Santa & Janet (excerpt)

The next blog post will be on Monday, Jan. 5, 2015. We wish you all the best during the holidays and a happy and healthy New Year.

Only a few days ago, investors were starting to doubt Santa Claus. He usually gives us a yearend rally as a Christmas present. However, the S&P 500 plunged 4.9% from December 5 through December 16. That was certainly a lump of coal. But then, the S&P 500 yet again found support around its 50-day moving average without leading to a correction of 10% or more--having done so more than a dozen times since the spring of 2012. Instead, it rallied 5.0% from Wednesday through Friday last week. The S&P 500 is only 0.2% below its record high of 2075.37 on December 5.

Santa had some help from the “Fairy Godmother of the Bull Market,” Fed Chair Janet Yellen. At her press conference on Wednesday, she sprinkled some fairy dust and waved her wand, saying that the Fed will remain “patient” when considering when to raise interest rates, which could still be a “considerable time” away. Whenever she speaks publicly about the economy and monetary policy, stock prices tend to rise. She hasn’t lost her touch!

Given that the market’s overall valuation multiple is quite high, investors are always ready to jump on undervalued situations that might develop. That was evident in last week’s rally, which was led by Energy and Materials: Here’s the S&P 500 sectors’ performance derby from Wednesday through Friday: Energy (9.8%), Materials (6.3), Health Care (5.2), Information Technology (5.1), S&P 500 Composite (5.0), Financials (4.8), Industrials (3.9), Utilities (3.9), Consumer Discretionary (3.9), Telecommunication Services (3.8), and Consumer Staples (3.3). (See Table.)

On a global basis (in dollars), value hunters jumped into Russia (22.4%), Brazil (9.8), Turkey (8.4), South Africa (7.5), and Mexico (7.2) from Wednesday through Friday. Nevertheless, the US outperformed the major market indexes during this three-day rally. Here is the performance derby (in dollars): S&P 500 (5.0), EM (3.8), World (3.7), United Kingdom (2.8), Japan (2.3), and EMU (0.9). (See Table.)

Finally, investors have good reason to believe in Santa. Since 1928, December has been the best month for stocks, with an average gain of 1.5%. That matches July’s average, but December has been up 64 times and down 22 times, while July has been up 49 times and down 38 times. By the way, the January Barometer is likely to be wrong this year. The S&P 500 fell 3.6% during the first month of this year, but is up nicely ytd, especially if Santa’s rally continues through the end of the year.

Today's Morning Briefing: Melt-Up for the Holidays? (1) Santa’s little helper. (2) From lump of coal to lump of sugar. (3) Transportation stocks on a roller coaster. (4) Yellen’s fairy dust full of good cheer. (5) Yellen claims FOMC members not worried about plunging oil prices, jumping junk yields, or imploding Russian ruble. Or are they? (6) Fed-Speak: Inflationary expectations vs. inflationary compensation. (7) December often stuffs goodies in socks and stocks. (8) A bull market for all seasons. (9) Dr. Ed’s Movie Reviews: 2014. (10) See you next year. (More for subscribers.)

The Fed Is Patient (excerpt)

Thank you, Janet Yellen! You didn’t disappoint me. You are still the “Fairy Godmother of the Bull Market!” As I’ve noted many times before, the S&P 500 tends to rise after Yellen speaks about the economy and monetary policy. The S&P 500 soared 4.5% on Wednesday and Thursday in response to the dovish FOMC statement and Yellen’s bullish press conference.

On Wednesday, I wrote:

However, the plunge in oil prices and the turmoil in the junk bond market might increase the likelihood that the Fed will delay the so-called "lift-off" of interest rates beyond mid-2015. "None and done" in 2015 is a distinct possibility for Fed policy. Let’s see what Fed Chair Janet Yellen has to say later today. I’m counting on her to continue to be the "Fairy Godmother of the Bull Market.”

On Tuesday, I wrote, “The FOMC might surprise us and keep ‘considerable time’ in the statement.” I noted that inflationary expectations are falling. I also wrote:

The distress in the junk bond market might also dissuade the FOMC from changing the "considerable time" language. In any case, Fed Chair Janet Yellen’s press conference on Wednesday afternoon could have a big impact on the markets. I’m still betting that she is the "Fairy Godmother of the Bull Market.”

On Monday, I noted that FRB-Chicago President Charles Evans, one of the Fed’s uber-doves, has called on his colleagues to be patient and to delay raising interest rates.

Wednesday’s FOMC statement confirmed my analysis:

Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

The FOMC remains dovish and patient. It will be even more dovish and patient next year when Evans will be a voter. Two of the three dissenters (Richard Fisher and Charles Plosser) were hawks, who are retiring. The FOMC has to be concerned about the financial stresses caused by the plunge in oil prices and the strength of the dollar, as evidenced by the spike in junk bond yields and the selloffs in the bonds, stocks, and currencies of emerging economies. That’s why they are willing to be patient for a considerable time longer.

Yesterday's Morning Briefing: Grand Central 24/7. (1) Fairy Godmother. (2) The FOMC will be even more dovish and patient next year. (3) Evans will get a vote next year, and two hawks are retiring. (4) FOMC clearly concerned about financial instability related to dropping oil prices, soaring dollar, and and rising junk yields. (5) Central banks succeeding in inflating wealth. (6) Their transmission mechanisms to their economies aren’t working so well. (7) Weak data stimulate PBOC to ease and Chinese stocks to soar. (8) ECB’s Coeuré pushing for QE. (9) November crude oil demand drowned in sea of oil. (10) Focus on market-weight-rated S&P 500 Energy. (More for subscribers.)

Crude Oil: Anatomy of a Glut (excerpt)

We now have November data compiled by Oil Market Intelligence on global oil demand and supply. The data show that world crude oil revenues and outlays, at an annual rate, plunged by $1.1 trillion from June through November, down to $2.7 trillion. OPEC’s revenues are down at an annualized $409 billion over this period.

Global oil demand growth continued to slow. While the 12-month average rose to a record high of 92.8mbd during November, it was up just 0.7% y/y, the lowest since April 2012. The weakness is mostly attributable to the advanced economies of the OECD, where oil demand is down 0.8% y/y, while emerging economies’ demand is up 2.2%.

The big story, of course, is the surge in non-OPEC production in recent months. It jumped 2.8mbd over the past six months through November. It is up 4.4% y/y. That’s forced OPEC to reduce output slightly last month. US and Canadian output rose 1.1mbd over the past six months through November.

I expect that the plunge in oil prices will reduce global production quickly within the next few months, especially in countries with relatively high production costs. We predict that the price of a barrel of Brent will stabilize between $60 and $70 next year.

