent rise in oil prices must also be squeezing margins.

Today's Morning Briefing: Arab Winter. (1) Anxiety attack about US attacking Syria. (2) Geopolitical premium in oil prices rising again. (3) From spring to winter in the Middle East. (4) An Arab world war between Sunnis and Shiites. (5) Meet the Hatfields and McCoys of the Middle East. (6) A short guide to the region. (7) Bibi’s warning. (8) Why Syria matters to oil prices. (9) Putting a lid on valuation, for now. (10) Emerging markets had issues before the price of oil moved higher. (11) EM profit margins have been squeezed significantly. (More for subscribers.)

S&P 500 Earnings Estimate Remains High (excerpt)

The second quarter’s earnings season was disappointing. S&P 500 operating earnings rose only 4.0% y/y, and actually fell 1.4% excluding the Financials sector. Revenues rose, but by only 2.1% y/y.

The earnings results beat expectations, by $0.68 per share, as they often do after analysts lower their estimates going into earnings seasons. However, analysts must have heard enough bad news to significantly lower their estimate for Q3 by $0.74 per share. Even their estimate for 2014 fell to a new low, which recently stalled the record-setting ascent of forward earnings.

So why no panic? The consensus analysts’ earnings estimate for 2014 is still very high at $123.01 per share, a gain of 11.1% over their estimate of $110.70 for this year.

Today's Morning Briefing: A Paucity of Panic. (1) Is the bull on anti-depressants now rather than steroids? (2) Moving sideways since mid-May. (3) Nothing to fear but fear. (4) Some fearful issues to worry about. (5) US economy continues to grow at stall speed. (6) The bad and the good in earnings. (7) Another round of fiscal follies in the fall. (8) Republicans debating defund vs.delay strategies for Obamacare. (9) Greece is still in the euro zone. (10) Everyone is bullish on Europe. (11) Focus on overweight-rated Industrials. (More for subscribers.)

The Fed’s Bubble Trouble (excerpt)

The talk of the town at this past weekend’s Jackson Hole monetary policy conference was a paper presented by Arvind Krishnamurthy and Annette Vissing-Jorgensen on Friday. At the annual FRB-KC symposium, the two academics argued that the Fed should taper its purchases of US Treasuries while increasing its purchases of mortgage-backed securities. That certainly is a novel variation on the QE tapering theme that has been unsettling financial markets since May 22, when Fed Chairman Ben Bernanke first raised the subject.

Adding to the influence of the two economists is that Bernanke mentioned another one of their papers in a footnote of his presentation at last year's conference. In his speech back then, the Fed Chairman focused mostly on QE, also known as "Large-Scale Asset Purchases (LSAP)" in Fed jargon. He admitted that it’s unconventional and has been mostly a “process of learning by doing.” It’s worth rereading his comments in light of recent developments. Most noteworthy is the following quote:

How effective are balance sheet policies? After nearly four years of experience with LSAPs, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields. … Three studies considering the cumulative influence of all the Federal Reserve’s asset purchases, including those made under the MEP ["Operation Twist"], found total effects between 80 and 120 basis points on the 10-year Treasury yield. These effects are economically meaningful.

Here’s the rub: The 10-year Treasury bond yield has spiked by 116 basis points from this year’s low of 1.66% on May 2 to 2.82% on Friday. That happened mostly as a result of all the Fed’s chatter about tapering QE. Oh well: Easy come, easy go. I presume that Bernanke must view the backup in yields as economically meaningful! QE was an experiment from the beginning, as Bernanke admitted. If the Fed does phase out QE, it will most likely have to provide more monetary stimulus through forward guidance, as discussed below.

The sharp increase in yields caused by the QE tapering talk suggests that the Fed's bond purchases inflated a big bubble in the bond market. As I’ve noted previously, the 10-year yield normally tends to trade around the y/y growth rate in nominal GDP. The jump in yields is normalizing this relationship. The Fed’s tapering talk has caused investors around the world to taper their holdings of bonds. That’s starting to poke holes in other bubbles as well, particularly emerging market bonds, currencies, and stocks.

