Explaining the Stock Market’s Zen (excerpt)

The S&P 500 has been trading in a remarkably narrow range since mid-February between 2040 and 2130. As I’ve noted before, since the start of 2013--when the “fiscal cliff” calamity was averted at the very last minute with a deal struck between Vice President Joe Biden and Senate Majority Leader Mitch McConnell (R-KY)--investors have been impervious to the sorts of anxiety attacks that caused significant corrections during the first four years of the bull market. This year, the major concerns have centered on falling commodity prices, a third bailout plan for Greece, and the meltdown in Chinese stock prices. Yet the market has been Zen-like.

This calm has been reflected in the trend of the 52-week average of the Bull/Bear Ratio compiled by Investors Intelligence. It is up from 1.77 at the end of 2012 to 3.36 at the end of July of this year. The series, which starts in 1988, is in record-high territory. That’s because the sentiment survey’s percentage in the correction camp is also at a record high. In other words, when troubles mount, sentiment doesn’t turn bearish. Rather, it turns mildly defensive, betting that any selloff will be just a correction in a bull market. Ironically, that helps to explain why corrections have been missing in action since the start of 2013.

Today's Morning Briefing: Zen & the Art of Investing. (1) Stocks are calm despite agitated commodities. (2) Why has the Bull/Bear Ratio been trending higher since 2013? (3) Goldman sees a negative feedback loop. (4) The super-cycle hype. (5) Are commodities really an asset class? (6) From the people who brought us BRICs and the GSCI. (7) The surface is calm. (8) Everything you want to know about “Silk Road.” (9) Potentially lots of positive feedbacks. (10) The Zen of freer trade. (More for subscribers.)

Is US Economy Getting Soft Again? (excerpt)

The US economy skidded on an ice patch at the start of the year. It seemed to be stuck in a soft patch during the early spring. However, May retail sales blew that notion away: It increased 1.2% following upwardly revised increases of 0.2% (from 0.0%) in April and 1.5% (from 1.1%) in March. Where are we now? On the soft side, again. Consider the following:

(1) Retail sales. The soft patch was back when June’s report showed retail sales fell 0.3%, while there were downward revisions to both May (from 1.2% to 1.0%) and April (0.2% to 0.0%).

(2) Consumer confidence. Yesterday, we learned that the Consumer Confidence Index (CCI) fell sharply during July to the lowest level since last September. Oddly, there was a huge 22-point drop in the index for consumers under 35 years old during July. Millennials may finally be moving out of their parents’ basements and renting their own apartments. They might be depressed that Mom isn’t there to cook dinner for them and do their laundry.

(3) Job openings. Given that initial unemployment claims are the lowest since November 1973 and that job openings are the highest on record, it’s hard to worry about the job market, though Fed Chair Janet Yellen always seems to find something troubling there. Jobs remain relatively plentiful, according to the CCI survey. However, the widening gap between job openings and the perception that jobs are plentiful may reflect the skills mismatch problem.

(4) Durable goods. The financial press mostly put a positive spin on yesterday’s report of a 3.4% increase in durable goods orders. I wasn’t as impressed. It was boosted by a big jump in the volatile civilian aircraft category. Excluding transportation, orders advanced for only the second time in nine months by just 0.8%.

Nondefense capital goods orders excluding aircraft (a proxy for future business investment) rose 0.9% in June after declines of 0.4% and 0.7% the prior two months, and are down 4.0% ytd. These orders contracted 5.4% (saar) in the three months through June (based on three-month average).

Today's Morning Briefing: Room To Grow? (1) Curbing enthusiasm on revenues growth. (2) The dollar remains strong, and oil remains weak. (3) Industry analysts still cutting 2015 and 2016 revenue estimates. (4) Weak growth rates. (5) Forward earnings rebounding and diverging from stalling forward revenues. (6) Forward profit margin at record high. (7) Mixed sector picture. (8) On the soft side, again. (9) Odd decline in consumer confidence. (10) Widening gap between job openings and perception of plentiful jobs reflects skills mismatch. (11) Durable goods orders not so durable. (12) Regional surveys lack luster. (13) Focus on major global MSCI stock indexes. (More for subscribers.)

Global Economy Needs Restraining Order (excerpt)

Economic growth can be like a drug. It can produce a real high, especially if it is laced with lots of debt. Fast growth justifies taking on more debt, and it also postpones the bad side effects of too much debt in the economy’s blood stream. It’s all one big rush. The withdrawal pains can be severe once too much debt no longer stimulates the economy. Excessive debt can worsen the economic slowdown, which worsens the pain. The problem is that policymakers tend to respond to this turn of events by providing more doses of debt, hoping to make the pain go away.

It all reminds me of Eugene Landy. In 1983, he was employed as the psychologist for Brian Wilson of the Beach Boys. According to the movie “Love & Mercy” (2014), Landy treated Wilson for psychiatric issues with lots of drugs, which made Wilson more disturbed and dependent on his therapist. A 1992 restraining order barred Landy from treating or contacting Wilson ever again. The global economy may need that kind of restraining order imposed on the major central banks and central planners. All of their meddling is resulting in bad vibrations for the global economy. Consider the following:

(1) Eurozone debt. Loans outstanding at Monetary Financial Institutions (MFIs) in the Eurozone rose €3.75 trillion to a record €10.87 trillion from January 2004 through January 2009. That borrowing binge helps to explain why loans have been essentially flat since then.

