Mixed Employment Report (excerpt)

December’s wage data were disappointing. Indeed, while private-sector payroll employment rose solidly by 240,000 and the average workweek for the sector was unchanged at 34.6 hours, the drop in private-sector wages by 0.2% m/m caused our Earned Income Proxy to flatten during December following November’s jump of 0.8% m/m. That doesn’t augur well for retail sales. However, the strong pace of employment and the boost to real incomes from lower energy costs should drive consumer spending higher in coming months. Let’s review the employment report:

(1) Payroll employment rose 2.95 million last year, the best calendar-year gain since 1999. Upward revisions totaling 50,000 during October and November boosted the former’s gain to 261,000 and the latter’s to 353,000.

(2) Full-time employment rose to a cyclical high of 119.9 million at the end of last year according to the household survey. That’s the most since July 2008. Part-time employment fluctuated around 27.5 million last year. In other words, there is no evidence in these data that Obamacare boosted part-time employment, as was widely feared. (That doesn’t mean I am endorsing the program. Rather, I continue to be impressed by the resilience of the economy despite Washington’s meddling!)

(3) The labor force fell 273,000 during December as the number of dropouts rose 456,000 to a record high of 92.9 million. Many economists have been expecting that this number would fall as the labor market tightened and encouraged more people to reenter the labor force because jobs are easier to get. That hasn’t happened so far. It is likely that many long-term unemployed workers are dropping out.

Today's Morning Briefing: Averting a “Catastrophe”. (1) Fairy Godmother and Godfather. (2) Charles Evans is an influential and patient member of the FOMC. (3) Is the Fed more or less patient than Evans? (4) Normalization looking less likely this year to us. (5) See you after April 28-29 FOMC meeting. (6) Stronger dollar could hurt. (7) Wage inflation heading in the wrong direction. (8) Wage weakness: Noise or signal? (9) Despite solid job gains, workers continue to drop out of labor force. (10) “Wild” (+ + +). (More for subscribers.)

S&P 500 Transportation Stocks Boosted By Lower Oil Price (excerpt)

In the US, the transportation industry is a big winner from falling oil prices. It is one of the few where industry analysts have responded quickly to the drop in energy prices by raising their S&P 500 Transportation earnings forecasts for 2014, 2015, and 2016. As a result, forward earnings rose 17.0% during the second half of last year, up from the first half’s increase of 8.5%. The forward profit margin for the sector is up from last year’s low of 9.0% during the week of January 23 to 10.4% at the end of last year.

Today's Morning Briefing: Job Machine. (1) ADP payroll data augur well for BLS measure. (2) Humming along. (3) Oil still gushing in Texas and N. Dakota. (4) No sign of trouble in jobless claims yet. (5) Direct impact of oil plunge on US employment and capital spending is very small. (6) ADP data should get more respect. (7) Small firms turning into larger firms account for lots of employment gains. (8) Oil windfall for advanced economies is almost $1 trillion. (9) Ditto for emerging economies. (10) Industry analysts raising profit margin and earnings forecasts for S&P 500 Transportation stocks. (11) Focus on overweight-rated S&P 500 Transportation sector. (More for subscribers.)

S&P 500 Earnings Holding Up Despite Oil Price Plunge (excerpt)

While forward earnings are dropping sharply for the S&P 500 Energy sector, forward earnings are holding up quite well in the other sectors. This analysis is based on aggregate dollar values rather than per share.

Over the past 12 weeks through the week of 12/25, the forward earnings of the S&P 500 Energy sector plunged 30%, by $38 billion to $90 billion. As a result, S&P 500 forward earnings peaked during the week of October 2 at a record high and edged down by 3.2% through the end of the year. Excluding Energy, forward earnings rose to yet another record high at the end of 2014.

Standard & Poor’s Capital IQ provides consensus earnings forecasts for each quarter. The sector estimates for Q4 are lower since the end of Q3, led by Energy, which has been revised down sharply by 26.2%. The overall S&P 500’s Q4 estimate is down 7.1%. Excluding Energy, it is down 5.2%.

Today's Morning Briefing: The World According to Gross. (1) Gross warning. (2) A bungee scenario for oil price. (3) The debt super-cycle is rolling over. (4) So is the commodity super-cycle. (5) Easy money has been stimulating supply more than demand lately. (6) Party is over for zombies. (7) Can US decouple from global secular stagnation? (8) Consumers’ windfall from lower fuel costs is over $200 billion. (9) Raising the odds of the Endgame, while lowering the odds of Irrational Exuberance. (10) Getting harder to see Fed raising rates this year under any scenario. (11) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)

Drowning in Oil (excerpt)

The ongoing freefall in the price of crude oil is unsettling investors. It dropped to $53.04 per barrel of Brent crude yesterday, the lowest since May 2009. It is down 54% from last year’s peak of $115.15 on June 19. The next significant support may be the December 24, 2008 low of $32.27.