Today's Morning Briefing: Bubbles Popping. (1) A novel variation on QE proposed at Jackson Hole. (2) Learning by doing at the Fed. (3) A year ago, Bernanke said QE lowered bond yields by as much as they just rose on QE taper talk. (4) Banks, foreign investors, and bond funds all selling bonds. (5) QE pumped air into bond and EM bubbles. (6) Since last FOMC meeting, bond yield up 22 basis points. (7) Rising mortgage rates hit housing. (8) FOMC minutes suggest tiny tapering in September and lower threshold for jobless rate (maybe). (9) “The Butler” (+). (More for subscribers.)

US International Capital Flows (excerpt)

The US Treasury released data last Thursday tracking international capital flows for the US through June. The outflows out of US securities was shocking. Especially troubling was the amount of US Treasuries sold by foreigners. Their outflows exceeded those from US bond funds. Of course, some of the outflows from the bond funds could be attributable to foreign investors. Nevertheless, the data suggest that foreign investors may have been more spooked by the Fed’s tapering talk in May and June than domestic investors.

As the US federal deficits have swelled, the US government has become more dependent on the kindness of strangers. Apparently, they are losing their interest in helping us out with our debts. Consider the following TIC data:

(1) Total securities. During June, foreigners sold $934.1 billion (annualized) in US Treasury bills, notes, and bonds; Agency bonds; corporate bonds; and US equities (Fig. 1). Over the past three months, the annualized net capital outflows from these securities was $462.8 billion (Fig. 2).

(2) Treasury notes & bonds. During June, the net outflows from US Treasury notes and bonds was $489.2 billion (annualized). The annualized rate out of these securities over the past three months was $271.1 billion.

(3) US equities. Over the past three months through June, foreigners have also been net sellers of US equities totaling $97.1 billion at an annual rate.

(4) Agency & corporate bonds. Foreigners haven’t been selling US Agency and corporate bonds, but they haven’t been buying them either.

Today's Morning Briefing: Kindness of Strangers. (1) Summer tour in America. (2) Dodging flash floods. (3) Tapering talk and the dissent debate. (4) Fed’s exit strategy getting messier. (5) Tapering taper. (6) Foreigners are tapering their holdings of US bonds. (7) Industries with lots of part-timers account for much of this year’s job gains. (8) Earnings season’s winners and losers. (More for subscribers.)

Jobs Growing Faster Than Workers (excerpt)

Initial unemployment claims dropped to 320,000 during the week of August 10. That’s the lowest reading since October 2007. When that was reported last Thursday, it contributed to the routs in bond and stock prices that day and on Friday. Is it possible that the claims data are exaggerating the strength of the labor market and the economy given the weakness in other recent indicators?

It’s possible. We know that lots of this year’s job gains have been for part-time workers as employers respond to Obamacare’s disincentives to hire full-time employees. The household employment survey shows that three-quarters of the 980,000 increase in jobs during the first seven months of the year represented part-time jobs. Perhaps employers are converting more of their full-time payroll jobs to part-time ones and hiring more part-timers. At the same time, many employees may be scrambling to find another part-time job to supplement their incomes. Presumably, they are getting counted twice (or more) in the payroll employment survey, thus exaggerating the strength of that survey’s employment gains!

Sure enough, payroll employment rose by 1,347,000 since the start of the year, or 367,000 more than household employment. Those extra jobs are probably all part-time ones and reflect the double counting of workers with more than one part-time job in the payroll survey. In the household survey, a worker with more than one part-time job counts as one worker. To repeat, the payroll survey counts jobs, while the household survey counts workers. So the number of jobs is increasing faster than the number of workers--with the former up 192,400 per month on average from January-July, while the latter is up 140,000 per month on average over the same period.

Today's Morning Briefing: Bonds Agitating Stocks. (1) Staying rational. (2) Neither melt-up nor meltdown for now. (3) Avoiding a melt-up would be good for secular bull story. (4) Has the bull been driven by QE or fundamentals? (5) Back to the old normal for bond yields. (6) From bonds to cash rather than equities. (7) Fed’s new problem is that rising yields are bad for growth. (8) Are jobless claims too good to be true? (9) Surge in part-time jobs exaggerating payroll gains. (10) What will clueless Fed do next? (11) Bullard’s baby steps. (12) Time to sell the bull market’s leaders? (More for subscribers.)

Washington Is a Big Redistributor (excerpt)

Federal revenues rose 12.8% y/y in July. They have been boosted by increases in tax rates at the beginning of the year rather than a significant improvement in US economic growth.

