We Are All Bulls Now (excerpt)

Everyone is bullish. Contrarians know that must be bearish. However, everyone has been bullish for a while, yet the S&P 500 rose to a record high of 2117 on April 24. That’s because everyone has finally figured out that fighting the Fed in particular and central banks in general is dumb. So we are all smart now. As a result, bullish sentiment is at a record high, though the bull market, which is more than six years old, is no spring chicken.

I calculated the 52-week moving average of the Investor Intelligence Bull/Bear Ratio. At 3.46 this week, it is the highest in the history of this series, which starts in 1987. The 52-week average of the sum of those who are bullish or expect a correction rose to 84.4%, also a record high. The percentage of bears fell to only 13.9% this week, with the 52-week average down to a record low 15.5%.

If we are all bullish, who is left to buy stocks? A 4/12 FT article reported: “Shareholders in the biggest US companies stand to receive a record $1tn in cash this year, as blue chips’ concerns over the global economic outlook have diverted cash away from investment and is driving a boom in buybacks and dividends.”

Today's Morning Briefing: Cold Cash. (1) Everyone is bullish, but that’s not bearish. (2) We are all smart bulls now. (3) No spring chicken. (4) Has-been Fed Model has been working since 2010. (5) Companies set to return $1tn to investors this year. (6) Fed’s easy money enables buybacks, spinoffs, and M&A. (7) Buybacks = Corporate QE. (8) Fed depending on undependable data. (9) Dollar looking peakish. (10) Money is exiting Greece in fear of Grexit. (11) More upbeat indicators out of Eurozone. (More for subscribers.)

S&P 500 Forward Earnings Driving Economic Slowdown (excerpt)

There are lots of correlations between S&P 500 forward earnings and several key economic indicators. The former dropped sharply late last year and early this year as Energy industry analysts slashed their earnings estimates for this year and next year.

While the plunge in oil prices accounts for much of the weakness in forward earnings since last fall, the soaring dollar has also weighed on earnings. Corporate profits tend to be the key driver of employment and capital spending. Profitable companies tend to expand their payrolls and capacity. Unprofitable companies don’t do so.

This explains why there is such a good correlation between the y/y growth rates of forward earnings and aggregate weekly hours. Forward earnings is also highly correlated with total factory orders as well as nondefense capital goods orders excluding aircraft. The weakness in forward earnings confirms that the slowdown in US economic growth so far this year wasn’t attributable just to the icy winter. Spring’s economic indicators remain disappointing so far.

The profits picture should brighten a bit if the dollar has peaked and oil prices have bottomed. The US economic outlook should also brighten in this scenario. However, don’t expect a boom.

Today's Morning Briefing: Forward Thinking. (1) Six degrees of separation. (2) LinkedIn and the kindness of strangers. (3) Correlations and divergences. (4) Industrial commodity prices aren’t confirming oil rally. (5) The oil price might have bottomed and peaked. (6) The dollar might have peaked. (7) Don’t buy into A$, C$, and gold rallies. (8) Expected inflation rebounding. (9) Forward earnings flagging, and so is economy. (10) Profitable companies expand. Unprofitable ones don’t. (11) Neither boom nor bust. (12) Focus on now underweight-rated S&P 500 housing-related industries. (More for subscribers.)

Will Robots Bend the Phillips Curve? (excerpt)

There’s an important debate about wage inflation. The inverse relationship between wage inflation and the unemployment rate is known as the "Phillips Curve." It makes sense that wage inflation would rise or fall depending on whether the unemployment rate was relatively low or high. However, I have been arguing that the Phillips Curve might not work as well given increasing globalization, innovation, and competition.

In his Barron’s column this week, Gene Epstein argues that wage growth is about to take off. He bases this forecast on a version of the Phillips Curve model devised by Jason Benderly of Applied Global Macro Research. In addition to the level of the unemployment rate, this model includes the change in the jobless rate, labor productivity, and the after-tax profit margin.

I note that the unemployment rate remained at 5.5% during March, the lowest since May 2008, yet wage inflation remained subdued for all workers at 2.1%, while falling recently to 1.8% for production and nonsupervisory workers. On the other hand, as we noted last week, wage inflation over the past three months through March for all workers jumped to 3.9% (saar), the highest since December 2008. That might have reflected the one-shot impact of the widespread hike in the minimum wage at the start of the year. Or else, the Phillips Curve is starting to work, finally.

If it’s different this time, then robots might be one of the reasons. The 4/23 WSJ reported that in Oxnard, California, “A 14-arm, automated harvester recently wheeled through rows of strawberry plants here, illustrating an emerging solution to one of the produce industry’s most pressing problems: a shortfall of farmhands.” The 4/24 NYT reported, “Faced with an acute and worsening shortage of blue-collar workers, China is rushing to develop and deploy a wide variety of robots for use in thousands of factories.”

