Recap 2014-08-29

Commentary:

A lot has been made of the S&P at 2000. Given the broadly unchanged price this week, undoubtedly some technicians will interpret that as weakening momentum. However, I’d argue that the reason price momentum has stalled here is not due to the 2000 price level per se, but rather due to the PE level, which as the chart below shows, is now essentially back to the highest level in over a decade:

The monthly BAML surveys have consistently shown that valuation concerns have been widespread. So we probably shouldn’t be surprised that some people are taking some chips off the table here.

But as I’ve been expounding for a long time now, the macro backdrop today is fully consistent with higher present value of all financial assets. I’ve written in the past that I think the 30y should settle around 3.0% – a view which the market seems to moving towards. (See my mid year outlook on 6/19 and commentary on 5/2, 4/11, etc) Now recall that the last time S&P valuations were here, the 30y yields were 5.2% and 4.8%, respectively. So in the spectrum of liquid, long duration investable assets, bond prices are about 65% more expensive than in the last cycle, but equity prices are about unchanged relative to future cash flows.

So my expectation is that the S&P may hover here for some period of time. But as long as the economy continues growing, everyday savings are being generated, and every day, people & corporations are buying shares. So it is really a matter of time before current resistance levels on the valuation charts are breached. Once that happens, we may well see a strong flood of money into equities, as more and more people finally give up and invest despite their misplaced concerned about valuation.

Finally, note that seasonally, next month is the low before the very strong 3rd presidential election year cycle starts. Historically, the S&P has returned an average of 2.8% per month from Sept to April going into the 3rd presidential year.

And here are the last several instances:

Notable:

  • Chicago PMI jumped to 64.3 in Aug vs 56.7 exp and 52.6 prev
  • UMichigan Consumer Sentiment was revised up to 82.5 vs 80 exp 79.2 initially
  • US Core PCE was stable at 1.6% YoY as exp
  • EU CPI declined to 0.3% as exp vs 0.4% prev. However, the Core measure ticked higher to 0.9% vs 0.8% exp and prev
  • EU Unemployment was flat at 11.5% as exp
  • UK GfK Consumer Confidence improved to +1 vs -1 exp and -2 prev
  • Canada 2Q GDP improved to 3.1% vs 2.7% exp. However, the 1Q print was revised down to 0.9% from 1.2%
  • Japan Unemployment ticked up to 3.8% vs 3.7% exp and prev
  • Japan CPI was flat at 3.3% as exp. Stripping out the tax hike, +1.3% y/y.
  • New Zealand ANZ Business Confidence declined to 24.4 vs 39.7 prev
  • UK’s Terror Threat level was raised today

Upcoming:

  • Mon: US holiday, AU Mfg PMI, Japan CapEx, China PMI, Japan PMI, EU PMI, Australia BoP, Building Approvals
  • Tue: RBA, EU PPI, US Markit PMI, ISM, Australia GDP, Japan Services PMI
  • Wed: EU Services PMI, 2Q GDP, BoC, NZ House Prices, AU Trade Balance, Retail Sales
  • Thu: BoE, ECB, ADP Employment, US Jobless Claims, Services PMI, ISM Non-Mfg
  • Fri: EU GDP, US Employment Canada Employment

Recap 2014-08-28

Commentary:

The US data is starting to perk up. In particular, the housing sector, which has been a drag in the 1H, is now surprising to the upside at a rate that we haven’t seen in over a year. How this will affect yields, however, is anyone’s guess as US data surprises and yields have been disconnecting somewhat:

A lot of that is due to Europe, of course. The Barclay’s chart below highlights the key problem. Despite decent M1 growth, broader monetary aggregates in the EU have been very weak. As I’ve mentioned before, this is likely a result of the impaired banking system – something that the AQR (along with forced recapitalization programs) will hopefully fix. I think this is a problem that the ECB recognizes, and a reason why the TLRTO’s specifically target bank lending, as well as coinciding with the AQR. IMO, this is also a reason the ECB is reluctant to pursue QE outright. There are many views on how QE affects the economy, but one of the clearest effects is the growth in base money. As the chart below shows – that really isn’t the problem at this juncture.

Notable:

  • German CPI was stable at 0.8% as exp
  • US Jobless Claims declined to 298k vs 300k exp and 299k prev
  • US Pending Home Sales rose 3.3% MoM in July vs 0.5% exp and -1.1% prev. Strength was broad based, bust strongest in the North east.
  • US Q2 GDP was revised up to 4.2% vs 4.0% exp and 3.9% prev
  • WSJ: Nonbank’s share of mortgage originations hit 23% in 1H

Upcoming:

  • Thu: NZ Building Permits, UK GfK Consumer Confidence, Japan Unemployment, CPI
  • Fri: Month End, UK House Prices, EU Unemployment, CPI, CanadaGDP, US Core PCE, Chicago PMI
  • Mon: US holiday, AU Mfg PMI, Japan CapEx, China PMI, Japan PMI, EU PMI, Australia BoP, Building Approvals
  • Tue: RBA, EU PPI, US Markit PMI, ISM, Australia GDP, Japan Services PMI
  • Wed: EU Services PMI, 2Q GDP, BoC, NZ House Prices, AU Trade Balance, Retail Sales
  • Thu: BoE, ECB, ADP Employment, US Jobless Claims, Services PMI, ISM Non-Mfg

