Thursday, February 27, 2014

Global Earnings Revisions Remain Mostly Negative (excerpt)

I calculate monthly Net Earnings Revisions Indexes (NERIs) for all of the S&P 500 sectors and industries and most of the MSCI global stock indexes. These NERIs are three-month moving averages of the number of forward earnings estimates that are up less the number of them that are down as a percentage of the total number of forward earnings estimates. Looking at these NERIs around the world, we can see lots of downward revisions through February. I believe they are consistent with subpar global economic growth.

Keep in mind that analysts tend to be too optimistic, so their estimates tend to be revised downwards. Nevertheless, NERIs tend to be positive when an economy is growing fast, especially during economic recoveries. They can be negative when economic growth is steady and middling. They always go negative during recessions since industry analysts aren’t any better than economists at foreseeing economic downturns. Let’s review:

(1) World NERI was -5.9 during February, the lowest since December 2012. It has been negative for the past 32 months.

(2) S&P 500 NERI also turned more negative in February, to -6.6, the lowest since January 2013. Guidance provided during the Q4-2013 earnings season caused analysts to reduce their estimates for the first quarter and all of 2014.

(3) Europe NERI fell to -11.0 this month, the lowest since December 2011. It’s rather odd that this index is so weak given the solid improvements in the region's M-PMIs and NM-PMIs.

(4) Emerging Markets NERI declined from -3.0 last month to -5.3 this month. It has been negative since March 2011.

Today's Morning Briefing: The Future Is Coming. (1) Forecast often, or far into the future. (2) Another dismal economist. (3) Professor Gordon responds to his critics. (4) Friedman is charged up about “Start-Up America.” (5) Change coming fast and furious. (6) Opportunities for investors. (7) If Abenomics fails, Japan’s future will be bleak. (8) Lots of negative NERIs around the world. (More for subscribers.)

Wednesday, February 26, 2014

Consumers Seeing More Jobs (excerpt)

The present situation component of the Consumer Confidence Index (CCI) rose to a new cyclical high this month, exceeding the expectations component for the first time during the current economic expansion. Buoying consumers’ optimism about the here-and-now is their assessment that the labor market is improving. In some ways, the CCI survey may provide a clearer picture of this market than the cacophony of data provided each month by the Bureau of Labor Statistics in its employment report. The picture continues to get brighter:

(1) Jobs are more plentiful. I am especially fond of the survey’s series tracking the responses to questions about whether jobs are plentiful or hard to get. The former jumped to 13.9% this month from 12.5% in January. That may not seem like much, but it is the best reading since June 2008. The percentage of respondents agreeing that jobs are hard to get fell to 32.5%, the lowest since September 2008.

(2) More jobs are boosting confidence. I found that the CCI’s present situation component is highly correlated with the difference between the jobs-plentiful and the jobs-hard-to-get series. In other words, jobs drive consumers’ confidence about their current well-being.

(3) Survey response is confirming falling jobless rate. There is even a better correlation between the official unemployment rate and the jobs-hard-to-get series. We all know that the unemployment rate has dropped during the current economic expansion, mostly because of a sharp decline in the labor force participation rate. If people are dropping out because they are discouraged by the lack of jobs, then the jobs-hard-to-get series should not be falling in lock-step with the unemployment rate. But it is suggesting that labor market conditions really are improving and that other factors are behind the falling participation rate.

Today's Morning Briefing: Consumers & Their Confidence. (1) Weathering the weather. (2) Confidence about “now” is at cyclical high. (3) Jobs are more plentiful and less hard to get. (4) Jobless rate may be doing its job well. (5) In the spring there will be growth, and more retail sales. (6) No clear theme in performance of S&P 500 sectors ytd. (7) A year for stock pickers. (8) Pick stocks in sectors with rising earnings expectations. (9) Health Care and Industrials are standouts. (More for subscribers.)

