Great Rotation? (Excerpt)

The jump in Lipper’s weekly equity mutual funds inflows since the start of the year has sparked some chatter about a "great rotation" out of bonds and into stocks.

January is historically a strong month for inflows as investors make their annual contributions to IRAs and year-end bonuses are invested. This year there was a bulge in such funds as more bonuses and dividends were paid out before the "fiscal cliff" tax hikes expected at the start of 2013. Let's have a closer look at the data:

(1) Wages and salaries in personal income popped by 0.6% during December. Odds are this number will be revised upwards given that individual income tax receipts collected by the US Treasury jumped 19.8% y/y (the most since October 2011), with the 12-month average up 1.9% m/m.

(2) Dividends in personal income spiked from $782 billion (saar) during November to $1.1 trillion during December. Data available through December show that reinvested dividends in equity mutual funds rose to a record $77.0 billion last year, with a record $46.6 billion during December alone.

Today's Morning Briefing: The Future Is Back. (1) Paradise lost and found. (2) The future is making a comeback. (3) Corporate flows feeding the bulls. (4) The Great Rotation? (5) The fiscal cliff turned out to be bullish. (6) Yearend bulge in bonuses and dividends. (7) The January Barometer. (8) Three major positive trends for the future. (More for subscribers.)

China (Excerpt)

The National Bureau of Statistics of China conducts the official surveys of purchasing managers. The agency’s manufacturing index for January was based on a pool of 3,000 respondents, more than triple the previous number. It also plans to expand the sample size for its services survey to about 8,000 companies from 1,200. China’s official M-PMI edged down from 50.6 in December to 50.4 last month. The official NM-PMI edged up from 56.1 to 56.2.

China’s manufacturing sector is showing signs of slowing as the country’s rising labor costs reduce the competitiveness of its export sector, which has been a major employer. Indeed, there is a good correlation between the M-PMI’s Export Orders Index and the Employment Index. Both have been mostly under 50 since mid-2011.

Today's Morning Briefing: Purchasing Managers: Our BFFs. (1) Insightful friends. (2) Been around for a while. (3) Are they seeing an upturn in the US and global economies? (4) PMIs are useful leading indicators for S&P 500 revenues and earnings. (5) US may be leading global upturn. (6) Services strong in Germany and China. (7) Export orders and employment weak in China's manufacturing sector. (More for subscribers.)

Euro Zone (Excerpt)

Yesterday’s selloff in the US stock market started early in the day as investors were spooked by a 24bps jump in the 10-year Spanish government bond yield. Reuters reported: “Spain's opposition party on Sunday called for Prime Minister Mariano Rajoy to resign over a corruption scandal, an allegation Rajoy denies, pushing Spanish 10-year bond yields to six-week highs. In Italy, 10-year Italian government bond yields hit their highest since late December, as chances of former prime minister Silvio Berlusconi regaining power raised worries about Rome's ability to fix its fiscal problems.” The good news is that the bad news might halt the recent rally in the euro, which can’t be good for the euro zone’s exporters.

Today's Morning Briefing: Latest Worry List. (1) Back to the wall. (2) Same old, same old. (3) Accentuating the negatives again? (4) Three scenarios: Rational exuberance (60%), irrational exuberance (30%), and panic attack (10%). (5) Hitting the payroll tax wall? (6) Gasoline prices making the news again. (7) Middle East rattling oil market, as usual. (8) Spain and Italy again. (More for subscribers.)

CNBC Appearance

Stocks & the Fed (Excerpt)

A melt-up could propel the S&P 500 to my yearend target of 1665 before the middle of the year. That might be too much of a good thing. Such exuberance for stocks would probably reflect and contribute to stronger-than-expected economic growth. The market could then have a nasty correction during the second half of the year if we learn that Fed officials are increasingly alarmed that they are doing it again, i.e., pumping air into another stock market bubble.

Stock investors were undoubtedly happy to see on Thursday of last week that the core personal consumption expenditures deflator rose only 1.3% y/y during December, the lowest since May 2011. It’s also well below the Fed’s 2.5% red line. In Friday’s employment report, wages of all workers rose 2.1% y/y during January. That’s still very subdued, though up from last year’s low of 1.5% during October.

On the other hand, the expected inflation rate embedded in the spread between 10-year Treasuries and TIPS was at 2.6% on Friday, and seems set to move higher. If it does so, that could put the Fed in a real box. If expected inflation spikes up later this year, there could be more than one or two dissenters in the FOMC. Esther L. George, the President of the Kansas City FRB, was the lone dissenter with a vote at the January 29-30 meeting of the FOMC because she “was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”

Today's Morning Briefing: Goldilocks Is Back. (1) Not too cold, not too hot. (2) The downside of a melt-up. (3) Goldie’s shoes. (4) Too many charging bulls? (5) Room for more bullish sentiment and spreads. (6) P/E of 14 = 1600 on S&P 500 & 15 = 1700. (7) Payroll report was just right. (8) Next big debate at the Fed: Blowing bubbles again? (9) Inflation remains on ice, but expectations are heating up. (10) Barrage of bullish data sends bears packing. (11) Go With the Flow. (12) What’s leading and lagging the 2013 rally? (More for subscribers.)