Thursday, January 31, 2013

Excerpt: Global Boom-Bust Barometer

I track a very simple Global Boom-Bust Barometer by averaging the CRB raw industrials spot price index and the price of a barrel of Brent crude oil. Yesterday, it rose to 112.0, the highest since May 2, 2012, and up 17.6% from last year’s low of 95.2 on June 28. The S&P 500 Transportation Index, which is highly correlated with the CRB index, has gone vertical this month, making daily new record highs, though it edged down yesterday for just the second time in the past 12 trading days. The MSCI World Share Price Index is up 5.7% ytd to a new cyclical high. 

Today's Morning Briefing: Silver Linings Playbook. (1) King of Prussia. (2) Silver linings in Philly. (3) The new hot topic: An inflationary boom. (4) The Success Scenario. (5) Global Boom-Bust Barometer looking up. (6) Not so fast: What about all that fiscal drag? (7) Putting the air back in the housing bubble. (8) If labor market continues to tighten, wage inflation will rise. (9) Bond yields rising along with inflationary expectations. (10) No boom in revenues yet. (11) Margin expectations may be too optimistic. (More for subscribers.)

Wednesday, January 30, 2013

Excerpt: US Leading Indicators

The ECRI’s Weekly Leading Index jumped 3.3% during the first three weeks of January. It is up 7.9% from its low last year during the week of June 15. The Conference Board's monthly Leading Economic Index jumped 0.5% in December to a new cyclical high. Interestingly, the ECRI index is highly correlated with our Fundamental Stock Market Index (FSMI). Our index is less volatile than the Institute's. Both closely track the S&P 500 and also the yield spread between corporate junk bonds and 10-year Treasuries. Both the stock index and the yield spread are signaling more economic growth is ahead, certainly not a recession.

Today's Morning Briefing: Too Much Good News? (1) Jeremiah was bearish. (2) Today’s bears: Prophets or spoilsports? (3) A misleading leading index. (4) S&P 500 forward earnings confirms good economic news on orders and sales. (5) What’s troubling consumers? (6) No surprises in economic surprise index. (7) Regional surveys don’t jibe with upbeat national PMI. (8) Draghi’s “whatever it takes” triggers “positive contagion.” (9) Euro-TARP winds down. (10) TARGET2 balances less imbalanced. (11) Lending still falling in euro zone. (More for subscribers.)

Monday, January 28, 2013

Excerpt: US Equity Mutual Funds

Equity mutual funds tend to reflect the sentiments and activities of retail investors. Here are some observations:

(1) Cumulative net inflows rose $2.7 trillion from the end of 1991 to peak at a record high during December 2007. Since then, the net outflow from equity mutual funds has been $247 billion. These flows suggest that the individual investor participated in the previous two bull markets, but did not do so during the current bull market, which has been driven mostly by corporate cash flows.

(2) Net inflows on a 12-month basis tell the same story and show an interesting correlation with the S&P 500. Such inflows rose dramatically from close to zero during 1991 to peak at $366.6 billion during September 2000. They then plunged and turned negative during the second half of 2002 and the first half of 2003. They were back in solid positive territory until turning extremely negative again during the second half of 2008 and the first half of 2009.

The swings in these flows clearly contribute significantly to the movements in equity prices from 1991 through early 2009. Since then, there has been a huge divergence, with net outflows on average, yet with the S&P 500 rising nearly back to its record high.

Today's Morning Briefing: Nothing to Fear but Nothing to Fear. (1) Fully invested bears worrying about too many bulls. (2) A red flag signaling that the bull will be gored? (3) Bull makes front page of NYT. (4) The fourth phase of the bull: Exuberance. (5) Worrying about missing a melt-up. (6) Corporate cash flows, not investor flows, driving bull up to now. (7) S&P 500 tracking buybacks plus dividends. (8) Retail investors may be ready to join the party. (More for subscribers.)

Sunday, January 27, 2013

Today's Excerpt: US Oil Production

An article in the 1/18 WSJ reported that US oil production “grew more in 2012 than in any year in the history of the domestic industry, which began in 1859, and is set to surge even more in 2013. … The shale drilling boom was first directed at natural gas production, but when a glut of natural gas drove down prices for the fuel, exploration companies redirected their efforts toward oil.”

