Upbeat Consumer Optimism Is Bullish for Economy & Stocks (excerpt)

Rising consumer confidence in the US is confirming my bullish outlook for the economy and stocks. Yesterday’s release of the August Consumer Confidence Index (CCI) was especially upbeat. It is based on a survey conducted monthly by the Conference Board. I think it is more sensitive to labor market conditions than the survey conducted by the University of Michigan to derive their Consumer Sentiment Index (CSI). Here are some of the key highlights that impressed me the most:

(1) The CCI jumped 2.1 points to 92.4 in August. That’s the highest reading since October 2007. The gain was led by the CCI’s present situation component. Also leading the way higher was the CCI for consumers who are 55 years old or older. They tend to have more income and wealth, and to spend more when they are optimistic.

(2) The Conference Board reported that the “jobs plentiful” response rate jumped from 15.6% during July to 18.2% during August, the highest since March 2008. The CCI is highly correlated with the quits rate. The latter rose in June to the highest reading since July 2008. August’s CCI suggests that it continued to rise during July and August. As Fed Chair Janet Yellen has noted, when workers perceive that jobs are plentiful, they are more likely to seek another job and quit their current one.

(3) I average the CCI and CSI to derive our Consumer Optimism Index (COI). It was little changed at 85.8 in August from July’s 86.1, which was the best level since October 2007. The present situation index jumped to 97.1, the highest since January 2008. The expectations component remains in its flattish and choppy range of the past couple of years.

Today's Morning Briefing: 2015 By 2015? (1) Bullseye! (2) Bull running ahead of schedule. (3) 2015 math: E = $140, P/E = 16.5, P = 2310. (4) No recession in 2015, so no bear market. (5) Positive thoughts on revenues, margins, and buybacks. (6) The longer the expected economic expansion, the higher the P/E. (7) Won’t Fed tightening be frightening in 2015? (8) Monetary normalization coming in baby steps. (9) The fifth-longest bull market of the 44 since 1928. (10) Consumer confidence rising because jobs are more plentiful. (11) Focus on overweight-rated S&P 500 Industrials. (More for subscribers.)

US & Eurozone Continue to Decouple (excerpt)

Can the US continue to grow if the Eurozone’s recovery continues to stall? It is doing a good job of doing just that so far. I think it may continue to do so. The question is, why are the two economies decoupling? The short answer is that the social welfare state remains too big in the Eurozone. There are too many government regulations and regulators, and not enough startups and entrepreneurs. Labor markets remain too rigid. Too much credit is provided by bankers, who aren’t lending, while capital markets remain relatively limited sources of capital. The region depends too much on Russian gas, and isn’t doing enough to find domestic sources of energy. It may also be more exposed to terrorism perpetrated by homegrown Islamic jihadists.

The latest evidence of decoupling between the US and the Eurozone’s economies is Germany’s IFO business confidence index. It dropped to 106.3 during August, down from a recent cyclical peak of 111.2 during April, and the lowest since July 2013. The expectations component, which is highly correlated with Germany’s M-PMI, fell from 107.2 to a 15-month low of 101.7 over this period. Flash estimates show the German M-PMI fell to 52.0 this month, while the US M-PMI rose to 58.0.

Credit remains amply available in the US capital markets and from US banks. The same cannot be said of the Eurozone’s capital markets and banks. Over the past 12 months through May, nonfinancial bond issuance totaled $750.5 billion. Short-term business credit rose to a record-high $2.0 trillion in mid-August. In the Eurozone, bank credit is down 2.2% over the past 12 months through June.

Today's Morning Briefing: Recoupling & Decoupling. (1) The bears keep seeing market tops as the bull charges ahead. (2) Market leaders leading again. (3) SmallCaps still lagging. (4) Retailers recharging. (5) Financials keeping pace with bull run. (6) Dow Theory is bullish. (7) IT and Health Care are hot this year. (8) 2014 by 2014 is just around the corner. (9) Oil made in USA is very bullish for US stocks. (10) The bull is maturing, not aging. (11) Why is Eurozone decoupling from US? (12) Draghi ready to do more whatever-it-takes. (13) US and German yields falling toward Japanese yields. (14) Focus on now underweight-rated S&P 500 Energy. (More for subscribers.)

