Tuesday, March 26, 2013
Fed officials, particularly the dovish ones calling the shots, are clearly preparing the financial markets for the phasing out of QE. That was obviously the intent of NYFRB President Bill Dudley on Monday when he delivered a speech titled “The Economic Outlook and the Role of Monetary Policy.” He has been an early and leading advocate of QE. However, for the first time he talked about “dialing back” QE.
I believe that the bull market can survive the phasing out of QE if the US economy continues to strengthen, which is the only reason why the Fed would do so in the first place. A strong case can be made that the bull market of the past four years has been directly tied to the Fed’s purchases of fixed-income securities.
I have also related the bull market to our Fundamental Stock Market Indicator (FSMI), which continues to rise to new cyclical highs. We may be reaching an inflection point where bad news out of Europe and the prospects of less QE from the Fed aren’t bearish for stocks because the US economy is fundamentally sound, which is bullish for stocks. Yesterday’s fundamentally sound reports on durable goods orders and home prices helped boost stock prices. Enjoy your Spring Break! We will be back on Tuesday.
Today's Morning Briefing: Give Us Your Tired Rich. (1) Never mind. (2) The Dutch finance minister is new on the job. (3) Cyprus is very special to Russians. (4) Putin’s threat. (5) There will be repercussions. (6) The US dollar, stocks, and real estate are all safe havens for wealthy foreigners. (7) Dudley is ready to dial back. (8) Phasing out QE should be bullish for stocks. (9) Focus on S&P 500 housing-related industries. (More for subscribers.)
Monday, March 25, 2013
The next big positive surprise in the US economy is likely to be that federal tax receipts are increasing faster than expected. That would certainly help to improve the budget deficit outlook and might make it easier to achieve at least some modest bipartisan agreements to lower the structural deficit and to reform the tax system.
I monitor the Treasury's daily data on federal tax receipts and deposits for individual and payroll taxes as well as for corporate income taxes. The daily data obviously are very volatile so I smooth them out with 260-day moving sums, which closely track the Treasury’s monthly data on a 12-month sum basis. The Treasury’s deposits of withheld income and employment taxes rose to a new record high on March 22. Corporate income tax receipts are the highest since February 2009.
Today's Morning Briefing: Decoupled. (1) The end has been postponed. (2) The moments after the Cyprus Moment. (3) Mr. Dijsselbloem's little fiasco. (4) Draghi to the rescue again. (5) Scrounging for good news in Europe. (6) More happy indicators in the US. (7) PMI down in Europe, up in US. (8) Houses are selling lickety-split. (9) Federal tax revenues are on the rise. (10) Earnings are still breaking records. (More for subscribers.)
Sunday, March 24, 2013
Leading the recent strength in the US economy is the long-delayed rebound in the housing industry.The Energy Revolution is also boosting economic activity. US crude oil production has soared by nearly 1.0 mbd over the past 27 weeks through mid-March. I am now tracking weekly production data by states, especially Texas (which is up 0.9 mbd over the past 52 weeks) and North Dakota (up 0.3 mbd).
US exports of petroleum products rose to a new record high of 3.2 mbd in mid-March. Those exports will most likely continue to increase as more domestically produced oil flows down to refineries along the Gulf of Mexico. As a result, US net imports of crude oil and petroleum products, currently at 6.7 mbd, should continue to decline, as they have been since peaking at a record 13.6 mbd during November 2005.
In recent meetings with some of our accounts, I’ve detected some skepticism about the Energy Independence theme touted by the secular bulls, including yours truly. The skeptics note that old wells don’t end well. In other words, fracking them yields more oil for a very short time before they are depleted. That’s why I am starting to monitor weekly oil production data by state.
Today's Morning Briefing: Crisis Champ. (1) Oscar for best crisis management. (2) Worst crisis managers. (3) Panics have been buying opportunities. (4) The mouse that roared. (5) US leading indicators are looking up. (6) Gushing over gushing oil. (7) Monitoring depletion. (8) Making nice in DC and Jerusalem. (9) China reforming again. (10) Time out for Little Kim. (11) Performance Derby turned defensive last week. (12) Risk On again post-Cyprus? (More for subscribers.)
