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.)

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.)

Is Gold Just Another Commodity? (excerpt)

Gold is widely viewed as among the best hedges against inflation. It rose dramatically from $287 an ounce on September 11, 2001 to a record high of $1,895 during September 6, 2011. It’s down 37% since then. Gold bugs figured that the war on terror would widen government deficits and that central banks would help by keeping credit conditions loose. The financial crisis of 2008 unleashed the major central banks to experiment with various forms of ultra-easy monetary policy including NZIRP and QE.

Yet inflation remained subdued. The price of gold seemed to break when gold bugs were disappointed by the metal’s failure to rally on Abenomics, specifically the latest round of extremely easy money from the BOJ. So they started to sell.

I’ve observed that the price of gold tends to coincide with the underlying trend in the CRB raw industrials spot price index. If so, then the trend in both is more likely to be flat to down than to be up, in my opinion, given my outlook of secular stagnation for the global economy. That’s neither a boom nor a bust, just more of the same.

Today's Morning Briefing: Inflation Still MIA. (1) Diminishing inflation. (2) Un-COLA. (3) The forces of disinflation remain intact. (4) Lots of liquidity, yet not much inflation. (5) Unit labor cost inflation remains subdued. (6) Weak productivity growth doesn’t jibe with record profit margin. (7) Is Yellen waiting for Godot? (8) Fed study says cost-push inflation is a myth. (9) Inflationary expectations trending downwards with commodity prices. (10) Is gold really an inflation hedge or just another commodity? (11) Inflation is obviously key to bond and stock valuations. (More for subscribers.)

Global Oil Supply Rising Faster Than Demand (excerpt)

Global oil demand rose to a new record high of 93.8 mbd based on the 12-month average through May. It’s been doing so since it recovered from the Great Recession ever since June 2010. It has been rising at a faster pace in recent months. It rose 1.2% y/y in May, up from a recent low of 0.6% during November 2014.

Does this suggest that global economic growth is picking up? I doubt it. More likely is that the drop in oil prices is boosting demand. That’s the way the price mechanism is supposed to work. While the upturn in demand has helped oil prices to rebound from their lows at the start of the year, there’s plenty of supply keeping a lid on them despite the fall in prices. Indeed, the ratio of demand-to-supply continued to fall in May as it has virtually every month since August 2013. I expect that the price of a barrel of crude will remain range bound between $46 and $68 (the year’s low and high in the nearby futures price) through the end of this year.

This suggests that the S&P 500 Energy sector isn’t likely to outperform the S&P 500. It might be a market performer at best. The sector isn’t cheap with a forward P/E of 24.7, although its forward earnings has stopped falling in recent weeks.

Today's Morning Briefing: Leading Sectors. (1) Three outperforming sectors: Health Care, Consumer Discretionary, and IT. (2) They aren’t cheap, but they can grow earnings. (3) Overall outlook for revenues and earnings growth is lackluster. (4) Industry analysts tend to be overly bullish about prospects for long-term growth. (5) Is the trend growth rate 10%, 7%, or 5%? (6) Investors are also optimistic given record-high PEG. (7) More upside for profit margins of some sectors. (8) Financial engineering can also boost earnings per share. (9) Why Goldman hates buybacks. (10) Lower prices boosting oil demand, but supply increasing faster. (11) Focus on market-weight-rated S&P 500 Energy. (More for subscribers.)

China Remains Epicenter of Global Deflation (excerpt)

Monday’s WSJ included an article titled “Glut of Chinese Goods Pinches Global Economy.” The main point is that “China’s excess manufacturing capacity and slowing growth rate are … putting renewed downward pressure on prices.” I have been expounding on this theme for quite some time, so I obviously think the article is worth reading.

When China’s economy was booming, so did its demand for commodities. The result was the commodity super-cycle, which started in late 2001 after China joined the World Trade Organization on December 11 of that year. The super-cycle was briefly interrupted by the financial crisis of 2008. However, the Chinese government responded to it with a major fiscal stimulus program while the PBOC pumped lots of credit into the economy. Other governments and central banks did the same, but the Chinese led the way.

As a result, commodity prices soared again in 2009 through 2010. However, China’s factories turned expensive commodities into lots of cheap manufactured goods thanks to the availability of cheap labor. In other words, the trend in the so-called “China Price” was disinflationary, if not deflationary for the world economy. For the seven countries that report their CPIs by goods and services, durable goods prices have been falling steadily since the start of 2001: Eurozone (-1.7%), US (-12.5), UK (-13.7), Sweden (-21.6), Taiwan (-22.3), Switzerland (-23.9), and Japan (-43.7).

