Global Economy: Muddling Along (excerpt)

The ongoing decline in oil prices since the summer reflects a glut of supply rather than a sudden slowing in the global economy, in our opinion. I note that the CRB raw industrials spot price index remains range-bound since 2012, though it is near the bottom of that range. If it dives below it, I will have to reconsider my assessment of the global economy. Here’s a brief rundown on some other recent economic indicators:

(1) Europe. Manufacturing activity in the UK improved in October, while it remained subdued in the Eurozone. The UK’s M-PMI increased for the first time in four months from a 17-month low of 51.5 in September to a three-month high of 53.2 last month, boosted by domestic demand. The Eurozone’s M-PMI ticked up from a 14-month low of 50.3 to 50.6, the third reading just above 50.

(2) China. China’s official M-PMI fell from 51.1 to a five-month low of 50.8 last month. Growth slowed for production (from 53.6 to 53.1) and new orders (52.2 to 51.6), while new export orders (50.2 to 49.9) contracted for the first time in May, albeit slightly. The supplier deliveries measure was unchanged at 50.1. The employment measure ticked up from 48.2 to 48.4, its 29th consecutive reading below 50.

Today's Morning Briefing: As The World Turns. (1) Wild ride in S&P 500 Transportation. (2) Burning cheaper fuel. (3) Intermodal loadings at record high along with ATA Trucking Index and real business inventories. (4) Slow speed reduces odds of derailment. (5) A couple of hot capital spending indicators in GDP. (6) Gasoline bill cut by at least $100 billion. (7) Wage gains remain too low for Yellen. (8) M-PMIs show global economy muddling along. (9) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

Valuations Not Too High for Central Banks (excerpt)

The combination of the recent weakness of forward earnings with the record-breaking performance of stocks has boosted forward P/Es significantly since mid-October. Here are the year’s peaks, mid-October lows, and Friday’s readings of the forward P/Es for the S&P 500 (15.7, 14.4, 15.7), S&P 400 (17.7, 15.3, 16.9), and S&P 600 (19.3, 15.8, 17.6).

The S&P 500 seems especially expensive relative to forward revenues. The same can be said for Q3’s ratio of the market capitalization of the S&P 500 to its aggregate’s revenues. The ratio rose to 1.66, the highest since Q1-2002. I suppose valuation multiples can continue to go higher now that we have the Kuroda Put. The major central banks and government pension funds are not value-oriented investors.

Today's Morning Briefing: Kuroda’s Put. (1) Main drivers of the bull market. (2) Worries have evaporated. (3) BOJ upping the ante. (4) QQE-1 was scheduled to terminate by end of FY2014. (5) QQE-2 is more open-ended at least through end of FY2015. (6) Contrary indicator alert: Japanese pension fund raising global equity allocation from 24% to 50%. (7) What if monetary policy can’t cure what’s wrong, but central bankers don’t get it? (8) How do you say “melt-up” in Japanese? (9) Forward earnings weighed down by falling oil prices. (10) Valuation metrics getting pricey again. (11) Central bankers and government pension funds aren’t value buyers. (More for subscribers.)

Congressional Cycle Is Bullish (excerpt)

Of course, one of the most concentrated pools of fools is in Washington, DC. This might explain the extraordinary conclusion of a study examining the performance of the S&P 500 by our long-time statistical consultant Jim Marsten. Along with Joe, he designed many of the publications in the Quant Center on our website. I asked Jim to calculate the three-, six-, and 12-month percentage changes following mid-term elections in the S&P 500. After doing so, Jim concludes:

Suppose I told you there is a technical indicator that, once the buy signal was given, has an amazing record--with the S&P 500 up three months later 17 times out of 18 since 1942, up six months later 18 times out of 18, and up 12 months later 18 times out of 18. The only condition this technical indicator has to meet is a particular political-calendar date, i.e., mid-term election day, which happens to be tomorrow. Buying on that day is one of the best technical strategies I have ever seen. One has to go back to Depression-era market losses to find two periods when this indicator did not give consistently positive results. The historical odds are almost 100% in your favor. The average percentage changes are also good since 1942: 8.5% for the three-month periods, 15.0% for six months, and 15.6% for 12 months.

