Friday, January 30, 2015

How the World Works (excerpt)

Why hasn’t ultra-easy monetary policy revived global economic growth? Why is the global economy increasingly mired in secular stagnation despite record-low interest rates and the flood of central bank liquidity? Last year, the supply of global liquidity, measured as the sum of non-gold international reserves held by all central banks plus the Fed’s holdings of US Treasuries and Agencies, rose to a record $16.6 trillion during August. That’s up $8.7 trillion, or 116%, since the start of 2009.

Central banks responded to the financial crisis of 2008 by pumping lots of liquidity into the global economy since then. They also lowered their official interest rates close to zero, with some of them now below zero. Bond yields are at historical lows in most of the major advanced economies. Rather than deleveraging, borrowers around the world were enabled by the central banks to borrow more.

The problem is that easy money has been around for a long time, and seems to be losing its effectiveness in stimulating economic growth. During the previous two decades, many of the borrowers were consumers of commodities, goods, and services. Their debt-financed spending boosted economic growth. That encouraged producers to expand their capacity by borrowing as well. In recent years, easy money seems to have lost its ability to boost consumption, while enabling producers to stay in business.

The result has been mounting deflationary pressures. The major central bankers have responded by lowering their interest rates to zero and providing more liquidity through various QE programs. They’ve been doing so since the financial crisis. That’s more than six years, yet secular stagnation seems to be spreading along with deflationary forces around the world.

In addition, populist politicians are gaining power, especially in the Eurozone and particularly in Greece. They want to end their governments’ austerity measures. In other words, they want to reduce the burden of the debts that their countries and countrymen accumulated during the so-called “debt super-cycle” of the past couple of decades. That means restructuring their debts by forcing lenders to extend maturities, to lower borrowing rates, to take haircuts, or to accept defaults. Of course, the last option is the one that would put a stake in the heart of the debt super-cycle and destroy the credibility of the central banks.

Is there a solution to this mess? Beats me. Central banks have been going down this road for a long time. They are likely to continue doing what they have been doing without recognizing how they might have inadvertently created the mess. Their mess has spread to the foreign exchange market, triggering an undeclared currency war. The central bankers have declared that their ultra-easy monetary policies aren’t aimed at driving down their currencies, but that’s what they are doing.

The Bank of Japan’s contribution to Abenomics was to devalue the yen with its QQE program. The currency plunged 34% from September 13, 2012 through yesterday. ECB President Mario Draghi started talking the euro down late last summer, and pushed it lower with the QE program announced last week. The euro is down 19% from last year’s high on May 6. Commodity currencies are plunging around the world because the commodity super-cycle wasn’t as super as many producers had anticipated when they expanded their capacity.

Instead of fretting over where this is all leading, let’s take a brief stroll down Memory Lane to recall how we got here:

(1) Fed. The Fed provided lots of easy money since the late 1980s. Under Fed Chair Alan Greenspan, the result was a bubble in high-tech stock prices during the late 1990s and a housing bubble during the previous decade. Under Fed Chair Ben Bernanke and now Janet Yellen, bond and stock prices have soared. Home prices have recovered.

The economy finally seems strong enough that Fed officials are aiming to start raising interest rates at mid-year. The problem is that the soaring dollar is pushing inflation further below the Fed’s 2% target. In addition, it is depressing corporate profits, causing companies to reduce their labor costs, which may continue to keep wage inflation around 2%, below the Fed’s 3%-4% preference.

This increases the likelihood of either one-and-done or none-and-done for rate-hiking this year. Yesterday’s FOMC statement reiterated: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” The word “patient” is ambiguous enough that the FOMC dropped the “considerable time” phrase without upsetting the markets yesterday.

(2) ECB. The introduction of the euro at the start of 1999 caused bond yields to converge in the Eurozone as investors no longer distinguished between the credit risk of the different members of the monetary union.

The spread between both Spanish and Italian government bond yields versus the comparable German yield narrowed to zero during the previous decade. Spreads widened again at the beginning of the current decade, but narrowed significantly after Mario Draghi pledged to do whatever it takes to defend the euro on July 26, 2012.

ECB data show that loans to the Eurozone private sector soared by €4.0 trillion to a record €11.1 trillion from the start of 2004 through the end of 2011. As of November 2014, this debt measure was down to €10.4 trillion. In other words, the ECB’s various attempts to revive lending since the financial crisis have failed. That might be because borrowers are already maxed out on their ability to service more debt.