The 7/22 FT reported: “Across countries that use the euro, average debt to gross domestic product reached 92.9 per cent in the first quarter of 2015, up from 92 per cent in the previous quarter and 91.9 per cent in the same period last year, according to figures from Eurostat, the EU’s statistical agency.”

On 7/14, the Central Bank of Italy reported that Italian public debt has risen upwards of 2.2 trillion euros in May, a new record for the Eurozone’s second-most indebted country after Greece. Italy’s debt is now at 132% of GDP, compared to Greece’s 175%. Both countries find themselves far from the 60% debt-to-GDP ratio target set by the European Commission.

(2) Chinese debt. China’s bank loans rose to a record $14.5 trillion during June, up a whopping $9.8 trillion since the start of 2009. They exceeded US bank loans for the first time ever during September 2010, and now are 76% greater.

The 7/15 BloombergBusiness reported: “While China's economic expansion beat analysts’ forecasts in the second quarter, the country’s debt levels increased at an even faster pace. Outstanding loans for companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008, data compiled by Bloomberg show.”

(3) Japanese debt. Japan’s gross debt is equivalent to 234% of its GDP. Its public debt was equal to about 85% of its GDP during Q1, up from 23% 20 years ago. A country report released by the IMF this month on Japan warned, “Japan’s public debt is unsustainable under current policies.” It projected that the debt ratio will rise to 290% by 2030.

Today's Morning Briefing: Bad Vibrations. (1) Making the pain go away with more debt. (2) Landy and the Beach Boy. (3) Getting some bad vibrations. (4) Eurozone may be binged-out. (5) China still on borrowing binge. (6) IMF says Japan’s debt is unsustainable. (7) The next Five-Year Plan. (8) Profits are deflating in China. (9) China sneezes. (10) Draghi still waiting for banks to lend to SMEs. (11) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)

When Will the Next Recession Start? (excerpt)

I have previously shown that based on the past five business cycles, the next recession might not start until March 2019. I examined the Index of Coincident Economic Indicators (CEI) for some historical guidance on the longevity of economic expansions. Let’s update our analysis.

It has taken 68 months--from January 2008 through October 2013--for the CEI to fully recover from its severe decline during 2008 and early 2009. The previous five recovery periods averaged 26 months within a range of 19-33 months. The good news is that the average increase in the CEI following each of those recovery periods through the next peak was 18.6%, over an average period of 65 months within a range of 30-104 months. If we apply this average to the current cycle, then the CEI would peak in 45 more months, during March 2019, with a substantial gain from here.

For now, let’s just enjoy the fact that the CEI is at a record high, and 4.7% above its previous cyclical high during January 2008. All four components of the CEI (payroll employment, real personal income less transfer payments, industrial production, and real manufacturing and trade sales) are at or near their recent record highs. The Index of Leading Economic Indicators rose 0.6% during June, very close to its record high in March 2006.

My extrapolation of the business cycle based on the recent and limited history of the CEI is meant simply as a benchmark for thinking about potential events that could cause a recession sooner, or later, than March 2019. In the past, economic expansions tended to crescendo into booms with rising inflation. The Fed would respond by raising interest rates. Tighter monetary conditions often caused a credit crunch, which then would cause a recession.

This time may not be different, but it has been different so far. Inflation has remained remarkably subdued, not just in the US but globally. Central banks have been flooding financial markets with liquidity in an attempt to boost inflation closer to their 2% targets. So far it hasn’t worked, and instead of a global boom we have global secular stagnation, with China slowing, the Eurozone barely recovering, and Japan stumbling. The CPI headline and core inflation rates among the major industrial G7 economies were only 0.2% y/y and 1.4% during May. The volume of world exports rose just 1.0% y/y during May, while the value of those exports is down over 10% through April.

I doubt that the business cycle is dead, though I suspect that inflation may be dead. As inflation remains subdued and central banks continue to provide ultra-easy monetary policies, the next recession may very well be a long ways off. If inflation makes a sudden comeback, a possibility I can’t dismiss, then all bets are off. A meltdown in China’s financial markets and economy might also trigger a global recession, which is why I am concerned about the renewed weakness in commodity prices, as I discussed last week.

Today's Morning Briefing: The Great Diversification. (1) Deep in the heart of Texas. (2) Lone Star State has lots of stars. (3) Healthy industrial mix around the country. (4) A long time till the next recession? (5) What might cause the next bust? (6) After the Great Moderation and the Great Recession. (7) Business has learned self-control. (8) Similar to the 1990s with more diversification? (9) Can the US decouple from a global recession? (10) Another round of “shock and awe?” (11) Curbing exuberance. (More for subscribers.)

More “Selfie” Households Who Rent (excerpt)

On a year-over-year basis, household formation hovered mostly below 1.0 million units from 2007 through mid-2014. Over this period, the growth rate in household formation fell below the growth of the civilian noninstitutional working-age population. The direct impact and the lingering effect of the Great Recession clearly depressed household formation. This may be finally about to change, as household formation has exceeded 1.0 million on a y/y basis every month for the past six months through March.