Today's Morning Briefing: Great Debates. (1) The link between easy money and secular stagnation. (2) Summers vs Rogoff. (3) Debt super-cycle. (4) Time heals all wounds. (5) Asia’s debt binge. (6) Glut of gluts. (7) Will China solve its debt problem with a stock bubble? (8) Lots of burdensome debt burdens in Japan, Eurozone, and China. (9) US corporations borrowing for financial engineering. (10) A cold spring following an icy winter. (11) Dallas slipping on oil. (12) Are robots bending the Phillips Curve? (13) Lots of debatable subjects including Fed, oil, dollar, Grexit, MENA, and the meaning of life. (More for subscribers.)

From Ice Patch to Soft Patch (excerpt)

The performance of the US stock market is quite impressive considering that there isn’t much of a spring in the latest batch of economic indicators. The winter’s ice patch is looking more and more like the spring’s soft patch--all the more reason to expect either one-and-done or none-and-done from the Fed. Consider the following:

(1) Business surveys. Three of the six regional business surveys that I track are available through April. The averages of their composite indexes tend to be highly correlated with the national M-PMI. The average for the FRB districts of Kansas City, New York, and Philadelphia fell to -0.2 this month from 2.6 last month and a recent peak of 18.8 during November of last year. It’s the lowest since May 2013.

The average of the three new orders indexes was -5.8 this month, about the same as last month’s -6.2, which was the lowest since October 2012. The employment index fell to 1.0, the lowest since November 2013.

(2) Flash M-PMI. The national flash M-PMI compiled by Markit fell from 55.7 in March to 54.2 this month. The ISM’s M-PMI was much weaker than Markit’s reading in March. The same is likely this month given the weakness of the available regional surveys so far.

(3) Durable goods orders. The weakness in the regional orders indexes was confirmed by Friday’s release of March durable goods orders. While the overall number rose 4.0% m/m, boosted by a surge in aircraft orders, nondefense capital goods orders excluding aircraft fell for the seventh consecutive month through March, by a total of 6.7%. Orders have been especially weak for primary metals, fabricated metal products, machinery, and electrical equipment, appliances, and components. That probably reflects the combined depressing impact of lower oil prices on the energy industry and the higher dollar on exports.

(4) Lumber prices. In recent days, I’ve noted the plunge in lumber prices since the beginning of the year through Wednesday. That’s not a good omen for housing starts or the S&P 500 Homebuilding Index. Neither is the flat trend in railcar loadings of lumber and wood products over the past year. New home sales fell 11.4% m/m during March.

Today's Morning Briefing: Conspiracy Theories. (1) Compelling narratives without any proof. (2) The central bankers are doing it in broad daylight. (3) Bonds and stocks achieve “escape velocity,” while economies don’t. (4) Connecting the dots in Chicago. (5) Fed’s bunker in Chicago. (6) Bernanke’s new job in Chicago. (7) Spoofing the CME in Chicago. (8) Crash Boys: Michael Lewis has some questions for CME & CFTC. (9) Meet Sarao and Aleyniko. (10) Goldman’s sinister algorithm. (11) The stock market is high on life. (12) More soft-patch indicators in the US. (13) Flash-fried PMIs. (14) “House of Clinton” (+ + +). (More for subscribers.)

Industrial Commodities Still Sinking (excerpt)

There’s no party in the commodity pits. While the price of a barrel of crude oil has rebounded smartly from a low of $46.59 on January 13 to $62.84 yesterday, the CRB raw industrials spot price index continues to slip and slide. In the past, the weakness in the CRB index would have been a bearish omen for stock prices. It still might be, but the monetary liquidity that isn’t boosting global economic growth and commodity prices is fueling bull markets in stocks and bonds. Consider the following:

(1) From 2005 through mid-2011, there was a reasonably good correlation between the S&P 500 and the CRB index. The two have diverged since then, with the S&P 500 heading higher to new record highs, while the commodity index has been trending lower and is now at the lowest since February 8, 2010.

(2) Since late 2001, there has been a very good correlation between the Emerging Markets MSCI stock price index (in local currencies) and the CRB index. The two have diverged significantly over the past year, with the former only 2.6% below its 2007 record high. Leading the way since early 2014 has been India in anticipation of a new reform-minded government headed by Prime Minister Narendra Modi, whose party won election last May.

Since mid-November of last year, when the PBOC started to ease monetary policy, the China MSCI stock price index has also joined the global melt-up parade. It had been very highly correlated with the price of copper since 2009. They too have diverged over the past year. This is yet another sign that ultra-easy monetary policy is boosting asset inflation rather than real growth and price inflation.