Tuesday, February 25, 2014

Jury Is Out on Abenomics (excerpt)

So far, Abenomics has succeeded in stopping deflation and actually boosting price inflation. However, the jury is still out on whether it is ending Japan’s economic stagnation. It still could backfire if wages aren’t raised by at least as much as the increase in consumer prices. What we know so far is that December’s CPI inflation rate was 1.6% y/y, the highest since October 2008. The core rate (excluding food and energy), which had been negative from January 2009 through August 2013, was up but by only 0.7% during December.

Unfortunately, much of the “improvement” in the headline rate has been in food and fuel prices as a weaker yen increased the domestic prices of imported commodities. Japan’s trade deficit widened dramatically last year through January as overall import costs soared, while exports weren’t boosted by the weaker yen as much as expected.

Even after adjusting for inflation, Japan’s imports increased during each of last year’s four quarters, while exports actually turned weaker during the second half of the year. That weakness contributed to the fourth quarter’s disappointing 1.0% (saar) gain in real GDP.

Much will depend on the spring wage negotiations, a tradition since the 1950s, during which big manufacturers set wage trends for the rest of corporate Japan. The 2/19 WSJ reported that employers may be willing to hike wages and bonuses to stimulate the economy, as requested by the government. I don’t expect that the gains will do much more than offset price increases over the past year.

Today's Morning Briefing: Stagnation? (1) The man who coined “stagflation.” (2) Plenty of “stag-disinflation.” (3) IMF sees better growth with lower inflation. (4) Professors Summers and Gordon share a bleak view. (5) Draghi on deflation alert. (6) Eurozone’s recovery is anemic. (7) Survey data showing better upturn than hard data. (8) Abenomics has boosted prices, but jury is out on wages and real economy. (9) Stagflation emerging in some EMs. (10) Are revenues, margins, and earnings starting to stagnate too? (11) Staying realistically optimistic. (More for subscribers.)

Monday, February 24, 2014

Emerging Markets Are Cheap For a Reason (excerpt)

So are emerging markets likely to underperform or outperform this year? Consider the following:

(1) Growing. Markit released January’s HSBC Emerging Markets Composite PMI on February 10. Despite all the unsettling headline news about EMs, the index remained above 50.0 at 51.4, down slightly from December’s 51.6 and the sixth consecutive reading above 50.0. The press release noted that manufacturing remained stronger than services.

(2) Lagging. The Emerging Markets MSCI (in dollars) has been underperforming the All Country World MSCI since their October 2011 lows. Since then, the former is up only 15.4%, while the latter is up 54.4%.

(3) Cheapening. The underperformance of the EM MSCI since the summer of 2011 is largely attributable to its forward P/E, which has been moving sideways around 10.0. Over the same period, the World P/E is up more than 30% (to 13.9), led by a 50% increase in the US (to 15.3).

(4) Flat-lining. The EM MSCI stock price index also has been moving sideways with some volatility since the summer of 2011, along with both the CRB raw industrials spot price index and the price of a barrel of Brent crude oil. The close relationship between these three variables suggests that the EM MSCI is likely to continue underperforming as long as commodity prices remain flat. That’s the most likely outlook this year if global economic growth remains subdued, as I expect.

Today's Morning Briefing: Flash Correction. (1) The rules of the game. (2) Mark to Markit. (3) Flashy and not-so-flashy M-PMIs of the month. (4) Accentuating the positives again. (5) Blaming the moon and the weather. (6) Regional surveys remained frozen. (7) Quick roundtrip for P/Es. (8) Melt-up is still on the table. (9) Discount traders are back in size. (10) A shortage of stock. (11) EMs are cheap, but may continue to underperform as they have since mid-2011. (12) “The Monuments Men” (- - -). (More for subscribers.)

Thursday, February 20, 2014

Global Oil Demand (excerpt)

The latest data, compiled by Oil Market Intelligence, show that the global supply of crude oil jumped to another record high during January. Global demand did the same, but its growth rate is slowing, led by weakness among emerging economies. Let’s review, using 12-month moving averages to smooth out the monthly volatility in the stats:

(1) Global oil demand rose to a record 91.2mbd last month. However, the growth rate fell to 1.0% y/y, the slowest since September 2012.