On November 12 last year, the International Energy Agency (IEA) released its widely followed World Energy Outlook. The report projected that around 2020, the US could become the largest oil producer in the world. IEA's projections show US oil production rising to 11.1mbd in 2020. Within a decade, US oil imports could drop in half to just 4.0mbd according to IEA.

I track the four-week averages of US crude oil field production and imports:

(1) Crude oil production soared to 7.0mbd during the week of January 18. That’s the highest since early 1993. It is up nearly 1.0mbd over the past 19 weeks!

(2) Crude oil imports are down roughly 1.0mbd over the past seven months through the week of January 18 to 8.0mbd. That’s the lowest since March 1998.

Today's Morning Briefing: Energy Independence Dividends. (1) Declaration of energy independence. (2) Independence dividends include less spending on oil imports and defense. (3) Reshoring of manufacturing and a secular bull market in stocks are also big dividends. (4) Chinese can defend Saudis. (5) US oil output soaring. (6) US is the new Saudi Arabia of oil and gas. (7) Matt Damon’s dry hole. (8) Obama will fix the climate. (9) Carbon tax? (10) “Quartet” (+). (More for subscribers.)

Thursday, January 24, 2013

Today's Excerpt: Home Prices

Home prices may be starting to melt up. That means that fewer homeowners will have negative equity in their homes and more of them will have less of it. That could do a lot to boost consumer confidence and spending, and boost bank profits too. The median existing single-family home price rose 10.9% y/y during December, the best performance since January 2006. This is happening because the supply of existing homes available for sale dropped last month to the lowest since January 2001.

Today's Morning Briefing: Secular Bull or Bear? (1) Is the end near for the cyclical bull, or for the secular bear? (2) Show time. (3) Fully invested bears should be happier. (4) Bear market in multiples and bull market in earnings. (5) Over a decade of dog days for the S&P 500. (6) The case for the secular bull. (7) Fiscal fight rescheduled. (8) Less negative equity in real estate. (9) Longer fuse in the Persian Gulf. (More for subscribers.)

Tuesday, January 22, 2013

Fiscal Drag

The payroll tax paid by workers increased from 4.2% to 6.2% at the start of the year. It was temporarily cut back in 2010 to stimulate consumer spending. The regressive tax is paid by everybody who earns $113,700 annually or less. That means someone making the median income of about $50,000 will pay $1,000 a year more in taxes, or a little more than $19 a week. These receipts are supposed to pay for Social Security and Medicare, but they are actually spent along with all other revenues.

I monitor the 260-day moving sum of withheld income and employment taxes deposited at the US Treasury. It was $1,791 billion on December 18. It jumped $25 billion to $1,816 billion on January 18. That’s a significant tax increase, especially if it is annualized, that could depress real GDP at least during the first quarter. The Treasury’s monthly data show that individual income taxes totaled $1,174 billion last year, while payroll taxes totaled $847 billion. Both increased last year along with payrolls.

Of course, the good news at the start of this year was that Congress voted to make the Bush tax cuts permanent for 98% of American taxpayers. That was offset by the bad news about the higher payroll tax rate. That would certainly explain why the Consumer Sentiment Index (CSI) slipped in January to the lowest reading since December 2011. Joining the recent downdraft in the overall CSI was its present situation component, which had risen to a cyclical high during November.

Today's Morning Briefing: Going Vertical. (1) Climbing the Wall of Worry (WOW). (2) Living less dangerously this year? (3) There’s still a worry list. (4) Fiscal drag is a drag in US. (5) Will Draghi’s stealth bomber work in Cyprus? (6) Running out of warm and able bodies in China. (7) It’s getting hard to breathe in China. (8) Distracting the masses with xenophobic nationalism. (9) Yet many stocks are soaring, including many of our favorites. (More for subscribers.)

