Thursday, February 26, 2015

Confidence Belies Middle Class Distress Legend (excerpt)

The US middle class is reportedly still in distress, although the economic recovery is now 68 months old. Politicians on the left and the right share this view, and blame each other for causing this sorry mess. It’s not at all obvious that the middle class agrees. Consider the following:

(1) Monthly optimism. I derive the Consumer Optimism Index (COI) by averaging the Consumer Sentiment Index and the Consumer Confidence Index. My COI dipped during February to 95 from a cycle high of 101 last month. Both readings are consistent with previous cyclical highs in the index, with the exception of the blowout readings during the second half of the 1990s.

(2) Weekly comfort. The strength in consumer optimism surely can’t be attributed to the “Top 1%.” There aren’t enough of them to move the needle. Apparently, the “Bottom 99%” didn’t get the memo that they should be miserable, or at least pretend to be so. Bloomberg’s weekly Consumer Comfort Index corroborates the upbeat readings of the COI. The weekly components of the weekly Bloomberg measure--including the state of the economy, personal finances, and buying climate--all are back to the previous cycle’s highs.

(3) Misery Index. My COI is highly inversely correlated with the Misery Index, which is simply the sum of the core PCED inflation rate (on a y/y basis) and the unemployment rate. The Misery Index fell during December to 6.9%, the lowest since February 2008. It tends to fall during bull markets and rise during bear markets. The index is also highly inversely correlated with the S&P 500 forward P/E.

Today's Morning Briefing: Exuberance. (1) Is the middle class really distressed? (2) Consumer Optimism Index near previous cyclical highs. (3) Misery Index lowest since Feb. 2008. (4) Spending less on gasoline, more on health care. (5) Bullish sentiment is almost off the charts. (6) Energy and REITs inflate S&P 500 forward P/E. (7) Expensive sectors are the defensive ones such as Consumer Staples and Utilities, which makes them less defensive. (8) Financials & IT sectors are relatively cheap. (9) Focus on overweight-rated S&P 500 Health Care. (More for subscribers.)

Wednesday, February 25, 2015

Headwinds for US Consumers & Home Buyers (excerpt)

It’s possible that US consumers aren’t spending their petroleum windfalls as much as was widely expected because they are not convinced that the prices of the fuels they use won’t bounce right back up, as they often have in the past. Many of them have also seen their health insurance copays rise sharply. The same can be said about their deductibles, which always hit consumers hardest at the beginning of the year until they’ve spent the amounts required before insurance starts picking up the tab.

US consumers have always been very important to the global economic outlook. They may be even more important now given the secular stagnation that is troubling the economies of the Eurozone and Japan. American incomes have certainly been boosted by solid employment gains. Despite a small decline during February, their confidence remained strong. Indeed, 20.5% agreed that jobs are plentiful, barely changed from January's 20.7%, which was the best reading since February 2008. The problem is that when consumers ratchet up their spending, they also spend more on imports. But that’s good for the global economy.

Perhaps the biggest disappointment of the current economic expansion is that housing remains a significant laggard. Indeed, despite the renewed decline in mortgage rates, existing home sales have been weak in recent months. Home buying has been a huge booster of consumer spending in past expansions, especially the previous one. When one buys a home, lots of spending that is discretionary suddenly becomes obligatory to fix it, furbish it, and maintain it.

There are many good demographic reasons why there should be plenty of pent-up demand for houses. On the other hand, there are many that would explain why home sales aren’t booming. The number of singles in the adult population aged 16+ is equal to the number who are married for the first time ever. Singles are less likely to buy a house than married couples. Also, lots of Millennials prefer renting apartments in cities rather than living in the suburbs.

Today's Morning Briefing: Zero Sum Game? (1) The decoupling debate. (2) More integrated. (3) Redistributing growth. (4) Oil: More winners than losers? (5) Negative vibes from oil shock. (6) US consumers using oil windfalls to pay health insurance deductibles? (7) Housing recovery still lagging. (8) Net Earnings Revision Indexes up in EMU and Japan, down in US. (9) Yellen sprinkles her fairy dust. (10) Yellen still worrying much more about labor market than financial bubbles. (11) Earnings: One more time. (More for subscribers.)