Are Biotech Stocks Stretched? (excerpt)

On July 15, Fed Chair Janet Yellen testified before the US Senate Committee on Banking, Housing, and Urban Affairs. She presented the Fed’s semiannual Monetary Policy Report (MPR) to the Congress. In her prepared remarks, she stated that while valuation seems “stretched” in some areas of the bond market, equities “remain generally in line with historical norms.” Yet in the MPR, which bears her signature, the following observation appeared: “Nevertheless, valuation metrics in some sectors do appear substantially stretched--particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.”

In other words, in her opinion, the stock market is showing some signs of irrational exuberance. Of course, this term was popularized by Fed Chair Alan Greenspan in a speech on December 5, 1996 indicating his concern about a possible bubble in stock prices. About two years later, on January 28, 1999, in testimony before a Senate Committee, he defended the mania in Internet stocks by offering his Lottery Principle. The following is a reconstruction of various quotes picked up by the press from his response to a question about this issue:

“You wouldn't get hype working if there weren't something fundamentally, potentially sound under it. The issue really gets to the increasing evidence that a significant part of the distribution of goods and services in this country is going to move from conventional channels into some form of Internet system--whether it's retail goods or services or a variety of other things. The size of that potential market is so huge that you have these pie-in-the-sky type of potentials for a lot of different vehicles. And undoubtedly some of these small companies, which have stock prices going through the roof, will succeed and they very well may justify even higher prices will succeed [even if] the vast majority are almost sure to fail. There is something else going on here though, which is a fascinating thing to watch. It is, for want of a better term, a 'lottery' principle. What lottery managers have known for centuries is that you could get somebody to pay for a one-in-a-million shot, more than the value of that chance. In other words, people pay more for a claim on a very big payoff, and that's where the lotteries' profits have always come from. What that means is that when you are dealing with stocks--the possibilities of which are it's going to be valued at zero or some huge number--you get a premium in that stock price which is exactly the same sort of price-evaluation process that goes on in the lottery.”

So who is right, Yellen or Greenspan? With the benefit of hindsight, we now know that Greenspan was too much of a cheerleader during the second half of the 1990s. He certainly contributed to the stock market bubble that burst one year after he promoted his Lottery Principle. However, that principle actually makes more sense today. This is especially true for biotechnology stocks, as I wrote on July 31:

“In addition, one has to wonder whether it is even appropriate for the Fed to express opinions about specific stock groups. Lots of sophisticated investors purchase biotech companies that have no earnings and are regularly raising cash to stay in business. These investors do so knowing that the outcomes are binary: The companies they invest in will either find a cure for a disease or they won’t. Their new drugs will either be approved by the FDA or they won’t. They might be acquired for a huge premium or they might not, or might go out of business. Why should the Fed weigh in on the valuation of biotechs? After all, speculators are providing the funding that might actually cure diseases. Or they might get wiped out. Why should the Fed get in the middle?”

In any event, industry analysts have been scrambling to raise their earnings estimates for S&P 500 Biotechology industry. They now expect earnings to rise 38.7% this year and 13.6% next year compared to forecasts of 15.8% and 17.8% at the beginning of the year. Forward earnings has soared 64.3% y/y through mid-August. Consensus expected earnings growth over the next five years is around 19% per year, up from 11% in 2011. The stock index is at a record high, up 23.4% ytd and 56.5% y/y, after a brief swoon during March and April. Yet the forward P/E has actually declined from this year’s peak of 24.0 during the week of January 23 to 16.1 currently.

Within days of Yellen’s testimony, Facebook, Google, and Twitter all reported better-than-expected results for Q2 earnings. The S&P 500 Internet Software & Services stock price index is up 17.0% from this year’s low on May 8. Forward earnings rose to a new record high in mid-August. The stocks seem expensive with the forward P/E around 20. But that’s also the expected annual growth rate for earnings over the next five years.

Today's Morning Briefing: Taking Issue With Yellen. (1) Are social media and biotech stocks still “stretched?” (2) Greenspan’s clever contribution to investment strategy: irrational exuberance and the Lottery Principle. (3) The biotech lottery. (4) Binary outcomes with all or nothing payouts. (5) Is the Fed registered to give investment advice? (6) Biotech earnings expectations are soaring. (7) The Internet’s fundamentals are also hot. (8) Yellen is a two-handed economist on wages. (9) The wage stagnation myth again. (10) Are baby boomers dropping out of the labor market, or staying in too long? (More for subscribers.)