Monday, January 21, 2013

The Bull Market

The S&P 500 index closed at 1485.98 on Friday, up 119.6% since the start of the bull market. I’m still targeting 1565 before the middle of the year, matching the record high on October 9, 2007. That would be an increase of 5.3% from Friday's close. My yearend target is still 1665, which would put the index up 16.7% for the year following last year’s gain of 13.4%

Several other major stock market indexes have gone vertical in recent days to new record highs including the S&P 400 MidCaps (up 165.4% since March 9, 2009), S&P 600 SmallCaps (175.1), S&P 500 Transportation (161.3), and Russell 2000 (160.1). The bull may be getting old, but you have to respect the strength and breadth of its most recent charge.

The bull’s stamina has been based on performance-enhancing earnings. The forward earnings of the S&P 500, S&P 400, and S&P 600 all rose to fresh record highs during the week of January 17, and are up 80.7%, 85.8%, and 102.7%, respectively, since the week of May 7, 2009. Actual revenues and operating earnings stopped growing on a y/y basis during Q3-2012. However, I’m expecting that better global economic growth will boost both of them this year.

Stocks remain relatively cheap. Since the start of the bull market, valuations have been held down by fears of a double dip in the US, a hard landing in China, and a meltdown in Europe. If these concerns diminish this year, as I expect, there is room for higher multiples, especially for the S&P 500 (selling at 13.1 times forward earnings on Friday) as well as the S&P 400 (15.3) and the S&P 600 (15.9).

Today's Morning Briefing: Performance-Enhanced Bull.  (1) Paying respects to Rodney Dangerfield. (2) Could it be a secular bull? (3) It snorts and stampedes like a bull. (4) Earnings are better than steroids. (5) Retail investors should notice that stocks are cheaper than bonds. (6) Debt ceiling is latest postponed apocalypse. (7) More good news about Second Recovery and energy independence. (8) Those blinking Republicans. (9) Inglorious Gridlock. (10) “The Impossible” (+ +). (More for subscribers.)

Thursday, January 17, 2013

S&P 500 Industrials

Manufacturing output is up 2.1% over the past two months to the highest since July 2008. Leading the gain was auto output--up 8.5% the past two months. Rising to a new record high was business equipment output--up 3.3% over the same period. December’s gain in business equipment was widespread, with output of industrial, transit, and information & processing equipment up 2.1%, 1.9%, and 0.6%, respectively. Consumer goods output was little changed after a 0.9% advance in November.

During the bull market since March 9, 2009, Industrials have been among the three top- performing sectors of the 10 in the S&P 500. It edged lower yesterday, weighed down by Boeing’s nightmare with its Dreamliner. However, it did manage to rise to a new cyclical high on Tuesday. The recent rally in Industrials has been mostly led by rising valuations, while forward earnings have been flat. Investors must be anticipating better global growth and perceive that the stocks are relatively cheap.

Today's Morning Briefing: Zero Hedge Thirty. (1) Fight Club: Durden vs. Draghi. (2) Last few “bubble months” before the bull is killed? (3) Lots of shocking numbers in Europe. (4) Draghi sees a recovery later this year. (5) Some good numbers. (6) Capital markets wide open for Italy and Spain. (7) France: change we can believe in? (8) Trade surplus in Italy. (9) Moving toward banking union. (10) The Dark Knight lightens up a bit. (11) Despite Boeing's woes, Industrials should continue to fly. (More for subscribers.)

Wednesday, January 16, 2013

Fundamental Stock Market Indicator

The first week of 2013 saw our FSMI--a good coincident indicator that can confirm or raise doubts about stock market swings--slide 2.1% after climbing a total of 12.2% the final four weeks of 2012. Our FSMI is the average of our Boom-Bust Barometer (BBB) and Bloomberg’s Weekly Consumer Comfort Index (WCCI). The BBB dipped 1.3% after a four-week jump of 17.2%. Jobless claims--a BBB component--rose to 365,750 (4-wa) after falling steadily from a Hurricane Sandy-related spike of 408,250 to 359,000 the prior four weeks. The CRB raw industrials spot price index component bounced off recent lows but is moving sideways currently. The WCCI slumped 3.8%, after hovering around eight-month highs.