Today's Morning Briefing: Grand Central 24/7. (1) Fairy Godmother. (2) The FOMC will be even more dovish and patient next year. (3) Evans will get a vote next year, and two hawks are retiring. (4) FOMC clearly concerned about financial instability related to dropping oil prices, soaring dollar, and and rising junk yields. (5) Central banks succeeding in inflating wealth. (6) Their transmission mechanisms to their economies aren’t working so well. (7) Weak data stimulate PBOC to ease and Chinese stocks to soar. (8) ECB’s Coeuré pushing for QE. (9) November crude oil demand drowned in sea of oil. (10) Focus on market-weight-rated S&P 500 Energy. (More for subscribers.)

The Next Financial Crisis? (excerpt)

Of course, debt defaults are likely to occur among oil producers. But I doubt they will trigger a financial crisis comparable to what happened in 2008 and 2009. Most of their junk bonds are in bond funds. There could be a liquidity crisis in those funds, but the pain will be limited to very few investors, in my opinion.

The cost to insure Russia's five-year bonds has surged to the highest levels since 2009, reflecting fears related to the fact that the Russian government gets half of its revenue from oil and gas exports. Moscow has significant foreign exchange reserves to service its debt. So far, the ratings agencies aren't downgrading Russian government debt. Standard & Poor's reaffirmed Russia's credit rating in October, though it warned of a downgrade over the next 18 months if the government's finances deteriorate.

Venezuela, on the other hand, is in dire straits. Oil makes up 96% of the country’s export earnings, and it stands to get squeezed more because its oil production costs are relatively high. Venezuelan credit default swaps cost five times more than they did in June.

The Bank of America Merrill Lynch high-yield corporate bond composite rose to yield 7.13% on Monday, up 197bps from the year’s low of 5.16% on June 23. The spread over 10-year Treasuries rose to 501bps on Monday, up from the year’s low of 253bps on June 23. That’s the widest since November 20, 2012. This spread is highly correlated with the S&P 500 VIX, which rose to 23.6 yesterday, still well below levels during the current bull market’s previous panic attacks.

Yesterday’s FT featured a story titled, “Oil plunge sparks US credit market fears.” It focused on collateralized loan obligations (CLOs). These “are a type of bond that bundles together cash flows from loans made to highly indebted companies and then slices them according to risk. … Oil and gas loans make up 4.5 per cent of the S&P LCD Loan index by amount outstanding-a proxy for exposure that may be embedded in CLOs. Energy loans make up 4.1 per cent of JPMorgan Chase’s loan index.”

Today's Morning Briefing: Two Shades of Grey. (1) Frackers: America’s patriots. (2) “Drill, baby, drill!” (3) Hurting our natural-born adversaries. (4) Assessing the odds of a new financial crisis. (5) Some German exports hit by sanctions on Russia. (6) Russia has reserves to service its debt. (7) Venezuela is an accident waiting to happen. (8) Stressed-out high-yield bond funds and CLOs. (9) Fed to the rescue again? (10) Flash PMIs mostly muddling around 50.0. (11) Focus on market-weight-rated S&P 500 housing-related industries. (More for subscribers.)

Energy Depressing S&P 500 Revenues & Earnings (excerpt)

Falling oil prices along with the slow pace of global economic growth are weighing on analysts’ estimates for S&P 500 revenues and earnings. They’ve lowered their revenue growth rates for 2014 and 2015 to 3.4% and 3.0% as of the week of December 4. At the beginning of October, when the price of oil was just starting to crash, they were predicting 3.9% and 4.2%.

Their estimates for earnings growth were 7.9% and 12.4% for this year and next year at the start of October. Now they are estimating 7.0% and 9.3%. They’ve slashed their estimate for Q4-2014 by 6.5% since then down to $29.91, slightly below Q3’s $30.06. That’s the S&P 500’s biggest decline since Q1-2009. Most of these downward revisions are attributable to the slashing of revenues and earnings estimates by energy industry analysts.

Today's Morning Briefing: Slipping in the Oil Patch? (1) The global growth question. (2) A new financial crisis? (3) Financial jitters could delay dropping “considerable time.” (4) Is Yellen still the “Fairy Godmother of the Bull Market?” (5) CRB raw industrials spot price index still consistent with muddling global economy. (6) US still stands out. (7) Eurozone stagnating, especially in Italy and France. (8) Japanese live in small places. (9) Chinese bank loans producing less bang per yuan. (10) India and Brazil production numbers are weak. (11) Energy analysts depressing S&P 500 estimates for revenues and earnings. (More for subscribers.)

The Energy Bubble (excerpt)

With the benefit of hindsight, it now appears that the energy boom of the past few years might have been a bubble, not just in the US, but worldwide. Booms have a tendency to turn into bubbles when they attract too much equity and debt capital, which leads to excess capacity. When the bubbles inflate, so do the prices that attract all the capital. When the resulting excess capacity leads to falling prices, the bubble bursts as capital dries up. The key characteristic of tulip and other bubbles is expectations that tulip prices will continue to rise even as more tulips are produced.

During the second half of the 1800s, we had the railroad boom in the US. During the early 1900s, the booms were in autos and appliances. The Great Depression ended with the defense spending boom of World War II. During the 1950s and 1960s, the expansion of the highway system stimulated the growth of suburbs. The resulting housing boom ended in a big bust at the end of the previous decade. The IT revolution stimulated the US economy during the 1990s. The energy industry was energized by the technological revolution, resulting in the fracking boom.

Again, with the benefit of hindsight, it now seems that the fracking boom was a bubble financed by investors desperately seeking better returns available from high-yield bonds issued by energy companies and countries. The chart of US plus Canadian oil production looks a bit like the chart of asset-backed commercial paper outstanding prior to the financial crisis of 2008.

The high-yield bond market has been hard hit by the sudden risk aversion of investors, particularly those who bought energy-related bonds. Many have been seeking safety in lower-yielding US Treasuries. The Bank of America Merrill Lynch US high-yield corporate bond yield rose from the year’s low of 5.15% on June 24 to Friday’s 7.04%, the highest since July 27, 2012. The spread over 10-year Treasury yields widened over this period by 237bps from 257bps to 494bps.