Real Wage Stagnation Is a Bit of a Myth (excerpt)

Contrary to popular belief, wages have been rising a bit faster than prices. In other words, real wages haven’t stagnated as widely believed, but have been moving higher, albeit at a slow pace:

(1) Real hourly wage rate. Average hourly earnings for all workers divided by the core personal consumption expenditures deflator (PCED) rose to a record high during February of this year. It edged down in June, but was up 0.4% y/y. This measure of real hourly wages is up 6.7% since the start of the data during March 2006. Using the headline PCED, real hourly wages also rose to a record high during February of this year and are up 5.2% since the start of the data. That’s not great, but it isn’t stagnation either.

(2) Real wages per worker. I calculate earned income per worker by dividing wages and salaries in personal income by payroll employment. It was at a record high of $49,500 during June. Dividing this series by the headline PCED shows that real wages and salaries per worker is up 1.4% y/y, and 6.0% since the start of 2006. Again, that’s not great, but it isn’t stagnation either.

Today's Morning Briefing: Jackson Hole. (1) Central bankers just wanna have fun. (2) Talking about the dynamics of the labor market. (3) Are investors jumping the gun ahead of Yellen? (4) She won’t let us down. (5) Pleasing the boss. (6) Less slack, yet wage and price inflation remain subdued. (7) Wage stagnation is a bit of a myth. (8) Drilling down to forward earnings by industries finds some gushers. (9) Standouts include Internet Retail, Oil & Gas Exploration, Consumer Finance, Biotech, Semiconductors, Specialty Chemicals, and Gas Utilities. (More for subscribers.)

A Good Year for Emerging Markets So Far (excerpt)

There was a 6.1% drop in the Emerging Markets MSCI stock price index (in dollars) at the beginning of this year, from January 22 to February 5, on fears of another emerging markets crisis. I didn’t buy this latest “endgame” scenario. On the other hand, I didn’t expect that the index would rebound by 17.5% through yesterday’s close. It has been highly correlated with the CRB raw industrials spot price index, which I use as a sensitive indicator of global economic growth. I don’t see enough of it to drive EM stock prices higher on a sustainable basis. The CRB index is back down to its lowest reading since February 13 after a brief and small rally.

There have been impressive rebounds in lots of EM stock price indexes since February 5. Among the so-called “Fragile Five,” there are ytd gains in the MSCI indexes (in dollars) for Indonesia (29.8%), India (24.2), Turkey (14.2), Brazil (13.1), and South Africa (11.0). The China MSCI (in dollars) has also rallied sharply by 20.0% since March 20, with a ytd gain of 6.4%. However, this rally hasn’t been confirmed by the price of copper, which has become a sensitive indicator of China’s economy in recent years.

By the way, there has also been a high inverse correlation between the EM MSCI and the trade-weighted dollar. Maybe that’s because the dollar tends to be strong when the global economy is relatively weak compared to the US. A strong dollar tends to depress commodity prices, confirming the relative weakness in the global economy. Weak commodity prices aren’t good for EMs that produce them. The trade-weighted dollar has been strong recently, and relatively flat since the start of the year. It hasn’t confirmed the rally in EM stocks.

The attraction of EM stocks has been their relatively low valuation. They are currently trading at a forward P/E of 11.0, which is up from the year’s low of 9.7 during the week of February 6. That’s still below the forward P/E of the MSCIs for the US (15.6), Japan (13.5), UK (13.3), and EMU (13.0).

Today's Morning Briefing: Staying Close To Home. (1) All the comforts of home are at home. (2) Eurozone may still have some upside. (3) Missing out on Abenomics, which may be striking out. (4) Emerging markets rally not confirmed by weak industrial commodity prices and strong dollar. (5) Nevertheless, EMs are still relatively cheap. (6) US MSCI still leading the pack this year, and since March 9, 2009. (7) Might easy money be deflationary? (8) Low inflation allows central banks to delay normalizing their ultra-easy policies. (9) US CPI gives Yellen more time to create more jobs. (More for subscribers.)

Dips Rather Than Corrections (excerpt)

There were some hair-raising corrections in the current bull market during 2010, 2011, and 2012. They were triggered by fears of a double dip in the US, the disintegration of the Eurozone, and a hard landing in China. The one during the summer of 2011 was exacerbated by the debt ceiling crisis in Washington, DC. The last correction occurred during the fall of 2012 as investors dreaded going over a “fiscal cliff” in the US, which was averted at the last minute at the start of 2013. However, the selloff wasn’t an “official” correction since the S&P 500 fell 7.7%, short of the 10% decline that is deemed to be a bona fide correction.