Today's Morning Briefing: Reviving Revenues. (1) Looking for positive revenue surprises. (2) Record high dividends. (3) Another new record high for business sales. (4) Tracking S&P 500 revenues with world crude oil demand and US tax receipts. (5) Commodity prices and the dollar no longer weighing on revenues. (6) Q3’s revenue losers: Utilities, Materials, & Energy. (7) Top three revenue winners: Telecom, Consumer Discretionary, and Tech. (8) Q4 retail sales boosted real GDP. (9) Retailers should continue to shine. (More for subscribers.)

Tuesday, January 15, 2013

Demography & Debt

For argument's sake, let’s assume that single people on average tend to be more self-absorbed than married people. That’s a conjecture, not a criticism. More specifically, I am assuming that singles care more about their own wellbeing than about the next generation, which is less the case for married people with kids. If my hypothesis is correct, then that might explain why President Barack Obama was reelected despite the poor performance of the economy. It would also shed some light on why there is no political will in Washington to reduce the federal deficit. The relevant demographic facts are as follow:

(1) Marital status. The civilian noninstitutional population 16 years and older that is single increased by 62.0 million to a record 121.2 million from December 1976 through December 2012. Over the same period, the number of married people increased by 25.0 million to 123.2 million. Over the past 10 years (since December 2002), the number of singles is up 20.4 million, four times the increase in the number of married persons, i.e., 5.2 million!

(2) Single
s. At the end of last year, singles accounted for a record 49.6% of the population aged 16 years or older. That’s up from 37.6% at the end of 1976. 

(3) Never married and other singles. The Bureau of Labor Statistics compiles these monthly statistics. There are two categories of singles, namely, those who have never been married and those who are divorced, separated, or widowed. The footloose and fancy-free rose to a record 73.0 million during December, accounting for a record 29.9% of the adult population, up from 22.3% at the end of 1976. The number of previously married persons rose to a record 48.1 million, accounting for 19.7% of the adult population, up from 15.3% at the end of 1976.

Adults who have never been married and have no kids aren’t likely to be all that concerned about leaving the next generation with more debt than has ever been passed on by one generation to the next. The younger adults should be more concerned because they are likely to suffer the consequences. However, many of them are currently more interested in getting government-subsidized student loans. Also, most of the young singles are simply not politically organized as are older singles, especially senior citizens.

Many of the seniors do have older children and grandchildren, and should be more concerned about burdening their progeny with so much debt. However, they are living longer, and are expecting the government to support them since their good-for-nothing kids won’t do it. Life expectancy at birth increased to a record 78.7 years during 2010, up from 76.8 a decade ago and 75.4 two decades ago.

There is also a rapidly growing population of single mothers. They undoubtedly care about their kids. However, since many of them have low incomes, their primary concern is likely to be to receive government support rather than to worry much, if at all, about the rapidly mounting federal debt we are bequeathing to our children.

The singles boom has certainly contributed to the drop in the general fertility rate (GFR) to the lowest on record. According to an October 3, 2012 release
from the National Center for Health Services, the GFR for 2011 was 63.2 births per 1,000 women aged 15-44. That’s about half the peak of 122.7 births during 1957, when the Baby Boomers were booming. The actual number of live births, on a 12-month moving sum basis, dropped from a record high of 4.33 million during February 2008 to 3.94 million in June 2012, the lowest since May 1999.

Today's Morning Briefing: Barrels of Oil. (1) There’s more on tap. (2) Saudis blame their output cut on weak demand. (3) Their real problem is more competition. (4) New math: US + Canada > Saudi Arabia! (5) World oil demand stats show global economy growing led by EMs. (6) Record auto sales in China pumping up oil demand. (7) Detroit scrambling to more than double fuel efficiency by 2025 with lighter materials. (8) Good for copper, platinum, and aluminum. (9) Energy likely to be market performer. (More for subscribers.)

Monday, January 14, 2013

The Fed

At their last meeting during December 11-12, the members of the Fed’s FOMC decided to add a new policy goal. They declared that their ultra-easy monetary policy would remain in force until the unemployment rate falls to 6.5%, as long as inflation doesn’t rise above 2.5%. According to the minutes of the meeting, instead of “calendar-date forward guidance,” the Fed now will focus on “quantitative thresholds,” which “could help the public more readily understand how the likely timing of an eventual increase in the federal funds rate would shift in response to unanticipated changes in economic conditions and the outlook.” 