Why has this mid-term cycle been so consistently bullish since 1942? The most likely explanation is that mid-term elections tend to increase gridlock in Washington, DC. While the debt-ceiling political crises of August 2011 and late 2012 suggested that too much gridlock is bearish for stocks, it has been quite bullish historically. Jim and I believe that it might be again after tomorrow. It would be bullish to see that our Founding Fathers’ system of checks and balances, designed to limit the folly of our foolhardy politicians, is still working.

Today's Morning Briefing: In Praise of Folly. (1) Folly speaks. (2) A famous essay. (3) Central banks get top billing today. (4) Doing more of the same including inflating bubbles. (5) Counterfactual praise. (6) From brief meltdown back to melt-up. (7) Japan: From aw-shucks to shock & awe. (8) Draghi’s low-key shock & awe. (9) Fed policy is also market dependent. (10) Biggest fool may be Pouting Putin. (11) Pool of fools in Washington. (12) Mid-term election rally almost a sure thing? (13) Risk On is back on. (14) “Nightcrawler” (+ +). (More for subscribers.)

Trick or Treat? (excerpt)

As I’ve often observed, the current bull market has been a series of panic attacks followed by big relief rallies. Last year and this year, the panic attacks were less severe and shorter than those from 2009-2012. That’s until October’s severe, but short panic attack. Just this year alone, the list of anxiety-provoking events has been a long one: Emerging markets mini crisis (January 23), Crimea invasion (February 28), Yellen rate-hike scare (March 19), momentum stocks meltdown (April 3), ISIS invasion of Iraq (June 10), Portuguese bank panic (July 10), Malaysian jet crisis (July 17), sanctions imposed on Russia (July 29), and the global growth and Ebola scares (September 30). And the year isn’t even over yet. So far, the trick to this bull market is not to panic. Investors who haven’t panicked have had quite a treat, with the S&P 500 up 193% since March 9, 2009.

Today's Morning Briefing: Mission Accomplished. (1) No surprises. (2) QE gets credit from its proud conceivers. (3) The right message. (4) Is inflation back on right track as Fed claims? (5) Harry Truman and the Fed’s two-handed economists. (6) Does forward guidance make sense, or is it nonsense? (7) Running out on “considerable time” on March 18, maybe? (8) Gradual normalization ahead or “one and done?” (9) Sentiment roller coaster, panic attacks, dips, and relief rallies. (10) Lots of earnings weakness across most MSCI sectors overseas. (11) Focus on overweight-rated S&P 500 Health Care. (More for subscribers)

Happy Days Are Here Again (excerpt)

All of a sudden, everyone seems to be bearish on oil and bullish on its implications for the economy. That’s fine with me since I started to speculate about a big downside move in the price of a barrel of Brent crude oil to $75 in mid-September. It was around $95 back then. On Monday, with the price around $85, I discussed some reasons why it might not have much more downside. Lower prices might be even too painful for the Saudis, who might reduce their output. The Chinese have been bargain hunting at these prices.

In any event, the drop in the price of gasoline and heating oil is a nice and early holiday present that could boost holiday retail sales. The national average pump price of gasoline has dropped 53 cents from this year’s peak of $3.70 a gallon during the week of July 2 to $3.17 in mid-October. The futures price suggests it will fall below $3.00 in the next couple of weeks.

That’s certainly helping to boost the Consumer Confidence Index. I average it with the Consumer Sentiment Index to derive our Consumer Optimism Index. My derived index rose during October to the highest reading since September 2007.

Interestingly, the Consumer Confidence Index among respondents under 35 years old soared during October to the highest since December 2006. This group’s confidence typically exceeds that of the older groups. I’m not sure why it surged so much for the younger crowd. Maybe they drive more. Maybe they are happier than others that jobs are less hard to find. In any event, they tend to form households. They buy houses, furniture, and cars, especially when they are optimistic.

Today's Morning Briefing: Considerable Time. (1) FOMC likely to treat rather than trick. (2) Fed officials were probably spooked by recent market turmoil. (3) QE has been terminated, until further notice. (4) FOMC has to fear stoking current melt-up. (5) Fed policy is market dependent. (6) Rosengren denies Fed’s role in wealth and income inequality. (7) No exit for central banks from ultra-easy monetary policy for a considerable time. (8) The “one and done” scenario. (9) Long expansion scenario would justify higher P/Es until it doesn’t. (10) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)