Since the start of 2013, there have been 10 dips that have retested the 50-day moving average of the S&P 500, as I’ve noted previously. They were mostly triggered by similar concerns as the ones that triggered the earlier corrections. The dip at the beginning of this year was caused by fears of an emerging markets crisis. It lasted just eight trading days, from January 22 to February 3, with the S&P 500 falling 5.6%, the worst dip since the start of 2013.

The latest dip started on July 24, when the S&P 500 peaked at a record 1987.98. It seems to have ended on August 7, with the S&P 500 down just 3.9% from its recent peak. After yesterday’s big rally, the stock composite is now only 0.8% below the peak. I have been in the dip camp rather than the correction camp. This downdraft was unusual because it was triggered mostly by geopolitical risks, which have been mostly ignored during the current bull market.

Often in the past, I’ve noted that the current bull market has been marked by a series of “endgame” corrections followed by relief rallies to new cyclical highs, and then new record highs since March 28, 2013. I also noted that at the start of 2013, when the widely dreaded fiscal cliff was averted, our accounts showed symptoms of anxiety fatigue. They were tired of worrying about endgame scenarios. That might explain why there have been dips rather than corrections since early 2013.

Today's Morning Briefing: Another Relief Rally. (1) Corrections followed by dips. (2) Averted “fiscal cliff” led to anxiety fatigue. (3) Ten dips since start of 2013. (4) Good buying opportunities at the 50-dma line. (5) The latest dip was on rising geopolitical risks. (6) Some relief on Ukraine, Gaza, and ISIS sparks latest relief rally. (7) “Fairy Godmother” will speak on Friday. (8) Yellen said it all in 2009 speech: Premature tightening would be a mistake. (9) Broken record: Forward earnings does it again. (10) Q2 had lots of positive earnings surprises. (More for subscribers.)

Global Economy Has Some Issues (excerpt)

Last week, there certainly was lots of bad news about the global economy. The Eurozone’s latest production and GDP numbers suggest that the lackluster recovery of the past year isn’t just stalling but may be turning into a recession. I think that the Ukraine crisis explains this downbeat turn of events. If it passes, as we expect it will soon, then the region’s weak recovery should resume. In addition, starting next month, the ECB will inject more funds into the Eurozone’s banking system with its “targeted longer-term refinancing operations” (TLTRO), as I discussed last week. (The details of the program were outlined in June 5 and July 3 press releases.)

The drop in Japan’s Q2 real GDP wasn’t a surprise. Much of the stimulus of Abenomics was more than offset by the hike in the sales tax on April 1. There is already chatter that more stimulus will be required. There was a surprise in China’s July report on social financing. It plunged, suggesting a significant slowdown in China’s economy. I am not convinced. Let’s have a closer look at some of the key indicators in the major overseas economies:

(1) China. Social financing during July was remarkably weak. It fell from $321 billion during June to $44 billion last month. That was the slowest pace of lending since October 2008. Bank loans dropped from $175 billion during June to $63 billion during July. We think this is a one-month aberration. However, it may be that lending to residential property builders has hit a brick wall as a glut of housing units is depressing prices. In any event, on a y/y basis, bank loans are up 13.4% y/y, in line with M2 growth.

(2) Japan. Real GDP fell 6.8% (saar) during Q2 in Japan. That’s after increasing 6.1% during Q1. Despite Abenomics, real GDP was unchanged on a y/y basis, and up just 2% in nominal terms. Private consumption plunged 18.7% during Q2. It’s not obvious why it wasn’t obvious to the government that mixing massive monetary and fiscal stimulus with a major tax hike was akin to stepping on the accelerator and the brakes at the same time. It’s a sure way to wind up in a ditch. Even capital spending fell 12.3%. Despite the weaker yen, exports fell 1.8%. It’s dismal.

(3) Eurozone. It’s also dismal in the Eurozone. That’s evident in bond yields, which continue to fall to historical lows. The German 10-year government bond yield fell below 1.0% for the first time in history, down to only 0.97% on Friday. Perhaps the biggest shock last week was that Germany’s real GDP fell 0.6% (saar) during Q2. But that’s after it rose 2.7% during Q1, which was boosted by mild winter weather. However, weakness in the rest of the Eurozone is weighing on the region’s biggest economy and biggest exporter. So is the Ukraine crisis, which has been a slow-motion train wreck so far.