Today's Morning Briefing: The Energy Bubble. (1) Worrying about the Middle East in the Midwest. (2) Too much of a good thing? (3) US consumers are happy shoppers. (4) Widespread shopping spree. (5) Consumers of last resort. (6) Definition of a bubble fits oil’s boom/bust. (7) High-yield market highly stressed. (8) Capital is drying up for drillers. (9) Submerging oil economies. (10) Fed in 2015: None and done? (11) Can US offset all the rest? (12) Iranian surrogates threatening Saudis. (13) Still bullish. (14) Focus on market-weight-rated S&P 500 Retailers. (More for subscribers.)

Zombies in China (excerpt)

In the 11/17 Morning Briefing titled “The Great Deflators,” I wrote about zombies: “In their effort to moderate the business cycle, central bankers have a tendency to keep zombies alive. These are the ‘walking dead’ business borrowers, who borrowed too much and are hemorrhaging cash. They need to die and should be buried. Instead, easy money keeps them in business, allowing them to continue producing more with their excess and unprofitable capacity. Today, China is full of zombies. There are plenty in the global mining industries.

“If you look hard enough, you’ll find zombies just about everywhere. It certainly would be easier to spot them if central banks started to tighten their monetary policies. That might explain why central banks aren’t likely to do so. Deflation may be the most telling sign of the zombie problem. By fighting deflation, the central banks are keeping the zombies alive!”

The latest Chinese data and policy response confirm my analysis. During November, the CPI rose just 1.4% y/y, the lowest since November 2009. The PPI fell 2.7% y/y, the 33rd consecutive monthly decline. PPI deflation continued to be widespread in November as follows: raw materials (-4.7%), manufacturing (-2.3), heavy industry (-3.0), light industry (-0.3), chemicals (-2.5), coal (-11.6), ferrous metals (-16.6), nonferrous metals (-2.8), durable goods (-0.7), and daily-use articles (0.1).

On November 21, the People's Bank of China (PBOC) cut its benchmark one-year loan interest rate to 5.6% from 6.0% and cut its benchmark one-year deposit rate to 2.75% from 3.00%. The nation's central bank also hiked the upper limit on deposit interest rates to 1.2 times the benchmark rate from 1.1 times the benchmark rate. The bank said it took the unexpected actions, which were the first such changes since July 2012, in response to expensive borrowing costs rather than any direct worries about the economy's slowdown.

Who are they kidding? Obviously, the PBOC is worried about slowing growth and persistent deflation. However, there they go again keeping zombies alive. They also triggered a mini-bubble in the stock market, as I discussed yesterday.

Today's Morning Briefing: China’s Zombies. (1) Many small winners and a few big losers. (2) Strong dollar partially offsetting lower oil prices overseas. (3) OPEC losing market share. (4) OPEC budgets getting squeezed. (5) Capital spending will get slashed in oil patch. (6) Energy analysts slashing estimates. (7) US oil stockpiles at seasonal high. (8) Saudis live in a dangerous neighborhood. (9) China’s zombies deflating PPI. (10) PBOC keeping zombies alive. (11) China’s latest purge is depressing economy. (12) OECD leading indicators continue to muddle along. (More for subscribers.)

Chinese Imports Suggest Much Weaker Economy (excerpt)

Late on Monday, China’s securities clearinghouse banned investors from using low-grade corporate bonds as collateral for short-term financing. The move is part of Beijing’s structural reforms aimed at shoring up the financial system.

The Shanghai Composite dropped 5.4% to 2,856.27, suggesting that the recent stock bubble may be bursting already. The retail-dominated market is still up 35% this year. The Chinese have a huge savings rate. They’ve cooled off to putting their money into properties and wealth-management products. Instead, they’ve been pouring funds into the stock market. Yesterday’s FT reported: “The balance of outstanding margin loans has risen more than two-thirds since the beginning of September, to Rmb575bn, by the end of last week. Banks were themselves among the worst fallers on Tuesday with the financial sector off 7.6 per cent while energy shares dropped 7.4 per cent.”

The 7/11 WSJ reported that “China's banking regulator imposed fresh requirements on banks to keep their wealth-management product business in check, in another step to tighten its grip on a once-loosely regulated part of the shadow-banking business.” Banks must separate their wealth-management product business from retail lending business by setting up separate accounting, statistical analysis, risk management and performance appraisal systems...” Banks had until the end of September to complete the setup of the independent wealth-management departments.

Wealth-management products have been popular because they offer higher yields than deposits. But they are obviously risky. The WSJ reported that over 400 banks had a total of 13.97 trillion yuan ($2.25 trillion) in outstanding wealth-management products at the end of May.

The more fundamental problem in China is that the economy may be slowing faster than widely recognized. Last Wednesday, I reviewed the country’s imports data through October. November data were released on Monday showing that imports remain flat this year, using the 12-month moving average. That’s mirrored in China’s imports from Australia, Brazil, Japan, Taiwan, and the US. Only imports from the European Union and South Korea remain on uptrends, though they started to look toppy in November.

Today's Morning Briefing: Downsides In 2015. (1) From the upbeat scenario to the downbeat risks. (2) The bull is still prone to mood swings. (3) “Considerable time” is running out of time. (4) Yellen’s 6-month horizon. (5) More upbeat labor market indicators. (6) Next Fed QE in corporate bonds? (7) Is China’s mini-bubble bursting already? (8) China’s imports showing no growth all year. (9) Draghi renews his vows to do whatever it takes. (10) Greeks breaking plates again. (11) Will there be blood in the oil patch? (12) Oil majors vs. frackers. (13) The Russian bear is wounded. (14) The jury is still out on Abenomics. (More for subscribers.)

Big Windfall for US Consumers (excerpt)

According to the WSJ yesterday, the IMF is raising its forecast for US growth next year to 3.5% from its last estimate of 3.1%, partly because of expected lower energy costs. The nearby futures prices for gasoline and heating oil are down 45% and 33% from their summer highs. Last year, consumers spent $371 billion on gasoline and $27 billion on heating oil. So they could save a total of about $175 billion, or $1,510 per household at an annual rate.

Payroll employment gains have averaged 227,830 per month during the 12 months through November, up from 205,100 per month last November, and the most since March 2006. Inflation-adjusted wages and salaries in personal income rose 2.9% y/y to a record high during October. As I showed yesterday, our Earned Income Proxy suggests that they continued to rise sharply during November.