(2) Emerging economies must be slowing, as evidenced by the drop in the growth rate in their demand for oil from a recent peak of 3.5% a year ago to 1.5% this January, the slowest since October 2009.

(3) Advanced economies have been reducing their oil demand since 2005. However, their demand has stabilized over the past year, with a very modest pickup in demand among the “Old World” economies (US, Western Europe, and Japan) offsetting some of the weakness in oil demand in the “New World.”

(4) US oil usage has been rising over the past year after mostly falling since the spring of 2007. In Europe, it has stopped falling over the past year after mostly falling since 2006. Interestingly, within Europe, it is still falling in Italy and Spain, while it is edging higher in Germany and the UK.

(5) China’s oil demand has stalled at a record high around 10mbd over the past seven months. Oil usage rates in Brazil and India continue to rise to new highs, though the pace of ascent may be slowing.

Today's Morning Briefing: Running Out of Gas? (1) Deep freeze freezes economy. (2) An icy soft patch. (3) Weather may not be the only reason for economic weakness. (4) Real GDP outlook: Slow H1, faster H2. (5) Slowing global oil demand suggests slower global economic growth, depressing revenues growth. (6) Oil demand slowing mostly among EMs, especially China. (7) Oil demand rising in US. No longer falling in Europe. (8) After ice melts, there will still be plenty of potholes. (9) How do positive revenues surprises square with near-zero growth? (10) Focus on underweight-rated S&P 500 Energy. (More for subscribers.)

Wednesday, February 19, 2014

When Credit Turns to Lead from Gold (excerpt)

The Chinese are scrambling to avert a credit crunch as they clamp down on the shadow banks by flooding the financial system with liquidity. How do you say “whatever” in Chinese? Let’s review the latest credit aggregates:

(1) Social financing. During January, China’s broadest measure of lending, a.k.a. “total social financing,” rose 2.58 trillion yuan, slightly exceeding the previous record high a year ago. In recent years, there has been a tendency for lending to surge in January just before the start of the Lunar New Year holiday. Nevertheless, over the past 12 months, social financing has increased by a near-record $2.80 trillion.

(2) Bank loans. January’s surge in social financing was led by a 1.32 trillion yuan ($216 billion) jump in bank loans. This is the largest one-month increase since January 2010. Over the past 12 months, banks loans are up $1.5 trillion, the most since October 2009, when the Chinese were still scrambling to recover from the global financial meltdown.

My assessment is that China’s real GDP will continue to grow around 7.5% with no immediate threat of a hard landing. Deflationary forces will be offset by the provision of lots of credit. However, China may have reached the tipping point where more credit is losing its effectiveness in halting deflation and stimulating growth. This is a long-term problem that many other countries are facing today. For any economy, credit is gold until it turns into lead.

Today's Morning Briefing: Credit Is Gold. (1) China’s great liquidity flood. (2) Bailouts for “Credit Equals Gold” and “Opulent Blessing.” (3) Orwellian economics: More credit to slow risky credit. (4) Social financing at $2.8 trillion over last 12 months. (5) Tipping point: When gold turns to lead. (6) PPI details show widespread deflation. (7) Technology and productivity boosting margins? (8) Not good for jobs and social stability. (9) Good news in China MSCI revenues and earnings. (10) Focus on overweight-rated S&P 500 IT. (More for subscribers.)

Tuesday, February 18, 2014

China Gets Lots of Credit (excerpt)

On our website, we have 14 “Country Briefing” publications that are automatically updated to track the key economic and financial variables in each of the countries. There’s one on China, which includes 60 charts. The last chart shows Chinese bank loans outstanding, valued in dollars, divided by US bank loans outstanding. Perhaps we should make this chart the first one in the publication because it may turn out to be the one that matters most for China’s economic future. Consider the following:

(1) Bank loans. When China joined the World Trade Organization during December 2001, the country’s banks had $1.4 trillion in loans outstanding, which was equivalent to 35% of US commercial bank loans. At the start of this year, Chinese bank loans rose to a record $12 trillion, now equivalent to 162% of their US counterparts! Those numbers don’t include the lending of the shadow banking system.