But China’s economic growth peaked during 2010, and labor costs started rising. The commodity super-cycle wasn’t so super, lasting just 10 years rather than 25-50 years. The subsequent drop in commodity prices since 2010 depressed commodity producers. Nevertheless, the China Price continues to fall as Chinese factories replace labor with automation. The 5/5 South China Morning Post included an article titled, “Building work starts on first all-robot manufacturing plant in China’s Dongguan.” A total of 1,000 robots will be installed at the factory, run by Shenzhen Everwin Precision Technology Co, with the aim of reducing the current workforce of 1,800 by 90% to only about 200.

To avert large-scale unemployment, the government continues to provide fiscal and monetary stimulus, which only worsens the excess capacity problem in manufacturing.

The WSJ article cited above reports, “Prices of all goods imported to the U.S. directly from China have fallen in 20 of the past 38 months, by 2.2% in all. For U.S. consumers, that is good news. But for policy makers and corporate executives, declining prices present a real challenge. The declines can sap profitability, deter investment and block wage growth, all of which are needed to help the world break out of its years of underwhelming growth.”

The article notes, as I have on a regular basis, that China’s PPI has declined on a y/y basis for 38 consecutive months. The PBOC has responded by easing credit conditions, which is likely to boost excess capacity by keeping “zombie” companies in business and by spurring even more capacity expansion.

Today's Morning Briefing: Blaming China. (1) No shortage of gluts thanks to China. (2) The epicenter of deflation. (3) Not so super super-cycle. (4) “China Price” remains deflationary as robots replace humans. (5) Deal or no deal? (6) Lots of big deals in healthcare, IT, and telecom. (7) Fed financing M&A mega-boom. (8) The fastest and easiest way to grow. (9) Challenging time for active managers. (10) Dividend-yielding stocks underperforming. (11) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

Central Banks Restore Wealth, Working on Growth (excerpt)

The major central banks of the world have been easing their monetary policies significantly since the financial crisis of 2008. They’ve succeeded in averting another financial crisis so far. They’ve also succeeded in recovering most of the fortunes that were lost during the crisis. For example, the total market value of all stocks traded in the US rose $22.7 trillion since Q1-2009 through the end of last year to $36.5 trillion. The S&P 500’s capitalization has increased $12.9 trillion during the bull market so far through last week. Both are at record highs, with the S&P 500 exceeding its 2007 peak by $5.0 trillion. All equity investors have benefited from the stock market rally.

Bond investors also enjoyed big gains as yields fell and prices rose. For example, US bond mutual funds had capital gains totaling $522 billion since the start of 2009. As we noted yesterday, the 12-month average of the median existing home price is up 29% since February 2012, while real estate held by households has increased by $4.2 trillion since then through the end of last year. Gold has also been golden, with a 118% rise in the price since the start of 2009 to its record high on September 6, 2011. It’s down 36% since then, but that’s hardly a sunken treasure for anyone who bought gold a few years ago.

Nevertheless, the central banks have been frustrated by the slow pace of the recoveries in their economies since the crisis of 2008. Reviving self-sustaining economic growth hasn’t been as easy as easing has been. Previously, I’ve argued that the ultra-easy monetary policies of the central banks might perversely have contributed to the slow pace of economic growth.

Today's Morning Briefing: Easy Come, Easy Go. (1) Elvis Presley and Janet Yellen. (2) Sunken treasures recovered. (3) Why easing hasn’t worked as expected. (4) Stock gains aren’t trickling down. (5) Savers earning less so saving more. (6) Fed has enabled fiscal excesses at cut-rate rates. (7) Near-zero interest rates contributing to income inequality. (8) Fed policies causing capital misallocation. (9) Enabling financial engineering. (10) The blame game. (11) Demography is also a downer. (12) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)

Reenergized Earnings? (excerpt)

If oil prices have bottomed and the dollar has peaked, then forward earnings should be moving forward again. Until recently, the S&P 500 forward earnings was tracking 7% annualized growth, the historical trend for this series.

If so, then forward earnings is currently predicting that the four-quarter trailing average of S&P 500 earnings, which was $119.20 per share during Q1, will rise to around $125 early next year. I am forecasting $130 for all of 2016, up from $120 this year.