Wednesday, March 20, 2013
In the US, the underlying trend in the CPI inflation rate tends to be driven by labor costs, which reflect wages (boosting inflation) and productivity (reducing inflation). There is a good correlation between core CPI inflation on a y/y basis and wage inflation. There is also a strong inverse correlation between the unemployment rate and wage inflation. The Fed’s working assumption seems to be that wage inflation won’t heat up as the unemployment rate falls. If that assumption is wrong, inflation may not stay as “well anchored” as the FOMC expects, forcing the committee to raise the federal funds rate well before the jobless rate falls to 6.5%.
Today's Morning Briefing: The Fed's Holy Grail. (1) The Fed’s mantra: 6.5% or bust! (2) From date-based to data-based guidance. (3) Esther George may not be lonely for long. (4) Phasing out QE as the quid pro quo for NZIRP. (5) All will be well as long as financial imbalances can be managed. (6) But what if price inflation makes a comeback? (7) There’s still an inverse relationship between jobless rate and wage inflation. (More for subscribers.)
Tuesday, March 19, 2013
The S&P 500 is highly correlated with the inverse of the four-week moving average of initial unemployment claims, which dropped to 346,750 during the week of March 9. That’s the lowest reading since March 2008. The S&P 500 is even more highly correlated with our Fundamental Stock Market Indicator (FSMI), which includes jobless claims. Our FSMI also includes the Bloomberg Consumer Comfort Index and the CRB raw industrials spot price index. It is up by 6.7% over the past nine weeks to the highest reading since November 2007.
Today's Morning Briefing: On the Margin. (1) Will depositors get toasted in Cyprus? (2) Don’t mess with Putin’s stash. (3) A deal will be done. (4) Aging bull still has legs. (5) Bullish: Jobless claims lowest since March 2008. (6) Our FSMI supports the bull. (7) Housing is following our “Second Recovery” script. (8) CoreLogic reports fewer underwater homes. (9) Forward earnings at new highs again. (10) S&P 500 margin in holding pattern. (11) Global oil demand at new high. (12) Non-OPEC supplies at new high too. (More for subscribers.)
Monday, March 18, 2013
The latest mess in the Euro Mess is a reminder that Mario Draghi's pledge to do whatever it takes to defend the euro won't clean up the mess. The pledge bought time, which must not be wasted or the Euro Mess will last for years to come. The “Cyprus Moment” is yet another waste of time.
For now, the euro zone is falling deeper into recession, as evidenced by the region's weak production numbers during January. The UK is heading in the same direction. The question is how long will the Cyprus Moment last, and will it morph into Europe's Lehman Moment? I doubt it. So far, government bond yields for both Italy and Spain remain subdued.
Today's Morning Briefing: Safe Haven. (1) Upside to Europe's downside. (2) Can risk be on in US, but off elsewhere? (3) Fewer safe havens for laundering money. (4) How long will the Cyprus Moment last? (5) The dollar is a safe haven again. (6) European investors are buying US stocks. (7) A shortage of stocks as a result of buybacks & M&A. (8) Only 3,678 companies in Wilshire 5000! (9) US and OECD inflation rates remain subdued. (More for subscribers.)
Sunday, March 17, 2013
Professor Robert Shiller, the man renowned for spotting irrational exuberance, is starting to warn that based on the valuation multiples he compiles, stocks aren’t cheap. However, his P/Es are controversial for all sorts of reasons including his use of 10-year trailing earnings to calculate them. I much prefer analysts’ consensus expected 52-week forward earnings based on a time-weighted average of their latest forecasts for the current and the coming years’ earnings estimates.
For the S&P 500, the forward P/E was at 13.5 on Friday. Monthly data show that the ratio of the forward P/E to consensus expected long-term earnings growth (which tends to have an upwards bias) was 1.26 during February. That’s about the same as the 1.21 average of this PEG ratio since 1985.
Another useful valuation measure is the ratio of the market value of all stocks traded in the US to nominal GDP. It is highly correlated with the market capitalization of the S&P 500 divided by S&P 500 revenues. Both of these measures have recovered from their lows of 2009, but remain well below their previous two cyclical peaks.