Today's Morning Briefing: Go Away or Go Global? (1) Nice melt-up overseas. (2) Days of Infamy: May Day to Halloween. (3) Two wicked corrections. (4) Three choices: Stay Home, Go Global, or Go Away. (5) Sunrise in Japan? (6) Can central banks overcome secular stagnation? (7) Not much fun in the commodity pits. (8) Unusual divergence between stock prices and commodity prices. (9) Lumber trading like lead. (10) China’s international reserves depressed by depreciations of euro and yen. (11) China’s capital outflows story still rings true. (More for subscribers.)

Churning (excerpt)

So far so good. In the 2/2 Morning Briefing, I wrote: “[T]he stock market may continue to trade in a volatile range during the first half of this year. The main negative for stocks is that valuation multiples are historically high, while earnings growth estimates are declining in the face of a strong dollar, weakening commodity prices, a flattening yield curve, and slowing global economic growth. The big positives are that bond yields are at historical lows and the plunge in oil prices is boosting consumer confidence and spending. Joe and I are still targeting 2150 for the S&P 500 by the end of this year and 2300 by the middle of next year.”

Yesterday, Kristen Scholer posted a story on the WSJ website titled “Why Record Highs May be Harder to Come By This Year.” She observed: “The Dow Jones Industrial Average and S&P 500 set 188 fresh all-time highs, or the equivalent of roughly one every five trading sessions, during 2013 and 2014. This year, though, the major indexes have booked only nine historic highs as stocks have moved sideways for much of 2015. … It has been 34 sessions since the S&P 500 last finished at a historic high. That’s the index’s longest streak without an all-time high since the first record of the current bull market in 2013, according to Bespoke Investment Group.”

Why has this been happening? According to the article: “Corporate buybacks, deals and low interest rates have kept equities afloat, while stalled earnings growth, high valuations and slowing economic activity have put a lid on gains.” If that sounds like the same story I’ve been telling, then I should disclose that I was interviewed for the WSJ story and mentioned as follows: “He thinks the tug of war between the bulls and the bears will continue through the summer and into the fall. ‘While some institutional investors might be inclined to sell due to overvaluation, the most significant buyers continue to be corporate managers buying back their shares, and they aren’t nearly as sensitive to valuations,’ he said.”

At the beginning of 2013, in the 1/29 Morning Briefing, which was titled “Nothing to Fear but Nothing to Fear.” I noted: “In recent discussions, some of my professional friends told me they are now worrying that there is nothing to worry about. They note that there may be too many bulls for the good of the bull market.” I also noticed that many of them had “anxiety fatigue.” After the widely feared Fiscal Cliff was averted, investors seemed to be less prone to anxiety attacks. In other words, they were less prone to sell on bearish news, and more likely to hold their stocks and add to their positions on any weakness.

Now they seem to have “bull market fatigue” because valuations are stretched. Nevertheless, they are mostly staying fully invested. Consider the following:

(1) Anxiety fatigue. Since the start of the year, the S&P 500 has been trading between a record high of 2117 on March 2 and a low of 1992 on January 15. There have been lots of panic attacks since 2013, but none that turned into significant corrections. Recent worries that the plunge in the oil price might trigger a rout in the junk bond market haven’t panned out. China’s latest batch of weak economic indicators has been mitigated by the PBOC’s easier monetary policy. The winter/spring economic slowdown in the US increases the odds of a “one-and-done” or “none-and-done” rate hike by the Fed this year.

(2) Moving averages. The S&P 500 has remained above its still-rising 200-day moving average after briefly retesting it in early October last year. The S&P 500 Transportation index is currently back to its 200-dma. That’s a bit of a concern from a Dow Theory perspective, especially since the index’s 50-day moving average has turned down since it peaked on January 22.

(3) Melt-up worries. Interestingly, in recent conversations with our accounts, I am finding that more of them are worrying about missing a melt-up in stock prices than about dodging a correction or a meltdown. What might trigger a melt-up? The obvious answer is a significant postponement of monetary normalization by the Fed. A more likely scenario is that the initial lift-off in interest rates might cause corporations to stampede into the bond market to raise funds for more buy backs and M&A.

Today's Morning Briefing: Paths of Least Resistance. (1) Going nowhere fast. (2) Tug of war. (3) From “anxiety fatigue” to “bull market fatigue.” (4) Still too many bulls. (5) Home on the range. (6) Sector-neutral strategy beating many active managers. (7) Melt-up anxiety. (8) Hard to find anything bullish in crude oil’s demand/supply balance. (9) Maybe it’s geopolitical. (10) Saudis playing for keeps. (11) Focus on market-weight-rated S&P 500 Energy. (More for subscribers.)

Dollar's Turn? (excerpt)

On balance, there still looks to be more stagnation around the world than either a boom or a bust. So how can we explain the remarkable rebound in oil prices in recent weeks? The nearby futures price of a barrel of Brent crude has risen from its recent low of $45.59 on January 13 to $63.45 on Friday.