(3) PBOC. The Chinese responded quickly to the financial crisis of 2008 with a large fiscal stimulus program and lots of easy money. Banks were encouraged to lend freely, which they did. Bank loans soared by $8.9 trillion from the end 2008 to a record high of $13.3 trillion at the end of last year. Yet China’s economic growth continues to slow as the economy gets less bang-per-yuan of borrowing.

(4) BOJ. Last Wednesday, the BOJ monetary policy committee cut its core inflation forecast to 1.0% for the fiscal year starting in April from 1.7%. Despite the latest QE (introduced on April 4, 2013) and then QQE (October 31, 2014) under Abenomics, Japan’s monetary policymakers can’t seem to get core inflation up to 2%.

The BOJ has succeeded in devaluing the yen and boosting stock prices. But it is distorting the bond market. Thanks to QQE purchases by the BOJ, the Japanese 10-year government bond yield was down to only 0.28% yesterday. The 30-year yield was 1.29%. The flattening of the yield curve near zero is bad news for financial companies, especially insurance companies and banks.

Already some forex watchers are watching out for a Swiss-style jump in the yen if the BOJ finds that it’s getting harder to buy JGBs because no one wants to sell them.

Thursday, January 29, 2015

The ECB Has a Challenge (excerpt)

The introduction of the euro at the start of 1999 caused bond yields to converge in the Eurozone as investors no longer distinguished between the credit risk of the different members of the monetary union.

The spread between both Spanish and Italian government bond yields versus the comparable German yield narrowed to zero during the previous decade. Spreads widened again at the beginning of the current decade, but narrowed significantly after Mario Draghi pledged to do whatever it takes to defend the euro on July 26, 2012.

ECB data show that loans to the Eurozone private sector soared by €4.0 trillion to a record €11.1 trillion from the start of 2004 through the end of 2011. As of November 2014, this debt measure was down to €10.4 trillion. In other words, the ECB’s various attempts to revive lending since the financial crisis have failed. That might be because borrowers are already maxed out on their ability to service more debt.

Today's Morning Briefing: How the World Works. (1) Two big questions. (2) Global liquidity doubles since start of 2009. (3) Easy money losing its effectiveness. (4) Debt-financed supply exceeds debt-financed demand, resulting in deflation. (5) Central banks doing more of the same and producing more secular stagnation and deflation. (6) The Greek solution to too much debt. (7) The death of the debt super-cycle. (8) Central banks messing with currency war. (9) The patient Fed. (10) Too many maxed-out borrowers in Eurozone? (11) Less bang-per-yuan. (12) Profit margin review. (More for subscribers.)

Wednesday, January 28, 2015

Ups & Downs for the US Economy (excerpt)

Yesterday was another up-and-down day for the US economy. On Monday, we learned that January’s Dallas Fed business survey suggests that the plunge in the price of oil is depressing Texas, the biggest oil-producing state in the US. On the other hand, plunging mortgage rates are lifting housing starts.

Yesterday, it was more of the same. Durable goods orders were weak, while new home sales were strong. Nondefense capital goods orders fell 0.6% for the second month during December. The weakest category is machinery orders, which declined 9.4% during the past four months. Leading the way down are orders for construction, industrial, mining, and farm machinery.

On the other hand, December’s new home sales data released yesterday showed a solid gain of 11.6% m/m to a new cyclical high. Even more impressive is the big jump in the Consumer Confidence Index this month. It soared from 93.1 last month to 102.9 this month, the highest since August 2007.

There was a significant drop in the percentage of consumers agreeing that jobs are hard to get to 25.7%, the lowest since March 2008. This series is highly correlated with the unemployment rate. If oil field workers are losing their jobs, that’s not having any impact on consumer confidence, which suggests that the job market is getting hotter.