Today's Morning Briefing: Animal Spirits. (1) East Coast to West Coast. (2) Keynes on human nature. (3) Keynes on steroids. (4) How will Fed deal with the animals? (5) No end to the endgame and no exit for the Fed? (6) Things could get tricky. (7) Greenspan’s famous question. (8) On the lookout for irrational exuberance. (9) S&P 500 PEG is at average. (10) Are sentiment indicators relevant if corporations are biggest buyers of stock? (11) No cause for exuberance in headline news. (12) The “Cyprus Moment.” (More for subscribers.)
Thursday, March 14, 2013
Since the start of the year, institutional investors seem to have stopped reacting to headline risk as quickly and intensely as they did since the start of the bull market. “Risk Off” periods now tend to last a couple of days rather than several weeks. Instead, investors seem to be focusing more on the performance of the US economy and taking comfort from its surprisingly good performance. At the same time, they have been remarkably relaxed about the bad economic performance of Europe, where stock prices are also moving higher nonetheless.
Another remarkable development is that the S&P 500, which has been very highly correlated with the price of oil and the inverse of the foreign-exchange value of the dollar, is significantly diverging from both of them. The S&P 500 has been on the rise, while the price of oil has been falling and the dollar has been strengthening. This gives me more confidence in the staying power of the bull, though I can see why others might be worried that something has to give, and it might be the S&P 500.
Today's Morning Briefing: Spring Break? (1) Will the bull take a holiday? (2) Going away is easier than coming back. (3) How to ride a bull. (4) Dearth of bears and volatility. (5) Lots of geopolitical event risks. (6) Militarism is on the rise in Asia. (7) Booming from Miami to San Francisco. (8) Market seems less headline driven these days. (9) Unusual divergence between stocks vs. oil and dollar. (10) No surprise in surprisingly strong retail sales. (11) More upside for Retailers and other Consumer Discretionary stocks. (More for subscribers.)
Tuesday, March 12, 2013
Stocks aren’t as cheap as they were during the summer of 2011, when the forward P/E of the S&P 500 fell to 10.4. It is now back up to 13.5. However, there is a widespread consensus among our accounts that stocks remain relatively cheap. I agree. That’s especially true now that several of the apocalyptic scenarios that weighed on valuation over the past three years seem less likely. Yet, at the same time, top Fed officials have explicitly stated that they intend to keep short-term rates near zero for a while even if the labor markets continue to improve.
What about Tobin’s q? It is a measure of the market value of an asset relative to its replacement cost. When values rise sharply relative to replacement cost that can signal a bubble as it did at the tail end of the 1990s bull market in technology stocks. For stocks, Tobin’s q peaked at a record high of 1.8 back then during Q1-2000. At the end of last year, it was just below 1.0 at 0.9.
Today's Morning Briefing: Eye of the Beholder. (1) Miami is hot again. (2) The bulldozers are working the night shift. (3) 50% down for out-of-towners. (4) Beauty and valuation contests. (5) The rise and fall of housing’s valuation multiple. (6) Affordability index has doubled. (7) Consensus is that stocks are cheap. (8) Professor Shiller disagrees. (9) Tobin’s q isn’t in bubble territory. (More for subscribers.)
A favorite country song of mine is Willie Nelson’s “On the Road Again.” It’s been my theme song since the beginning of the year. Today, I’ll be visiting with our accounts in Miami. Then I will be doing the same in California over the rest of the week. While I always enjoy meeting with our accounts, it’s more fun when the economic news is good and stock prices are rising, especially into record territory. Our Second Recovery scenario is on track, and so are our bullish targets of 1565 before mid-year and 1665 by the end of the year for the S&P 500.
Truckers are on the road again too. Employment in transportation and warehousing has increased 88,000 over the past 12 months. Truck tonnage rose 6.5% y/y during January, the best gain in more than a year.
The “Dow Theory” paradigm remains bullish as both the DJIT and S&P 500 Transportation Index are making new record highs. The latest earnings and valuation metrics for the S&P 500 Transportation sector show forward revenues and earnings are at record highs.