(2) Deflation. Coal companies seem to be at the epicenter of the current rising default risks in China’s shadow banking system. That’s because coal prices are falling. So are other industrial prices, according to China’s PPI, which is down 1.6% y/y through January. It has been deflating since March 2012. China’s CPI is still inflating at a moderate pace, with an increase of 2.5% y/y through January.

The combination of lots of debt and mounting deflationary pressures increases the risks of a credit crisis in China.

Today's Morning Briefing: Scary Parallel? (1) Seeing a pattern. (2) Bearish technicians waiting for Godot. (3) Hindenburg and Hulbert omens. (4) Manipulating the scales to maximize the fear factor. (5) The great crash in commodity prices and the Smoot-Hawley Tariff. (6) Is Godot Chinese? (7) Do WMPs = WMFD? (8) Credit = Gold vs. Debt = Lead. (9) China's LTCM? (10) China’s deflation problem. (11) China makes world trade go round. (12) No credit crunch in China. (13) Focus on market-weight-rated S&P 500 Retailers. (More for subscribers.)

Monday, February 17, 2014

The Fairy Godmother of the Bull Market

Several times in the past, I’ve referred to Fed Governor Janet Yellen as the Fairy Godmother of the bull market. I supported this notion with a chart showing that the S&P 500 has tended to rise more often than not after she gave a speech on the economy and monetary policy. Now that she is the Fed chair, she did it again last Tuesday with her congressional testimony.

She suggested that the consensus opinion of the members of the FOMC is that the economy should continue to do well enough to justify tapering QE by $10 billion per meeting: “If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.”

Investors have gotten over their taper tantrum of last summer. Now tapering is bullish because it shows the Fed’s confidence in the economy. Either that or it shows that the FOMC has lost confidence in the efficacy of QE and would rather replace it with ultra-easy forward guidance about the federal funds rate. That’s my assessment of what’s driving the Fed. Both stock and bond investors seem to be adjusting to more forward guidance with vanishing QE.

Thursday, February 13, 2014

Europe MSCI Revenues Remain Downbeat (excerpt)

Europe’s economic indicators have been improving over the past year, especially in the UK, where the economic rebound has been surprisingly strong. The Eurozone indicators have been signaling a recovery since last summer, but a very weak one. Yet European stock markets have rallied strongly over the past year, led by the ones in the Eurozone’s peripheral countries.

Unfortunately, forward revenues isn't as upbeat. It’s been falling over the past year in the UK. Furthermore, the UK's forward profit margin has declined sharply over the past three years, which has depressed forward earnings over that period. That might explain why the forward P/E is relatively low at 12.5, which is a 7% discount to the world.

The forward revenues of the EMU MSCI is also falling, and has been doing so at a faster pace recently, suggesting that the region may be especially hard hit by weaker growth among emerging economies. The only good news is that the forward profit margin seems to have bottomed early last year and is recovering slowly.

With the forward P/E at 12.9, the region is selling at a 4% discount to the world. I am skeptical that the Eurozone’s economic indicators and MSCI fundamentals justify higher valuation multiples in the region given that they have rebounded back to the previous highs during 2009.

Today's Morning Briefing: Global Revenues & Earnings. (1) Not much evidence of EM crisis in weekly analysts' consensus estimates. (2) Are EM stocks oversold and cheap? (3) Some Eurozone stocks may be overbought and expensive. (4) Forward revenues rising to record highs in US, meandering elsewhere. (5) Margin squeeze in EMs. (6) China MSCI is cheapest since 2001. (7) Brazil’s revenues up, but margins down with P/E at 33% discount. (8) Eurozone’s weak economic and MSCI fundamentals may cap P/Es. (9) Japan is still relatively choppy. (More for subscribers.)

Wednesday, February 12, 2014

Emerging Markets Might Not Submerge (excerpt)

The latest mini-correction was triggered by anxiety over an emerging markets crisis, which some feared had the potential to turn into a global contagion. I argued that the crisis would be contained to the Fragile Five, and wouldn’t morph into another Lehman-style financial calamity.