Today's Morning Briefing: 2015 Is Coming. (1) Reassessing 2015. (2) Lower oil prices widely deemed to be a net positive for growth. (3) $1.5 trillion windfall. (4) Winners and losers by countries. (5) IMF raising US growth for 2015. (6) Better growth with lower inflation. (7) Bond yields and crude oil should stabilize, but the dollar could soar some more. (8) Fed’s “lift off” may be delayed or downsized. (9) Still targeting 2300 for S&P 500 in 2015. (10) Net earnings revisions down for Energy, up for Transportation. (11) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

US Employment: Old Normal (excerpt)

As I do every month, I cut to the chase when analyzing the employment report by calculating our Earned Income Proxy, which is highly correlated with both private-sector wages and salaries as well as retail sales. Our proxy is simply the average workweek times payrolls times average hourly earnings in the private sector. It jumped 1.0% m/m during November as the workweek rose 0.1 hours, payrolls jumped 314,000, and wages rose 0.4%.

Revisions have added 44,000 jobs to the preliminary estimates for September and October, now showing gains of 271,000 and 243,000, respectively. During the first 10 months of this year, nine of the months were revised higher.

Some cranky observers question November’s strength, noting that it might have been boosted more than usual by seasonal workers in retailing, transportation, and warehousing. Others question the seasonal adjustment factor. Then again, odds are that November’s number will be revised higher anyway.

What about wages? November’s 0.4% m/m increase was the best monthly gain since June 2013. However, it remained stuck around 2% on a y/y basis. So far, upward pressures seem to be building up only in construction (2.5%) and leisure & hospitality (3.6). Manufacturing (1.1) remains remarkably moderate. Retail trade (2.3) and wholesale trade (2.5) are in line with the average trend. Financial services (3.8) and transportation and warehousing (2.9) are relatively high, while natural resources (1.4) and educational & health services (1.6) are relatively low.

Today's Morning Briefing: Sheik Out. (1) Sheiks vs shale. (2) The world’s lowest-cost producer. (3) Offshore drillers tend to have highest costs. (4) Shale drillers are more nimble and tech savvy. (5) No bust for frackers. (6) Saudis facing Iranian surrogates in Yemen. (7) Saudis draw $60 line in the sand. (8) Frackers still pumping. (9) Weak oil price boosting dollar. (10) EM oil consumers are winners. (11) Back to the old normal in the labor market? (12) “The Theory of Everything” (+ +). (More for subscribers.)

US Valuation: No Bargains (excerpt)

Does low inflation justify higher valuation multiples? There are many valuation models for stocks. They mostly don’t work very well, or at least not consistently well. Over the years, I’ve come to conclude that valuation, like beauty, is in the eye of the beholder.

For many investors, stocks look increasingly attractive the lower that inflation and interest rates go. However, when they go too low, that suggests that the economy is weak, which wouldn’t be good for profits. Widespread deflation would almost certainly be bad for profits. It would also pose a risk to corporations with lots of debt, even if they could refinance it at lower interest rates. Let’s review some of the current valuation metrics, which we monitor in our Stock Market Valuation Metrics & Models:

(1) Reversion to the mean. On Tuesday, the forward P/E of the S&P 500 was 16.1. That’s above its historical average of 13.7 since 1978.

(2) Rule of 20. One rule of thumb is that the forward P/E of the S&P 500 should be close to 20 minus the y/y CPI inflation rate. On this basis, the rule’s P/E was 18.3 during October.

(3) Misery Index. There has been an inverse relationship between the S&P 500’s forward P/E and the Misery Index, which is just the sum of the inflation rate and the unemployment rate. The index fell to 7.4% during October. That’s the lowest reading since April 2008, and arguably justifies the market’s current lofty multiple.

(4) Market-cap ratios. The ratio of the S&P 500 market cap to revenues rose to 1.7 during Q3, the highest since Q1-2002. That’s identical to the reading for the ratio of the market cap of all US equities to nominal GDP.

Today's Morning Briefing: Inflating Inflation. (1) Dudley expects Fed to hit inflation target next year. (2) It all depends on resource utilization. (3) What if demand-side models are flawed? (4) Supply-side models explain persistence of deflationary pressures. (5) Inflationary expectations falling in TIPS market. (6) Bond market has gone global. (7) Valuation and beauty contests. (8) Rule of 20 says stocks still cheap. (9) Other valuation models find no bargains. (10) Cheaper stocks abroad, but for lots of good reasons. (11) US economy humming along. (More for subscribers.)

Crude Oil: Seasonal Adjustment (excerpt)

I’m an economist by training. I’ve seen pictures of oil rigs, but never seen one up close. As an economist, I have a tendency to use seasonally adjusted data to analyze the economy. For example, on my website I have a publication titled, “US Petroleum Weekly.” It shows data compiled by the US Department of Energy (DOE) for domestic production and usage, as well as exports and imports. I’ve been using the seasonally adjusted series rather than the unadjusted data compiled by DOE.

One of our accounts noted that the seasonally adjusted production numbers show a decline of 0.4mbd over the past 10 weeks through the week of November 21 to 9.0mbd, while the unadjusted data continued to rise by 0.3mbd to 9.1mbd. The former suggest that the plunge in oil prices may be depressing production already, while the latter suggest that’s not so. The unadjusted data for the key oil-producing states, especially Texas and North Dakota, show production still rising.

I will continue to monitor usage as well as exports and imports on a seasonally adjusted basis. However, I will focus on the unadjusted data for production to assess whether the drop in oil prices is depressing US oil field output. For now, my conclusion is that the US oil industry intends to play the Saudis’ game of chicken.

Today's Morning Briefing: China’s Soft Landing. (1) US oil production still going strong. (2) Saudis’ game of chicken. (3) Secular stagnation in Eurozone weighing on global economic growth. (4) Chinese imports suggest growth weaker than shown by GDP. (5) Emerging markets hard hit by China slowdown. (6) China still dependent on export-led growth. (7) Chinese crude oil demand and railway freight traffic also weak. (8) S&P 500 earnings and revenues remain on bullish trends. (9) Dudley's upbeat outlook. (10) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

Global Economy: Top-Down View (excerpt)

Could it be that the plunge in oil prices isn’t just attributable to a supply glut? Perhaps the global economy has turned much weaker since the summer than widely recognized. The Eurozone’s recovery since the summer of 2013 has been very weak. The sanctions imposed on Russia during the summer of this year seem to have hurt lots of businesses in the Eurozone. China’s anti-corruption drive has depressed demand for luxury properties and high-end consumer goods among the country’s elite. And now the plunge in oil prices will depress spending by oil-rich countries. Let’s have a look at some of the key global economic indicators before turning to a more detailed analysis on a country-by-country basis:

(1) Industrial commodity prices. So far, the plunge in the price of a barrel of Brent hasn’t been reflected in a comparable drop in the CRB raw industrials spot price index. This index has been range-bound since the start of 2012 between 495 and 550. It is currently at the bottom of that range with a reading of 505.