Today's Morning Briefing: Yearning for Earnings. (1) Get ready, set, go. (2) The $120/$130 scenario. (3) Lowering S&P 500 target to 2150 this year and pushing 2300 to mid-2016. (4) Several factors weighing on earnings. (5) Not a zero-sum game. (6) Still waiting for usual earnings season upturn. (7) Industry analysts slashing 2015 and 2016 estimates. (8) Margin estimates falling. (9) Energy remains the biggest dead weight. (10) Durable goods are also heavy. (11) Consumer confidence is euphoric. (12) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)

Tuesday, January 27, 2015

Global Economy Showing Some Signs of Life (excerpt)

Everyone’s been down on the global economic outlook. Both the IMF and World Bank have lowered their global growth forecasts for 2015 and 2016. There has been quite a bit of skepticism about the likelihood that ultra-easy monetary policies in Japan and now the Eurozone will do much to lift their economies. I have been skeptical as well. However, I am open to the possibility that surprises may be to the upside rather than the downside. On balance, the plunge in oil prices should be stimulative for the global economy. The same can be said for the plunge in bond yields.

The question is whether the devaluations of the yen and the euro will boost exports in Japan and the Eurozone. Maybe so, but their gain could be some other economies’ loss. In particular, US exporters could suffer if the greenback continues to strengthen. However, that could be offset by stronger US consumer spending and home building. In this light, consider the following upbeat indicators:

(1) Germany. Germany’s Ifo Business Confidence Index rose for the past three months through January from 103.4 to 106.7. That’s after falling for six consecutive months. The sanctions imposed on Russia seem to have hit Germany hard last year. Now the falling euro may be starting to boost German exports.

(2) Japan. Japanese merchandise exports (in yen) rose 2.0% m/m and 12.9% y/y during December to the best reading since September 2008.

(3) Copper. Given the improvement in US housing starts, German business confidence, and Japanese exports, the recent freefall in the price of copper may be overdone. Yesterday, it rose 4 cents to $2.54 per pound. My hunch is that the selloff may be over and the price should stabilize for a while.

Yes, but what about China? Some of the recent copper selling might have been attributable to traders lightening their positions before the Chinese Lunar New Year Holiday begins on February 19. Most businesses are shut from February 18-24; 2015 is the Year of the Sheep. By the way, Markit reported that China’s flash M-PMI output index rose from 49.9 during December to 50.1 in January, the highest in three months.

Today's Morning Briefing: Houston’s Problem. (1) Houston has a problem. (2) US oil wells still gushing. (3) Dallas Fed survey showing weakness. (4) US consumer confidence going vertically up as gasoline prices go vertically down. (5) Homebuilding boom could offset oil industry bust. (6) Is the gloomy consensus on global economy too gloomy? (7) Yergin explains it all. (8) Oil shale frackers are the new swingers. (9) The free market vs. the Saudis. (10) Focus on market-weight-rated S&P 500 Energy. (More for subscribers.)

Monday, January 26, 2015

Q€ Is Mostly About Depressing the Euro (excerpt)

In the beginning, the Lord said, “Let there be light.” And there was light. Then in 2008, Ben Bernanke said, “Let there be NZIRP and QE.” And the Earth’s dark financial chaos ended as near-zero interest-rate policy and quantitative easing lit the way to recovery. Last week, Mario Dragi said, “Let there be Q€.” And the euro continued to plunge. Eurozone stocks continued to rally on hopes that Q€ will revive the region’s economy and avert deflation. If it works, light will replace darkness in the Eurozone. Currently, I’m not a believer, but I am willing to move from the dark side to the light side if I see some light at the end of the Eurozone’s economic tunnel.

The euro plummeted to $1.12 on Friday, the lowest since September 17, 2003, and down 20% from last year’s high of $1.39 on May 7. Now that the euro is trading more like the drachma than like the Deutsche mark, everyone seems to expect that it is heading for parity with the dollar, which would be a 28% decline from last year’s high.

I began to speculate about that possibility last summer. As I’ve noted before, Draghi first started talking the euro down at his 8/7 press conference last year. In his Q&A comments, he said that “the fundamentals for a weaker exchange rate are today much better than they were two or three months ago.”

Meanwhile, the trade-weighted dollar continues to soar, rising 2.4% since the start of the year and 13.6% since last year’s low on July 1. The EMU MSCI in euros is now up 7.8% ytd, following last year’s lackluster gain of 2.3%. It is outpacing the US MSCI, which is up 1.6% ytd following last year’s 11.1% rise. However, the EMU MSCI in dollars is up just 0.3% ytd following last year’s drop of 10.2%. As was demonstrated in the US and Japan, QE is bullish for stocks, but its stimulative impact on nominal GDP remains debatable.