That’s despite record production by Saudi Arabia, all-time highs in crude oil inventories, gushing US oil production, and the possible end of sanctions against Iran. Could it be that the global economy is improving more than widely recognized? I doubt it. There’s certainly no confirmation of this possibility in the CRB raw industrials spot price index, which continued to edge lower last week, and now is the lowest since February 2010. This index does not include any petroleum or lumber commodities.

The apparent bottoming of oil prices is coinciding with the apparent peaking in the trade-weighted dollar. Previously, I’ve often observed that the two are highly inversely correlated. The dollar may be peaking on expectations that the Fed’s policy stance over the rest of the year is more likely to be “one-and-done” or even “none-and-done” than normalization, notwithstanding the recent upbeat views of two Fed officials (Stanley Fischer and Bill Dudley) about the US economic outlook. I am in the one-and-done camp for now.

The strong correlation may occur because rising (falling) oil prices increase (decrease) the dollar revenues of oil exporting countries. Many of them prefer to diversify their currency holdings so when they get lots of dollars, they tend to convert them to other currencies, which weakens the dollar. The reverse happens when they earn fewer dollars on their oil exports.

The currency markets are turning bullish not only for oil but also for other commodities, suggesting that there may be mounting expectations of better global economic activity. A few of the commodity currencies--i.e., the Canadian dollar, Brazilian real, and Russian ruble (thanks to the oil price rebound)--have been rallying in recent days. However, that’s after significant selloffs over the past year or so. On the other hand, the Australian dollar and the South African rand have simply stopped falling in recent days.

Today's Morning Briefing: Uneven Growth.(1) Ups and downs in IMFs latest forecast. (2) Redistributing the same growth. (3) Draghi’s push. (4) Rising in the EZ: production, exports, and car sales. (5) Fischer and Dudley expect more. (6) Weakening in the US: production, orders, and starts. (7) Stepping on the gas and the brakes in China. (8) Data suggest massive capital outflows from China. (9) India is looking up, while Brazil is looking down. (10) Industrial commodities yet to confirm oil’s rebound. (11) Has the dollar peaked because oil has bottomed, or vice versa? (More for subscribers.)

Inflation Warning (excerpt)

Last week, the 4/16 WSJ reported: “U.S. wages may be starting to pick up, a development that could help policy makers at the Federal Reserve feel more confident that sluggish U.S. inflation also will gain traction, Fed Vice Chairman Stanley Fischer said Thursday.” He said so on a panel discussion in Washington. That same morning, in a CNBC interview, he said the Fed knows the markets “look ahead somewhat, so I think--I hope--that they are taking into account that the Fed, at some point, is likely to raise the interest rate.” On timing, he said markets “can’t depend on the current situation continuing forever--or even probably--beyond the end of this year.”

He reiterated that “there are more signs every day” of mild wage increases. What is he looking at? Let’s have a look:

(1) Minimum wage. Anecdotally, the minimum wage was raised in 21 states at the start of the year. However, during March, average hourly earnings rose only 2.1% and 1.8% for all workers and for production and nonsupervisory workers.

(2) McDonald’s. On 4/15, fast-food cooks and cashiers demanding a $15 minimum wage walked off the job in 236 cities in what organizers called the largest mobilization of low-wage workers ever. On April 1, McDonald’s announced plans to give employees a 10% pay bump and some extra benefits. The raise will affect about 90,000 workers at a small fraction of McDonald’s stores. Employees at franchises, which make up the majority of the burger chain's locations, won't be affected.

(3) Walmart. At the start of April, Walmart raised its minimum starting wage to $9 an hour, 24% higher than the federal minimum. A 4/10 story on PBS NewsHour noted, “The company says that its wage increases will impact 500,000 workers, but the number who will see their wages rise from the federal minimum of $7.25 to $9 is much smaller. Only 5,000 of its 1.4 million workers actually make the minimum wage. And the minimum in most of the country, 29 states, is already considerably higher than the federal minimum. Seven states and the District of Columbia have minimums of $9 or higher. So the average pay raise for the affected Walmart workers will be far less than the 24% raise for the very small number currently earning the federal minimum.”

(4) Quit rate. The quit rate in retailing tends to be relatively high, especially among low-paid workers. Retailers are raising their wages to reduce their labor turnover costs.

(5) Q1 wages and prices. Average hourly earnings for all workers rose 3.9% (saar) during the first three months of the year, the highest since December 2008. That’s the kind of y/y increase that Fed officials have said would allow them to normalize monetary policy sooner and at a faster clip.

In addition, the core CPI inflation rate edged back up to 1.8% during March, closer to the Fed’s 2% target--which is really for the core PCED, which was 1.4% during February. The three-month annualized change in the core CPI through March was 2.3%, suggesting that the core PCED, which was 0.9% through February, might show a higher increase when March data are released on Thursday, April 30.