Nevertheless, the tax hikes combined with the spending sequester since March 1 are restoring some fiscal discipline in the United States. That’s good news. Over the past 12 months through July, federal receipts rose to a record high of $2.7 trillion while outlays fell to $3.4 trillion, the lowest since October 2010. The 12-month federal deficit is down to $723 billion from a record high of $1.5 trillion during February 2010.

In a new publication, we compare federal government spending on goods and services, as reported in the GDP accounts, to total federal outlays as reported in the Monthly Treasury Statement of Receipts and Outlays. The difference between the two series is spending on income redistribution through entitlement programs.

During the four quarters through Q2-2013, federal outlays totaled $3.4 trillion, with $1.3 trillion attributable to spending on goods and services and $2.1 trillion attributable to entitlement outlays. Prior to the expansion of the social welfare state under President Johnson’s Great Society program, entitlements accounted for less than 10% of government spending. They are now up to about 65%.

Today's Morning Briefing: Private & Public Revenues. (1) Global oil demand at record high, but growing very slowly. (2) Oil demand up in emerging economies, down in advanced ones. (3) S&P 500 revenues growing slowly too, at 3.4% y/y. (4) US business sales up 4.9% y/y at new high. (5) Oil demand edging up in Germany and France. (6) Europe’s recession may be over, but recovery likely to be weak. (7) Could it be that austerity works? (8) Fiscal discipline in US narrowing the federal budget deficit significantly. (9) Federal government redistributing $2.1 trillion of income. (10) The US housing recovery is fragile. (11) Focus on underweight-rated S&P 500 Energy. (More for subscribers.)

Capital Spending Now and Then (excerpt)

We compiled a new publication titled, Capital Spending During Expansions. It compares the performance of all the major categories of capital spending in the real GDP accounts during the current economic expansion and during the previous six upturns. The current one is the second weakest, with a gain of 20.6% versus the 29.5% average for the previous ones.

The weakest components of capital spending in the current expansion are structures (down 8.5% vs. up 6.2%, on average, for the previous six expansions), information processing equipment (25.1% vs. the 71.9% previous average), and software (18.2% vs. the 66.4% previous average). The last two categories have experienced the weakest spending this recovery of all the measured periods. My hunch is that the Cloud has radically increased the productivity (bang per buck) of technology. In other words, less is more: Less IT hardware and software can do much more than in the past.

On the other hand, capital spending on transportation equipment is the best ever, up 224.4% this recovery vs. an average of 47.2% in the past. Spending on industrial equipment is about average, with a gain of 23.3% compared to the previous average of 25.7%. By the way, spending on overall real intellectual property products is the weakest of the seven expansions since 1961; real R&D (one of its components) is the third worst of the seven.

Admittedly, there isn’t much here to make the case for a capital spending boom in the US, especially if my more-bang-per-buck thesis is valid for technology. However, there could be booming demand overseas for capital goods made in the USA. The latest US trade figures show capital good exports (excluding autos) rising rapidly to a new record high of $554.6 billion (saar) during June. They account for 62% of nondefense capital goods shipments (including civilian aircraft).

Today's Morning Briefing: You Asked for It. (1) William Tell’s son. (2) Hazardous, but not dangerous work. (3) Investigating three open investment strategy cases. (4) June’s leading indicators bullish for Europe. (5) So are US exports to Europe. (6) US capital spending weakness led by structures and IT. (7) The Cloud increases IT’s bang per buck. (8) US capital goods exports are strong. (9) Leading indicators bearish for BRICs. (10) Latest earnings season mostly nonevent for overall earnings. (11) However, earnings downers included Health Care, Industrials, IT, and Materials. (12) Focus on overweight-rated Retailers. (More for subscribers.)

Emerging Market Economies & Advanced Market Economies (excerpt)

The overall economic performance of the EMEs weakened in July, according to the HSBC Emerging Markets Index, a monthly indicator derived from the PMI surveys and produced by Markit. It fell to a new post-crisis low of 49.4 in July, down from 50.6 in June. The latest figure was the first sub-50.0 reading since April 2009. Output fell across the four largest emerging economies, the first broad-based contraction since March 2009.