Tuesday, February 24, 2015

US Revenues: Running Out of Energy (excerpt)

In the Quant Center of our website, we update, on a weekly basis, tables showing analysts’ consensus expectations for annual revenues growth rates. As of February 12, here is the performance derby for S&P 500 revenues growth rates this year for the sectors: IT (7.3%), Health Care (6.2), Consumer Discretionary (4.7), Consumer Staples (4.0), Telecom Services (2.9), Financials (2.4), Industrials (1.9), Utilities (1.2), S&P 500 (-0.2), Materials (-1.0), and Energy (-24.3). Clearly, Energy is a huge drag on revenues.

The y/y growth rate of S&P 500 revenues is highly correlated with the comparable growth rate of manufacturing and trade sales. The former was up 4.9% during Q3, while the latter was up only 0.9% during December. Excluding petroleum products, business sales rose 5.5% y/y during December

Today's Morning Briefing: More Fairy Dust? (1) Something in common with Yellen. (2) Shades of grey. (3) “Patient” may still be the word after first rate hike. (4) “Patient” is the new “measured.” (5) Will Fed's report update valuation view? (6) Hilsenrath’s take. (7) Earnings erosion may be spreading beyond Energy. (8) Is a P/E of 19.0 irrationally exuberant? (9) Energy is weighing down revenues growth for S&P 500. (More for subscribers.)

Monday, February 23, 2015

Why Have Bond Yields Rebounded? (excerpt)

The 10-year Treasury bond yield is up from this year’s low of 1.68% on February 2 to 2.13% on Friday. It started the year at 2.17%. What happened to trigger such a fast and nasty reversal? Here is a partial list:

(1) Payroll employment data were released on February 6, showing not only another solid gain in January payrolls but also big upward revisions to the previous two months. The federal funds futures market immediately discounted a Fed rate hike around midyear and another by the end of the year. The FOMC minutes cited above seemed relatively dovish, as I discussed last week, but the meeting occurred the week before January’s robust data were released. Subsequently, several Fed officials have said that they favor starting liftoff at midyear.

(2) German yields fell early this year on weaker-than-expected new orders data for November, released on January 8. This year, the German 10-year yield fell to a record low of 0.31% on January 30 in response to mounting fears of a Grexit and the worsening of the Ukraine crisis, along with deflationary CPI readings and anticipation of QE.

However, on February 5, we learned that December factory orders rose 4.2% m/m, led by a 4.8% increase in foreign orders. This augurs well for exports, which rose to a record high during December. Eight days later, Germany’s latest real GDP release showed a gain of 2.8% (saar) during Q4-2014. On Friday, Markit reported that the Eurozone’s Composite Output PMI rose from 53.5 during January to 54.3 during February, the highest in seven months. The German bond yield is now back up to 0.36%.

(3) Japanese yields also have risen recently on better-than-expected economic data, and expectations of more to come. The 10-year government yield fell to a record low of 0.21% on January 19. Real GDP rose 2.2% (saar) during Q4-2014, according to the February 15 release. On February 18, we learned that exports rose 1.8% m/m and 17.0% y/y during January. The 10-year bond yield is now up to 0.37%.

Today's Morning Briefing: Bad Jokes. (1) Bag of monetary tricks. (2) Two-handed economists tend to be data dependent. (3) On the third hand: Market dependence. (4) Financial stability is another concern of the FOMC. (5) Forward guidance: Thanks, but no thanks. (6) Did ECB corner itself into QE? (7) Eight reasons why bond yields have risen this month. (8) Currency depreciations lifting German and Japanese exports. (9) Foreign bond buying in US surprisingly weak. (10) Keep the euro, pass the ouzo. (11) Yellen likely to sprinkle more fairy dust this week. (12) Is Yellen still short Biotech and Internet stocks? (More for subscribers.)

Thursday, February 19, 2015

Eurozone Bonds Ignoring Greece This Time (excerpt)

When the Greek drama unfolded during 2010 and 2011, the 10-year Greek government bond yield soared to peak at a high of 43.92% on March 8, 2012. That triggered a divergence among Eurozone bond yields, with peripheral yields moving higher while core yields trended lower. In the latest act of the Greek drama, the 10-year Greek yield rose from last year’s low of 5.57% on September 5 to 9.66% currently, still well below the prior peak. The yields of comparable bonds in Italy and Spain remain relatively subdued at 1.62% and 1.60%, though still higher than in France at 0.69% and Germany at 0.38%.