The FOMC also announced on December 12 that the Fed will buy $45 billion a month in long-term US Treasuries starting January, with no limit on the total amount and no termination date. That adds up to $540 billion a year, though Fed Chairman Ben Bernanke said the latest version of QE would be “flexible.” Of course, that’s in addition to the $40 billion on mortgage-backed securities per month that the Fed committed to start buying back at the September 12-13 meeting of the FOMC under QE3. The latest program, let’s call it "QE4," replaces Operation Twist, which expired at the end of last year. Under that program, the Fed swapped about $45 billion in short-term Treasuries for long-term Treasuries.

From September 12 through January 9, the Fed’s assets are up $105 billion, with holdings of mortgage-back securities and Agency debt up $72 billion and holdings of US Treasuries up $19 billion. A few Fed officials are having some second thoughts about sinking deeper into the QE mud pit. For example, Esther George, the President of the Kansas City FRB, warned in a 1/10 speech that “These purchases also have their own set of risks and are not without cost. At their current level and pace of growth, I believe they almost certainly increase the risk of complicating the FOMC’s exit strategy.” She is a voting member of the FOMC this year.

Today's Morning Briefing: Whatever It Takes. (1) Central bankers are less conservative, more progressive. (2) Giving the people more money. (3) Let’s have some austerity, but later. (4) The Fed’s “quantitative threshold” for jobless rate is 6.5% until further notice. (5) Draghi’s amazing verbal intervention is working amazingly well. (6) BOJ is giving Abe what he wants. (7) A more populist bull market. (8) Risk On/Off is the wrong model. (9) Health Care leading the way. (10) Asset Managers are also leading. (11) Transports are bullish on global economy. (12) “Zero Dark Thirty” (+ + +). (More for subscribers.)

Thursday, January 10, 2013

US Fiscal Policy

Let’s assume that President Obama really wants to reduce the federal deficit by trillions of dollars over the next 10 years rather than mint platinum coins. Then most of that money will have to come out of defense spending if the Republicans won’t let him increase taxes again and he won’t cut spending on entitlements. Over the past 12 months through November, federal government spending totaled $3.6 trillion, with “non-discretionary” spending on social benefits accounting for 61%. Discretionary spending on defense accounted for 19%, and all other such outlays were just 20% of the total. By the way, during Q3-2012, spending on entitlements by federal and state governments accounted for 15% of nominal GDP, while federal defense outlays was 5%. The spread is likely to widen.

Chuck Hagel was nominated on Monday by President Obama to run the Defense Department. David Brooks wrote in his 1/7 column that Hagel was picked “to supervise the beginning of this generation-long process of defense cutbacks. If a Democratic president is going to slash defense, he probably wants a Republican at the Pentagon to give him political cover, and he probably wants a decorated war hero to boot.”

Yesterday, when asked whether the administration would rule out minting a trillion-dollar coin, White House Press Secretary Jay Carney didn't outright deny the option: "You can speculate a lot of things, [but] nothing needs to come of these speculative notions" so long as Congress does its job, he said.

Today's Morning Briefing: The Trouble with Trillions. (1) Homer Simpson, Paul Krugman, and Bill Clinton. (2) The coin of the realm. (3) Change we can spend. (4) Democrats and Republicans kicking cans. (5) Altman sees a lid on the debt can. (6) Going over the sequester cliff. (7) Another deal to postpone a deal. (8) Boehner’s Rule vs. Obama’s rule. (9) A trillion here and there. (10) Global economic growth should improve this year, boosting revenues growth. (11) Our favorite Materials industries are Industrial Gases and Specialty Chemicals. 

Wednesday, January 9, 2013

US Commercial Banks

On Monday, 10 US banks announced two big settlements worth a total of $18.5 billion, clearing up claims relating to the mortgage crisis. Bank of America agreed to pay $10 billion to Fannie Mae to settle claims that the bank (actually Countrywide) sold Fannie Mae bad loans for 10 years through 2008. In another unrelated settlement, several financial institutions agreed to settle claims of foreclosure abuses for $8.5 billion. The banks got off easy, and the bankers can now move on.