Many of the new households are likely to be seniors living alone or young unmarried adults living either alone or together to share living expenses. These “selfies” are more likely to rent than to buy homes. The percentage of the adult population 16 years or older who are singles has been running around 50% since June 2014. That’s up from 37% in the mid-1970s.

Since 1994 and through 2013, the percent of households with one person rose from 24% to 28%, while the percent with three or more persons fell from 43% to 39%. Since 1970, the percent of households with married couples living with their children dropped from 40% to 20% during 2012. Apparently, young selfies tend to get married later in life. During 2013, the median ages of first marriage for men and women were 29 and 27, up from 26 and 23 thirty years ago.

The homeownership rate for persons under 35 fell from a peak of 44% during Q2-2004 to 35% during Q1-2015. The rate for 35- to 44-year-olds fell from 69% to 58% over this period.

Since 2004, on balance, the number of households who rent jumped by 9 million, while the number who own fell 2.5 million since 2006. As a result, the percent of households who rent rose from a low of 30.8% during Q2-2004 to 36.3% during Q1-2015, the highest reading since Q2-1995.

Today's Morning Briefing: Build & They Will Come. (1) Is housing’s subpar recovery on a good foundation? (2) Demographic profile still favors renters over owners. (3) Household formation is picking up. (4) More younger and older “selfies.” (5) Getting married later. (6) More renters. (7) Millennials and Gen Xers are stuck. (8) Baby Boomers don’t want to cut the grass. (9) Student loan burden. (10) Affordability and availability of credit still hurdles for would-be homeowners. (11) Field of dreams and nightmares. (12) High-end buildings with sky-high rents. (13) Focus on market-weight-rated S&P 500 housing-related industries. (More for subscribers.)

Buffett’s Ratio Is Bearish (excerpt)

Warren Buffett’s favorite valuation model is screaming that stocks are overvalued. It was discussed in a 7/20 Business Insider article titled “Warren Buffett’s ‘single best measure’ of stock market value falls short in 3 big ways.” The article was based on a note to clients on Monday from Bank of America Merrill Lynch’s Savita Subramanian. She wrote that Warren Buffett’s favorite metric of long-term value “may have limited utility.” The market-cap-to-GDP ratio, which he once characterized as the “single best measure” of value, is used to determine whether the stock market is overvalued or undervalued. Here are the three shortcomings of the Buffett ratio according to BAML and my thoughts:

(1) Like price-to-sales ratios, the Buffett ratio doesn’t adjust for structural changes in profit margins due to lower taxes, lower interest expense, and higher operating margins attributable to technological innovation.

Maybe so, but that assumes that these changes are indeed permanent. They may be, but that is quite debatable. The implication that the profit margin may remain structurally high is a radical idea given that it has been a highly cyclical variable since the beginning of recorded time, i.e., since 1947. There are lots of reversion-to-the-mean believers who would vociferously dissent from the view that margins may remain higher than in the past.

(2) On average, more than half of S&P 500 revenues come from overseas. So comparing the index’s market cap to domestic GDP is flawed. It would be more accurate to measure it relative to a global measure of GDP.

I calculate the Buffett ratio dividing total US equity market capitalization excluding foreign issues by nominal GDP. Interestingly, it is almost identical to the market cap of the S&P 500 divided by the index’s revenues, which includes both domestic and overseas revenues. Both are near their peaks during 2000, suggesting that stocks are indeed extremely overvalued.

(3) The market cap of the S&P 500 has a much different industry mix than GDP. So the ratio is comparing apples and oranges.

I don’t disagree. However, I long ago concluded that every valuation model has flaws. That’s why I try to track them all. I see are lots of valuation measures that look quite stretched to me. But then again, valuation, like beauty, is in the eye of the beholder.

Today's Morning Briefing: Challenges for Earnings. (1) The dollar and oil price could weigh on earnings again. (2) Industrial commodity prices may also be signaling trouble for earnings. (3) The Boom-Bust Barometer may be running out of boom. (4) Will rebound in forward earnings move forward? (5) Are Gordon-type models really bullish for valuation? (6) The Buffett ratio is bearish, and it is flawed according to top Wall Street strategist. (7) Most valuation models are flawed for one reason or another. (8) Valuation is subjective. (More for subscribers.)

Will the “Silk Road” Boost Commodity Prices? (excerpt)

The crowd has been fleeing commodities since last year and continues to do so. My contrarian instincts are on full alert. However, I’m hard pressed to make the case for a sufficient pickup in global economic growth to advise going against the crowd.

China’s “Silk Road” project is a possible global growth booster. Yale Professor Valerie Hansen, who wrote a 2012 book titled The Silk Road: A New History, discusses the implications of this project in a 7/17 The Indian Express article titled “What the Silk Road means today.” She wrote: “The Silk Road initiative announced by Chinese President Xi Jinping in 2013 and implemented, beginning this year, contemplates so vast an investment in highways, ports and railways that it will transform the ancient Silk Road into a ribbon of gold for the surrounding countries. Officially called ‘The Silk Road Economic Belt and the 21st Century Maritime Silk Road’, the project also has the shorter title, ‘One Belt, One Road.’”