(2) Copper price. On the other hand, the price of copper, which is a component of the CRB raw industrials spot price index, fell sharply last week, posting the longest string of readings below $3.00 since the summer of 2010.

(3) Emerging markets. As I noted yesterday, the Emerging Markets MSCI stock price index continues to track the range-bound CRB raw industrials spot price index. It hasn’t plunged along with oil prices or in response to the stronger dollar, so far.

(4) Global M-PMI. Yesterday, Markit reported that global manufacturing production “expanded at the slowest pace for 15 months in November, as growth of new orders hit a 16-month low and the trend in international trade volumes stagnated.” Output rose for the 25th consecutive month, but the rate of expansion was the lowest since August 2013. The press release stated that some of the weakness was attributable to “stagnation in China.”

Today's Morning Briefing: Slippery Slope. (1) Too much supply, or weakening demand? (2) Negative and positive knock-on effects. (3) Clash of the Titans in the oil patch. (4) US frackers could be more resourceful than Saudis expect. (5) From peak oil to cheap oil. (6) Yergin’s upbeat story for lower oil prices. (7) Getting more cash to drill into the ground will be challenging. (8) Other global economic indicators suggest oil plunge is a supply issue rather than a demand one. (9) Survey of global economies is a mixed bag, with US standing out. (More for subscribers.)

Oil’s Winners & Losers (excerpt)

I calculate that world oil revenues peaked this year at an annualized rate of $3.8 trillion during June. I do so by multiplying monthly global oil demand (in millions of barrels per day) by 365 days and by the price of a barrel of Brent.

The 40% drop in the price of Brent since June reduces those revenues by a whopping $1.5 trillion at an annual rate. Those losses are staggering and are bound to depress global capital spending by the oil industry and reduce the availability of cash to finance fracking in the US. In other words, low oil prices will eventually be the cure for low oil prices.

I calculate that OPEC’s revenues peaked this year during June at an annual rate of $1.5 trillion based on the cartel's actual monthly output. Saudi Arabia’s revenues also hit this year’s high during June, at $391 billion. The 40% drop in the price of Brent reduces the revenues of OPEC and Saudi Arabia by $590 billion and $160 billion, respectively, at an annual rate.

For oil users, falling oil prices are a huge windfall, which is equal to the drop in global oil revenues. In the US, I calculate that the current annualized windfall--since June and based on the 40% drop in oil prices--amounts to $291 billion. In Western Europe, it amounts to $221 billion, or €163 billion. In Asia and Latin America, I calculate windfalls of $484 billion and $107 billion, respectively.

Today's Morning Briefing: Cheap Oil. (1) OPEC agrees to do nothing. (2) 40% discount just in time for the holidays. (3) Winners and losers. (4) Big wipeout for producers equals big windfall for consumers. (5) US drivers could save more than $200 billion. (6) Dow Theory suggests melt-up in Transports could spread to broad market. (7) Big windfall for many EMs. (8) Oil price plunge adding to deflation and prolonging NZIRPs. (9) Bonanza for bond investors. (10) The latest round of central bank puts. (11) Performance since October 15. (12) The Hunger Games: Mockingjay, Part 1 (- - -). (More for subscribers.)

Thanksgiving (excerpt)

This is the time of the year when we count our blessings. We certainly are thankful for your interest in our research service. We will be taking the rest of the week off to celebrate Thanksgiving with our families and friends, and enjoy a great meal on Thursday. It’s a bad day for turkeys. On the other hand, it’s been another great year for bulls, as it has been in the stock market since March 6, 2009. Thankfully, we’ve been bullish since the start of the bull market. Here are a few highlights of some of our best calls:

2008. On November 12, I met with my congressional representative, Gary Ackerman, in his district office in Queens, about 15 minutes from my home. He and his legislative assistant agreed to hear me out on why more needed to be done in Washington to bring mortgage rates down and why mark-to-market (MTM) accounting rules should be suspended. He was a senior member of the House Committee on Financial Services, which was chaired by Barney Frank.

In the 11/20 Morning Briefing, I predicted that the Fed would soon purchase 10-year Treasury bonds to lower their yield, thus bringing down mortgage rates and reviving housing activity and prices. On November 25, the Fed announced QE1, aiming to purchase $600 billion in mortgage-backed securities (MBS) and Agencies.

2009. On March 16, I wrote: “We’ve been to Hades and back. The S&P 500 bottomed last week on March 6 at an intraday low of 666. This is a number commonly associated with the Devil. … The latest relief rally was sparked by lots of good news for a refreshing change, which I believe may have some staying power … I’m rooting for more good news, and hoping that 666 was THE low.” The same day, QE1 was expanded to $1.25 trillion in mortgage-related securities and $300 billion in Treasury bonds. (See QE Chronology.)

On March 12, Frank’s committee held a hearing on MTM. Congressman Ackerman reminded the chairman of the Financial Accounting Standards Board (FASB) that Congress was considering a bill to broaden oversight of his organization. He told him to suspend MTM in three weeks. On April 2, FASB did just that. I predicted this “would certainly be another positive for Financials, in general, and Banks, in particular.” (See “Congress Helped Banks Defang Key Rule,” WSJ 6/3/2009.)

On July 27, I wrote, “I prefer melt-ups to meltdowns. The S&P 500 has been on a tear ever since it bottomed at the intraday low of 666 on Friday, March 6. We should have known immediately that this devilish number was the bear market low. It took me a few days to conclude that it probably was the low. … I felt like Tom Hanks in the ‘Da Vinci Code.’”

I also noted that the bears were attributing the rebound in earnings to cost cutting rather than improving revenues. I countered that “the stock market discounts the future, and it is predicting that better-than-expected earnings now will be followed by a recovery in revenues, and more positive earnings surprises.”

2010. On February 10, I wrote, “Is the EMU doomed? Euro skeptics have long predicted that monetary unification without fiscal unification won’t work. They’ve been wrong since the euro was first introduced on January 1, 1999. However, the current crisis is the first real stress test of the viability of the euro. Although the European charter includes a no-bailout clause, there is bound to be an attempt by the EMU to prop up Greece. … My prediction is that this latest challenge will pass.”

2011. On August 31, I observed, “Basically, all those fully invested bears I’ve been writing about over the past two years are thinking of bailing out because they believe that the ‘endgame’ is near. They may be right. However, I’m inclined to believe that this game may have no end. In other words, what we see is what we will get for some time to come, i.e., subpar growth in the US, Europe, and Japan with better growth everywhere else. Muddling along like this really is not a bad scenario given the two obvious alternatives. It’s certainly better than a global recession. It also beats a global boom.”