Of course, this optimistic outlook requires that the economy finds some traction to get out of its current soft patch with both business sales and industrial production rebounding from their recent dips and moving to new highs again.

Today's Morning Briefing: Reenergized Earnings? (1) From “peak oil” to “cheap oil” to bad oil data. (2) Will the real Phil please stand up? (3) What are oil inventories doing? (4) EIA gets authority to require oil drillers to fill out a monthly supply survey. (5) Fewer railcar loadings of oil. (6) Lots in storage still. (7) World oil demand/supply ratio remains bearish. (8) Oil earnings may have stopped weighing on S&P 500. (9) Profit margins rebounding from recent dip. (10) Brighter outlook for earnings depends on soft patch as well as oil patch. (11) Focus on market-weight-rated S&P 500 Energy industries. (More for subscribers.)

Revenues & Earnings Coming Back Down to Earth? (excerpt)

While valuation multiples are flying into the wild blue yonder, revenues and earnings have been coming back down to Earth. But that’s all because of the crash in the Energy sector. Excluding this sector, the skies are still relatively sunny. Nevertheless, investors have to beware of repeating the fate of Greek mythology’s Icarus, who flew too close to the sun, melting the wax on his homemade wings and sending him into the sea. It was the first meltdown recorded in human history. Let’s have a closer look at the data:

(1) Revenues. The y/y growth in S&P 500 revenues, as compiled by Thomson Reuters I/B/E/S, is highly correlated with the comparable growth in manufacturing and trade sales. The former was down 1.8% y/y through Q1, while the latter declined 2.4% through March. However, excluding petroleum products, business sales rose 2.4% y/y. Petroleum-related sales plunged 31.7% y/y through March.

(2) Earnings. Thomson Reuters I/B/E/S calculates that S&P 500 earnings fell 6.3% q/q to $28.58 per share during Q1. It was up just 1.4% y/y. Excluding the Energy sector, Q1 earnings rose 11.5%. The following sectors had very strong results: Health Care (19.8%), Financials (19.5), and Tech (11.2).

Today's Morning Briefing: Wild Blue Yonder. (1) David Bowie’s scenario for stocks. (2) Valuations are flying into the wild blue yonder. (3) Blue Angels and the stunt plane. (4) Icarus and Major Tom. (5) Revenues and earnings have come back to Earth, but are still flying excluding Energy. (6) Joe confirms earnings rose 11.5% y/y during Q1 excluding Energy. (7) Not much spring in consumer’s step. (8) Four theories for why consumer spending is disappointing. (More for subscribers.)

Bond Market: Sprechen Sie Deutsch? (excerpt)

Yesterday’s much weaker than expected US retail sales report initially caused the 10-year US Treasury bond yield to fall in the morning. Then it spent the rest of the day moving higher. The comparable pesky German bond yield continued to move higher to 0.73% from its record low of 0.03% on April 17. The US bond yield has been joined at the hip with the German one all year.

While April’s payroll employment report put a Fed rate hike back on the table yet again for June, the retail sales report arguably took it off the table--yet again. That should have been bullish for bonds. Instead, the dollar took a dive on the soft-patch sales report. The weaker dollar lifted the prices of precious metals and oil (before crude oil inventory data depressed them), which also unnerved bonds.

A 2% bond yield looks attractive for the US 10-year Treasury given the subdued outlook for the Fed’s rate hiking. The problem is that if the German yield gets there, the US yield will be closer to 3%. That would make it even more attractive as long as you didn’t buy the bond at 2%.

Today's Morning Briefing: Consumers Not Registering. (1) Less “ka-ching” around the world. (2) A demographic theory of secular stagnation. (3) Older workers can’t depend on broke social welfare states. (4) May you live a long life and have lots of savings. (5) How governments depressed fertility. (6) US retail sales join the soft-patch batch. (7) China’s senior moment? (8) Japan, Italy, and Germany are at the top of median-age ranking. (9) Spotting some shoppers in Europe. (10) Bonds learning to speak Deutsche. (11) Focus on market-weight-rated S&P 500 Retail industry. (More for subscribers.)

What’s Driving Yields Higher (except)

Only a few weeks ago, we all figured out why bond yields had dropped close to zero in the Eurozone. It was mostly because the ECB implemented QE on March 9, and pledged to buy bonds yielding at least the same as the central bank’s deposit rate, which was lowered to minus 0.20% on September 4.