Helping to keep a lid on bond yields in the Eurozone is the perception that the financial uncertainty and turmoil triggered by a Grexit might worsen deflation, and would be minimized by the ECB, which will start its QE program in March.

Today's Morning Briefing: Greece or Dare? (1) Germany asks Greece: “Yes or no?” (2) They invented math. (3) Three reasons why Greece doesn’t matter, so far. (4) From nothing to fear to fearing nothing. (5) Eurozone stocks and bonds remain calm, except in Greece. (6) QE is coming to Eurozone. (7) Some stocks are relatively cheap in Eurozone compared to US. Some are not. (8) US stocks aren’t cheap, but they are cheaper than bonds. (9) Contrarians beware: Four times more bulls than bears. (10) Dovish FOMC minutes support one-and-done scenario for Fed rate hiking. (11) So does federal funds outlook implied by futures. (More for subscribers.)

Wednesday, February 18, 2015

Crude Oil Price: Take Your Pick (excerpt)


There’s quite a debate about the price of a barrel of Brent crude oil. Some experts say it has bottomed and might soon stabilize somewhere above $50 a barrel, but well south of $100. I am not an expert, but agree with this view. Then there are others who say it is going a lot lower.

It’s funny that there wasn’t much of a debate when the price seemed stuck around $110 from 2011 through mid-2014. The supply/demand balance was turning increasingly bearish during this entire period as non-OPEC production surged, led by US output. Yet almost no one expected the sudden plunge in the price that started last October.

The one notable exception was Barron’s, which ran a cover story by Gene Epstein on March 29, 2014 titled, “Here Comes $75 Oil.” That was a great call. However, the article pulled the punch by predicting it could happen over the next five years. It happened over the next 10 months instead, and then some. Gene doubled down with a 12/6 follow-up titled, “The Case for $35 a Barrel Oil.” He did it again in a 1/10 follow-up titled, “Price of Oil: It Could Fall to $20.” The actual analyses are much more nuanced and thoughtful than the titles suggest.

Less nuanced is a 2/16 Bloomberg analysis by my friend A. Gary Shilling titled, “Get Ready for $10 Oil.”  I have been impressed, but not surprised, by the plunge in the oil rig count and expect that it is a harbinger of a sharp drop in US oil production later this year. Gary writes: “Sure, the drilling rig count is falling, but it’s the inefficient rigs that are being idled, not the horizontal rigs that are the backbone of the fracking industry.”

That’s an interesting observation, but it’s hard to imagine that the freefall in the rig count isn’t going to significantly reduce US oil production. Then again, a 2/13 chart highlighted in Bloomberg shows that falling natural gas prices did trigger a drop in the US gas rig count since late 2008, yet US gas production continued to increase: “Why is this happening? For one thing, both the rigs and the oil wells are becoming more productive. Producers are getting better at blasting oil and gas out of the ground. The rigs that are being idled tend to be the older machines, and the most effective rigs are being concentrated on the most-productive oil fields.”

We’ve updated our Global Crude Oil Demand & Supply chart book with January data compiled by Oil Market intelligence (OMI). I have to admit, the picture remained quite bearish for oil prices through the first month of this year:

(1) Global oil demand rose to a record high of 93.1mbd during January, based on the 12-month average. But it was up just 0.8% y/y. Actual global oil supply matched oil demand during January, according to OMI. If that’s anywhere close to accurate, why have oil prices been plunging? The OMI’s supply series tends to be lower than the OMI’s demand series. On a year-over year basis, the former rose 4.6%, while the latter rose just 0.9%.

The ratio of the demand to the supply series, based on their 12-month averages, tends to be a useful indicator of the trend in oil prices. The ratio has been increasingly bearish since the start of last year. In January, it was the lowest since December 1998.

(2) OPEC production has been relatively flat over the past five months through January, and was up 3.3% y/y. Non-OPEC output soared 5.5% y/y to a new record high last month. Interestingly, the sum of US and Canadian oil production exceeded Saudi output by a record 3.4mbd last month.

(3) Fluid situation. Libya’s oil production remains depressed as a result of the country’s chaos, with various militia’s fighting over the oil fields. Egypt might be forced to enter the fray to fight ISIS. On the other hand, Iraqi production continues to rise. Iran’s production could also increase rapidly if a nuclear deal is reached with the US at the end of March. The situation is always fluid in the oil market.

