Elevated Valuation Metrics (excerpt)

The Fed released its quarterly Flow of Funds report last Thursday. It showed that the market value of all equities traded in the US soared to a record $34.7 trillion at the end of last year, up a whopping $20.9 trillion since the start of the bull market during Q1-2009. Total stock market capitalization as a ratio of nominal GDP rose to 1.25 at the end of last year, exceeding the previous 2007 peak of 1.12 and the highest since Q3-2000. The price-to-sales ratio of the S&P 500 rose to 1.54 at the end of last year to the highest reading since Q1-2002.

Tobin’s Q is another valuation metric that can be calculated using data in the Flow of Funds report. It is the ratio of the market value of equities to the net worth at market value of nonfinancial corporations. I adjust it by dividing it by the average ratio since the start of the data. It was 1.44 at the end of last year, the highest since Q2-2001.

Today's Morning Briefing: Hillary’s Department. (1) Natural gas and diplomacy. (2) Putin helping to resolve a debate in US. (3) Thank goodness for Texas and N. Dakota. (4) Fisher’s irrationally exuberant ghosts. (5) Fed data show elevated valuation multiples. (6) Janet may soon start singing Britney’s “Oops” song. (7) YRI Earned Income Proxy at another record high. (8) Real hourly wage rate at record high. (9) Long-term unemployment remains high. (10) Yellen & Dudley continue to accentuate the negatives. (11) Monetary policy likely to remain ultra-easy and bullish for stocks. (More for subscribers.)

Valuation Multiples At Bull-Market Highs (excerpt)

There are more hints of a melt-up in stock prices. That could be a more serious threat than any geopolitical blowup to my prediction that the secular bull market could run for another two years or longer. The forward valuation multiples of the S&P 500/400/600 are now at bull-market highs and slightly exceed the 2007 highs of the previous bull market. On Tuesday, the forward P/Es of the three S&P composites rose to 15.4, 17.7, and 19.1.

Bullish sentiment has rebounded sharply during the past few weeks. The Bull/Bear Ratio compiled by Investors Intelligence fell from a recent high of 4.23 during the week of December 24 to 2.40 during the week of February 11. Over the past three weeks, it has bounced back to 3.62.

Today's Morning Briefing: Peace Prize. (1) Putin: A man of peace. (2) All quiet on the stock market front. (3) Geopolitical flare-ups tend to be buying opportunities. (4) Forward P/Es at bull-market highs. (5) Forward earnings stagnating for S&P 500, but still rising for US MSCI. (6) Ex-US, global earnings continue to flat-line. (7) Europe’s recovery is too weak to boost earnings estimates. (8) China staying with 7.5% growth. (9) Pollution is China’s “red-light warning.” (More for subscribers.)

BOJ Is Pumping Like Mad (excerpt)

The Bank of Japan has been injecting lots of liquidity into the financial system over the past year in an effort to stop deflation and raise the CPI inflation rate to 2% on a sustainable basis. January’s monetary base was up 56% y/y. So far, the BOJ can take credit for boosting the inflation rate to 1.4% during January from -0.9% last March. However, it did edge down over the past two months.

The core CPI inflation rate (excluding food & energy) has been positive for the past four months through January, when it was 0.6%. That’s still awfully low, but it beats the 55 consecutive months of negative readings from January 2009 through July 2013.

Today's Morning Briefing: Don't Blink. (1) Shorter panic attacks. (2) Russian markets were blitzed on Monday. (3) Back on melt-up track? (4) Low inflation good for valuations. Deflation bad for earnings. (5) Yellen’s report says temporary factors depressing inflation. (6) There’s deflation in the Eurozone’s PPI. (7) BOJ pumping lots of liquidity to boost inflation a little bit. (More for subscribers.)

No Financial Meltdown in Eurozone (excerpt)

It wasn’t too long ago that the bears were predicting a financial meltdown in the Eurozone and the disintegration of this monetary union. The only meltdown currently underway in the Eurozone is occurring in bond yields. Spanish bond yields reached new historic lows last Friday as persistent expectations that the ECB will loosen monetary policy further supported lower-rated debt, even though inflation ticked up. Italian 10-year yields are at eight-year lows around 3.48%. Greek 10-year yields fell below 7% for the first time since April 2010, hitting levels seen just before Greece's EU/IMF bailout.