Today's Morning Briefing: The Twilight Zone. (1) Valuations on the border of the Irrational Zone. (2) Three fears hit market: Greek exit, China bubble, and inflation uptick. (3) Recapping stretched valuations. (4) Institutional investors remain skeptical. (5) Outperforming SMidCaps less exposed to dollar. (6) Shortage of bargains. (7) Buybacks = Corporate QE. (8) Corporate execs comparing earnings yield to borrowing rate when buying back shares. (9) Warning: Inflation may be warming. (More for subscribers.)

Less Bang-Per-Yuan (excerpt)

Over the past couple of decades, China’s growth was supercharged by lots of debt that was used to expand industrial capacity to employ the huge influx of new workers into the labor market resulting from the demographic dividend. The Chinese have a very high saving rate. As some of them prospered, they poured their savings into properties; many built in the country’s “ghost cities.” Now China has a glut of industrial capacity spewing out life-shortening pollution and a speculative bubble in real estate that is quickly losing air. The government continues to provide lots of easy credit, but it has lost its bang-per-yuan for stimulating growth, and instead is fueling a speculative bubble in stocks.

Real GDP rose 7.0% y/y through Q1-2015, the weakest growth rate since Q1-2009. Haver Analytics calculates that the seasonally adjusted and annualized quarterly growth rate was 5.3%, also the weakest since Q1-2009. Industrial production was up only 5.6% y/y in March. It’s very unusual to see production growing below real GDP.

Over the past three months through March, bank loans are up at an annual rate of 16.9 trillion yuan ($2.7 trillion dollars), the highest since March 2009! Yet despite all that liquidity, real GDP growth continued to move lower.

Today's Morning Briefing: Live Long & Prosper. (1) Spock and China’s future. (2) “China will get old before it gets rich.” (3) The downside of China’s demographic dividend. (4) Chinese speculating in stocks rather than real estate. (5) Q1 real GDP up just 5.3% (saar). (6) Big declines in exports, imports, and railways freight traffic. (7) Plenty of credit, and lots of deflation. (8) More easing coming. (9) Premier is alarmed. (10) US consumer getting squeezed. (11) Focus on market-weight-rated S&P 500 IT. (More for subscribers.)

US Consumers: Chill in the Air (excerpt)

Yesterday’s March retail sales report was certainly disappointing. It suggests that the winter’s big chill has turned into the spring’s sloppy soft patch. Bond yields fell on the news, which might force the Fed to postpone liftoff from mid-year to later this year.

The weakness in retail sales from December through February didn’t jibe with the strength in employment and consumer confidence. Another surprise was that the windfall from falling gasoline prices didn’t show up in better spending in other retail categories. Then March employment data turned weak, and the month’s 1.0% gain in retail sales excluding gasoline (to a new record high) wasn’t much of a spring rebound following the 0.8% decline from December through February. Even worse, on an inflation-adjusted basis, core retail sales (excluding autos, gasoline, and building materials) fell 1.3% saar during Q1.

What’s the problem? It might be our health. American consumers now spend a record $8,066 per capita annually on health care. Thanks to Obamacare, we are all paying more to the piper. The out-of-pocket costs of health care have increased significantly, with higher premiums and co-pays and bigger deductibles. Unfortunately, it’s hard to quantify this because statistics are not available. The government’s data show total spending on health care without showing payments made by the government, insurance companies, and consumers.

Today's Morning Briefing: Paying the Piper. (1) T-Day! (2) Road crews filling potholes on a hit-or-miss basis. (3) It’s good to be king. (4) Who pays taxes? (5) From winter’s ice patch to spring’s soft patch. (6) Postponing liftoff? (7) Not much spring in March retail sales. (8) Health care out-of-pocket outlays infecting retail sales? (9) Excluding energy, revenues growth holding up. (10) Lots of geopolitical hot spots. (11) Talking points vs. wish lists. (12) Focus on market-weight-rated S&P 500 Retail. (More for subscribers.)

Have Profit Margins Peaked? (excerpt)

Both the S&P and the US Bureau of Economic Analysis reported that profit margins dipped during Q4-2014. The former was at 10.2%, while the latter was at 10.4%. But both remained near their record highs of the previous quarter. One of our accounts observed that data that I compile are showing a possible peak in the forward profit margins of the S&P 500/400/600. That’s not so clear for the S&P 500, where the margin peaked at a record high of 10.8% during the week of December 4, 2014. It did dip recently, but edged up over the past few weeks back to 10.6% in early April.

The dips are more noticeable and remain underway for the SMidCaps. For the S&P 400, the forward profit margin is down from last year’s peak of 6.7% during the week of June 19 to 6.2% currently. For the S&P 600, it is down from the 2013 peak of 6.1% during the week of October 3 to 5.5% currently.