2012. At the start of the year, I predicted, “If we survive the dangers confronting us this year as well as we did those of last year, then 2013 may be much safer for investors. If so, then financial markets, especially global stock markets, may start to discount this bullish scenario in 2012.”

On October 12, I first discussed the impact of stock buybacks: “The Fed’s exceptionally easy monetary policy is boosting stock prices by enabling debt-financed stock buybacks. Individual investors have been hot on bonds and cold on stocks. But by snapping up investment-grade and high-yield corporate bonds at record rates, they’ve fueled the stock market rally through corporate buybacks. The Fed’s QE and NZIRP have compelled individual investors to buy bonds at record low rates, while compelling CFOs to issue lots of bonds and use lots of the proceeds to repurchase their shares.”

At the end of 2012, I wrote, “Global equity markets seem to agree with my assessment that having survived the third year of living dangerously [since 2010], we can do it again for a fourth year. Europe and China seem to pose less danger for investors in the coming year. The US economy is actually in remarkably good shape, as long as the fiscal cliff is averted, as I continue to expect.”

2013. At the beginning of the year on January 24, I first suggested that if we all just keep calm and carry on, "then maybe the cyclical bull market will morph into a secular bull market.” On May 16, I observed, “In other words, we have nothing to fear other than an absence of fear. … Perhaps now that investors are no longer fearful that the end is near, all the liquidity pumped into the financial markets by the major central banks over the past four years to avert the Endgame scenario is about to cause the Mother of All Melt-Ups (MAMU).”

I opined on March 6 that “Fed Vice Chair Janet Yellen has become the fairy godmother of the bull market. When she speaks, stock prices tend to rise, especially since late 2011. ... Odds are she will be the next Fed Chair …”

On September 9, the S&P 500 rose back above my yearend 2013 target of 1665, which had been my forecast since the start of that year. The next day, rather than tweak it, I moved ahead to predict that the S&P 500 would rise to 2014 by the end of 2014.

2014. On February 6, I wrote, “Early last year, in my conversations with several of our accounts, I detected that many of them had what I described as ‘anxiety fatigue.’ They were tired of being anxious about the bull market. … Well, many of them are anxious again. They are jittery that something bad is coming. More specifically, they are concerned that the tapering of QE by the Fed has triggered an emerging markets crisis. It could happen again, I suppose, though I doubt it.”

On August 20, I noted, “It can get boring staying home for a long stretch. It can also be profitable. Joe and I have favored a ‘Stay Home’ investment strategy over a ‘Go Global’ one during the current bull market. That’s worked out quite well. On one occasion, we did get bored with it. We recommended overweighting Eurozone stocks during the second half of last year.”

On October 13, I once again concluded that the latest selloff was yet another panic attack that would be followed by a relief rally: “The current dip could turn into a correction. If so, it could also be a great seasonal buying opportunity. The question is whether it is actually the beginning of a bear market. I don’t think so because I don’t expect a recession in the US anytime soon.”

The S&P 500 exceeded my yearend forecast on October 31. Actually, on August 27, it was close enough that I wrote, “Once again, the bull is running ahead of schedule. Once again, I’m moving on with a forecast for next year. How about 2015 by 2015? Just kidding. … Joe and I remain secular bulls and pick 2300, a 15% increase from yesterday’s close.”

The World Is Awash In Oil (excerpt)

Consumers should be thankful for the plunge in oil prices since the summer. The price of a barrel of Brent crude oil peaked this year at $115.15 on June 19. It is down 31% to $79.43 since then. The futures price of a gallon of gasoline is down 34% over this same period. This decline saves consumers about $150 billion at an annual rate at the pump--just in time for the holiday shopping season. There could be even more windfalls at the pump ahead for consumers.

Most of the oil price decline occurred after Saudi Aramco started a price war on October 1 for all its exports, reducing those bound for Asia to the lowest level since 2008. Bloomberg reported: “The move suggests that the biggest member of the Organization of Petroleum Exporting Countries is prepared to let prices fall rather than cede market share by paring output to clear a supply surplus ...

“Saudi Arabia has acted in the past to stop a plunge in prices. It made the biggest contribution to OPEC’s production cuts of almost 5 million barrels a day in 2008 and 2009 as demand contracted amid the financial crisis. The kingdom would need to reduce output about 500,000 barrels a day to eliminate the supply glut now stemming from the highest U.S. output in three decades ...”

Iran's semi-official news agency Mehr reported on Sunday that ministers from Iran will seek an output cut from Saudi Arabia at Thursday’s meeting of OPEC. Yesterday, Reuters reported, “Oil prices could plunge to $60 a barrel if OPEC does not agree on a significant output cut when it meets in Vienna this week, market players say.” OPEC probably needs to slash production by at least 1.0mbd to stabilize prices. That’s not likely to happen. Let’s review October’s Oil Market Intelligence (OMI) data on global crude oil supply and demand:

(1) Supply. World crude oil production soared to a record 93.0mbd during October. That’s up 3.3mbd in just the past five months! Over this period, non-OPEC output is up 2.0mbd, while OPEC output is up 1.3mbd. Furthermore, over this five-month period, the combined oil production of the US and Canada rose 0.9mbd to a record 12.7mbd, well exceeding that of both Saudi Arabia (9.6mbd) and Russia (10.6mbd).

(2) Demand. World crude oil demand rose to a record 92.8mbd during October. However, the growth rate slowed to 0.8% y/y, the slowest since May 2012. That slowdown is attributable to the advanced economies of the 34 members of the OECD. Their oil demand growth rate has been slightly negative for the past six months.

Today's Morning Briefing: Thanksgiving. (1) Counting our blessings. (2) The Ackerman bull market. (3) From 666 to 2063. (4) Da Vinci Code. (5) EMU hasn’t disintegrated so far. (6) Fully invested bears and the Endgame. (7) Muddling along beats the alternatives. (8) The importance of stock buybacks. (9) No double-dips or fiscal cliffs for the US. (10) Secular bull vs. melt-up. (11) OPEC’s holiday gift to consumers. (12) Global oil supply soars as demand growth weakens. (13) Focus on market-weight-rated S&P 500 Energy. (More for subscribers.)

Is a Strong Dollar Bullish or Bearish for US Stocks? (excerpt)

Of course, a major concern among investors is that slower global economic growth outside the US and a stronger dollar will weigh on S&P 500 earnings per share. That’s why I lowered my forecasts last week to $125 in 2015 and $135 in 2016, down from $130 and $140 previously. On the other hand, it is interesting to note that US stocks tend to outperform stocks in the rest of the world when the dollar is strong. That’s because this generally happens when the US economy is outperforming the overseas economy. On a ytd basis, the US continues to outpace the other major MSCI stock prices indexes (in dollars): US (11.4%), All Country (4.1), Emerging Markets (0.2), Japan (-3.9), UK (-5.6), and EMU (-7.3).