Today's Morning Briefing: Reaching for Zero. (1) Two forces of gravity tugging at bonds. (2) Domestic vs. foreign forces. (3) Fed is the outlier among central banks. (4) Lenders must pay to play. (5) Central banks venture into the underworld. (6) TICS showing inflows into US bonds. (7) The Fed’s chorus and their diva. (8) Running out of patience. (9) The oil debate among debatable experts. (10) Does the rig count count? (11) More than a barrel of excess supply. (12) Ex-Energy, S&P 500 forward earnings is flat at record high. (13) Focus on now overweight-rated S&P 500 Energy. (More for subscribers.)

Tuesday, February 17, 2015

US GDP Looking Weaker (excerpt)

On second thought, economists seem to be having second thoughts about what happened to real GDP during Q4-2014 and what may be happening during the current quarter. We are all lowering our expectations. The official preliminary number for Q4 was 2.6% (saar). That was disappointing compared to the previous quarter’s 5.0%. Moreover, a big jump in inventories boosted the Q4 growth rate, with final sales up only 1.8%.

Economists concluded that a slower pace of inventory investment would weigh on the current quarter’s GDP growth rate. Last week’s release of December business inventories suggests that inventory investment was much weaker during Q4. So this component should be less of a drag on GDP during Q1. However, January retail sales were surprisingly weak following December’s disappointing numbers. Let’s have a closer look:

(1) Retail sales fell 0.8% during January, following a 0.9% drop during December. However, falling prices, especially for gasoline, exaggerated the weakness. Inflation-adjusted retail sales rose 8.4% (saar) during the three months through January. That makes more sense to us given the strength in payrolls and the record high in inflation-adjusted wages.

(2) Inventories rose just 0.1% during December following a 0.2% gain during November. The official preliminary estimate of real GDP includes a $113 billion increase in inventories (saar), the most since Q3-2010. I estimate that this number could be revised downwards to unchanged from the previous quarter, which would lower the Q4 real GDP growth rate to only 1.8%. On the other hand, the inventory investment component is now much less likely to be a significant drag on Q1’s growth rate.

(3) GDP rose 2.3% last year, on a Q4/Q4 basis, assuming that Q4 is revised downward as noted above. That’s okay, but not awe inspiring. I expected more awe this year, but it is starting out more like “aw, shucks.” I am lowering my forecast for this year from 3.0% to 2.8%, and for Q1 from 3.2% to 2.7%.

The problem may be that there has been a secular slowdown in the growth rate of the labor force in recent years, which has lowered the trend growth of real GDP. On the other hand, payroll employment growth rose to 2.3% y/y during January, the best since June 2000. In other words, there is still a puzzling discrepancy between the improvement in the labor market and the lack thereof in GDP.

Today's Morning Briefing: Reenergized. (1) The more things change, the faster they change. (2) Three scenarios. (3) Six-year bull going on seven. (4) Another panic followed by another relief rally to record high. (5) Stocks aren’t cheap. (6) More fairy dust from Yellen next week? (7) Oil’s bungee jump. (8) Overweight Energy and market-weight Transportation. (9) Time out for bonds and currencies. (10) Retail sales not so bad. (11) Downward revision for GDP. (12) Perceptions change on global economy. (13) China’s debt addiction. (14) Focus on market-weight-rated S&P 500 Retailers. (15) “Timbuktu” (+ + +). (More for subscribers.)

Thursday, February 12, 2015

Hunting for Global Value (excerpt)

In the bond market, investors are reaching for yield. In some countries, where short-term interest rates are negative, they are reaching for zero. In the equity markets, some investors are scrambling for dividends, as evidenced by the 19.3% y/y increase in the S&P 500 Utilities stock price index. The sector’s forward P/E rose to 18.0 at the end of January from around 10.0 during 2009.

The sector isn’t cheap. Neither is the overall S&P 500, which has a forward P/E of 16.8. Even more expensive are S&P 400 MidCaps (17.6) and S&P 600 SmallCaps (18.3). Global investors are hunting for cheaper stocks than are available in the US. Some of them are in the Eurozone and Japan. While their economies aren’t performing as well as the US economy, their central banks are easing, while the Fed is moving to tighten. That means their currencies may continue to weaken, requiring currency-hedged bets.