Recap 2014-08-26

Commentary:

None

Notable:

  • NZ Trade Balance
  • US Core Capital Goods Orders declined -0.5% vs +0.2% exp. However, the previous print was revised up to 5.4% vs 1.4% prev. The headline figure jumped 22.6% vs 8% exp as a result of aircraft orders, but the revision was also strong, rising to 2.7% vs 0.7% prev
  • House Prices: FHFA index rose 0.4% MoM while the Case Shiller measure fell -0.2% MoM. The two series seems to be converging to a ~6% YoY figure.
  • Consumer Confidence rose to 92.4 vs 89 exp and 90.9 prev.
  • Impact of Russian Food bans – According to Statista, the price of potatoes has gone up 72.7 percent since Jan. 1. Chicken and pork prices have increased 25.8 percent and 23.5 percent, respectively.

Upcoming:

  • Wed: Italy Consumer Confidence, Australia New Home Sales, 2Q Private Cap Ex
  • Thu: German CPI, US Jobless Claims, NZ Building Permits, UK GfK Consumer Confidence, Japan Unemployment, CPI
  • Fri: Month End, UK House Prices, EU Unemployment, CPI, CanadaGDP, US Core PCE, Chicago PMI
  • Mon: US holiday, AU Mfg PMI, Japan CapEx, China PMI, Japan PMI, EU PMI, Australia BoP, Building Approvals
  • Tue: RBA, EU PPI, US Markit PMI, ISM, Australia GDP, Japan Services PMI

Recap 2014-08-25

Commentary:

Before I get to Jackson Hole – note this study from Quantifiable Edges published on Friday: The equity bounce has been very strong, and while the historical precedents have been few, they have been unambiguously bullish:

With respect to Jackson Hole, Macro Man did a great post on it already. Readers should read the post in its entirety, but he took the Fed’s new labor market index and converted it to a cumulative series, then noting the incidences of previous first hikes. As his chart shows, relative to history, the Fed is ‘behind the curve.’ Of course, the Fed looks forward rather than back, and given recent inflation trends, this seems to be the right move.

Many commentators have noted that Yellen’s tone seems to have shifted to being more balanced from outright dovish. It’s hard not to agree, although the number of qualifiers she used makes any definitive judgment difficult. Note that Williams, Yellen’s protégé at the SF Fed, noted last week that an earlier hike may be warranted, throwing out a ‘summer 2015’ time frame. The 1st full hike is priced in for July of next year in the Fed Funds market, so all in all, there isn’t any major news here.

Draghi’s speech actually read hawkish to me. He spent a lot of time talking about how the Unemployment in the Euro area may be structural, and noted that:

  • the euro area Beveridge curve – which summarises unemployment developments at a given level of labour demand (or vacancies) – suggests the emergence of a structural mismatch across euro area labour markets
  • Another important explanation seems to be a lack of redeployment opportunities for displaced low-skilled workers, as evidenced by the growing disparity between the skills of the labour force and the skills required by employers. Analysis of the evolution of skill mismatch [4] suggests a notable increase in mismatch at regional, country and euro area level (Figure 5). As the previous figure shows, employment losses in the euro area are strongly concentrated among low skilled workers
  • All in all, estimates provided by international organisations – in particular, the European Commission, the OECD and the IMF – suggest that the crisis has resulted in an increase in structural unemployment across the euro area, rising from an average (across the three institutions) of 8.8% in 2008 to 10.3% by 2013.

The other way of saying that is that the EU may be only 1.2% away from full employment, vs ~0.9% for the US and the UK! Finally he says that:

“I am confident that the package of measures we announced in June will indeed provide the intended boost to demand, and we stand ready to adjust our policy stance further. We have already seen exchange rate movements that should support both aggregate demand and inflation, which we expect to be sustained by the diverging expected paths of policy in the US and the euro area”

That doesn’t sound like he thinks the current plan needs to change much.

Some items not directly market related:

This is a sad story and concludes with a great idea:

http://www.politico.com/magazine/story/2014/08/what-i-did-after-police-killed-my-son-110038_Page2.html#.U_tt7KNA6WY

Robots replacing farm workers:

http://singularityhub.com/2014/07/14/pepper-picking-soil-testing-plant-pruning-robots-are-coming-to-farms/

I read about the Stockade Paradox today. An important philosophy of duality that is necessary for all the hard things that are worth doing:

When Collins asked who didn’t make it out of Vietnam, Stockdale replied:

Oh, that’s easy, the optimists. Oh, they were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart."[12]

Stockdale then added:

This is a very important lesson. You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be."