That hasn’t changed. So why the backup in bond yields? Maybe the markets have concluded that the ECB’s QE will avert deflation and boost the Eurozone’s economic growth. The rebound in oil prices certainly helped to allay some of the deflation concerns in the bond market.

Oil prices stopped falling on January 13. The price of copper stopped falling on January 29, and is up 18% since then. Both have been highly correlated with the US bond yield over the past year. The rebound in the price of oil may be a correction of a severely oversold condition. The supply/demand balance remains bearish, but turmoil in the Middle East is recurring and tends to add a risk premium to the price of oil.

The price of copper may reflect an improving global economy in general and a strengthening Chinese economy in particular. More likely, it reflects expectations that the Chinese government will provide lots of stimulus to revive China’s growth rate, which isn’t likely to happen.

Today's Morning Briefing: Major Tom & the Fed. (1) Ground Control has lost control of the bond market. (2) Bond yields should maintain current altitude for a while. (3) Stocks ready to go into outer space? (4) A simple theory for the backup in yields. (5) Close correlation between bond yield and oil and copper prices over past year. (6) US bond market no longer for isolationists. (7) Four Fed heads speak. (8) No big surprise in Q1 earnings season’s positive surprise. (9) Financials and Health Care sectors save the quarter. (10) Energy earnings crash and burn, but S&P 500 earnings up impressive 11.5% y/y ex-Energy. (More for subscribers.)

US Housing: Breaking Ground? (excerpt)

Many years ago, before China emerged, the price of copper was driven mostly by demand from the US housing industry. Could it be that US housing starts are taking off, which is why copper is firming? Let’s review some of the related indicators:

(1) Employment. Residential construction payrolls rose 23,600 during April. That was the best monthly increase since the start of the current housing expansion. However, that followed a decline of 1,800 during March, the first decrease since May 2012. Then again, total residential construction employment rose to 2.45 million, the highest since January 2009.

(2) Railcar loadings. On the other hand, railcar loadings of lumber and wood products are consistent with the current subdued pace of housing starts.

(3) Lumber prices. While both are volatile, there is a decent correlation between the nearby futures price of lumber and the S&P 500 Homebuilding stock price index. I have found that an average of the two is highly correlated with housing starts. The average is down 14.4% ytd.

Today's Morning Briefing: Breaking Bad? (1) China’s stock market turns volatile as P/Es surge. (2) The “insanity” trade in China. (3) PBOC warns about too much debt as it cuts interest rates. (4) China suffering from too much capacity, too much debt, too much deflation, too much pollution, and too many seniors. (5) Professor Copper is bullish on China and bearish on bonds. (6) Is housing turning up or down? (7) Payrolls say “up,” while lumber futures say “down.” (8) Brexit and Grexit? (More for subscribers.)

Why Are Bonds Taking a Dive? (excerpt)

US bond yields have jumped recently. The 10-year Treasury is up from a recent low of 1.87% on April 17 to 2.26% yesterday. Everyone is blaming that development on the spike in Eurozone bond yields, particularly the surge in the 10-year German government yield from its all-time low of 0.033% on April 17 to 0.58% yesterday. That’s despite the implementation of QE by the ECB starting on March 9.

With the benefit of hindsight, the backup in yields isn’t a surprise. Yields simply fell too low at the start of the year on fears that plunging oil prices might trigger widespread deflation, especially in the Eurozone, and maybe cause another financial crisis if oil companies started to default on their debts. Now that oil prices have rebounded, those concerns are evaporating and yields are normalizing. I think it’s that simple.

In any event, the backup in bond yields is doing the same to mortgage rates in the US. That could stall the already lackluster recovery in the housing industry, which might explain why lumber prices are falling. So maybe the Fed should postpone its lift-off given the lift-off in bond yields?

Today's Morning Briefing: Bonds Away? (1) Confused Fed heads. (2) More on the dark side than the light side. (3) Our collective conundrum. (4) A simple explanation why bond yields have surged. (5) Are bond traders expecting Fed lift-off, while forex players aren’t? (6) Wages might finally be rising faster, but gasoline prices are rising rapidly too. (7) Stocks, bonds, and currencies could be choppy through the summer. (8) FOMC members expecting much better growth may be disappointed. (9) ADP payrolls especially weak for large goods-producing companies. (10) Oil and dollar hitting capital spending on construction and industrial machinery. (11) Focus on overweight-rated S&P 500 Financials. (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.)

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.)

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.)

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.)