Today's Morning Briefing: State of the World. (1) America is exceptional. (2) US economy stands out. (3) Dismal news out of Eurozone and Japan. (4) Less bang per yuan in China. (5) Debt weighing down some major economies. (6) US economy is diversified with lots of world-class industries. (7) Many US industries remain relatively unregulated. (8) US news remains upbeat. (9) China’s social financing plunged in July. (10) Stepping on the accelerator and brakes in Japan. (11) German GDP drops after mild winter boost. (12) “Calvary” (+ + +). (More for subscribers.)

S&P Revenues Growing Solidly (excerpt)

Bull markets are fundamentally driven by rising earnings, which are driven by rising revenues. Since more companies are doing more of their business on a global basis, the outlook for revenues depends on the outlook for the global economy. So far, so good: The global economy isn’t booming, but it is growing fast enough to drive revenues and earnings higher. It is likely to continue doing so over the rest of this year and next year too. Let’s first have a close look at the latest developments in the US before turning to the rest of the world:

(1) Business sales. US business sales rose 0.3% m/m to a new record high during June. This series tends to be highly correlated with S&P 500 revenues. Business sales--which includes manufacturers’ shipments and distributors’ sales--rose 4.7% y/y during June. S&P 500 revenues grew 5.8% y/y during Q2.

(2) Forward revenues. Not surprisingly, there is a good fit between S&P 500 actual quarterly revenues and S&P 500 forward revenues, which is available weekly. The latter has been rising rapidly this year to new record highs and is up 4.2% y/y through the first week of August. That’s because industry analysts’ consensus expectations for 2014 have stopped falling, while 2015 estimates have been rising in recent weeks. They now expect S&P 500 revenues to grow 3.9% this year and 4.2% next year.

Today's Morning Briefing: Revenues Looking Up. (1) Fundamentally, revenues drive earnings drive stocks. (2) Business sales, forward revenues, PMIs, and federal tax receipts all bullish for corporate revenues. (3) S&P 500 revenues up 5.8% y/y during Q2. (4) Europe is weighing on global revenues. (5) EM MSCI has outperformed since 2006 because revenues outperformed. (6) Latest Chinese indicators upbeat for China and for global economy. (7) Focus on market-weight-rated S&P 500 Retailers. (More for subscribers.)

Are Baby Boomers Weighing on Wages? (excerpt)

Aging Baby Boomers may be keeping a lid on wage inflation. They are currently 50-66 years old. Since the previous peak in employment during November 2007, employment has been little changed, yet workers who are 55 years old or older grabbed 5.6 million of the jobs. That means that all the younger workers lost about as many jobs.

Of course, what really happened is that simply by keeping their jobs during the Great Recession, Baby Boomers “aged out” of the stats for the younger workers and bloated the stats for the older ones. In any case, they’ve probably done well enough so that they aren’t likely to be pushing for significant wage gains.

Meanwhile, the younger workers may not be in a position to push for better pay either since they are competing with Baby Boomers who are likely to remain on the job well past the traditional retirement age of 65. This creates a new source of labor, i.e., elderly workers, which may keep a lid on wage inflation.

We can already see this tendency in the number of workers who are 65 or older. Since November 2007, this segment of the working-age population has increased by 8.5 million. The number of these folks who have dropped out of the labor force (mostly to retire) has increased 6.3 million over this period. The number who remained in the labor force rose 2.2 million. There are lots more older workers coming as the Baby Boomers age.

Today's Morning Briefing: Another Good JOLTS. (1) Fed Chair is no slacker, but worries a lot about slack. (2) JOLTS report and NFIB survey upbeat on jobs. (3) Ratio of unemployed to job openings down to 2.03. (4) More hires than fires, and plenty of quits. (5) Quitting is a good sign. (6) Yellen’s comfort zone for wage inflation is 3%-4%. (7) Wage inflation remains remarkably low around 2%. (8) Lots of Baby Boomers will retire. (9) Lots will keep working, providing a new source of labor, i.e., elderly workers. (More for subscribers)

A Happy Earnings Season (excerpt)

The latest earnings season is almost over, with 91% of S&P 500 companies having reported their Q2-2014 results. The latest blend of actual and estimated earnings shows a growth rate of 9.6% y/y. That’s up from the low of 5.9% at the start of the earnings season during the week of July 10. It is also up from the first quarter’s growth rate of 5.3%.