At the beginning of February, among the major MSCI indexes, the US was the most expensive, with a forward P/E of 16.9. All of the following were cheaper: Emerging Markets (11.4), Japan (13.7), Germany (14.1), EMU (14.8), Canada (16.6), and UK (15.0). There are some values in the Emerging Markets: Russia (4.4), China (9.5), Brazil (10.3), Turkey (10.6), Indonesia (14.8), South Africa (16.6), India (17.4) and Mexico (17.5). Of course, there are plenty of “value traps” overseas that are cheap for a reason.

Today's Morning Briefing: Hunt for Global Value. (1) The widespread consensus. (2) Opportunities overseas. (3) Dollar-based vs. currency-hedged investors. (4) S&P 500 and Fed’s bond holdings still joined at the hip. (5) Draghi has been Fairy Godfather of EMU stock markets. (6) Abenomics has worked for Japanese stocks. (7) PBOC good for Shanghai-listed stocks. (8) Fundamentals don’t matter as much if central bank is easing. (9) In some countries, fixed-income investors are reaching for zero. (10) The US isn’t cheap. (11) Value traps. (12) Falling earnings. (More for subscribers.)

Wednesday, February 11, 2015

China is the Epicenter of Global Deflation (excerpt)

The People’s Bank of China (PBOC) has been a major source of global liquidity which is causing deflation rather than inflation. Consider the following:

(1) Chinese bank loans rose 13.6% y/y last year. They have increased by a whopping $8.9 trillion, or 200%, since the end of 2008 to a record $13.3 trillion. They first exceeded US bank loans during September 2010, and now exceed them by 69%!

(2) Bank loans accounted for 60% of social financing at the end of last year. Twelve years ago, bank loans accounted for 90% of financing. In other words, the shadow banking system has grown faster than the banking system.

(3) The result of all this credit has been lots of economic growth, but also lots of excess capacity in manufacturing and PPI deflation. The PPI fell 4.3% y/y during January, the most since October 2009. That’s the 35th consecutive monthly decline on a y/y basis. The manufacturing PPI fell 3.1% y/y in January. The raw materials PPI fell 8.6%, led by ferrous metals (-20.5%) and coal (-13.0).

Today's Morning Briefing: Greece & Popeye. (1) Popeye, Wimpy, Angela, and Alexis. (2) Beware of Greeks bearing debts. (3) Grexit or Bailout II? (4) Who will pay for anti-austerity measures? (5) When Germans say “nein,” they mean “nein.” (6) Beware: In Greek, “no” is “├│khi,” which sounds like “okay” to English speakers. (7) Greenspan predicting Grexit. (8) Obama straddling the issue. (9) More signs of life in Eurozone economy. (10) China deflating despite, or because of, mountain of debt. (More for subscribers.)

Tuesday, February 10, 2015

China May Be Weaker Than Widely Recognized (excerpt)

China’s imports took a dive during January. The data come in two flavors, i.e., unadjusted and adjusted for seasonality. The latter are provided by Haver Analytics, our data vendor. The news was bad either way. Imports fell 21.1% m/m unadjusted and 9.1% adjusted for seasonality to the lowest since April 2012. Seasonally adjusted exports fell 3.0% last month, but remains near recent record levels.

Some of the weakness in imports might reflect declines in commodity prices, especially for crude oil and iron ore. Furthermore, while the data are seasonally adjusted, doing so can be a bit tricky at the start of the year when the Lunar New Year holiday falls at different times.

Of course, the data might also simply reflect that China’s economy is slowing more than widely expected. Indeed, I found a very strong correlation between the sum of imports and exports (both unadjusted for seasonality) and railway freight traffic. Both series are volatile, and both have been going nowhere since the start of 2012 after rising fast from 2003-2011, with only a brief stop in late 2008.

Today's Morning Briefing: Bottom of the Barrel? (1) Are commodity prices overshooting the downside? (2) Crude oil price rebounds as rig count sinks. (3) For S&P 500 Energy & Materials the worst might be over. (4) Trucking index still barreling along in US. (5) Eurozone retail sales moving higher. (6) Germany benefitting already from weaker euro. (7) China’s imports and railway freight traffic are worrisome. (8) Will Fed tightening steepen or flatten the yield curve? (9) Larry Summers warns Fed that raising rates before inflation returns to 2% could be a catastrophe. (More for subscribers.)