Interestingly, even Nouriel Roubini, who had been a perma-bear during the first four years of the current bull market, was relatively relaxed about the current crisis in a 1/31 article, though it was titled, “The Trouble with Emerging Markets.” He started his analysis ominously, warning: “This mini perfect storm in emerging markets was soon transmitted, via international investors’ risk aversion, to advanced economies’ stock markets. But the immediate trigger for these pressures should not be confused with their deeper causes: Many emerging markets are in real trouble.”

Near the end of his article, Roubini turned more upbeat for some of the same reasons that we didn’t get panicky about the current crisis: “Nonetheless, the threat of a full-fledged currency, sovereign-debt, and banking crisis remains low, even in the Fragile Five, for several reasons. All have flexible exchange rates, a large war chest of reserves to shield against a run on their currencies and banks, and fewer currency mismatches (for example, heavy foreign-currency borrowing to finance investment in local-currency assets). Many also have sounder banking systems, while their public and private debt ratios, though rising, are still low, with little risk of insolvency.”

Last Wednesday, I offered a “too-important-to-implode” analysis of the EM crisis: “Obviously, a widespread emerging markets crisis would be a calamity for the global economy. However, it is precisely because EMs have become so much more important to the global economy that such a crisis might be less rather than more likely. Capital flows aren’t likely to dry up to companies operating in EMs that are doing more and more business in those economies and the rest of the world.”

The Emerging Markets MSCI (in dollars) has been highly correlated with both the CRB raw industrials spot price index and the price of a barrel of Brent crude oil. While the EM MSCI is down 5.0% ytd, it is encouraging to see that commodity prices remain surprisingly stable. That suggests that the global economy is carrying on.

Today's Morning Briefing: Another Relief Rally. (1) What a relief! (2) Breaking 50-dma isn’t so bad. (3) Big correction in BBR sentiment indicator. (4) Keeping calm and carrying on despite half-a-dozen anxiety-provoking uncertainties. (5) Even Roubini isn’t that bearish on EM crisis. (6) EMs: Too important to implode? (7) US consumer income measures at record highs. (8) The Fairy Godmother of the bull market speaks. (9) Raising the debt ceiling without drama. (10) German court passes the case. (11) Europe still muddling. (More for subscribers.)

Tuesday, February 11, 2014

Global Leading Indicators Upbeat on Balance (excerpt)

I am a fan of the OECD’s monthly leading indicators. The only problem is that their release is delayed by the time necessary to collect and compile the data. So here we are in the second week of February with the leading indicators released for December just yesterday. However, leading indicators are supposed to lead by three to six months, so they are still relevant, in our opinion.

Then again, they may be less relevant given the emerging markets crisis that emerged during January. Over the past couple of weeks, we’ve analyzed the magnitude of the problem and concluded that the crisis is likely to be contained to the Fragile Five, and shouldn’t morph into a global contagion. If so, then the solid forward momentum signaled by the latest OECD leading indicators suggests that the global economy should absorb the latest shock relatively well. Let’s review the latest data:

(1) Advanced economies advancing. Most encouraging is that the composite leading indicator for all of the 34 members of the OECD rose to 100.9, the highest level since February 2011. That confirms the upbeat readings of the more volatile JP Morgan Global Composite Output PMI, which remained upbeat during January at 53.9. Over the past year, there have been steady monthly gains in the indexes for the US, Europe, and Japan. The same can be said about all the major economies of Europe and the peripheral ones too.

(2) Emerging economies submerging. The OECD also compiles leading indicators for the BRICs. They remained depressed during December, with India falling to a record low.

Today's Morning Briefing: Uptrends. (1) Barring recession, earnings heading to new record highs. (2) Earnings have a history of 7% growth. (3) Spread between earnings yield and bond yield drives buybacks. (4) Earnings growth solid in Q4, but looking weak for Q1. (5) Revenues growth was weak during Q4. (6) Is there enough forward momentum in OECD leading indicators to overcome EM crisis? (7) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

Monday, February 10, 2014

Employment Trends (excerpt)

I’ve noticed recently at my local CVS Pharmacy that there are three cash registers but only one person operating one of them. The other day, I was surprised when this person offered to help me to check out using the self-service barcode scanner rather than do it for me at her register. The message is “do it yourself.” This is just one of many examples of how businesses are using technology to reduce their headcount.