Today's Morning Briefing: On the Road Again. (1) Playing country music backwards. (2) Willie Nelson and the economy. (3) Second Recovery scenario on track. (4) Employment rebounding. (5) So are housing and construction jobs. (6) Transportation stocks are cruising to new highs. (7) Restocking, and borrowing to do so. (8) Sentiment is wildly neutral. (9) Financial press advises investors to curb their enthusiasm. (10) Shiller says: “Who Knows Why?” (11) Analysts are rationally exuberant about earnings. (12) Valuation turning more exuberant too. (13) The secular bull case. (More for subscribers.)
Sunday, March 10, 2013
Of all the numbers that are released in the payroll report, I tend to give the most weight to the ones I use to calculate our YRI Earned Income Proxy. It is simply average hourly earnings in private industry (i.e., the hourly wage rate) multiplied by aggregate hours worked in private industry. The latter variable reflects the length of the workweek and the number of people working, i.e., payroll employment. During February, our proxy rose 0.7% to another new record high. It is highly correlated with wages and salaries in personal income (excluding government payrolls) and also with retail sales.
Consumers have other reasons besides an improving labor market to accentuate the positive. The Fed’s Flow of Funds data also showed last week that household net worth has recovered since Q1-2009 by $14.7 trillion to $66.1 trillion at the end of last year, nearly back to its previous all-time high during Q3-2007. The increase has been attributable mostly to rising stock prices, which boosted the values of households’ pension fund reserves, mutual fund shares, directly owned shares, and equity in non-corporate businesses.
Today's Morning Briefing: Bull's Anniversary. (1) Raging bull. (2) New highs despite all the headline risk. (3) Billy Joel, Fred Astaire, Ginger Rogers, and the market. (4) Record high stock prices and earnings. (5) Corporate cash assets at record despite record buybacks and dividends. (6) Fed’s doves want much lower jobless rate. (7) Wealth effect or asset bubble? (8) Payroll gains push earned incomes to new highs. (9) Consumers recoup their net worth losses. (10) Will the bull market’s leaders continue to be so? (11) “Emperor” (+). (More for subscribers.)
Wednesday, March 6, 2013
Last December, I wrote: “[M]y working hypothesis is that the fiscal cliff will be averted and there won’t be a recession next year.” I also predicted: “Averting the fiscal cliff could be very stimulative for the economy.” The cliff was averted, but the payroll tax rate was raised back to 6.2% from 4.2%, and marginal tax rates were increased for high-income taxpayers. Evidence is mounting that the economy is performing very well so far this year despite the tax hikes. The jury is out on the impact of the March 1 sequester, though that certainly hasn’t stopped the DJIA from rising to record highs over the past two days.
According to ADP, nonfarm private payroll employment rose solidly last month by 198,000. This series closely tracks the comparable official series compiled by the Bureau of Labor Statistics (BLS). January’s increase was revised upwards by 23,000 to a gain of 215,000. The latest gains were fairly evenly distributed among large companies (57,000), medium companies (65,000), and small companies (77,000). This confirms my view that dodging the fiscal cliff gave the economy enough of a boost to offset the fiscal drag attributable to the tax hikes and the sequester.
Today's Morning Briefing: Modest to Moderate: (1) Averting the cliff was stimulative and bullish. (2) Two shades of beige. (3) Fed’s national survey more positive than district surveys. (4) Latest employment indicators looking good. (5) Big rebound in machinery orders. (6) Good news for Industrials boosts their stock prices. (7) Weak economies weighing on the euro, pound, and yen. (8) Will rising trade-weighted dollar depress S&P 500 revenues and earnings? (More for subscribers.)
Tuesday, March 5, 2013
On Monday morning at the National Association for Business Economists, Fed Vice Chair Janet Yellen presented a speech titled, “Challenges Confronting Monetary Policy.” In her opinion, the biggest challenge remains to lower the unemployment rate. She favors maintaining ultra-easy monetary policy for as long as it takes to bring the jobless rate down to 6.5%. And even then she would probably advocate maintaining the federal funds rate near zero, though she might be willing to terminate the Fed's purchasing of securities.