Today's Morning Briefing: Q€. (1) After the darkness, there was light. (2) Euro is trading more like drachma than D-mark. (3) QE still lifts stock and bond prices. (4) Good to be a Bond King. (5) Paying for the privilege of lending money. (6) Still betting on one-and-done. (7) Draghi’s shock-and-awe. (8) Open-ended Q€. (9) Greeks vote, while ECB does not. (10) Eurozone stats still mostly stagnating. (11) Performance Derby. (12) “Birdman” (+). (More for subscribers.)

Thursday, January 22, 2015

Will QE Work for ECB? (excerpt)

Today, the ECB will detail a new QE program for the explicit purpose of averting deflation. Bloomberg reported yesterday that ECB President Mario Draghi favored spending as much as €1.1 trillion through asset purchases of €50 billion a month until December 2016, according to two euro-area central-bank officials.

It will be interesting to see how the QE program will handle loss sharing. According to an article in the 1/19 FT: “It is very likely that much of the burden for losses on sovereign bonds bought under QE will lie with individual member states, though there are various ideas about the exact role the national central banks will play. The losses are set to apply should a government pursue a debt restructuring or a default. The national central banks would be obliged to buy as much of their country’s debt as the ECB orders, though they may have some freedom over the sorts of maturities they buy.”

It’s not obvious that QE will revive inflation in the Eurozone given that it didn’t do so in the US. Perhaps inflation would have moved lower in the US without QE, though I doubt it. Given that government bond yields have plummeted close to zero in the Eurozone, QE’s mission has already been accomplished in the bond market, in my opinion.

The only transmission mechanism that I see between QE and inflation is through the currency. If the euro continues to plunge as a result of the new QE program, then the Eurozone’s economy might get a lift from exports and fewer imports. That could boost inflation, I suppose. However, I remain skeptical given Japan’s recent disappointing experience with quantitative easing.

Meanwhile, inflation continues to fall in the Eurozone. Thanks to falling oil prices, the headline CPI inflation rate was -0.2% y/y during December. The core rate was 0.7%.

Today's Morning Briefing: QE Futility. (1) The magic inflation target. (2) IMF lowers inflation outlook. (3) Despite ultra-easy money, central banks fighting deflation. (4) Rosengren is in no rush to raise rates. (5) What does QE really do? (6) From Draghi’s whatever-it-takes to QE. (7) Canadian surprise. (8) BOJ lowers inflation forecast and its credibility. (9) BOE is unanimous. (10) Earnings have some major headwinds. (More for subscribers.)

Wednesday, January 21, 2015

Will Regulators End Shanghai High? (excerpt)

I think we all know that China’s economy suffers from widespread excess capacity in manufacturing and a glut of properties. There is also too much pollution and corruption. The government has been targeting the latter in a campaign that has instilled fear among party and government officials--so much so that it has probably contributed to the property bust by cooling the investment demand for residential real estate. It has also reduced the number of Chinese high-rollers going to Macau to gamble.

Instead, China’s gamblers have turned to the stock market. The Shanghai-Shenzhen 300 index is up 63% from last year’s low. It dropped 7.7% on Monday after regulators clamped down on margin trading. It bounced back 1.2% yesterday. In addition to the margin restrictions, China’s banking regulator also released draft rules on Friday to curb the growth of entrusted loans. This type of company-to-company loan has surged in recent years along with other forms of shadow banking. The new rules forbid the use of entrusted loans for equity investment. These loans rose a record 458 billion yuan during December.

We all know that China’s economic growth rate has slowed. The unknown is how quickly it might continue to do so. The latest data show that the growth rate stabilized last year just north of 7% for real GDP. Industrial production eased to 7.9% y/y in December from 9.7% the year before. Retail sales growth was 11.9% last year, weaker than 2013’s 13.6%.

Today's Morning Briefing: Will the Other Shoe Drop? (1) The neighbor upstairs. (2) The unknown consequences of known freefalling commodity, forex, and bond markets. (3) Iranian oil minister says $25 a barrel possible. (4) What will consumers do? (5) Will oil debt defaults trigger a calamity? (6) What about Petrobras? (7) How big a hit to capital spending really? (8) Houthis in Yemen. (9) What killed the commodity super-cycle? (10) Real world experiment: Does devaluation work? (11) A bubble in Chinese stocks? (12) More about foreign earnings. (More for subscribers.)