Too bad there isn’t an index for the AMEs. However, Markit does produce the JPMorgan Global Manufacturing & Services PMI. It was very strong last month, rising from 51.2 in June to 54.1 in July, the best reading in 16 months. Obviously, this implies that the strength in the AMEs more than offset the weakness in the EMEs. Indeed, Markit’s press release noted: “The expansion remained uneven by region, however. Stronger growth was registered in the US and the UK, while the eurozone stabilised. This was partly offset by weaker performances in Asia and a number of emerging markets.”

The question is whether the growth rate in the AMEs will improve enough to boost the EMEs and their stock markets, which have been among the worst-performing ones so far this year.

Today's Morning Briefing: Emerging & Advanced Economies. (1) Mixed global grab bag. (2) Global economy gets a C+ from us. (3) Muddling along in the mud. (4) Not submerging, but emerging at a slower pace. (5) In China, all stimulus will be local from now on. (6) Mickey Mouse is coming to Shanghai. (7) Brazil has lost its groove. (8) Mexico is opening up. (9) India is on a rocky road. (10) Advanced economies showing better PMIs than emerging ones. (11) Less bang per yen than expected from Abenomics. (12) US is gushing oil. (13) Euro zone is on the slow road to recovery. (More for subscribers.)

S&P 500 Earnings (excerpt)

Did the Q2-2013 earnings season, which is almost over, contribute to the summer rally or did it set the stage for the doldrums over the rest of the summer? Yes, it did both. Let’s review:

(1) Q3 drops almost as much as Q2 increases. As of August 1, earnings announcements by the S&P 500 companies have boosted the Q2 number by 2.4%. However, the Q3 estimate was lowered by 1.7% over this same period.

(2) The 2013 estimate didn’t change. So on a y/y basis, Q2 and Q3 earnings are each up 5.7%. The expected level for 2013 hasn’t changed much at all during the latest earnings season and is currently projected to gain 7.3% over 2012.

(3) No change in 2014’s upbeat estimate either. Even more impressive is that the earnings estimate for 2014 has been flat-lining around $123 per share for the past 15 weeks through last week, implying that industry analysts collectively expect earnings to grow 11.3% next year. As I noted last week, S&P 500 forward earnings has risen to another new record high of $118.84 per share.

Today's Morning Briefing: Summer Doldrums. (1) Tailwinds and headwinds. (2) Bernanke is reassuring. (3) Dovish Evans is ready to taper QE with the hawks. (4) Federal deficit has been tapered, leaving room for Fed to taper. (5) Lots of commotion in Washington this fall. (6) CFI sectors continue to lead the charging bull. (7) Not much happens during doldrums. (8) Latest earnings season leaves 2013 and 2014 estimates unchanged. (9) Believe them or not: Analysts see more upside for margins in all 10 S&P 500 sectors. (10) Valuations are getting stretched in some sectors and industries. (11) “The Attack” (+ +). (More for subscribers.)

The Accelerator Effect (excerpt)

In economic theory, the “accelerator effect” is when an increase in national income results in a proportionately larger rise in investment. It tends to boost overall economic growth during expansions. Needless to say, it can work in reverse during recessions. A growing economy boosts corporate profits and cash flow, which tends to stimulate an expansion of the capital stock of the business sector.

One of the more encouraging accelerator relationships that I track is the close one between real capital spending in the GDP accounts and S&P 500 forward earnings. During the two previous business cycles they both rose to new record highs at the same time. This time, however, forward earnings has been rising into new high ground ever since early 2011, yet real capital outlays still are hovering near the previous cyclical peak.

The dramatic rebound in the M-PMI from 50.9 in June to 55.4 in July and in the NM-PMI 52.2 to 56.0 over the same period may be the triggers that boost capital spending to new highs in coming quarters. Our “Second Recovery” scenario seems to be playing out as pent-up demand for autos and houses is finally boosting economic activity. Another happy surprise is that US exports rose to a new record high during June.

Contributing to a possible capital spending boom might be a shortage of workers. Yes, I know that the unemployment rate is still very high at 7.4%. However, there is a shortage of knowledge workers, including those with basic manufacturing skills and work experience. The unemployment rate for workers with a college degree is only 3.8%. Businesses may have to rely increasingly on high-tech equipment and software to do the work.

Today's Morning Briefing: The Accelerator Effect. (1) The circle of life: GDP and profits drive capital spending, which drives GDP. (2) Hunkering down this time. (3) Lots of cash for dividends and buybacks. (4) Lots of pent-up demand for capital goods. (5) Forward earnings is bullish for Industrials. (6) A shortage of knowledgeable and experienced workers. (7) Capital goods output popping in Germany, the UK, and the US. (8) Overweight-rated Industrials are outperforming. (More for subscribers.)