The perceptive fellow who brought this to our attention wondered why margins seem to be coming down more for smaller than for larger firms. That’s a good question, assuming that the forward profit margins accurately reflect the situation. We think so. We calculate the data by dividing forward earnings by forward revenues.

The pace of employment has picked up over the past year. ADP data through March show that payrolls are up 2.9 million y/y, with large companies adding 546,000, medium-sized companies adding 1.0 million, and small companies adding 1.3 million. The additional payrolls may squeeze margins more for small firms than for large firms simply because add-to-staffs are more significant to the budgets of the former than the latter.

In any event, profit margins may be peaking across the board, though they aren’t likely to tumble until the next recession. If they have peaked, then profits growth will be determined mostly by revenues growth, which is likely to be below 5% this year and next year.

Today's Morning Briefing: On the Margin. (1) More stagnation than boom or bust. (2) Commodity prices stabilizing. (3) Six cylinders firing in Eurozone, but recovery remains lackluster. (4) Waiting for US consumers to spend gasoline windfall. (5) Japanese output remains disappointing. (6) Chinese exports and imports are shockingly weak. (7) Bad news for Brazil. (8) Signs of profit margin peak, especially for SMidCaps. (9) Hillary’s challenge: Six out of 10 say junk Obama policies. (10) Focus on underweight-rated S&P 500 Materials. (More for subscribers.)

Chinese Government Driving Stock Prices Higher (excerpt)

On 4/8, Reuters reported, “Chinese funds are snapping up shares in Hong Kong, betting that a link-up between the Shenzhen and Hong Kong stock exchanges, and easier access for institutional investors, will yield quick double-digit or even triple-digit arbitrage profits. On Wednesday, Chinese investors used the entire 10.5 billion yuan ($1.69 billion) daily investment quota for buying Hong Kong stocks under the Shanghai-Hong Kong Stock Connect scheme for the first time. This propelled the Hang Seng China Enterprises Index up 5.8 percent, following a 6.43 percent gain last week, and helped the Hong Kong exchange reach record volume on Wednesday.”

China's CSI 300 stock index of the largest listed companies in Shanghai and Shenzhen has soared 91.3% y/y while the Hong Kong China Enterprises Index of 40 companies is up 36.8% over the same period. The broader Shanghai A-Shares index of around 1,000 companies is up 67.0% since mid-November 2014, when the PBOC started cutting interest rates to boost economic growth. The China MSCI includes 138 companies and recently joined the circus with a gain of 10.1% just last week.

Nevertheless, the China MSCI forward P/E remains relatively cheap. It was just 10.3 at the start of April. On the other hand, this composite’s Net Earnings Revisions Index was -3.9 during March, the 14th consecutive monthly negative reading. Furthermore, both forward revenues and forward earnings remain below last year’s record highs.

The Reuters story cited above also noted, “In the past, arbitrage opportunities proved a mirage. The Shanghai-Hong Kong stock connect not only failed to narrow the premium after its November launch but actually widened it as Chinese retail investors declined to move money south. But this time may be different. In late March, China's securities regulator improved access, letting mainland mutual funds invest in Hong Kong shares via the connector. Several days later, China allowed insurers to buy shares listed on GEM.”

The 4/10 FT reported: “After years of poor performance, confidence in the stock market has returned in China with a vengeance. Savers have switched hundreds of billions of dollars out of property, deposits and wealth management products in the hope of making a fast buck in stocks. … Investors opened more than 4.8m new stock trading accounts in March alone and almost 1m more in the first two days of April, according to the latest figures from the country’s main clearing house. These accounts largely represent new investors ….The explosive growth of margin lending, in which brokerages lend money to investors to play the markets, also suggests irrational exuberance. Margin loans outstanding in Shanghai and Shenzhen--home to China’s two stock exchanges--totaled Rmb2.2tn ($358bn) on Wednesday, two-and-a-half times the total six months earlier.”

Today's Morning Briefing: The Greatest Show on Earth. (1) A day at the circus. (2) Honorary member of Crudele’s rig club. (3) Send in the clowns. (4) Cecil B. DeMille on central banks. (5) Dudley’s Put. (6) What’s the difference between the “wealth effect” and asset bubbles? (7) Removing the safety net in China’s high-flying stock market. (8) Draghi sends EMU stocks into orbit. (9) Lots of cotton candy in the capital markets. (10) The Down Under controversy. (11) Are analysts underestimating EMU earnings? (12) “Woman in Gold” (+ +). (More for subscribers.)

Oil Output Continues To Gush (excerpt)

Yesterday, the price of a barrel of oil gave back recent gains after Saudi Arabia reported record production of 10.3mbd in March, a figure the country's oil minister said was unlikely to fall by much. They are obviously aiming to keep oil prices down to hurt Iran, and Russia too. In addition, yesterday we learned that US crude oil inventories soared to a record-high 482.4 million barrels during the week of April 3, 2015, up 26% y/y.