The S&P 500 Bank Composite Index rose 21.2% last year, outpacing the 13.4% gain in the S&P 500. Ultra-easy monetary policy and declining unemployment are boosting bank profits by reducing charge-offs and provisions for bad loans. Loans are rising, led by business demand for funds to finance rising inventories.

Meanwhile, US commercial bank deposits rose by a record $878 billion last year to $9.3 trillion, the highest ever. Banks have deleveraged their balance sheets significantly since the financial crisis. Their borrowings are down sharply from an all-time peak of $2.6 trillion during the week of October 22, 2008 to $1.5 trillion at the end of last year. As a result, their borrowings as a percentage of their total liabilities plunged from 24.4% to 13.1% over this period.

Today's Morning Briefing: Another Bank Bailout. (1) Nice to have friends in high places. (2) Lowering the cover charge. (3) Another good year for Financials. (4) Foreclosure Gate is settled. (5) US banks have deleveraged significantly and are lending more. (6) European banks have been performance champs. (7) New loans are still MIA in Europe and Japan. (8) Regulators prefer more lending to more liquidity. (More for subscribers.)  

Tuesday, January 8, 2013

S&P 500 Earnings Squiggles

I track the industry analysts’ annual consensus earnings estimates of the S&P 500 for the current year and the coming year on a weekly basis. I call them “Earnings Squiggles” because that’s what they look like. As of last week, industry analysts estimated that the S&P 500 will earn $112.98 this year and $125.91 in 2014.

The estimates for 2012 and 2013 mostly fell all last year, yet the S&P 500 rose 13.4%. I have the Squiggles data back to 1979 on a monthly basis. More often than not, they tend to trend down; yet more often than not, the market has trended higher. That’s because the market discounts 12-month forward consensus expected earnings. A good proxy for this concept is forward earnings, i.e., the time-weighted average of consensus estimates for the current and coming years. It tends to be a good 12-month leading indicator for actual profits, with one important exception: Analysts don’t see recessions coming until we all do too.

The bottom line is that the bottom line for S&P 500 companies on a 12-month (and on a 52-week) forward basis rose to a record high at the beginning of this year even though analysts have been lowering their estimates for 2012 and 2013.

Today's Morning Briefing: Snakes, Squids, & Squiggles. (1) Seeing patterns. (2) Let the earnings season begin. (3) Cobra formation in estimated and actual earnings. (4) Earnings surprises for the sectors tend to be surprising. (5) The guidance myth. (6) Squid formation: Biggest downward revisions for Materials, IT, Financials, and Industrials. (7) Market often goes up even when Earnings Squiggles go down. (8) Another record high for forward earnings. (9) Record highs for MidCap and SmallCap stocks too. (10) A good year for auto dealers and retailers. (More for subscribers.)

Monday, January 7, 2013

US Employment

The Employment Situation report from the Bureau of Labor Statistics provides lots of data on the labor market every month. There tends to be lots of noise in the data and lots of noise about the data. Debbie and I prefer to cut to the chase by computing just one number based on the report, i.e., our Earned Income Proxy (YRI-EIP).

It is simply aggregate hours worked by all payroll employees times their average hourly earnings during the month. So it reflects the number of people working, the hours in their workweek, and their wage rate. It is highly correlated with aggregate wages and salaries in the private sector and jumped 0.7% for the second straight month during December to a new record high. Aggregate hours rose 0.4% and wages increased 0.3% last month. This measure is also highly correlated with retail sales, suggesting that a strong sales number will be reported on January 15 for the final month of last year.

Once again there was plenty of noise in the rest of the latest jobs report. Payroll employment rose 155,000 during December, following gains of 161,000 and 137,000 during November and October, which together were revised up by a net 14,000. Private payrolls rose 168,000 last month. On the other hand, the household measure of employment edged up by only 28,000 during December. However, when it is adjusted to be comparable to the payroll measure, the increase was 270,000, more in line with the ADP private payrolls gain of 215,000.