While Yellen’s speeches tend to be more dovish than Bernanke’s, they seem to share most of the same views. Since she joined the Fed she has given 19 speeches: two in 2010, ten in 2011, four in 2012, and three so far this year. Many of the ones since late 2011 boosted stock prices. In her latest speech, she made several extremely important points that are likely to drive monetary policy over the rest of this year and next year:
For starters she thinks that the official unemployment rate is too high and significantly understates the problem. She notes that while 12 million workers are currently counted as unemployed, an additional 8 million are working part time because they can’t find a full time job. She is also discouraged that there are 800,000 discouraged workers who have stopped looking for work. She notes that the official U-6 unemployment rate reflecting all these people is at 14.4%, nearly double the official rate of 7.9%.
In a 2/11 speech, Yellen said that ultra-easy monetary policy might remain in place even if the Fed’s unemployment “threshold” of 6.5% is achieved as long as inflation remains around 2%. I'm sure that in her mind 6.5% is still too high.
Today's Morning Briefing: Fairy Godmother. (1) The bull has a powerful friend. (2) Yellen thinks that even 6.5% is too high. (3) The wealth effect vs. asset bubbles. (4) Yellen wants more risk-taking as long as it is prudent! (5) CNBC Flash: Buffett says NZIRP is bullish for stocks. (6) US economy displays resilience. (7) Purchasing managers surveys upbeat for revenues outlook. (8) Consumers are taking recent hits in stride. (9) Construction upturn giving green light to light truck sales. (10) Joe reviews overweight-rated Financials. (More for subscribers.)
Monday, March 4, 2013
When the current bull was a youngster during 2009, the bears growled that the rebound in earnings back then was all attributable to cost cutting. They were very pessimistic about the outlook for revenues. I was among the optimists.
So far, so good. S&P 500 revenues per share bottomed during Q1-2009 and are up 30.2% through Q4-2012, and 5.9% y/y. I also track revenues for the S&P 500 Industrial Composite, which excludes Transportation, Financials, and Utilities. On a per-share basis, it is up 42.4% over this same period, and 4.4% y/y. Both measures are at record highs. I am predicting that revenues will increase 5% this year and next year.
As of the week of 2/21, industry analysts were predicting that S&P 500 revenues will increase 3.1% this year and 5.0% next year. Forward revenues, the time-weighted average of these two forecasts, rose to a new cyclical high.
Today's Morning Briefing: Happy Anniversary! (1) Jumping the gun. (2) So close, and not so far. (3) Is sentiment too bullish? Short answer: Nope. (4) Bull/Bear Ratio works better at bottoms than tops. (5) Four years ago, skeptics doubted revenues could grow. (6) Must profit margins revert? Yes, but no rush. (7) Forward earnings at record highs yet again for S&P 500/400/600. (8) S&P 500 Blue Angels flying high. (9) Still targeting 1665. (More for subscribers.)
Sunday, March 3, 2013
US manufacturing activity has been expanding at its fastest pace since June 2011. The M-PMI has jumped 4.0 points the past two months to 54.2 in February, after being range-bound the last half of 2012. During the first two months of 2013, the new orders index soared 8.1 points to a 22-month high of 57.8; the production index was 5 points higher at a 10-month high of 56.7. The inventory index (often volatile) climbed 8.5 points over the two months to 51.5. The employment index took a step back (from 54.0 to 52.6), though remains above December’s 51.9 reading. Sub-indexes show backlog orders soared 7.5 points in February to 55.0; indexes for export orders (53.5) and imports (54.0) climbed 3.0 and 4.0 points during the month.
Today's Morning Briefing: Pagliacci. (1) The clowns. (2) The sequel. (3) Beppe & Silvio. (4) Mario’s pledge isn’t unconditional. (5) Ben wants to take it easy for a long time. (6) Republicans won’t shut the government down. (7) Same old Kabuki? (8) China set for another round of massive urbanization. (9) Are the clowns bullish? (10) Will US economy pass latest stress test? (More for subscribers.)