This is one of the main reasons why employment gains have been subpar during the current economic expansion. Friday’s employment report for January, which included benchmark revisions, didn’t alter this picture. There are lots of numbers in this report and, once again, they were all over the place with some surprisingly strong and others surprisingly weak.

Once again, I cut through all the noise by calculating our YRI Earned Income Proxy, which is simply aggregate hours worked times average hourly earnings in the private sector. It is highly correlated with both wages and salaries in the private sector and retail sales. It rose 0.3% during January to yet another new record high.

In addition, there are five employment measures that we monitor to keep us confused. They certainly did their job in January: Payroll employment (up 113,000), private payrolls (142,000), household employment (638,000), household measure comparable to payroll measure (901,000!), and the ADP measure of private payrolls (175,000). Our assessment is that the labor market continues to improve at a subpar pace. Private payrolls are finally back, matching the record high during January 2008.

And knowledge workers are putting knowledge workers out of work too. Payroll employment in all information industries peaked at a record 3.7 million during March 2001. It dropped to 2.7 million during mid-2010, and has remained around that level since then.

Today's Morning Briefing: Man vs. Machine. (1) Virtuous cycles now and then. (2) Golden Ages. (3) Professor Gordon is pessimistic. (4) “The Second Machine Age” is here. (5) Bounty vs. spread. (6) Machines replacing routine workers. (7) The job of knowledge workers is to eliminate jobs. (8) Productivity outpacing real wages and employment. (9) Do it yourself. (10) YRI Earned Income Proxy at record high. (11) Yellen’s testimony. (12) Stock picking is making a comeback. (13) “Alone at Sea” (+). (More for subscribers.)

Thursday, February 6, 2014

Valuation & Earnings Growth (excerpt)

The plunge in valuation multiples since January 15 is reminiscent of similar downdrafts during previous corrections of the current bull market. There are many valuation models, but most strategists agree that P/Es are significantly influenced by the prospects for interest rates and earnings growth.

I focus on the Aaa-rated corporate bond yield (compiled daily by Moody’s) and analysts’ consensus expectations for S&P 500 earnings growth over the next five years (compiled by Thomson Reuters I/B/E/S). I find that the trends in the spread between these two important variables are similar to the trends in the forward P/E of the S&P 500. The bond yield has been edging lower this year, while growth expectations remain relatively high around 11%-12%.

Given recent developments among emerging economies and some weaker-than-expected indicators for the US and Europe, investors seem to be reassessing the prospects for earnings growth and reducing the valuation multiple they are willing to pay for earnings in a slower-growing world.

I think investors may be overreacting to some of the weak indicators, particularly January’s M-PMIs for China and the US. Interestingly, J.P. Morgan’s Global PMIs remained near recent cyclical highs during January for the composite (53.9), manufacturing (53.0), and services (53.8).

Today's Morning Briefing: Something Wicked This Way Comes? (1) Another anxiety attack. (2) Will tapering trigger an EM-led contagion? (3) From East Asia EMs to US subprime mortgages to EZ-PIIGS. (4) Message from a friend in UK. (5) Less irrational exuberance in P/Es. (6) Are investors turning too pessimistic on revenues growth? (7) Is it different this time for profit margins? (8) Risk to margins may be weak pricing rather than rising costs. (9) Focus on overweight-rated S&P 500 Financials. (More for subscribers.)

Wednesday, February 5, 2014

Commodity Prices & the EM Crisis (excerpt)

So far so good: Commodity prices suggest that the global economy is holding up well despite the latest emerging markets crisis. This confirms that the crisis remains contained mostly to the F-5 and isn’t morphing into a contagion--so far, knock on wood. I construct a YRI Global Growth Barometer by simply averaging the price of a barrel of Brent crude oil with the CRB raw industrials spot price index.