Today's Morning Briefing: London Days. (1) Tour of London. (2) Taxi vs. limo drivers. (3) “The Knowledge.” (4) Attack of the socialized students. (5) Worrying about both high P/Es and a melt-up in the US. (6) The new consensus on bonds. (7) Secular stagnation overseas, and no global recession in sight. (8) PMIs flashing global slowdown. (9) Waiting for wage inflation and Fed normalization. (10) Putin needs higher oil prices. (11) Is a strong dollar bearish or bullish for US stocks? (More for subscribers.)

Wage Inflation Remains Abnormally Low (excerpt)

Wage inflation remains abnormally low although the labor market has clearly tightened. The short-term unemployment rate fell to 3.9% during October, the lowest reading since November 2007. Back then, wage inflation was 3.3%. Today, it is only 2.0%. Fed Chair Janet Yellen has said that she believes that wage inflation is too low. She would prefer to see it rise to 3%-4% before starting to normalize the federal funds rate.

I monitor wages in various key industries and am hard-pressed to see any signs of mounting inflationary pressures. During October, here were the y/y increases for the ones we monitor from highest to lowest: leisure & hospitality (3.6%), information services (3.3), mining & logging (2.9), construction (2.6), professional & business services (2.4), retail trade (2.3), financial activities (2.0), manufacturing (1.9), utilities (1.7), transportation & warehousing (1.2), education & health services (1.1), and wholesale trade (1.1).

Today's Morning Briefing: The New Abnormal. (1) Tower of London. (2) From London to Zurich. (3) Is the normal business cycle dead? (4) Volcker was never in the put business. (5) Greenspan and Bernanke Puts. (6) The consequences of minimizing pain. (7) Abnormalities in this cycle. (8) Waiting for Godot and wage inflation. (9) New forces keeping a lid on price inflation. (10) Secular stagnation over there depressing bond yields over here. (11) Producers misjudged Chinese demand. (12) Profit margins still aren’t reverting. (13) Tour of London. (More for subscribers.)

Russia’s Catastrophe (excerpt)

Last Friday, Bloomberg reported that “President Vladimir Putin said Russia's economy, battered by sanctions and a collapsing currency, faces a potential ‘catastrophic’ slump in oil prices.” Nevertheless, he claimed that Russia’s reserves, at more than $400 billion, would allow the country to weather such a turn of events. Russia is the world’s largest energy exporter. So Putin’s assurances that Russia can absorb the oil shock are hard to believe.

Russia’s non-gold international reserves have dropped from $457 billion at the start of this year to $383 during October. The ruble has plunged 30% since the start of the year. To stem the drop in reserves, Russia’s central bank on November 10 allowed the ruble to float freely in the market. I wouldn’t rule out a debt default crisis if the price of oil continues to fall. In that event, Russia might have to spend more of its reserves to stop the crisis. In other words, catastrophic outcomes are still possible for Russia.

Today's Morning Briefing: Oil Bubble Bursting. (1) Bullish or bearish for global economy and equities? (2) Drilling deeper. (3) Zero-sum game? (4) Russia’s catastrophe. (5) No props from next OPEC meeting. (6) The Saudis’ game plan. (7) Wolf on Wall Street says it was all a big bubble. (8) Drilling money into the ground. (9) Transports on speed. (10) Subsidize frackers! (11) Cutting earnings estimates for next two years. (More for subscribers.)

Bubble in the Oil Patch (excerpt)

When the price of a barrel of Brent crude oil peaked at a record $145.40 on July 3, 2008, there was lots of talk about “peak oil.” Industry experts were speculating about whether the price might continue to rise to $200 or even higher. Global oil demand was growing faster than global oil supply. It was widely believed that global oil reserves were likely to dwindle because all the cheap stuff had been found. The remaining reserves would require higher prices to develop. Now that the price has plunged from this year’s high of $115.15 on June 19 to Thursday’s $76.13, the focus is on how low can it go, what I called “trough oil” in late October.

In a matter of a few months, the world suddenly recognized that the world is awash in oil. That’s largely because of the extraordinary surge in US oil field production, which soared 3.6mbd over the past two years to a high of 9.4mbd during the week of September 12. Easy money in the US sent lots of investors searching for better returns in the oil patch. They fueled the oil boom. In many ways, it was a bubble that may be starting to burst. Over the past eight weeks through the first week of November, US output has dropped by 0.4mbd to 9.0mbd. As they say in the commodity pits: “The best cure for falling commodity prices is falling commodity prices.”

Today's Morning Briefing: The Great Deflators. (1) The New Abnormal. (2) Nostalgia about normalizing monetary policy. (3) Monetary policy affects both demand and supply. (4) Awash in liquidity and oil. (5) Easy money fueled the oil bubble. (6) Secular stagnation specter haunting Europe. (7) China remains on soft-landing course. (8) Specter of deflation in Asia. (9) Durable goods prices are falling everywhere. (10) How the Great Moderators became the Great Deflators. (11) Central bankers keeping zombies alive. (12) Governments are the biggest zombies of all. (13) Meet the Selfies. (14) “Whiplash” (+ + +). (More for subscribers.)

Small Business Owners Confirm Improving Jobs Market (excerpt)

October’s NFIB survey of small business owners continued to show an improving trend in almost all categories. The data can be volatile on a monthly basis, so I track various monthly averages. October’s Small Business Optimism Index (on a 12-month basis) rose to 94.6, the best reading since April 2008. The percentage of respondents reporting “poor sales” (on a six-month basis) fell to 12.8% last month, down sharply from the cyclical peak of 33.2% during March 2010. (By the way, this series is highly correlated with the unemployment rate.)

The survey corroborates lots of other positive labor market indicators. On a 12-month basis, the percentage of firms with one or more job openings rose to 23.4%, the highest since February 2008. The percentage expecting to increase employment rose to 9.4%, the best reading since May 2008. Capital spending plans aren’t as strong, though more owners say it is a good time to expand.

Today's Morning Briefing: Still Decoupling. (1) Standing out. (2) The benefit of slower global growth. (3) US small business survey showing lots of cyclical highs. (4) Citigroup Economic Surprise Index positive in US. Not so much in G9. (5) JP Morgan global composite index confirming global growth. (6) OECD Leading Indicators especially weak in Japan and Germany. (7) Maersk sees shipping slowdown. (8) Lower fuel costs should benefit EMs. (More for subscribers.)