The professor concludes with a warning: “When the Chinese proclaim the One Belt, One Road as a win-win policy, more careful analysts will see this as yet another attempt to increase Chinese influence around the world. The Silk Road initiative is aptly named. Just as China used the Silk Road to expand its sphere of influence in the past, it is doing exactly the same thing now.”

The question is: How will this ambitious project get financed? The recent stock market rout must be a setback since the Chinese government was certainly counting on the equity capital markets for funding. That helps to explain why Chinese authorities have been scrambling to end the rout and restore the bull market.

Chinese officials are obviously counting on kicking their can down the Silk Road. They desperately need a new source of growth to replace their export-led model. They hope that by building more infrastructure along the road, they’ll reduce the excess capacity of all the infrastructure they built at home. While we are waiting to see how it all plays out, commodity prices continue to signal that there remain lots of gluts.

The ratio of the S&P 500 Materials sector to the S&P 500 is down to the lowest reading since November 9, 2005. It is highly correlated with the CRB raw industrials spot price index, which is also falling and is now down to its lowest level since November 12, 2009. The CRB index is inversely correlated with the trade-weighted dollar, which is up 16% since July 1, 2014.

Today's Morning Briefing: Reaching for Growth (RFG). (1) Reaching for yield vs. growth. (2) The most hated asset class is due for a bounce at least. (3) Investment strategist Yellen was right about RFY, wrong about RFG. (4) Reversal of fortune for Utilities, and bonds. (5) The growth-is-scarce scare. (6) No shortage of commodity gluts. (7) China aiming to kick some big cans down Silk Road. (8) Strengthening dollar once again depressing commodity prices. (9) Is gold just another commodity, or a pet rock? (10) Did Opie ever really kick the can down the road? (11) Focus on market-weight-rated S&P 500 Energy industries. (More for subscribers.)

The Productivity Puzzle (excerpt)

There is widespread concern about the slow growth in nonfarm business productivity. Over the past 20 quarters (five years) since Q1-2010, it is up only 0.5% on average during each of the Q1-to-Q1 periods spanning this period: 0.4% through Q1-2011, 0.9% through Q1-2012, 0.5% through Q1-2013, 0.6% through Q1-2014, and 0.3% through Q1-2015. That’s awfully weak growth.

There are lots of different reasons to be concerned. Fed Chair Janet Yellen is worried that wage gains are being held down by weak productivity. Bond investors are worried that inflation might rebound if tightening labor markets push up labor costs, with wages rising faster than productivity. In this scenario, stock investors would fret that profit margins would be squeezed if labor costs rise faster than prices. Progressives are saying that companies are using their cash and borrowings to buy back their shares rather than invest in productivity-enhancing capital equipment. They claim that’s worsening income inequality.

In other words, everyone wants to see productivity growing at a faster pace. The key reason is that productivity is the key determinant of consumers’ purchasing power (i.e., real income) and the standard of living (i.e., consumption). However, there are measures of these two variables suggesting that the productivity problem may not be as serious as widely believed. Consider the following:

(1) Long term. First, let’s keep in mind that technological innovations--which are the key drivers of productivity--tend to be lumpy. They don’t happen continuously over time, and they take time to be adopted once they are ready for prime time. We can see this by looking at the growth in productivity over 24-quarter periods. Since the early 1950s, productivity grew especially fast during the 1960s and the late 1990s and the first few years of the next decade. Before and after these bursts, the pace of productivity growth was relatively subpar.

(2) Short term. On a shorter-term basis, productivity jumped 5.2% from Q1-2009 through Q1-2010 before the slowdown since then. That boosts the average productivity growth rate a full percentage point to 1.3% per Q1-to-Q1 period over this six-year time span. I constructed a good proxy for productivity by dividing real GDP by the average weekly hours index in the private sector. I did so because there are no official productivity measures for goods and services industries in real GDP.

I constructed proxy measures of productivity in goods and services industries by dividing their contributions to real GDP by their average weekly hours indexes. Both proxies jumped during 2009. Goods productivity has continued to trend higher at a slower pace, but services productivity has dropped 5.7% from Q4-2009 through Q1-2015! That seems very odd and suggests that the government’s bean counters may be having an especially tough time counting the beans in services.

(3) Freebies. “[T]he U.S. doesn’t have a productivity problem, it has a measurement problem.” That’s according to a 7/16 WSJ article titled “Silicon Valley Doesn’t Believe U.S. Productivity Is Down.” It reviews the contrarian views of Hal Varian, Google’s chief economist. The article notes, “[T]he only way goods and services move the official U.S. productivity needle is when consumers and businesses pay for them. Anything free, no matter how much it improves everyday life, isn’t included.” Many of today’s time-saving technologies are free, like some location-based apps, cloud computing, and robust search engines.

On the other hand, the first posted comment about the article observes: “I suspect that all the productivity gains provided by Google and the like are more than offset by the ridiculous amount of time people spend on FaceBook, Twitter, Instagram etc writing about the cute thing their dog did today, or posting a picture of what they had for lunch...”