At the end of last year, Saudi Arabia’s oil minister Ali al-Naimi said in the Middle East Economic Survey that the current prices of oil will persist over the long term and that oil prices will never go back to $100. He also told the FT, “It is not in the interest of OPEC producers to cut production, whatever the price, whether it is $20, $40, $50 or $60, it does not make sense.” According to him, if Saudi Arabia lowers its production “prices will rise again but the Russians, Brazilians and US shale oil producers will take market share from us.”

For Ali al-Naimi, with production costs at $4-$5 per barrel, the Gulf countries can hold indefinitely with oil at current prices or even if it fell to as low as $20 per barrel. In contrast, the production of shale oil in the US costs in a range between $50-$80 per barrel. “They will be injured before we felt any pain,” he declared. Now consider the following:

(1) Hedges. Yesterday, Reuters posted an article titled, “Revamped U.S. oil hedges may test OPEC's patience.” The key point: “As a war of nerves between U.S. shale producers and Gulf powerhouses intensifies, OPEC's biggest members are counting down the months until their upstart rivals lose the one thing shielding them from crashing oil prices--hedges.

“They may need much more patience than they reckon, however, because those hedges are a moving target. Rather than wait for their price insurance to run out, many companies are racing to revamp their policies, cashing in well-placed hedges to increase the number of future barrels hedged, according to industry consultants, bankers and analysts familiar with the deals.”

(2) Stress test. On the other hand, Bloomberg yesterday ran an article titled, “Oil Below $60 Tests Economics of U.S. Shale Boom.” It notes that oil companies started slashing their capital budgets late last year, when oil was still above $60 a barrel. Bloomberg also reported that some of the largest U.S. shale drillers “have been spending money faster than they make it, borrowing to pay for their expansion, according financial statements filed with the U.S. Securities and Exchange Commission.”

The 12/15 FT reported: “Almost $1tn of spending on future oil projects is at risk after a brutal plunge in crude prices to nearly $60 a barrel, Goldman Sachs has warned. Any cancellation of these developments would deprive the world of 7.5m barrels a day of new output over the coming decade--or 8 per cent of current global oil demand. The findings suggest the supply glut that has sent prices tumbling could soon vanish as the oil majors delay big-ticket production projects--the lifeblood of future petrol supplies, heating fuels and chemicals.”

(3) Rig count. It’s too soon to tell, but my hunch is that US crude oil production peaked at the end of last year and could fall rapidly in coming months. The US oil rig count peaked at 1,609 during the week of October 10 and fell to 1,482 through the week ending January 2.

Today's Morning Briefing: Here We Go Again. (1) Déjà vu all over again. (2) Fear making a comeback? (3) Euro Mess is back with talk of “Grexit.” (4) Is QE the answer to “whatever it takes” for the Eurozone? (5) German bond yield just north of zero. (6) Drowning in oil. (7) Saudi oil minister gets the prize for lowest oil price target at $20. (8) Will hedges keep US frackers pumping longer than expected? (9) Oil industry is slashing budgets. (10) Plunging oil prices should trigger plunge in oil production. (11) Energy sector is weighing on S&P 500 forward earnings, which is at a record high excluding the sector. (12) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

A Happy New Year So Far (excerpt)

In the US, it is a happy new year already. It isn't for everyone, but it certainly is starting this way for US consumers. Payroll employment rose 2.73 million over the 12 months through November, the best such gain since March 2006. The average hourly wage rate rose 2.1% y/y that month, while PCED prices rose 1.2%. The recent plunge in gasoline prices is providing consumers with an annualized windfall of about $200 billion. This happy news is boosting various measures of consumer confidence:

(1) Consumer Comfort Index. Bloomberg’s weekly measure of consumer confidence jumped late last year, ending 2014 at the highest level since October 2007. Consumers turned more bullish on the state of the economy and the buying climate.

(2) Consumer Confidence Index. The present situation component of the Consumer Confidence Index rose to a new cyclical high during December, and the best reading since February 2008. The percentage of this survey’s respondents who said that jobs are hard to get dropped to 27.7% last month. That’s down from the cyclical high of 49.4% during September 2011, and the lowest since March 2008. It tends to be highly correlated with the unemployment rate, which should continue to fall this year.

Consumers are in the mood to spend some more. Revised data showed that they did so during Q3, contributing 2.2 percentage points to the quarter’s 5.0% increase in real GDP. No wonder that the ATA Trucking Index of freight tonnage jumped 3.5% m/m in November to a new record high. Intermodal railcar loadings also rose to a new record high at the end of last year.

Today's Morning Briefing: Another Happy Year? (1) Santa was early last year. (2) Dow Theory is bullish. (3) Still targeting 2300 for S&P 500. (4) Bond Kings remain bullish on bonds, and we are inclined to agree. (5) Hard to argue against stronger dollar. (6) Oil could retest 2008 low before bouncing back to around $60. (7) US GDP should gain from lower oil prices. (8) US MSCI should continue to outperform. (9) Eurozone is a mess again. (10) China’s zombies. (11) Consumer confidence is soaring, according to weekly measure. (12) “The Imitation Game” (+ + +). (More for subscribers.)