Contributing to the rise in payrolls during December was a 30,000 jump in construction employment. The gain was 18,100 among workers in the residential construction industry. Some of that might have been attributable to rebuilding following the devastation left by Hurricane Sandy. However, such employment is highly correlated with housing starts, which has been rebounding strongly in recent months. The partial resolution of the fiscal cliff issue at the start of the year also should boost employment as employers who held back on hiring move forward on doing so.

Today's Morning Briefing: One Singular Sensation. (1) From Booming Babies to Soaring Singles. (2) Demography is Washington’s destiny. (3) Singles account for half of working-age population! (4) Singles grew at four times the rate of married persons over past 10 years. (5) A self-absorbed generation leaving lots of debt. (6) Living longer, saving less, and spending more. (7) Fertility rate lowest on record. (8) Consumer Discretionary stocks should continue to outperform. (9) Our Earned Income Proxy soared to new high in December. (10) Bullish sensation. (11) “Django Unchained” (+). (More for subscribers.)

Thursday, January 3, 2013


I no longer start my mornings by looking for the latest 10-year yield on Spanish government bonds. It dropped from a high of 7.61% on July 24 last year to 4.99% this morning. Even the 10-year Greek government yield has plunged from a high of 43.92% last year to 11.14% this morning.

These extraordinary declines weren't triggered by any improvement in the sorry state of state finances in the euro zone. Rather, they started when ECB President Mario Draghi declared in late July of last year that he would do “whatever it takes” to defend the euro, including buying the sovereign notes of euro zone governments. So far, the ECB hasn’t had to do much to back up Draghi’s declaration. His willingness to implement unlimited “outright monetary transactions” (OMT) has worked wonders.

Draghi’s fairy dust also stopped the massive capital outflows out of Spain and Italy into Germany, as evidenced by the flattening of TARGET2 balances since last summer. Among the best-performing stock markets last year were the ones in the euro zone: Greece (33.4%), Germany (29.2), Ireland (17.1), and France (15.2).

So far, the rally in European stock prices hasn’t been validated by the region’s economic indicators with a couple of important exceptions. As Debbie discusses below, the euro zone’s manufacturing PMI index was 46.1 during December, little changed from November and well below 50. On the other hand, the M-PMI for the UK jumped to 51.4 last month from 49.2 during November and 47.9 in October. In addition, Germany’s Ifo business confidence index rebounded from 100.0 during October to 102.4 during December.

Today's Morning Briefing: Live to Die Another Day? (1) The Person of the Years 2008-2012. (2) Don’t fight the Feds. (3) Policymakers’ mantra: “Whatever it takes.” (4) Markets are driven by headlines, driven by Big Governments. (5) Bond yields dive in Europe. (6) Draghi’s fairy dust. (7) China’s new leaders promoting same old policy of more urbanization. (8) Japan’s new prime minister wants more fiscal spending and more monetary easing. (9) Another fiscal fist fight coming. (10) The winner will be Big Government. (More for subscribers.)

Wednesday, January 2, 2013

Consumer Confidence

Consumer confidence dropped during December as measured by both the Consumer Sentiment Index and the Consumer Confidence Index. I track the average of the two measures. The resulting Consumer Optimism Index dropped from a 2012 high of 77.9 during October to 69.0 during December. However, that was entirely caused by a plunge in the expectations component of our composite index to 65.2, the lowest since November 2011. The present situation component rose last month to 74.9, the highest since April 2008!

Obviously, consumers last month perceived that the economy was performing well, but feared falling off the fiscal cliff. Now that the cliff has been averted, the resulting relief should boost both confidence and the economy. I am especially encouraged by the drop in the “jobs hard to get” response in the survey conducted by the Conference Board. It suggests that the unemployment rate might continue to fall much faster than widely expected, especially at the Fed.

Today's Morning Briefing: Fiscal Lift? (1) The flinch that stole Christmas. (2) Another apocalyptic scenario postponed. (3) Rooting for three round numbers: 1465/1565/1665. (4) The curmudgeon and smiley do a deal. (5) Another cliff in March. (6) Grover’s spin. (7) From fiscal cliff to fiscal drag to fiscal lift. (8) Some uplifting data on GDP, consumer spending, confidence, and profits. (9) “Hyde Park on the Hudson” (+). (More for subscribers.)