The Saudis are also hoping that low crude oil prices will significantly reduce the output of US frackers. There is no sign of that happening just yet. US oil field production remained at 9.4mbd during the first week of April, following a seven-week climb. The US still imports 9.6mbd, though that’s about as low as levels were during 1996. Furthermore, US exports of petroleum products are at a record 4.3mbd.

US merchandise trade data show that in current dollars, US oil imports have dropped by a whopping $274 billion (saar) from the most recent high of $470 billion during May 2011 to $196 billion during February. The trade deficit in crude oil and petroleum products has dropped by $258 billion to $97 billion over this period. In current dollars, US oil exports are down $70 billion over the past six months through February as lower oil prices more than offset the increase in exported barrels.

Today's Morning Briefing: The Obama Doctrine. (1) The Middle East is flat. (2) Seeking peace in our time for a troubled region. (3) Let the Arabs fight their own fights. (4) Can we all get along? (5) Obama’s utopian dream. (6) Postponing Armageddon. (7) Kicking the bomb down the road. (8) Game of the Saudi throne. (9) Talking Fed head says first rate hike may or may not be coming soon. (10) Dudley’s staff assigned snow job. (11) Transportation in the ditch. (More for subscribers.)

Solid Rebound in PMIs Augur Well for Global Economy (excerpt)

Stock investors have been going global rather than investing in the US. While going global has been mostly driven by relative valuation considerations rather than relative earnings, global fundamental economic indicators are generally improving. The reasons could be that lower oil prices are boosting global growth and that the stronger dollar is redistributing growth away from the US to other countries.

Especially impressive is the rebound in the JP Morgan Global Composite Output PMI from a recent low of 52.4 during December to 54.8 last month. The increase has been led by the service component, while the manufacturing component has meandered between 51 and 52. The Eurozone has been leading the improvement in the global composite, rising from a recent low of 51.1 during November to 54.0 during March.

The March PMIs suggest that manufacturing may be weakening in the US, while services are holding up. Japan’s M-PMI (50.3) and NM-PMI (48.4) were relatively weak last month. China’s M-PMI continues to hover around 50.0, while its NM-PMI has remained solidly above that level at 53.7. Both indexes are strong in the UK.

Today's Morning Briefing: Earnings Revival? (1) Another earnings season. (2) Oil, the dollar, and exports all weighing on earnings. (3) Analysts now expect S&P 500 earnings growth of only 2.6% this year. (4) Negative growth during H1-2015. (5) Recent forward earnings rebound waiting for confirmation from commodity pits. (6) US exports are the pits. (7) Going with “Go Global” for now. (8) Cheap is in fashion. (9) Puzzling: Weak currencies boosting forward earnings in Japan, but not Eurozone. (10) Global PMI rebounded smartly in March, led by Eurozone. (11) Focus on market-weight-rated S&P 500 Transportation. (More for subscribers.)

April Employment Report Will Be Key to Fed (excerpt)

Until the March report, the past few monthly employment reports indicated that the economy was performing better than suggested by other economic indicators. Turns out that not only was March weak with a nonfarm payroll gain of only 126,000 but January’s advance was revised down by 38,000 to 201,000 and February’s was lowered by 31,000 to 264,000.

Those are the first back-to-back downward revisions since February/March 2011 (based on first-reported data). Downward revisions tend to occur when the economy is contracting. They are rare during expansions. Since 2011, there have been only 9 downward revisions but 41 upwards revisions. If the weather is to blame for the latest reductions, that’s not a problem.

It’s hard to find much positive news in the March report. The household employment survey found that full-time jobs rose 190,000 to a new cyclical high, while part-time positions fell 170,000. That’s good, but total household employment rose just 34,000 during March. The labor force fell 96,000.

Bad weather seems to have had some impact on depressing employment during the first three months of the year. But so did the strong dollar, weak oil prices, and slow economic activity abroad. The dollar may be starting to stabilize, and the price of oil may be bottoming. Economic activity seems to be improving in the Eurozone.

In any event, I expect that April’s employment report should show a spring rebound. If so, then the Fed would remain on course for one-and-done for this year, if not in June then in September.

Today's Morning Briefing: Forecasting Jobs & the Weather. (1) March employment changes outlook for Fed’s liftoff again. (2) Both “one-and-done” and “none-and-done” more likely again. (3) Earned Income Proxy froze in March. (4) Was it a worse winter than normal? (5) Green shoots. (6) Unusual downward revisions in payrolls. (7) Globalization reduces reliability of Phillips Curve. (8) Not much wage inflation in US or Japan. (9) Deal or no deal with Iran? (10) English vs. Farsi. (11) Saudis raising their price. (12) Oil still gushing in US. (13) “Effie Gray” (+). (More for subscribers.)