Tuesday, January 20, 2015

Don’t Bet Against US Consumers (excerpt)

Last week, I put a positive spin on the disappointing retail sales numbers. I noted that despite the downward revisions in October and November and the decline in December, the first two months of Q4 were strong enough, and inflation was low enough during the quarter, to boost inflation-adjusted retail sales (including gasoline) by 7.7% (saar) last quarter. I assumed a 0.8% m/m drop in consumer goods prices during December. In fact, the goods CPI was down 1.2%, raising the quarter’s growth rate to 8.3%.

The Consumer Sentiment Index soared during the first half of January. The overall index jumped from 93.6 during December to 98.2 this month, the highest reading since January 2004. Both the expectations and present situation components soared this month. Solid employment gains along with rising confidence suggest that consumers have the means and the will to spend.

Today's Morning Briefing: Shanghai Chaos. (1) The trauma of 2008 still haunts investors. (2) Another dip, or worse? (3) Nothing to fear but volatility in commodity, financial, and forex markets. (4) Yes, we know, stock investors hate volatility. (5) There may be more downside in oil price, and more risk in energy junk bonds. (6) Iran’s president wants a vote. (7) Did Shanghai Chaos sell copper? (8) Negative interest rates in the Eurozone, Switzerland, and Japan. (9) Flattening yield curves signal secular stagnation abroad, not in US. (10) More chaos in currencies. (11) Grexit: Part II. (12) Don’t bet against US consumers. (13) How much will strong dollar hurt earnings? (14) “American Sniper” (+ +). (More for subscribers.)

Thursday, January 15, 2015

Dr. Copper Is Turning Bearish (excerpt)

The CRB raw industrials spot price index is a great indicator of global economic activity. It includes the price for copper scrap, which has led the index’s recent decline. The nearby futures price of copper has plunged so far this year by 10% after falling 18% last year. The price of copper is also highly correlated with the price of a barrel of Brent crude oil.

Dr. Copper is widely perceived to be the base metal with a PhD in economics. Many investors view the price of copper as one of the best indicators of global economic activity. Its recent drop is raising fears that maybe the plunge in oil prices is attributable not just to too much supply but also to not enough demand.

That’s possible. But there may also be too much supply of copper, rather than a sudden dearth of demand for the metal. An article on commodity gluts in the 1/11 WSJ observed: “Take copper. The worst performer among base metals last year, it has shed 14% of its value on the back more than four straight years of oversupply. Yet, new mines, including the Sierra Gorda mine in Chile that was inaugurated in October, continue adding to the glut. The Constancia mine, set to begin operations in Peru next year, looks to add even more.”

Today's Morning Briefing: Warning Flags? (1) It’s all up to American consumers. (2) Can the US continue to decouple? (3) Inflation-adjusted retail sales were very strong during Q4. (4) Weekly consumer confidence has been rising fast recently. (5) Real hourly pay at record high. (6) Green, yellow, and red flags. (7) CRB raw industrials spot price index breaking down. (8) Copper following oil price. (9) Excess supply or shortage of demand? (10) Forward earnings turns down along with Boom-Bust Barometer and Fundamental Stock Market Indicator. (11) Commodity currencies getting weaker. (More for subscribers.)

Wednesday, January 14, 2015

Nine Reasons Why Bond Yields Are Falling (excerpt)

The 30-year Treasury auction today is likely to price the bonds around 2.50%. During the auction on November 13, 2014, the yield was 3.09%. The price of these bonds is up roughly 10% since then.

The 10-year bond yield was 3.00% at the end of 2013, when the widespread consensus was that it would move higher in 2014 because the Fed was expected to taper and terminate QE3. There was also some chatter about a “great rotation” out of bonds and into stocks. The 10-year yield is now down to 1.92%.

Last year, in the 5/8 Morning Briefing, I discussed nine reasons why yields were falling rather than rising using the following headings: “Bond shortage,” “Portfolio rebalancing,” “Bond fund inflows,” “Fed still buying,” “Yields plunging in Europe,” “Inflation remains subdued,” “Global growth is slow,” “Ultra-easy monetary policy,” and “Safe Havens.” These factors continue to drive yields lower. They also make stocks, especially dividend-yielding ones, look more attractive.