Monday, February 9, 2015

Revisions Boosting Payrolls (excerpt)


Ignore January’s payroll employment gain of 257,000. The number, which was reported on Friday along with lots of other employment data, will be revised probably higher early next month when February’s jobs data are released. When the Bureau of Labor Statistics (BLS) reports the latest monthly payroll numbers, the previous two months are always revised. I have often observed that the numbers tend to be revised downwards during recessions and upwards during expansions.

Sure enough, November was revised higher for a second time by 70,000, following the first upward revision of 32,000. With a preliminary increase of 321,000, November is now showing a whopping gain of 423,000. December’s number was revised up by 77,000 to 329,000, and will probably be revised up again when February’s data are reported early next March. Revisions added 457,000 to last year’s 3.12 million jump in payrolls (December/December), the best full year since 1999.

Today's Morning Briefing: Revise That. (1) Game changer? (2) One-and-done vs. normalization. (3) Yellen’s semi-annual testimony should be interesting. (4) Payrolls tend to be revised higher during expansions. (5) Labor force soared in January after long-term jobless insurance terminated. (6) Earned Income Proxy at new record high. (7) Wage gains boosted by hike in minimum wage, but remain subdued. (8) Old Normal for employment and New Normal for wages? (9) GDP and productivity are puzzling. (10) Go Global outperforming so far this year. (11) “Unbroken” (+ +). (More for subscribers.)

Thursday, February 5, 2015

Can the US Decouple? (excerpt)

When real GDP came out on Friday showing that it was weighed down by a wider trade deficit, there was some concern that the global economic slowdown is starting to depress the US economy. In fact, real exports of goods and services rose 2.0% y/y to a record high during Q4-2014. However, real imports rose faster, by 5.3% y/y, also to a record high. Exports suggest that the global economy continues to grow, albeit at a slow pace. The US economy is performing well, as confirmed by the increasing demand for imports.

So while the widespread concern has been that the global economy will drag down the US, it is also possible that the US economy will boost the rest of the world. Instead of the US decoupling, the rest of the world might benefit by being coupled with the US economy. While exports have become more important to the US, they still account for only 13.2% of nominal GDP, up from 10.1% twenty years ago.

Nevertheless, also weighing on the US economy is the sharp drop in the global price of oil and the strength of the dollar. Both are depressing corporate profits of energy and multinational companies. Some of these companies are responding by cutting capital spending and paring their payrolls.

It’s too soon to be sure about the magnitude of these cuts. Nevertheless, nondefense capital goods orders excluding aircraft fell 3.5% during the final four months of 2014. This series is very volatile on a monthly basis. However, it is highly correlated with S&P 500 forward earnings, which has been falling since October 10, dragged down by earnings of the Energy sector.

Much of the recent weakness in capital goods orders has been for machinery, particularly construction and industrial equipment. The former may be related to the recession in the oil patch. The latter may be attributable to a pause in the US manufacturing renaissance as the strong dollar reduces America’s competitive advantage.

Today's Morning Briefing: Gwyneth’s World. (1) “Conscious uncoupling.” (2) Will the US, the Fed, and Greece decouple this year? (3) US exports still growing. (4) Will US imports save the world? (5) US bond yields brought down by gravitational pull of near-zero German and Japanese yields. (6) Chinese just want to have fun too. (7) US profits coupled to oil price and the dollar. (8) Emerging markets decoupling from commodity prices and the dollar. (9) Stocks love easy central bankers. (10) Can Islam decouple from jihadists? (More for subscribers.)

Wednesday, February 4, 2015

What’s Driving the Oil Price Rally? (excerpt)

The latest oil price rally started on Friday when Baker Hughes reported that the US oil rig count had plunged to 1,223 during the week of January 30. That’s down 24% from last year’s peak of 1,609 during the week of October 10.

I’m really surprised by the drop in the rig count since I expected that production cuts would occur quickly in response to the price freefall. However, US oil field production actually rose to a new high of 9.3mbd during the week of January 23. Most analysts expect it to continue rising through mid-year and then either level out or decline later this year through 2016. Furthermore, US crude oil inventories are at a record high for this time of year.