Strong Dollar Is Depressing Commodity Prices (excerpt)

There are strong correlations between the inverse of the trade-weighted dollar and the following: industrial commodity prices, the Brent crude oil price, and the Emerging Markets MSCI stock price index. The strength of the dollar has been especially bearish for the price of oil, though causality also runs the other way.

While the CRB raw industrials spot price index dropped during September and October, it seems to be finding support at the bottom of its trading range, which starts in mid-2012. A sharp drop below the bottom of this range would be a worrisome indication of a rapid global economic slowdown. Also mildly encouraging is that the EM MSCI seems to have stopped falling in recent days despite the latest surge in the dollar, which was mostly attributable to the drop in the yen when the BOJ expanded and extended QQE at the end of last month.

Today's Morning Briefing: Competitive Devaluation. (1) US MSCI continues to outperform. (2) Dollar soaring as ECB and BOJ boost their balance sheets after Fed terminated QE. (3) Devaluation is often a zero-sum game. (4) Desperate measure for desperate countries. (5) Currency wishes come true for Draghi and Kuroda, but not for economy and inflation. (6) Interesting correlations between US dollar, commodity prices, and EM MSCI. (7) China is first to report trade stats, and they were good last month. (More for subscribers.)

Why Is Gold Losing Its Luster? (excerpt)

Gold is a hedge against inflationary monetary policy. So why isn’t it soaring anymore? Maybe it isn’t doing so because the ultra-easy monetary policies of the major central banks haven’t boosted inflation. Instead, they’ve become increasingly concerned about the prospects of deflation, especially at the ECB and BOJ. At the Fed, the worry must be that the ECB and BOJ are exporting their deflation to the US by pursuing policies that are weakening their currencies. A strong dollar hasn’t historically been good for gold.

I’ve previously explained why ultra-easy monetary policy might be deflationary rather than inflationary. In brief, it might stimulate supply more than demand. In the past, easy money stimulated demand more than supply as borrowers borrowed lots of money and spent it all. Now their debt burdens are such that many may be maxed out. Meanwhile, suppliers have taken advantage of easy money to expand their capacity, assuming that “if you build, they will come.” That’s been a bad assumption for a lot of producers, especially of commodities.

Gold also tends to reflect the underlying trend in commodity prices, including the price of crude oil. Their trends have been mostly flat since 2011, and down more recently.

Today's Morning Briefing: More Relief. (1) Recalling the causes of October’s panic attack. (2) Where are we now? (3) Cocoa price as an Ebola thermometer. (4) Reversal of futures: Distant crude oil prices exceeding nearby ones. (5) QE termination anxiety in US dissipated by more of it from ECB and BOJ. (6) Eurozone economy crawling along. (7) Chinese curse: Prolonged soft landing. (8) Falling oil prices depress Energy earnings, but boost Transportation earnings. (9) US consumers have the will and means to spend. (10) Crude oil plunge yields winners and losers. (11) Evil doers in Russia and Iran among the losers. (More for subscribers.)

Political & Other Cycles Driving S&P 500, Maybe (excerpt)

Last week, I observed that the one-year periods following mid-term congressional elections and third years of presidential terms have been consistently very bullish for stocks. A few of our accounts reminded me that years ending in “5” have also been consistently very positive ones for stocks. Let’s review these cycles:

(1) Mid-term elections. Last Monday, I noted that our analysis of mid-term elections found that since 1942, the S&P 500 rose on average by 8.5% for the subsequent three-month periods, 15.0% for six months, and 15.6% for 12 months. There was only one out of the 45 periods that was down, and just for three months! One has to go back to Depression-era market losses to find two periods when this indicator did not give consistently positive results.

(2) Presidential third terms. I extended last week’s analysis of the presidential cycle from 1951 back to 1928 using daily data for the S&P 500. The average gain for the third years of presidential terms was 13.4%, well ahead of the averages for the first (5.2%), second (4.5), and fourth years (5.5). Of the 21 third years, only two of them were down during the Great Depression. The 22 first years and 21 second years each included 10 downers. The 21 fourth years included six negative ones.

(3) Years ending in “5.” There have been eight years ending in “5” since the start of our daily S&P 500 data. They all have been up with an average gain of 25.3% ranging from 3.0%-41.4%. By the way, the two-year gain for years ending in “5” and “6” averaged 37.6%, with seven of the eight periods having double-digit gains and only one period down by 5.2%.

Today's Morning Briefing: Gridlock & Goldilocks. (1) Three bullish cycles: Mid-term elections, third years of presidential terms, and years ending in “5.” (2) An anti-progressive, pro-business vote. (3) Review of Republican sweep. (4) Second “shellacking.” (5) Gridlock is bullish. Shutdowns are not. (6) Madison’s biggest fan. (7) McConnell’s impressive deal-making resume. (8) Employment report pushes the Fed to tighten sooner, but doves likely to focus on subdued wages. (9) Price inflation may be keeping lid on wage inflation. (10) “Stay Home” still the way to go. (11) “Interstellar” (-). (More for subscribers.)

Is Sentiment Too Bullish? (excerpt)

In the past, when sentiment, as measured by the Bull/Bear Ratio compiled by Investors Intelligence, was too bullish, the market often took a fall. Contrarians tended to turn bearish when the ratio rose to 3.00 or higher, and bullish when it was down to 1.00 or lower. Previously, I’ve demonstrated that the ratio works better as a contrary buy signal than as a sell signal.

In the current manic environment, I doubt that it will be a very useful sell signal. That was demonstrated by the latest correction, in my opinion. The Bull/Bear Ratio whipsawed from a recent high of 4.22 during the week of September 2 down to a low of 1.94 during the week of October 21. It rebounded to 3.62 this week. Most of the swings down and up were attributable to bulls jumping into the correction camp and then back into the bullish one. Remarkably, bearish sentiment has averaged just 15.4% since the start of September, the lowest since 1987, and below readings during the financial crisis of 2008-2009.

Today's Morning Briefing: Mood Swings. (1) Manic-depressive disorder. (2) Computers vs. humans. (3) Algorithms reading the headlines. (4) Bull/Bear Ratio’s latest bungee jump. (5) The bears have left the building. (6) The fourth phase of the bull market. (7) Don’t fight the central banks. (8) Don’t fight the political cycle. (9) Congressional mid-term elections and third years of presidential terms tend to be very bullish. (10) SMidCaps are rising and outperforming again for a couple of good reasons. (More for subscribers.)