Our YRI-GGB registered 106 on Monday. It has been fluctuating around this level for the past two years. Both components are very sensitive indicators of global economic activity. Both are holding up remarkably well given the headline news about the EM crisis and the strength of the dollar, which tends to depress commodity prices.

Today's Morning Briefing: Fragile Fear. (1) The Fragile Five are submerging. (2) Fickle short-term capital flows. (3) Are F-5 scarier than five PIIGS? (4) Greece again, but no Grexit. (5) EMs do matter to both US and the world. (6) The F-5 may not matter all that much. (7) Severe devaluations stress F-5 with higher import prices, and wider trade and budget deficits. (8) Not much stress in commodity prices so far. (More for subscribers.)

Tuesday, February 4, 2014

Perplexing PMI (excerpt)

During the current bull market, the first trading day has tended to be one of the best of the month, mostly on better-than-expected M-PMI news for the US. These data are released during the first business day of each month. Yesterday’s report was unexpectedly weak, with the overall index plunging from 56.5 during December to 51.3 last month, led by even bigger dives in the production index (from 61.7 to 54.8) and the new orders index (from 64.4 to 51.2).

The chairman of the Institute for Supply Management, which conducts the survey, blamed the weather for some of the weakness in the results. The eastern half of the US is experiencing one of its 10 coldest winters on record, with thousands of local records for cold already tied or broken. So the M-PMI hit an ice patch rather than a soft patch.

I’m not sure that makes sense. Why would orders be down so much just because the weather was bad? More perplexing is that the average of six regional business surveys showed solid gains last month, although they too were mostly hit by the bad weather. Furthermore, Markit reported yesterday that its final M-PMI for the US dipped from 55.0 during December to 53.7 last month. No big deal.

Today's Morning Briefing: Soft Patch or Ice Patch? (1) New month, old worries. (2) Chill now, thaw later. (3) Plunge in national M-PMI doesn’t jibe with regional surveys. (4) Markit’s M-PMI showing life. (5) Lots of upbeat M-PMIs around the world. (6) Eurozone factory index at 32-month high. (7) Our FSMI is at 1700, around key support for S&P 500. (8) P/E correction. (9) Guidance and headlines depressing Q1 earnings estimates. (10) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

Monday, February 3, 2014

Emerging Markets Have Reserves (excerpt)

Despite interest rate hikes announced last week by the central banks of India, South Africa, and Turkey, the currencies of these countries remained weak. The Russian ruble tumbled. Argentina’s currency continued to plunge. These currencies have been weak since last spring, when Fed officials started to talk about tapering QE.

So the crisis didn’t just start in January. However, it may be premature to say that it is almost over. Nevertheless, it may soon be over as far as the stock markets in the US, Europe, and Japan are concerned. That’s because Debbie and I don’t expect a contagion. The trouble spots are troubled by their own unique circumstances and will have to work them out on their own.

The global economy has been weathering several storms in recent years. The first storm, during 2008, was US-centric and depressed the global economy. The second storm, from 2010-2012, was centered in the Eurozone and dampened global economic growth. Now, the third storm is hitting a number of emerging economies, but shouldn’t slow the global economy much given that growth is picking up in the US, Europe, and Japan.

Helping some of the emerging markets weather their storms should be the record amount of non-gold international reserves that they hold. IMF data show that collectively they held a record $7.8 trillion during November. China’s reserves account for about half of that sum. However, some of the more troubled emerging economies also held sizeable record or near-record reserves at the end of last year: Russia ($470bn), Brazil ($356bn), India ($275bn), Turkey ($129bn), South Africa ($45bn), and Argentina ($28bn).

Today's Morning Briefing: Take the Money & Run? (1) January Barometer hits and misses. (2) Positive annual exceptions to negative Januarys. (3) Melt-up/meltdown less likely? (4) An inauspicious beginning. (5) Assessing the bear case. (6) Are the bears teeing us up for yet another relief rally? (7) The moon can influence China’s M-PMI. (8) Power to the Chinese people. (9) Oil exports pumping up US GDP. (10) Fed giving more weight to inflation data, and so are we. (11) “Jack Ryan: Shadow Recruit” (- - -). (More for subscribers.)