I won’t be surprised if the 10-year yield retests its 2012 low of 1.43%. In this scenario, the 30-year yield could fall to 2.00%. Yields on 10-year government bonds are already much lower overseas: Japan (0.28%), Germany (0.48), France (0.76), Sweden (0.81), and UK (1.58). Previously, I’ve shown that the trend in the bond yield has been highly correlated with the trends in both inflation and the Age Wave, i.e., the percentage of the labor force that is 16-34 years old. The latter two variables remain bullish for bonds.

Today's Morning Briefing: Accentuating Some Positives. (1) S&P 500 remains near record high despite drop in Energy stock prices. (2) Small business owners are feeling very good. (3) Lots of job openings. (4) FOMC voters Williams and Lockhart are patient men. (5) Nine reasons why bond yields are falling in US. (6) Bond yields falling worldwide. (7) China’s exports showing more life than China’s imports. (More for subscribers.)

Tuesday, January 13, 2015

The Commodity Super-Cycle Wasn’t So Super (excerpt)

Last year on numerous occasions, I argued that the commodity super-cycle wasn’t so super. It lasted roughly 10 years. It started when the CRB raw industrials spot price index (which does not include petroleum) troughed at 214 on November 5, 2001, coinciding with China joining the World Trade Organization on December 11 of that year. It rose 198% to peak at 638 on April 11, 2011. It dropped sharply that year and has been range-bound between approximately 500-550 since then. On Friday, it was down to 490, which may signal a breakdown.

Commodity producers expanded their capacity, expecting a 20- to 30-year super-cycle driven by ever-increasing demand from China. Instead, the Eurozone fell into a recession during 2011 and seems mired in structural stagnation, while China’s growth has slowed. Industrial production data through November show that output remains below the 2011 highs for France, Germany, Spain, and the UK.

During December, China’s PPI for manufacturing was down 2.5% y/y, the 32nd consecutive monthly decline. China’s PPI for raw materials was down 6.4% y/y, the weakest since October 2009. It was led by a 19.0% drop in ferrous metals prices. The heavy industry PPI was down 3.5%, while the light industry PPI was down 0.6%.

Today's Morning Briefing: Commodity & Wage Deflation. (1) Goldman’s oil forecast. (2) Are commodities an asset class? (3) Goldman’s commodity index is drowning in oil. (4) CRB raw industrials spot price index is on edge. (5) Global Growth Barometer indicating stormy weather. (6) More PPI deflation in China. (7) A real prince. (8) Saudi’s shale game. (9) Why did wages fall during December? (10) Slicing and dicing average hourly earnings. (11) Another curve ball for the Fed. (More for subscribers.)

Monday, January 12, 2015

Mixed Employment Report (excerpt)

December’s wage data were disappointing. Indeed, while private-sector payroll employment rose solidly by 240,000 and the average workweek for the sector was unchanged at 34.6 hours, the drop in private-sector wages by 0.2% m/m caused our Earned Income Proxy to flatten during December following November’s jump of 0.8% m/m. That doesn’t augur well for retail sales. However, the strong pace of employment and the boost to real incomes from lower energy costs should drive consumer spending higher in coming months. Let’s review the employment report:

(1) Payroll employment rose 2.95 million last year, the best calendar-year gain since 1999. Upward revisions totaling 50,000 during October and November boosted the former’s gain to 261,000 and the latter’s to 353,000.

(2) Full-time employment rose to a cyclical high of 119.9 million at the end of last year according to the household survey. That’s the most since July 2008. Part-time employment fluctuated around 27.5 million last year. In other words, there is no evidence in these data that Obamacare boosted part-time employment, as was widely feared. (That doesn’t mean I am endorsing the program. Rather, I continue to be impressed by the resilience of the economy despite Washington’s meddling!)

(3) The labor force fell 273,000 during December as the number of dropouts rose 456,000 to a record high of 92.9 million. Many economists have been expecting that this number would fall as the labor market tightened and encouraged more people to reenter the labor force because jobs are easier to get. That hasn’t happened so far. It is likely that many long-term unemployed workers are dropping out.