Today's Morning Briefing: Opie Kicks the Can. (1) The best can kickers on the road. (2) Going fishing on a summer’s day down a country road. (3) Mario and Opie. (4) Between “aw, shucks” and “shock and awe.” (5) Another panic sell-off followed by another relief rally. (6) Marty Zweig’s famous mantra on steroids. (7) Another better-than-expected earnings season, especially ex-Energy. (8) Putting together the pieces of the productivity puzzle. (9) Productivity has a long boom-bust cycle because innovation is lumpy. (10) Our productivity proxies suggest bean counters aren’t counting all the beans in services. (11) The freebie problem. (12) “Mr. Holmes” (+ +). (More for subscribers.)

US Economy: Small Is Beautiful (excerpt)

Notwithstanding politicians’ claims, businesses create jobs, not Washington. To be more exact, it is small businesses started and run by entrepreneurs that create most of the jobs in our economy.

ADP, the payroll processing company, compiles data series on employment in the private sector of the US labor market by company size. The series start during January 2005. Since then through June 2015, small companies with 1-49 employees added 5.1 million workers and had payrolls totaling 50.2 million. Medium-sized companies with 50-499 employees added 3.8 million workers and had payrolls totaling 43.0 million. Large companies with 500 workers or more cut 234,000 from their payrolls, which totaled 26.5 million.

Small and medium-sized companies currently account for 42% and 36% of private payrolls, according to ADP. Large companies account for just 22% of total private payrolls, down from 24% at the start of 2005.

This is really remarkable data. It suggests that if Washington’s policymakers really and truly want to create jobs they should provide a favorable business climate for small and medium-sized companies. The best way for Washington to do that is to cut their taxes and reduce their regulations. That’s what small business owners tell the folks at the National Federation of Independent Business (NFIB) who poll them monthly about business conditions. When asked about their biggest problems, the average responses over the past six months through June showed 22.0% and 21.8% complaining about taxes and government regulation. Only 11.3% said that sales are poor, while merely 2.2% said that credit conditions are tight.

Today's Morning Briefing: Entrepreneurial Capitalism at Work. (1) Who actually creates jobs? (2) ADP data show that small and medium-sized companies do most of the hiring. (3) Be nice to small business owners. (4) NFIB survey data show profits drive employment and capacity cycles. (5) National unemployment rate closely correlated with NFIB indicators. (6) Wage inflation should be higher given all the job openings. (7) Barack, Elizabeth, and Hillary spout the party line. (8) Entrepreneurial vs. crony capitalism. (9) SMidCaps have led the bullish charge. (10) Morgan Stanley warns that China could cause next global recession. (11) Still muddling along. (12) Focus on market-weight-rated S&P 500 Information Technology. (More for subscribers.)

Another Weak Revenues Season (excerpt)

According to Standard & Poor's, S&P 500 revenues fell 2.3% y/y during Q1 mostly as a result of the plunge in the revenues of the Energy Sector, and also the strength of the dollar. On a same company basis for both periods, we calculate that S&P 500 revenues fell 3.0% y/y during Q1, but rose 2.4% excluding the Energy sector.  A similar pattern is likely for Q2. Industry analysts currently estimate a 4.0% decline in revenues during the quarter, but a small gain of 1.5% excluding Energy.

The y/y growth rate in S&P 500 revenues tends to be highly correlated with the comparable growth rate in manufacturing and trade sales. The latter was down 2.2% in May, but up 1.9% excluding petroleum.

Industry analysts are currently estimating the following revenues growth rates for Q2 on a y/y basis, from high to low: Health Care (6.1%), Telecommunication Services (2.8), Information Technology (2.6), Financials (2.5), Consumer Staples (2.4), Consumer Discretionary (2.0), Utilities (0.0), Industrials (-3.9), S&P 500 (-4.0), Materials (-8.8), and Energy (-34.8).

Today's Morning Briefing: United Shoppers of America (USA!) (1) USA women rule soccer! (2) A patriotic happening. (3) Crowd chants “USA! USA! USA!” (4) Soccer unites, politics divides. (5) The standard of living and income inequality debate. (6) Flawed income measures used to gauge inequality and poverty. (7) Key items missing. (8) What about the Earned Income Tax Credit? (9) What about government support programs? (10) Real consumer spending per household at record high. (11) Consumer stocks confirm strength of consumer. (12) Another weak earnings season for revenues, led by plunge in Energy. (13) The Greek deal is to make a deal. (14) Tsipras as Sisyphus. (15) Focus on market-weight-rated S&P 500 Retail industries. (More for subscribers.)

China’s Trade Data Showing More Weakness Than Strength (excerpt)

The good news is that Chinese exports and imports both rose last month by 4.7% and 15.6%, respectively, on a m/m basis and using seasonally adjusted data. The bad news is that imports are still down 6.1% y/y, while exports are up only 2.8% y/y. The former suggests that China’s domestic economy remains weak. The latter, which has been in a flat and volatile range since early 2013, suggests that global economic growth remains subpar.