The solid gain isn’t surprising given the 6.0% (saar) growth in nominal GDP during the second quarter. It was up 4.1% on a y/y basis. What is surprising is the gain during the first quarter, when nominal GDP fell 0.8% (saar). However, it was still up 3.3% y/y.

S&P 500 revenues are driven by global nominal GDP, with the US accounting for a significant portion of that total, of course. S&P 500 forward revenues rose to a new record high at the end of July. Forward earnings rose to record highs yet again last week for the S&P 500/400/600. For the S&P 500, forward earnings was $128.22; it is converging toward the 2015 consensus estimate of $133.69 (as of last week), which has been edging higher recently.

Today's Morning Briefing: Revisiting Eurozone. (1) Earnings growth near 10% for Q2. (2) New record highs for forward revenues and earnings in US. (3) Tough year for EMU investors. (4) The case for resumption of EMU bull market in stocks. (5) TLTROs will soon provide lots more ECB liquidity. (6) Bond yields plunging and euro falling should help too. (7) Uptrends in exports to Eurozone and in retail sales. (8) EMU forward earnings bottoming, maybe. (9) EMU MSCI cheaper than US MSCI, as usual. (10) Leading indicators weaken, especially in Germany. (11) Resolution of Ukraine crisis will determine whether buying opportunity is now or in the foreseeable future. (More for subscribers.)

Old Normal Growth for US Nonfarm Business Output (excerpt)

The US economy dipped during the first quarter, with real GDP falling by 2.1% (saar). It then bounced back by 4.0% during the second quarter. There has been much angst about the subpar pace of economic growth during the current expansion. However, much of that is attributable to weakness in government spending.

That’s confirmed by last week’s productivity report showing that the real output of nonfarm business has been hovering around 3% y/y since Q2-2010, consistently higher than real GDP growth, which has been fluctuating around 2% over the same period, with the former up 2.9%, on average, while the latter is up 2.2%, on average. Over the past four quarters through Q2-2012, the former is up 3.2% while the latter is up 2.4%. During the latest quarter, real nonfarm business output jumped 5.2% (saar) after falling 2.4% during the first three months of the year.

Today's Morning Briefing: Buying Dips. (1) Bad news bulls. (2) Lots of dips. (3) Dips to 50-dma have been good buying opportunities since early 2013. (4) Russian and other barbarians at the gates. (5) Bond market continues to ease as Fed moves towards tightening. (6) Nine reasons to be bullish on bonds. (7) Draghi wants euro to keep dipping. (8) Despite Q1 dip, US economy continues to grow with solid gains in business sector. (9) “The Hundred-Foot Journey” (+ +). (More for subscribers.)

US Is Gushing Oil (excerpt)

In the US, June’s merchandise trade deficit narrowed to $60.3 billion from May’s $63.3 billion as oil imports dropped $0.9 billion during the month. At an annual rate, the trade deficit in crude oil and petroleum products dropped by $181 billion over the past 36 months through June.

Compared to the rest of the world, it’s easy to gush over the US economy, which is gushing so much oil. US crude oil field production has been soaring since 2012, and was up to 8.6 million barrels per day during the week of August 1. That’s the highest since November 1986. All this oil reduces the likelihood that a geopolitical crisis might trigger a spike in oil prices that could cause a recession and a bear market in stocks, at least in the US.

Today's Morning Briefing: Geopolitical Matters.(1) Discounting geopolitical risk. (2) Will push come to shove? (3) Panic, or buying opportunity? (4) Ukraine weighing on Russia MSCI and Eurozone MSCI too. (5) Flight to safety boosting demand for Eurozone bonds. (6) Historically low yields in Eurozone pushing yields down in US despite tightening outlook for Fed. (7) Eurozone may be slipping back into recession owing to latest crisis. (8) Bad news out of Italy and Germany. (9) US is gushing oil. (10) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

Fundamentals Remain Bullish (excerpt)

My Fundamental Stock Market Indicator (FSMI) rose to another new record high during the week of July 26. It now exceeds the 2007 peak by 4.7%. It’s up 3.1% over the past four weeks. The FSMI has been highly correlated with the S&P 500 since 2000. It didn’t track the stock market as well prior to that year.