Today's Morning Briefing: Averting a “Catastrophe”. (1) Fairy Godmother and Godfather. (2) Charles Evans is an influential and patient member of the FOMC. (3) Is the Fed more or less patient than Evans? (4) Normalization looking less likely this year to us. (5) See you after April 28-29 FOMC meeting. (6) Stronger dollar could hurt. (7) Wage inflation heading in the wrong direction. (8) Wage weakness: Noise or signal? (9) Despite solid job gains, workers continue to drop out of labor force. (10) “Wild” (+ + +). (More for subscribers.)

Thursday, January 8, 2015

S&P 500 Transportation Stocks Boosted By Lower Oil Price (excerpt)

In the US, the transportation industry is a big winner from falling oil prices. It is one of the few where industry analysts have responded quickly to the drop in energy prices by raising their S&P 500 Transportation earnings forecasts for 2014, 2015, and 2016. As a result, forward earnings rose 17.0% during the second half of last year, up from the first half’s increase of 8.5%. The forward profit margin for the sector is up from last year’s low of 9.0% during the week of January 23 to 10.4% at the end of last year.

Today's Morning Briefing: Job Machine. (1) ADP payroll data augur well for BLS measure. (2) Humming along. (3) Oil still gushing in Texas and N. Dakota. (4) No sign of trouble in jobless claims yet. (5) Direct impact of oil plunge on US employment and capital spending is very small. (6) ADP data should get more respect. (7) Small firms turning into larger firms account for lots of employment gains. (8) Oil windfall for advanced economies is almost $1 trillion. (9) Ditto for emerging economies. (10) Industry analysts raising profit margin and earnings forecasts for S&P 500 Transportation stocks. (11) Focus on overweight-rated S&P 500 Transportation sector. (More for subscribers.)

Wednesday, January 7, 2015

S&P 500 Earnings Holding Up Despite Oil Price Plunge (excerpt)

While forward earnings are dropping sharply for the S&P 500 Energy sector, forward earnings are holding up quite well in the other sectors. This analysis is based on aggregate dollar values rather than per share.

Over the past 12 weeks through the week of 12/25, the forward earnings of the S&P 500 Energy sector plunged 30%, by $38 billion to $90 billion. As a result, S&P 500 forward earnings peaked during the week of October 2 at a record high and edged down by 3.2% through the end of the year. Excluding Energy, forward earnings rose to yet another record high at the end of 2014.

Standard & Poor’s Capital IQ provides consensus earnings forecasts for each quarter. The sector estimates for Q4 are lower since the end of Q3, led by Energy, which has been revised down sharply by 26.2%. The overall S&P 500’s Q4 estimate is down 7.1%. Excluding Energy, it is down 5.2%.

Today's Morning Briefing: The World According to Gross. (1) Gross warning. (2) A bungee scenario for oil price. (3) The debt super-cycle is rolling over. (4) So is the commodity super-cycle. (5) Easy money has been stimulating supply more than demand lately. (6) Party is over for zombies. (7) Can US decouple from global secular stagnation? (8) Consumers’ windfall from lower fuel costs is over $200 billion. (9) Raising the odds of the Endgame, while lowering the odds of Irrational Exuberance. (10) Getting harder to see Fed raising rates this year under any scenario. (11) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)

Tuesday, January 6, 2015

Drowning in Oil (excerpt)

The ongoing freefall in the price of crude oil is unsettling investors. It dropped to $53.04 per barrel of Brent crude yesterday, the lowest since May 2009. It is down 54% from last year’s peak of $115.15 on June 19. The next significant support may be the December 24, 2008 low of $32.27.

At the end of last year, Saudi Arabia’s oil minister Ali al-Naimi said in the Middle East Economic Survey that the current prices of oil will persist over the long term and that oil prices will never go back to $100. He also told the FT, “It is not in the interest of OPEC producers to cut production, whatever the price, whether it is $20, $40, $50 or $60, it does not make sense.” According to him, if Saudi Arabia lowers its production “prices will rise again but the Russians, Brazilians and US shale oil producers will take market share from us.”

For Ali al-Naimi, with production costs at $4-$5 per barrel, the Gulf countries can hold indefinitely with oil at current prices or even if it fell to as low as $20 per barrel. In contrast, the production of shale oil in the US costs in a range between $50-$80 per barrel. “They will be injured before we felt any pain,” he declared. Now consider the following:

(1) Hedges. Yesterday, Reuters posted an article titled, “Revamped U.S. oil hedges may test OPEC's patience.” The key point: “As a war of nerves between U.S. shale producers and Gulf powerhouses intensifies, OPEC's biggest members are counting down the months until their upstart rivals lose the one thing shielding them from crashing oil prices--hedges.