Today's Morning Briefing: Playing the Averages. (1) Bearish technical signals have been buying opportunities in this bull market. (2) Central planners and central bankers intervening in financial markets. (3) Chinese officials buying ETFs, just as Japanese officials have been doing for a while. (4) Draghi still buying bonds, while Yellen magically boosts stocks. (5) “Agreekment” more likely than “Grexit” until further notice. (6) S&P 500 sectors mostly showing rising 200-dmas. (7) Forward earnings still driving sector performances. (8) China’s trade data show weak domestic economy and subdued global economy. (More for subscribers.)

Yellen Still Sees Slack in Labor Market (excerpt)

Was it a coincidence? The S&P 500 rose 1.2% on Friday to 2076. Fed Chair Janet Yellen spoke about the economy and monetary policy the same day. Previously, I’ve observed that whenever she does so, stock prices tend to be up that day. Of course, investors were also relieved to see that China’s stock market rallied and Greece might still get a bailout. In any event, Yellen will be speaking again on July 15 and July 16 in her semiannual testimony to Congress on monetary policy.

In her speech on Friday, she made headlines saying, “Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” So one-and-done is still the most likely scenario for Fed policy this year. If so, then the next hot topic will be when might the second rate hike occur next year and how many more rate hikes might there be. Yellen’s comments suggested that rate hikes are likely to be small, few, and far between in 2016.

Yellen is a labor economist by background, and it shows. She just isn’t convinced that the labor market has improved as much as suggested by numerous upbeat indicators, including the official unemployment rate, payroll employment, and job openings. She said: “But it is my judgment that the lower level of the unemployment rate today probably does not fully capture the extent of slack remaining in the labor market--in other words, how far away we are from a full-employment economy.”

Today's Morning Briefing: Bull in a China Shop. (1) Best-laid plans of mice and men, and central planners. (2) Central bankers are central planners too. (3) Pain in China’s master plans. (4) Government cheerleaders held pep rallies to rally stocks. (5) The biggest winner and loser in China. (6) “Silk Road” has a slippery slope. (7) Falling PPI and auto sales. (8) Command economies don’t do markets very well. (9) Xi’s dream turning into a nightmare. (10) Obamacare is a nightmare. (11) Yellen does it again and says it again. (12) Record job openings. (13) Taylor Swift gets + + + for best capitalist of the year. (More for subscribers.)

China’s Bubble Pops (excerpt)

The Chinese may have set a record for inflating a huge stock market bubble in the shortest period of time. It started last year on November 21, when the PBOC cut interest rates for the first time in two years. It did so to revive economic growth. Instead, investors and speculators piled into the stock market. At the beginning of February, the PBOC lowered bank reserve requirements. Effective March 2, the PBOC cut interest rates for the second time in three months. On March 5, the PBOC lowered the rates it charges commercial lenders on a special short-term lending tool.

The Shanghai-Shenzhen 300 stock price index soared 107% from November 21 through this year’s peak on June 8. It has plunged 32% since then. Even the less volatile China MSCI stock price index (in yuan) jumped 35% from November 21 through April 27. It has plunged 21% since then, retracing most of the rally. In the past, this index was highly correlated with the price of copper, which failed to confirm the recent ascent in Chinese stock prices. Instead, the nearby futures price of copper remained near its lowest reading since July 2009.

The latest moves by Chinese officials to prop up stock prices certainly won’t revive confidence in China’s stock market. Why would anyone want to invest in a market where the government can ban selling?

Yesterday, Bloomberg reported: “China’s securities regulator banned major shareholders, corporate executives and directors from selling stakes in listed companies for six months, its latest effort to stop the nation’s $3.5 trillion stock-market rout. Investors with stakes exceeding 5 percent must maintain their positions, the China Securities Regulatory Commission said in a statement. The rule is intended to guard capital-market stability amid an ‘unreasonable plunge’ in share prices, the CSRC said.”

Regulators have introduced market-boosting measures almost every night over the past several days, as the following selected timeline shows:

6/25: PBOC injects cash into the financial markets.
6/27: PBOC cuts interest rates and lets banks lend more money.
7/1: Investors allowed to put up real assets as collateral to buy stocks.
7/2: Stock manipulation will be investigated.
7/4: IPOs suspended.
7/4: People’s Daily urged investors to stay calm.
7/4: Twenty-one brokerage firms will invest $19 billion in a stock market fund.
7/7: Trading suspended in more than 1,300 companies.
7/8: State-run companies ordered to maintain holdings in listed units.

The stock market meltdown and the inept official attempts to stop the rout could weaken confidence in the government’s ability to manage the economy, which has been slowing significantly. A slew of June data will be released in the next few days. May’s indicators were uniformly weak. For example, electricity output over the past 12 months through May was up just 3.5% y/y, the slowest pace since October 2009.

Today's Morning Briefing: The Confidence Game. (1) The first and second mandates. (2) The third mandate. (3) The credibility challenge. (4) Chinese set a record in the history of bubbles. (5) Roundtrip. (6) Banning selling is a dumb desperate measure. (7) Market-boosting measures failing to boost market. (8) Draghi running out of W-I-T. (9) Japanese exports are weak. (10) Fed needs to reload its gun. (11) “Stay Home” outperforming “Go Global.” (More for subscribers.)

