We Are All Bulls Now (excerpt)

Everyone is bullish. Contrarians know that must be bearish. However, everyone has been bullish for a while, yet the S&P 500 rose to a record high of 2117 on April 24. That’s because everyone has finally figured out that fighting the Fed in particular and central banks in general is dumb. So we are all smart now. As a result, bullish sentiment is at a record high, though the bull market, which is more than six years old, is no spring chicken.

I calculated the 52-week moving average of the Investor Intelligence Bull/Bear Ratio. At 3.46 this week, it is the highest in the history of this series, which starts in 1987. The 52-week average of the sum of those who are bullish or expect a correction rose to 84.4%, also a record high. The percentage of bears fell to only 13.9% this week, with the 52-week average down to a record low 15.5%.

If we are all bullish, who is left to buy stocks? A 4/12 FT article reported: “Shareholders in the biggest US companies stand to receive a record $1tn in cash this year, as blue chips’ concerns over the global economic outlook have diverted cash away from investment and is driving a boom in buybacks and dividends.”

Today's Morning Briefing: Cold Cash. (1) Everyone is bullish, but that’s not bearish. (2) We are all smart bulls now. (3) No spring chicken. (4) Has-been Fed Model has been working since 2010. (5) Companies set to return $1tn to investors this year. (6) Fed’s easy money enables buybacks, spinoffs, and M&A. (7) Buybacks = Corporate QE. (8) Fed depending on undependable data. (9) Dollar looking peakish. (10) Money is exiting Greece in fear of Grexit. (11) More upbeat indicators out of Eurozone. (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.)

Will Robots Bend the Phillips Curve? (excerpt)

There’s an important debate about wage inflation. The inverse relationship between wage inflation and the unemployment rate is known as the "Phillips Curve." It makes sense that wage inflation would rise or fall depending on whether the unemployment rate was relatively low or high. However, I have been arguing that the Phillips Curve might not work as well given increasing globalization, innovation, and competition.

In his Barron’s column this week, Gene Epstein argues that wage growth is about to take off. He bases this forecast on a version of the Phillips Curve model devised by Jason Benderly of Applied Global Macro Research. In addition to the level of the unemployment rate, this model includes the change in the jobless rate, labor productivity, and the after-tax profit margin.

I note that the unemployment rate remained at 5.5% during March, the lowest since May 2008, yet wage inflation remained subdued for all workers at 2.1%, while falling recently to 1.8% for production and nonsupervisory workers. On the other hand, as we noted last week, wage inflation over the past three months through March for all workers jumped to 3.9% (saar), the highest since December 2008. That might have reflected the one-shot impact of the widespread hike in the minimum wage at the start of the year. Or else, the Phillips Curve is starting to work, finally.

If it’s different this time, then robots might be one of the reasons. The 4/23 WSJ reported that in Oxnard, California, “A 14-arm, automated harvester recently wheeled through rows of strawberry plants here, illustrating an emerging solution to one of the produce industry’s most pressing problems: a shortfall of farmhands.” The 4/24 NYT reported, “Faced with an acute and worsening shortage of blue-collar workers, China is rushing to develop and deploy a wide variety of robots for use in thousands of factories.”

Today's Morning Briefing: Great Debates. (1) The link between easy money and secular stagnation. (2) Summers vs Rogoff. (3) Debt super-cycle. (4) Time heals all wounds. (5) Asia’s debt binge. (6) Glut of gluts. (7) Will China solve its debt problem with a stock bubble? (8) Lots of burdensome debt burdens in Japan, Eurozone, and China. (9) US corporations borrowing for financial engineering. (10) A cold spring following an icy winter. (11) Dallas slipping on oil. (12) Are robots bending the Phillips Curve? (13) Lots of debatable subjects including Fed, oil, dollar, Grexit, MENA, and the meaning of life. (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.)