“They may need much more patience than they reckon, however, because those hedges are a moving target. Rather than wait for their price insurance to run out, many companies are racing to revamp their policies, cashing in well-placed hedges to increase the number of future barrels hedged, according to industry consultants, bankers and analysts familiar with the deals.”

(2) Stress test. On the other hand, Bloomberg yesterday ran an article titled, “Oil Below $60 Tests Economics of U.S. Shale Boom.” It notes that oil companies started slashing their capital budgets late last year, when oil was still above $60 a barrel. Bloomberg also reported that some of the largest U.S. shale drillers “have been spending money faster than they make it, borrowing to pay for their expansion, according financial statements filed with the U.S. Securities and Exchange Commission.”

The 12/15 FT reported: “Almost $1tn of spending on future oil projects is at risk after a brutal plunge in crude prices to nearly $60 a barrel, Goldman Sachs has warned. Any cancellation of these developments would deprive the world of 7.5m barrels a day of new output over the coming decade--or 8 per cent of current global oil demand. The findings suggest the supply glut that has sent prices tumbling could soon vanish as the oil majors delay big-ticket production projects--the lifeblood of future petrol supplies, heating fuels and chemicals.”

(3) Rig count. It’s too soon to tell, but my hunch is that US crude oil production peaked at the end of last year and could fall rapidly in coming months. The US oil rig count peaked at 1,609 during the week of October 10 and fell to 1,482 through the week ending January 2.

Today's Morning Briefing: Here We Go Again. (1) Déjà vu all over again. (2) Fear making a comeback? (3) Euro Mess is back with talk of “Grexit.” (4) Is QE the answer to “whatever it takes” for the Eurozone? (5) German bond yield just north of zero. (6) Drowning in oil. (7) Saudi oil minister gets the prize for lowest oil price target at $20. (8) Will hedges keep US frackers pumping longer than expected? (9) Oil industry is slashing budgets. (10) Plunging oil prices should trigger plunge in oil production. (11) Energy sector is weighing on S&P 500 forward earnings, which is at a record high excluding the sector. (12) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

Monday, January 5, 2015

A Happy New Year So Far (excerpt)

In the US, it is a happy new year already. It isn't for everyone, but it certainly is starting this way for US consumers. Payroll employment rose 2.73 million over the 12 months through November, the best such gain since March 2006. The average hourly wage rate rose 2.1% y/y that month, while PCED prices rose 1.2%. The recent plunge in gasoline prices is providing consumers with an annualized windfall of about $200 billion. This happy news is boosting various measures of consumer confidence:

(1) Consumer Comfort Index. Bloomberg’s weekly measure of consumer confidence jumped late last year, ending 2014 at the highest level since October 2007. Consumers turned more bullish on the state of the economy and the buying climate.

(2) Consumer Confidence Index. The present situation component of the Consumer Confidence Index rose to a new cyclical high during December, and the best reading since February 2008. The percentage of this survey’s respondents who said that jobs are hard to get dropped to 27.7% last month. That’s down from the cyclical high of 49.4% during September 2011, and the lowest since March 2008. It tends to be highly correlated with the unemployment rate, which should continue to fall this year.

Consumers are in the mood to spend some more. Revised data showed that they did so during Q3, contributing 2.2 percentage points to the quarter’s 5.0% increase in real GDP. No wonder that the ATA Trucking Index of freight tonnage jumped 3.5% m/m in November to a new record high. Intermodal railcar loadings also rose to a new record high at the end of last year.

Today's Morning Briefing: Another Happy Year? (1) Santa was early last year. (2) Dow Theory is bullish. (3) Still targeting 2300 for S&P 500. (4) Bond Kings remain bullish on bonds, and we are inclined to agree. (5) Hard to argue against stronger dollar. (6) Oil could retest 2008 low before bouncing back to around $60. (7) US GDP should gain from lower oil prices. (8) US MSCI should continue to outperform. (9) Eurozone is a mess again. (10) China’s zombies. (11) Consumer confidence is soaring, according to weekly measure. (12) “The Imitation Game” (+ + +). (More for subscribers.)