Global Economy: More Secular Stagnation (excerpt)

Is it a banana? In the 19th century, downturns were called “depressions.” However, the term got a bad name in the 1930s, and “recession” was coined. Alfred Kahn, one of President Jimmy Carter’s economic advisers, was once rebuked by the President for scaring people by talking of a looming recession. Mr. Kahn, in his next speech, substituted the word “banana” for “recession.”

“Secular stagnation” also has lots of negative connotations. Alvin Hansen was a professor at Harvard University who introduced Keynesian economics in the US during the 1930s and helped create the Council of Economic Advisors. His first book at Harvard was titled Full Recovery or Stagnation? (1938). He outlined what came to be called the “secular stagnation thesis.” He claimed that the American economy would never grow rapidly again because all the growth ingredients had played out, including technological innovation and population growth. The only solution, he argued, was constant, large-scale deficit spending by the federal government.

The economic boom of the 1940s and 1950s buried the term “secular stagnation” in the dust bin of economic history until Professor Lawrence Summers of Harvard University recently dusted it off to explain the slow pace of the current economic expansion. He too is all for more deficit-financed government spending.

I agree that the global economy is struggling with secular stagnation. However, I think it is mostly attributable to too much fiscal and monetary intervention by our governments. More of these policies will make things worse, not better. I’ve discussed my views on this subject on a regular basis in the recent past. For now, let’s review the latest data showing that the global economy is just muddling along.

Global economic growth slowed during June led by a significant contraction in emerging market output, according to Markit’s latest report. The J.P. Morgan Global Composite PMI fell from 53.6 in May to 53.1 in June, down from a recent high of 55.6 during July 2014. The Global M-PMI fell from 51.3 to 51.0 in June, back down at April’s reading, which was the lowest since July 2013.

Most of the weakness was in the BRIC economies, while Japan and the Eurozone posted growth. The US remained well below recent highs, yet above the global average. On a positive note, employment rose m/m for the overall index, albeit at a slower rate, with declines posted in the BRICs.

The HSBC Emerging Markets Composite PMI fell to 49.6 during June. It was only the second reading below 50 since the start of the data in January 2010.

Today's Morning Briefing: Ban Buybacks? (1) Who’s on first? (2) Financial engineering in one easy lesson. (3) Strategists shouldn’t be preachers. (4) Elizabeth Warren: The Fairy Godmother of the Bears. (5) Are buybacks sugar highs for corporations? (6) Meet Senator Baldwin. (7) Professor Lazonick explains how buybacks worsen income inequality. (8) Goldman prefers M&A to buybacks. (9) Depressions, recessions, secular stagnation, and bananas. (10) Mostly ho-hum indicators around the world. (11) Focus on overweight-rated S&P 500 Health Care industries. (More for subscribers.)

Commodities: Commotions Across the Oceans (excerpt)

The latest Greek crisis in the Eurozone and the wild roller coaster ride in Chinese stock prices are boosting the US dollar and unsettling commodity markets. In addition, a possible deal with Iran over its nuclear program is depressing the price of oil, which is also boosting the US dollar, which is also weighing on other commodity prices. Consider the following:

(1) CRB industrials & gold. Interestingly, the commotions across the oceans have failed to lift the price of gold. Previously, I’ve observed that the price of gold tends to follow the underlying trend in the CRB raw industrials spot price index. The latter fell to a new cyclical low last Thursday, led by its metals component. Copper, tin, and zinc prices have been particularly weak lately.

(2) The dollar and commodity prices. The CRB raw industrials spot index is highly correlated with the inverse of the JP Morgan trade-weighted dollar. Among the weakest currencies currently are the commodity-related ones, including the Australian and Canadian dollars.

(3) The price of oil. An even higher correlation is between the price of a barrel of Brent crude oil and the inverse of the trade-weighted dollar. I still believe that the price of oil is likely to be range bound between $47 and $68. Right now, it seems to be heading from the top of that range towards the bottom. Helping to push it down is the ongoing ascent in US oil field production to 9.6mbd during the last week of June. In addition, there was a small uptick in US petroleum stocks of crude oil during the last week of June. That was the first increase in nine weeks. However, it is still 21% ahead of last year’s comparable week.

(4) The meaning of life. What does it all mean? Investors may be starting to fret that the Greek crisis and the Chinese stock market roller coaster ride could weaken global economic growth. It is a legitimate concern.

Today's Morning Briefing: Pass the Ouzo. (1) Greek in one lesson. (2) Ouzo is good pain medicine. (3) First two Greek bailouts were comparable to QE. (4) Weinberg’s Lehman-style scenario for Greece. (5) ECB could make pain in the periphery go away with more QE. (6) Scams as a way of life. (7) Is paying taxes really austerity? (8) Strengthening dollar is depressing commodity prices including oil prices, which is strengthening the dollar, again. (9) The commotions across the oceans in Eurozone and China raising risk of weaker global growth. (10) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

US Economy Is Still the Promised Land (excerpt)

June’s employment report was released on Thursday rather than Friday, when US markets and government offices were closed for the long Fourth of July weekend. Overall, there weren’t any fireworks in the report. Our Earned Income Proxy rose to a new record high in June, edging up only 0.2% m/m. Last month’s 223,000 payroll gain was fine, but the previous two months were revised downwards by 60,000. The labor force fell 432,000, while the household measure of employment declined 56,000.