Since 2012, the S&P 500 has outpaced the FSMI. Does this divergence suggest that stocks need to fall back towards our FSMI? I certainly don’t think so. I constructed the FSMI as an index--combining three high-frequency fundamental indicators--which I believe shows the underlying direction of the market. More specifically, I average Bloomberg’s Consumer Comfort Index (CCI) and my Boom-Bust Barometer (BBB), which is the CRB raw industrials spot price index divided by initial unemployment claims. (Both the CCI and BBB are four-week moving averages.)

Of course, corporate earnings are the fundamentals that truly drive stock prices. Not surprisingly, my FSMI is highly correlated with S&P 500 forward earnings. My Boom-Bust Barometer is also highly correlated with S&P 500 forward earnings, with both rising at a faster pace recently into record-high territory.

Today's Morning Briefing: Fundamentally Speaking. (1) FSMI at new record high. (2) Three high-frequency indicators. (3) Boom-Bust Barometer is booming. (4) Forward earnings booming too. (5) Still no recession in ECRI Weekly Leading Indicator. (6) July was a good month for US according to purchasing managers. (7) Eurozone’s retail sales showing signs of life. (8) China’s M-PMI moving higher, but employment component remains weak. (More for subscribers.)

Rising Earnings Estimates Offsetting Falling Valuations (excerpt)

Stock market investors have been jittery since the start of the year mostly because valuations have been stretched. That’s been especially noticeable in the performance of the SmallCaps. It’s also been reflected in the P/E-led correction in the stock market. On the other hand, industry analysts remain very upbeat on the outlook for earnings, especially forward earnings. As long as their optimism continues, it should offset investors’ jitters about valuation. Consider the following recent developments:

(1) Forward P/Es. There has been a significant correction in the forward P/Es of the S&P 500/400/600, especially for the SmallCaps. The forward P/E for the S&P 600 peaked at 19.3 on March 18 of this year and was down to 17.2 as of yesterday. It remains 11% below this year’s peak.

The S&P 400’s forward P/E of 16.6 is down 6% from the year’s peak of 17.7 on March 4. This valuation multiple rose to a bull market high of 15.7 for the S&P 500 on July 3. It was down only 3% since then to 15.2 yesterday.

(2) Forward earnings. Helping to offset the drop in these valuation multiples are the solid performances of forward earnings. Indeed, they rose to new record highs for the S&P 500/400/600 last week. They’ve been doing so at a faster pace in recent weeks.

Today's Morning Briefing: Secular Stagnation? (1) Updating the “Great Rotation.” (2) Good, not great. (3) How much longer will money rotate from SmallCaps to LargeCaps? (4) Jittery investors lower P/Es, while analysts raise E estimates. (5) Forward P/Es cheaper, but not cheap. (6) Forward earnings making new highs. (7) Larry Summers is an important fellow with a debatable thesis. (8) Less support for his secular stagnation hypothesis in the labor market. (9) Consumers are earning more and spending more. (10) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

US Dancing to “Get On Up” (excerpt)

The US economy appears on my worry list only indirectly and only because it is performing well, showing no signs of a recession. That’s bearish only if the Fed’s response of starting to raise interest rates in baby steps triggers an unanticipated financial crisis simply because interest rates have been too close to zero for too long. A rush out of corporate bond funds could be one of the consequences with recessionary consequences, or maybe not. It’s something to watch.

For now, let the good times roll: At the beginning of every month, the Bureau of Labor Statistics provides a whole bunch of labor market indicators. The latest batch was very upbeat. Everyone focuses on payroll employment. Debbie and I focus on our Earned Income Proxy (EIP), which is payroll employment times average weekly hours worked times average hourly earnings, all in the private sector. It is highly correlated with private wages and salaries (a major component of personal income), and also with retail sales.

The EIP rose 0.2% during July, following a jump of 0.5% the previous month. It is at a record high. So is private wages and salaries, which rose 0.5% m/m and 5.8% y/y during June. This augurs well for consumer spending during the third quarter.

Today's Morning Briefing: Complacency Disturbed. (1) Bad two days in a long bull market. (2) Dow Theory is bearish in theory. (3) Corrections are not required by law. (4) Recessions, not old age, kill bulls. (5) Sanctions against Russia could weaken Europe too. (6) Don’t cry for hold-outs in Argentina. (7) Normalizing Fed policy shouldn’t cause a recession. (8) Bad news on Japanese wages. (9) Terrorists, WTO, and Ebola. (10) Earnings need time to catch up with valuation. (11) Earned Income Proxy at new high, auguring well for US consumer spending. (12) “Get on Up” (+ +). (More for subscribers.)