Coming Collapse of China? (excerpt)

Based on the Skyscraper Index, China’s big collapse is likely to occur just after the completion of Sky City in the southern Chinese city of Changsha. On July 20, developers broke ground for this building, which will be the world’s tallest building, taller by 10 meters than Burj Khalifa. It is set to be completed in 2014. A CNN article has a nice chronology of the tallest building curse.

China’s economy is already slowing. That’s partly because the labor force is growing much less rapidly as a result of the one-child policy first introduced in 1978. In addition, the government is attempting to reverse years of horrible environmental pollution caused by rapid industrialization over the past few decades. Sunday’s NYT had a disturbing account of the problem titled, “Life in a Toxic Country.”

There is also a new official campaign to reduce corruption by government officials, who have been building lots of glitzy office buildings for themselves and driving luxury cars to get to work. This week, the government started to audit the books of all these officials in an attempt to measure how much public debt they’ve accumulated during their spending sprees.

All these issues could come to a head just in time for the completion of Sky City. No wonder that China’s stock market has been among the worst performing in the world. The China MSCI stock price index is down 8.9% ytd. It seems cheap, selling at a forward P/E of 8.5, which matches most of the lows since 1995. However, forward earnings has been essentially flat for the past two years. Net earnings revisions have been negative for 23 of the past 25 months through July.

There has been a great deal of criticism about the quality and accuracy of China’s official economic data, especially trade statistics. One way around the problem is to monitor the value of exports to China compiled by the countries of origin. The results aren’t pretty. Data through May show that dollar-denominated exports (on a 12-month sum basis) to China from the US, the euro zone plus the UK, Japan, and South Korea have been mostly flat to down in recent months. All together, they were down 4.9% y/y through May.

Today's Morning Briefing: Sky City. (1) Can superbull leap over tall buildings? (2) Shanghai Tower this year. Sky City next year. (3) China has world-class pollution and corruption. (4) Taking the glitz out of growth. (5) China's MSCI has lots of negative earnings revisions. (6) World trade at record high, but not growing much. (7) More upbeat indicators out of Germany (orders) and UK (output). (8) US exports rise to record high. (9) US oil trade deficit narrowing as domestic output soars. (10) ATA trucking index at record high. (11) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

PMIs, Revenues, & the Stock Market (excerpt)

Why does the stock market so often react to the latest readings of the domestic and global PMIs? The y/y growth rate of S&P 500 revenues is highly correlated with our Global Super PMI, which is simply an average of all of them. On balance, the latest readings are bullish, suggesting that the pace of global economic activity is picking up. That supports our forecast of relatively modest revenues growth of 5% for the S&P 500 next year.

Industry analysts are currently forecasting that S&P 500 revenues will rise 1.8% this year and 4.3% next year. Forward earnings for the S&P 500 rose to yet another record high last week of $118.84, the 14th consecutive weekly increase. Also rising to new record highs are the forward earnings of the S&P 400 and S&P 600. This might explain why stock prices have been rising to new record highs without much volatility in recent weeks as well.

Forward earnings for the S&P 500 rose faster than forward revenues during 2009 and 2010 as the profit margin rebounded. During 2011 and 2012, earnings grew at a more subdued pace in line with revenues. This year, forward earnings is once again outpacing the growth in forward revenues. It’s a bit hard to believe that profit margins can expand much more. However, given the latest batch of supercharged PMIs, it’s easier to believe that revenues growth might pick up.

Today's Morning Briefing: Second Wind. (1) No soft patch this summer. (2) Seasonal factors could be exaggerating strength. (3) Credibility of Endgame scenario has ended. (4) Resilience of economy is feeding on itself. (5) Central bankers’ forward guidance is working. (6) More green shoots. (7) A tour of world PMIs is upbeat for company revenues. (8) Another happy Earnings Tuesday. (9) There may be more upside for profit margins and revenue growth. (More for subscribers.)

Mixed Signals from Economic Indicators (excerpt)

In addition to analyzing the monthly seasonality of the stock market, I have noticed that the first trading day of the month tends to be an especially good one during bull markets. I attributed this to the release on those days of the manufacturing PMI, which tends to be bullish when the economy is expanding.