Nevertheless, oil market participants may be starting to price oil based on future shortages caused by today’s low prices. Everyone in the commodity pits knows that low prices are the best cure for low prices, just as high prices are the best cure for high prices as demonstrated by the stunning freefall in the price of oil from over $100 last summer to under $50 recently.

Today's Morning Briefing: High Octane. (1) Bottom of the barrel for oil price? (2) Nearby vs. distant futures. (3) It takes two to Contango. (4) Fewer rigs to count, but US still gushing oil. (5) Not everyone is cutting capital spending in the oil patch. (6) Energy analysts have slashed their long-term earnings growth expectations. (7) Don’t bet against US consumers. (8) Auto sales revved up by jobs, real wages, and confidence. (9) Inflation-adjusted hourly pay at record high. (10) Focus on market-weight-rated S&P 500 auto industries. (More for subscribers.)

Tuesday, February 3, 2015

When Oil Bottoms, Dollar Should Stop Soaring (excerpt)

Last year, I focused on several cross-market correlations, which worked very well. The price of a barrel of Brent crude oil has been highly correlated with the inverse of the trade-weighted dollar in recent years, and especially last year. Now that the price of oil may be stabilizing around $50, let’s see if the dollar stops soaring.

By the way, in the past, there was a close correlation between the price of oil and the Emerging Markets MSCI stock price index in local currencies. That hasn’t been the case over the past year. The relative strength of the EM MSCI suggests that the drop in oil prices reflects excess supply rather than significant weakness in demand attributable to slowing global economic growth. Using local currencies, the EM MSCI is up 8.9% y/y, but only 2.7% in dollars.

Today's Morning Briefing: Bad Play. (1) Woody Hayes on forward passes. (2) Three paths for stocks. (3) Playing corrections requires two great calls. (4) Barometers don’t always work. (5) Playing the averages doesn’t always work. (6) Volatility can be a bearish signal, or just what happens in a sideways trading range. (7) Dollar and oil mix. (8) Headwinds for earnings. (9) Quarterly earnings estimates falling fast. (10) Is valuation getting boost from falling earnings and stronger dollar? (More for subscribers.)

Monday, February 2, 2015

Bond Yields Heading Toward Zero (excerpt)

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.” Most of these factors continue to drive yields lower. The 10-year US Treasury fell from 3.04% at the end of 2013 to 2.17% at the end of 2014. It was down to 1.68% on Friday.

At the beginning of this year, I agreed with three highly respected Bond Kings (Jeffrey Gundlach, Van Hoisington, and Lacy Hunt), who predicted that the 30-year Treasury bond yield could fall to 2% by the end of this year. It was down to 2.25% on Friday from 3.96% at the end of 2013 and 2.75% at the end of last year. It fell below 3.00% at the start of December, racking up a very impressive gain of 17% since then!

How much lower can US bond yields go? Well, the Japanese and German 10-year government bond yields were down to 0.27% and 0.30% on Friday. The comparable 30-year government bond yields were down to 1.26% in Japan and 0.95% in Germany.

With the benefit of hindsight, Japan’s dismal economic and financial experience since the early 1990s has been a harbinger of the experience of other developed economies. Japan was first with a huge asset bubble that burst in the early 1990s. It was first to experience a “lost decade” of secular stagnation and deflation. It is now working on its third lost decade. The Japanese government was first with ultra-easy monetary policies (including NZIRP, or near-zero interest-rate policy, and QE), along with Keynesian fiscal stimulus funded with huge budget deficits, resulting in an ever-rising mountain of government debt. Japan has a rigid labor market and a big social welfare state.

The Eurozone seems to be working on its first Japanese-style lost decade. The US may not be going down the same road. However, US bond yields could continue to decline as overseas investors scramble to get better yields than the negative and near-zero ones available in Japan and the Eurozone. This is especially the case if the dollar continues to strengthen, which it will if foreigners continue to snap up US bonds.

Today's Morning Briefing: NIRP. (1) Less than zero. (2) Back to the future: Nine reasons why yields are falling. (3) Three wise men. (4) Amazingly low 30-year yields. (5) Japan blazes the trail. (6) From NZIRP to NIRP. (7) Disinflation, deflation, and stagnation. (8) ECB’s liquidity challenge. (9) Four horsemen of deflation. (10) Flight to zero. (11) China slowing. US growing. (12) Up, down, and sideways. (13) “Taken 3” (- -). (More for subscribers.)