Is US Economy Coming Out of Ice Patch? (excerpt)

On March 18, I observed that spring is coming. Just as I predicted, it started two days later on March 20. On the other hand, the latest batch of economic indicators for March suggests that I may have been too optimistic when I wrote: “I agree with Chauncey Gardiner’s prediction: ‘In the spring, there will be growth.'”

I argued that the economy’s weakness during the first two months of the year reflected an ice patch rather than a soft patch. There are still grounds for optimism as the ground thaws. However, the latest data suggest that it could be a cold spring:

(1) Business surveys. Yesterday we learned that the latest survey of manufacturing purchasing managers showed a decline in the M-PMI to 51.5 during March from 52.9 during February. I wasn’t surprised since the overall index is highly correlated with the average of the composite indexes for the six available regional business surveys. This average fell to -0.1 during March, the lowest since April 2013.

The same can be said for the orders and employment components of the national and average regional surveys. The average regional orders index was especially weak in March, falling to -9.6, the lowest since May 2009. The national orders index (51.8) wasn’t as weak, but it was down from February (52.5). The national employment index (50.0) was weaker than suggested by the regional average, which edged higher during March.

It’s getting harder to blame the weather. Of course, other factors are working to slow the economy. The strong dollar’s negative impact is visible in the M-PMI’s new exports component, which dropped to 47.5 in March, the lowest reading since November 2012. The plunge in oil prices may be depressing energy-related new orders as well as production.

(2) Employment. Yesterday, we also learned that the ADP measure of private payroll employment rose 189,000, the weakest since January 2014. It may be that energy-related employment is taking a hit from the drop in oil prices. The four-week average of jobless claims in North Dakota, Ohio, Pennsylvania, and Texas has spiked up recently from 41,210 near the end of last year to 54,408 in mid-March.

Today's Morning Briefing: Ice & Soft Patches. (1) Full steam ahead on ECB’s QE. (2) ECB facing self-inflicted bond shortage. (3) Negative yields at the short end of the yield curve. (4) Questioning the necessity of ECB’s QE. (5) Taper talk already. (6) Central bankers co-opt the bond market that was once ruled by Bond Vigilantes. (7) Will there be growth in the spring? (8) March business surveys mostly downbeat. (9) Energy-related job losses weighing on ADP payroll gains. (10) Personal income strong, while spending is weak. (11) March data will be key, with auto sales auguring well for spring spending. (12) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

PBOC Fueling Chinese Stock Rally (excerpt)

The PBOC is committed to doing whatever it takes to boost China’s flagging economy. The central bank started lowering interest rates late last year and bank reserve requirements early this year. As a result, the China Shanghai ‘A’ stock price index (in yuan) has soared 53.1% since November 19.

Markit reported bad news on China’s M-PMI, which fell back into contractionary territory in March. It sank from 50.7 in February to 49.6 last month, which was slightly above an earlier flash estimate of 49.2. On the other hand, the official M-PMI rose to 50.1 in March from February's 49.9.

On Monday, the PBOC, the housing ministry, and the banking regulator said in a joint statement that buyers of second homes would be required to make a minimum down payment of 40%, down from the previous 60%, as part of efforts to stimulate the housing market.

China new home prices registered their sixth straight month of annual decline in February, as tepid demand continued to weigh on sentiment despite the government's efforts to spur buying. New home prices fell 5.7% y/y in February, according to Reuters calculations based on data from the National Bureau of Statistics. The reading was worse than January's 5.1% decline and marks the largest drop since the current data series began in 2011.

On Sunday, Zhou Xiaochuan, China’s central bank governor, said that he is concerned about signs of deflation and that policymakers are closely monitoring the slowing of global economic growth and declines in commodity prices. He added that the central bank is “vigilantly” ready to battle deflation. The Shanghai ‘A’ stock price index jumped 2.6% on Monday.

In the past, there was a good correlation between the China MSCI (in yuan) and the CRB raw industrials spot price index. They’ve diverged since early last year, suggesting that while slowing growth in China is bearish for commodities, it is bullish for stocks because the PBOC will be forced to ease. Bad news is good news.

Today's Morning Briefing: Bad News Bulls. (1) Breaking bad. (2) Central bank liquidity is the drug of choice. (3) Updating the “insanity trade.” (4) Global stocks move higher as commodity prices move lower. (5) Japan’s CPI and industrial production disappoint. (6) Draghi steps on the accelerator of an accelerating Eurozone economy. (7) Bad news out of China. (8) PBOC eases mortgage terms and remains vigilant about deflation. (9) US stocks marking time while waiting for Fed to do something, nothing, or not much. (10) S&P 500 forward earnings rising again. (More for subscribers.)