It happened again last Thursday, August 1. The M-PMI was remarkably strong, jumping from 50.9 in June to 55.4 in July. Its major components all surged as well, with new orders rising from 51.9 to 58.3, production from 53.4 to 65.0, and employment from 48.7 to 54.4. These data certainly support our “Second Recovery” scenario with economic growth led by housing and autos. They also support the view expressed in Wednesday’s FOMC statement that while economic growth was “modest” (down from “moderate”) during the first half of the year, it should pick up during the second half.

Last Thursday’s drop in initial unemployment claims to 326,000, the lowest since January 2008, also supports the more upbeat outlook for the economy. The four-week average remains at a cyclical low and is a good leading indicator of the unemployment rate, which fell to 7.4% in July. That’s the good news. The bad news is that Friday’s employment report was among the weakest of the year. Let’s review:

(1) Lots of weak numbers. Payrolls rose 162,000 during July, below the 192,400 average from January-July. The previous two months were revised downwards. More significantly, aggregate hours worked fell 0.1%, and average hourly earnings also declined 0.1%, suggesting that lots of the new jobs are part-time ones with low wages.

(2) Not enough full-time jobs. July’s household employment survey shows that part-time jobs rose 174,000, while full-time ones increased 92,000. Since the start of the year, part-time employment is up 731,000, while full-time has risen 222,000. The data show that since the record-high peak in employment during November 2007, full-time jobs are still down 5.8 million, while part-time jobs are up 3.5 million to a record high. The biggest losers of full-time jobs since November 2007 have been 25- to 54-year olds, with a loss of 7.7 million. Over this same period, this group has gained only 864,000 part-time jobs.

(3) Mixed readings on wages and salaries. Our YRI Earned Income Proxy--which is the product of aggregate hours worked and average hourly earnings in the private sector--fell 0.2% during July. That’s bad news for July’s wages and salaries in personal income, since it is highly correlated with this series for the private sector. On the other hand, inflation-adjusted wages and salaries in personal income managed to grow at a 3.4% (saar) pace during the second quarter.

Today's Morning Briefing: Spring, Summer, & Fall. (1) Old adage getting old: May is just another month. (2) Aging bull still raging. (3) Our mantra: Four more years! (4) Julys and Augusts can be big winners. (5) Blue skies for our Blue Angels. (6) Rule of 20 P/Es at 17-19. (7) September can be a big loser. (8) Lots of stuff hitting the fan in the fall. (9) Another big up day at the start of the month. (10) M-PMI confirms “Second Recovery” scenario in US. (11) Soft patch in July’s labor indicators. (12) “Blue Jasmine” (+). (More for subscribers.)

The FOMC & GDP (excerpt)

All in all, the FOMC didn’t change the message much at all from the previous one dated June 19. Despite widespread expectations that QE will be tapered at the next FOMC meeting in September, the latest statement simply indicated that the Fed will continue to buy $85 billion in Treasuries and Agencies but will either increase or decrease this pace “as the outlook for the labor market or inflation changes.”

There was no change in the forward guidance on how long the federal funds rate will remain near zero. The unemployment threshold for starting to discuss the possibility of tightening monetary policy remains at 6.5%. There was no hint that a lower jobless rate, such as 5.5%, was even discussed. Nor was there any hint that the FOMC is considering a threshold for the inflation rate.

On balance, the FOMC statement was more dovish than the previous one. That simply reflects the fact that monetary policy is data dependent. The data that were released yesterday showed weak GDP growth and near-zero inflation. Indeed, nominal GDP was up only 2.9% y/y during Q2, the lowest since Q1-2010.

I suppose that all this lowers the odds of QE tapering starting at the September meeting. However, I hope that there was some discussion at the latest meeting about why the economy is so weak given so much QE. Since the latest program was started on September 13, 2012, the Fed’s balance sheet has increased by $751 billion to a record $3.5 trillion.

Today's Morning Briefing: From Moderate to Modest. (1) FOMC downgrades economic growth. (2) BEA does the same to GDP. (3) Slower than the much-dreaded “stall speed.” (4) Obamacare: Two part-timers for the price of one full-timer less benefits. (5) FOMC indicates inflation is too low. (6) No change to QE or forward guidance, but statement is more dovish. (7) QE certainly isn’t doing much for GDP. (More for subscribers.)