Inflation & the Fed (excerpt)

Expected inflation in the 10-year TIPS yield has declined from a recent high of 2.59% on February 13 to 2.37% yesterday. The core PCED inflation rate fell in March to 1.1% y/y, the lowest since March 2011. I don’t understand why Fed officials are so convinced that lower inflation is a bad thing. They obviously view it as a sign of economic weakness. They also seem to fear that falling inflation will hurt demand for goods and services by eliminating buy-in-advance attitudes.

Are they aware that much of inflation’s recent improvement (IMHO) is attributable to health care costs? That’s right: The PCED medical care inflation rate was down to 1.7% in March, the lowest since April 1998. There have been significant drops in inflation rates for drugs and physician fees. Does the Fed want to see higher inflation rates in the health care industry so that people will rush to buy medical care goods and services before their prices go up?

Rent inflation has rebounded during the current economic recovery, but now shows signs of peaking. The CPI and PCED data are nearly identical and show that rent of shelter is up 2.2% y/y. It was actually falling during 2010. It accounts for 17% of the core PCED and 42% of the core CPI. Do Fed officials really want still higher rent inflation?

Today's Morning Briefing: Low Maintenance Bull. (1) A couple of simple wishes. (2) What’s charging up the bulls? (3) Hilsenrath says it all. (4) Disinflation making a comeback. (5) Why do they want more inflation? (6) Medical care inflation falling led by drugs and doctors. (7) Rent inflation peaking? (8) Hooray for Italy. (9) ECB set to ease. (10). No bank runs in euro zone money data. (11) Consumers still spending. (12) Focusing on fun-related Consumer Discretionary stocks. (More for subscribers.)

S&P 500 Revenues & US Exports (excerpt)

Both the levels and the growth rates of S&P 500 revenues and US nominal exports are highly correlated. Nominal exports remained in a volatile flat trend during the first two months of the first quarter. This might be one reason why revenues have been lower than expected during the first quarter’s earnings season. Of the 270 S&P 500 companies that have reported, 56% had negative revenue surprises. Nevertheless, analysts’ consensus revenue estimates are holding up surprisingly well for this year and next year with gains of 3.0% and 4.6%, respectively.

S&P 500 profit margin estimates are also holding up, with 9.8% expected this year and 10.5% expected next year. I expect margins to remain flat in 2013 and 2014. So earnings should grow at the same pace as revenues. For earnings, I am still predicting $110 per share this year, up 5.9% y/y, and $118 next year, up 7.3%. Obviously, I am more optimistic about the prospects for revenues than the analysts. However, because they are more optimistic on margins, they are currently predicting that earnings will be $111 and $124 this year and next year.

Today's Morning Briefing: Austerity & Disruptive Innovation. 1) From Tribeca to London. (2) If I had a hammer. (3) Stockman, Psy, and me. (4) Christensen, Schumpeter, and Marx. (5) Capitalism creates winners and losers all the time. (6) Politicians know how to win. (7) The anti-austerians fight back. (8) Reinhart & Rogoff’s big error. (9) Frustrated central bankers do more of the same. (10) The anti-austerity bull market in stocks. (11) The BRAINE revolution. (12) GDP is a mix of new and old normal. (13) “Mud” (+). (More for subscribers.)

S&P 500 Revenues, Commodity Prices, & the Dollar (excerpt)

Previously, I’ve observed that S&P 500 revenues are highly correlated with both world industrial production and world exports. The same goes for these revenues and the CRB raw industrials spot price index. I am predicting that revenues will be up 5%-7% this year and next year.

If commodity prices weaken further, I will have to reassess this outlook, especially if the dollar continues to strengthen. There is a strong inverse correlation between the y/y percent changes in the CRB index and the JP Morgan trade-weight dollar index. A strong dollar tends to decrease the demand for many commodities that are priced in dollars. A strong dollar also depresses the value of profits earned abroad by US companies.

Today's Morning Briefing:The Pits and the Pendulum. (1) Dr. Copper isn’t the only economist in the commodity pits. (2) CRB spot price index less volatile. (3) World exports and production rose to record highs in January. (4) The relationship between S&P 500 revenues, commodity prices, and the dollar. (5) Germany’s Ifo dipping. (6) US capital goods orders slowing. (7) China not as weak as Dr. Copper suggests. (8) Underweight-rated Materials may be oversold. (9) Focus on overweight-rated Industrials, especially enablers of factory automation. (More for subscribers.)

Dividends, Buybacks, & the Bull Market (excerpt)

Why did US stocks rally yesterday? Despite disappointing revenues, earnings expectations are holding up well during the current earnings season, with the forward earnings of the S&P 500, S&P 400, and S&P 600 all in record-high territory.

Most importantly, during the current earnings season, US corporations continue to announce dividend increases and more share buybacks. Previously, I’ve shown that this corporate cash flow into the stock market--which totaled $2.1 trillion for the S&P 500 since stock prices bottomed during Q1-2009 through Q4-2012--has been driving the bull market since it began.

On Tuesday, Apple announced that it will more than double its program to return cash to shareholders through stock buybacks and a higher dividend, spending $100 billion on the effort through the end of 2015. Its share repurchases alone will increase to $60 billion from the $10 billion it committed previously, the largest such plan in history.

Today's Morning Briefing: Money for Nothing. (1) Fearless bulls. (2) Bear raid. (3) Finding support. (4) Beware of “Dow 16,000!”? (5) Bad to ugly Markit data. (6) More recession stats out of Europe. (7) Copper much weaker than CRB spot index. (8) Bad news is still good news. (9) Draghi to the rescue? (10) Apple slices some cash for shareholders. (11) Dangerfield vs Potemkin rally. (12) Dueling ratios. (13) Dire Straits. (14) Focus on housing-related stocks. (More for subscribers.)

US Housing (excerpt)

The National Weather Service reports that last month ranked as the second coldest March in the continental United States since 2000. The average temperature across the US was also 13 degrees Fahrenheit lower than in March 2012, and a late-winter blizzard broke snowfall records in many areas.

Bad weather certainly can explain why single-family housing starts fell and existing home sales dipped in March. However, that didn’t stop the median price of a single-family existing home from rising by 12.1% y/y, the best rate of increase since November 2005.

In April, there was a two-point drop to 42 in the Housing Market Index (HMI) compiled by the National Association of Home Builders. That’s still a very upbeat leading indicator for both housing starts and new home sales. 

Today's Morning Briefing: Blaming the Weather. (1) What done it? (2) A soft batch or a soft patch? (3) The seasonal adjustment curse. (4) The coldest March since 2000. (5) Utility output jumped. (6) Hot home prices. (7) Outstanding oil output. (8) Stovall on going away in May. (9) Health Care is a good sector for the season. (10) It’s defensive, but still cheap. (11) A table of forward P/Es. (More for subscribers.)