The meltdown in yields is attributable to the meltdown in the Eurozone’s inflation rate, which is somewhat worrisome if it turns into deflation. On Friday, February's flash CPI for the region was up 0.8% y/y, unchanged from the month before. That’s well below the ECB's target of 2% and within the “danger zone” of below 1% as defined by the bank's president, Mario Draghi. This inflation rate was 2.7% two years ago and 1.8% a year ago.

Yesterday, we learned that the Eurozone's M-PMI dipped from 54.0 during January to 53.2 last month. That’s still a solid reading. Germany's dipped but was at 54.8, and even Italy's (52.3) and Spain's (52.5) remained above 50.

Today's Morning Briefing: Cold War II. (1) The Dirty Half-Dozen: Six worries for the bulls according to the bears. (2) Hot and cold world wars. (3) Upbeat employment stats in US regional surveys. (4) Yields melting down in Eurozone. (5) Draghi’s “danger zone.” (6) Chinese set to announce latest GDP growth target. (7) Will it matter if Abenomics fails? (8) Yellen vs. Plosser: Debating forward guidance. (9) Merkel vs. Putin: Who is in touch with reality? (10) Crimea and lots of other crimes. (11) Summering in Sevastopol. (12) Heating up Cold War II? Not likely. (More for subscribers.)

Baby Boomers Are Dropping Out (excerpt)

In her congressional testimony last week, Fed Chair Janet Yellen strongly suggested that the recent decline in the unemployment rate may be a more accurate indicator of a tightening labor market than previously thought. Many economists have said that the falling labor force participation rate (LFPR) may be exaggerating the improvement in the unemployment situation. Yellen said that the drop in the LFPR in recent years may be more structural than cyclical:

“A significant part of the decline in labor force participation is structural and not cyclical. Baby boomers are moving into older ages where there is a dramatic drop off in labor force participation and (with) an aging population we should expect to see a decline in labor force participation... There is no doubt in my mind that an important portion of this labor force participation decline is structural. That said, there may also be, and I am inclined to believe myself based on the evidence--that there are also cyclical factors at work. ... There is no sure-fire way to separate that decline into those components.”

She might be right, but the data tell a complex story. The LFPR peaked at a record high of 67.3% during January 2000. The big drop occurred since November 2007, which remains the record high for the household measure of employment. Since then, the LFPR has plunged from 66.0% to 63.0% at the start of this year. Let’s review the relevant data by age groups:

(1) Working-age population. Since November 2007, the working-age population is up 14.0 million, yet the labor force is up just 1.6 million. The number of people not in the labor force rose 12.4 million. The aging Baby Boomers are having a big impact on the age distribution of the working-age population. Since November 2007, the fastest-growing group is the 55- to 74-year-olds, up 12.6 million. The 35- to 54-year-olds group is down 3.5 million.

(2) In the labor force. The weak 1.6 million increase in the labor force since November 2007 can be explained mostly by the loss of 4.9 million workers in the 35- to 54-year-old group, offset by a gain of 5.7 million in the 55- to 74-year-olds.

(3) Not in the labor force. That older group tends to have a high labor force dropout rate due to retirements. Indeed, 6.7 million more of them were not in the labor force since November 2007 through January of this year.

On the other hand, that still leaves 5.5 million people younger than 55 who dropped out of the labor force over that same period. (The numbers don’t quite add up because the age group data are not seasonally adjusted as are the aggregate data.)

By the way, the Monetary Policy Report submitted by the Fed to Congress noted that while there might be structural explanations for the falling participation rate related to the aging of the Baby Boomers, the employment-to-population ratio remains very depressed. This suggests that “some of the weakness in participation is also likely due to workers’ perceptions of relatively poor job opportunities.”

Today's Morning Briefing: Paradigm Lost? (1) The “Fairy Godmother of the Bull Market” does it again. (2) Yellen promises continuity. (3) They didn’t have Bernanke & Yellen in 1929. (4) Yellen sees “soft data” and blames the weather. (5) Yellen says declining participation rate is structural. (6) Baby Boomers are dropping out. (7) Key labor stats Fed is watching. (8) Latest global indicators are mixed. (9) Performance Derby ytd. (10) “Non-Stop” (+). (More for subscribers.)