Wages rose, but by only 2.0% y/y, which remains remarkably low given that the JOLTS measure of the jobs openings rate rose during April to the highest since January 2001. The unemployment rate is down to 5.3%, the lowest since April 2008. It is just 4.8% for adults, a new cyclical low. Yet despite the tightness in the labor markets, wage inflation remains remarkably subdued. On the other hand, Q1’s Employment Cost Index for private industry rose to 2.8% y/y, the highest since Q3-2008.

Like Moses, Fed Chair Janet Yellen has pledged to bring us to the Promised Land of milk and honey, i.e., good jobs and good wages. Are we there yet? There certainly are plenty of job openings that can’t easily be filled by the available supply of labor. Apparently, employers aren’t convinced that raising wages will attract the workers they need. Workers who have the right skills to match the available jobs are in the Promised Land. The ones who don’t qualify are still wandering around in the desert, or they’ve dropped out of the labor force and stopped searching for the Promised Land.

There are plenty of other economic indicators suggesting that the US is still the Promised Land for most Americans. Here’s a brief review of the latest:

(1) Construction spending, especially on factory capacity. Construction spending rose to a cyclical high of $1.04 trillion (saar) during May. Leading the way was a 1.5% m/m jump in nonresidential private construction, with manufacturing soaring 6.2% during the month. The latter has been climbing almost vertically this year, posting a 70% y/y gain. This is certainly consistent with the view that despite the strong dollar, the US may be enjoying an industrial renaissance based on cheap energy and technological innovation.

(2) Business equipment spending, especially on heavy trucks. Another category of capital spending that’s showing strength is sales of medium and heavy trucks. It rose to 450,000 units (saar) during June, a new cyclical high and the best pace since February 2007. That’s impressive given that the oil patch has been hard hit by the plunge in oil prices since last summer.

(3) Consumer spending, especially on autos. Retail auto sales averaged 17.1 million units (saar) during Q2, the best such pace since Q3-2005. Overall retail sales have rebounded smartly this spring following the winter’s ice patch. There seemed to be a spring soft patch in retail sales, but it was revised away. While June’s employment report had some soft spots, there was enough strength to provide consumers with more purchasing power.

(4) Purchasing managers, especially the ISM survey. There was also a soft patch in the M-PMI earlier this year. The index fell from 55.1 last December to a recent low of 51.5 during March and April. But it rose during the past two months to 53.5 in June.

Today's Morning Briefing: Ye Shall Merge & Acquire. (1) Greece: This too shall pass? (2) Greeks invented mythology and mathematics. (3) Be fruitful and multiply. (4) M&A and buybacks are shrinking supply of stocks. (5) The Wilshire 3,666. (6) Jump-starting growth with M&A. (7) America is still the Promised Land for most Americans. (8) Janet and Moses. (9) Wages: Are we there yet? (10) More evidence of US industrial renaissance. (11) Pedal to the metal. (12) “Terminator Genisys” (+). (More for subscribers.)

Happy Fourth of July! (excerpt)

In addition to barbeques and fireworks, the Fourth of July weekend is also a big one for big discount sales. Consumers are certainly in a happy mood. The Consumer Confidence Index rose from 94.6 during May to 101.4 during June, remaining near recent cyclical highs. The labor market continues to improve, with the percentage of consumers saying that jobs are plentiful at 21.4% last month, a new cyclical high and the best reading since February 2008.

An index of pending existing home sales rose in May to the highest since April 2006. That’s yet another sign of improving consumer confidence. The puzzle, though, is that Census data on household formation show that they continue to be all renters. This suggests that most of the housing transactions are between younger current owners who are trading up and older current owners who are trading down. First-time homebuyers seem to be missing in action. That may be because the Millennials are saddled with student debt, postponing getting married, and renting apartments in cities, as we discussed last week.

Finally, I should note that the five available regional business surveys for June are showing an upturn from their winter/spring soft patch. The average of the composite business indexes for the Fed Districts of New York, Philadelphia, Richmond, Kansas, and Dallas rose to 0.7 last month, the first reading above zero since February. That’s still relatively weak, suggesting that there may still be some soft spots in the economy. The Dallas survey is especially weak because the oil industry in Texas has been hard hit by lower oil prices.

Today's Morning Briefing: Land of the Free, Home of the Brave. (1) Fireworks on July 4 in US, July 5 in Greece, and July 6 in the markets. (2) Another panic attack followed by another relief rally? (3) Greece will either be kicked out or kicked down the road. (4) US fundamentals improving relative to rest of world, but valuation is a problem. (5) S&P 1500 forward earnings bottoming and turning up. (6) Consumers are in a spending mood as labor market continues to improve. (7) Housing sales looking up, although all new households are renting. (8) Trading up and down. (9) Regional business surveys still show a few soft spots. (10) Focus on market-weight-rated S&P 500 housing-related industries. (More for subscribers.)