Notable:

  • German IFO declined to 106.3 vs 107 exp and 108 prev
  • US New home Sales declined -2.4% vs +5.8% exp and -8.1% prev

Upcoming:

  • Mon: NZ Trade Balance
  • Tue: US DGO, House Prices, Consumer Confidence
  • Wed: Italy Consumer Confidence, Australia New Home Sales, 2Q Private Cap Ex
  • Thu: German CPI, US Jobless Claims, NZ Building Permits, UK GfK Consumer Confidence, Japan Unemployment, CPI
  • Fri: Month End, UK House Prices, EU Unemployment, CPI, CanadaGDP, US Core PCE, Chicago PMI
  • Mon:

Recap 2014-08-19

Commentary:

NB: No updates the rest of the week.

Notable:

  • RBA minutes “noted the significant uncertainties around the growth forecast and the importance of considering risks to the forecast as well as the central projection.” The minutes noted that “GDP growth was likely to have slowed to a more moderate pace in the June quarter.”
  • UK CPI declined to 1.6% YoY vs 1.8% exp and 1.9% prev. The Core measure also fell to 1.8% vs 1.9% exp and 2.0% prev
  • US CPI declined to 2.0% as exp vs 2.1% prev. The Core measure was stable at 1.9% as exp
  • US Housing Starts jumped 15.7% MoM vs 8.1% exp and -4.3% prev. Building Permits jumped to 8.1% vs 2.8% exp and -3.2% prev,

Upcoming:

  • Wed: BoE Minutes, Fed minutes, Japan PMI, China HSBC PMI
  • Thu: EU PMI, US Jobless Claims, Markit PMI, Philly Fed, Existing Home Sales, EU Consumer Confidence
  • Fri: Canada CPI, Yellen & Draghi Speak at Jackson Hole
  • Mon: German IFO, US New home Sales, NZ Trade Balance

Recap 2014-08-18

Commentary:

The low growth => higher PV view is starting to get disseminated, but it’s not quite there yet. Shiller wrote an op-ed in the NY Times about high equity valuations, but he conclusion was disappointingly short of complete:

Shiller: It’s possible that bond prices account for today’s stock market valuations. But that raises another question: Why are bond prices so high? There are short-term explanations: the role of central banks, for example. But is there a compelling reason for prices of stocks and bonds (and maybe houses, too) to remain high indefinitely? … nothing I’ve come up with is a slam-dunk explanation for the continuing high level of valuations. I suspect that the real answers lie largely in the realm of sociology and social psychology — in phenomena like irrational exuberance, which, eventually, has always faded before. If the mood changes again, stock market investments may disappoint us.

On that topic, my two takeaways from this graphic from the WSJ:

  1. People have been comparing this rally with the 1990’s market. The macro backdrop is actually more similar to the 1950’s market, IMO. Either of those templates suggest the current rally may not even be half over yet, in terms of either time or price
  2. The outflow data suggest a repeat of the Feb price action

This chart from Brent Donnelly @ Citi is interesting:

Daiwa @DaiwaEurope observes that Japanese Labor Cash earnings are the highest in 4 years, but note that growth remains below 1% YoY.

Finally, this is a text book case of one sided reporting: http://www.nytimes.com/2014/08/15/business/energy-environment/traders-profit-as-power-grid-is-overworked.html

The NYTimes reporter did not get anyone to explain the other side of this story, so it comes off as an outrage. But if you replace “congestion contract” with “call option on power prices” this basically seems like a working market. Not free of abuses, but also not a market where people are getting fleeced. The Stanford economics professor does not come off well either.

Notable:

  • US NAHB rose to 55 vs 53 exp and prev.
  • Hilsenrath in the Journal said the Fed is confident it isn’t behind the curve and that they will raise rates at the appropriate time without stoking inflation or imperiling the nascent economic recovery. “Fed officials believe they have been served well keeping the money spigots open in an economy that keeps disappointing. They will need some more proof before they heed the warnings of those who say they’re falling behind the curve.”
  • Kurdish forces retook a key dam in Mosul with help from US air support. With Maliki’s resignation the US will significantly increase the aid sent to Iraq including more arms to both Baghdad as well as the Kurds.
  • Home sellers in London cut asking prices by the most in more than six years this month, trimming 5.9% off prices from the previous month. This is the largest drop since December 2007 tracked by Rightmove. “Buyers and sellers are becoming increasingly aware about personal finances, given that the cost of mortgages are going up and regulators are trying to bring availability down, this limits what buyers are willing or able to pay, and helps moderate sellers’ price expectations.” Prices across the UK dropped -2.9%.
  • ECB lending – economists cut their TLTRO demand forecasts. Analysts estimate that banks will borrow 650 billion euros ($870 billion) in the targeted longer-term refinancing operations, or TLTROs. That’s down from 710 billion euros estimated in last month’s survey. Bloomberg

Upcoming:

  • Mon: RBA Minutes
  • Tue: UKCPI, USCPI, US Housing Starts, Building Permits,
  • Wed: BoE Minutes, Fed minutes, Japan PMI, China HSBC PMI
  • Thu: EU PMI, US Jobless Claims, Markit PMI, Philly Fed, Existing Home Sales, EU Consumer Confidence
  • Fri: Canada CPI, Yellen & Draghi Speak at Jackson Hole
  • Mon: German IFO, US New home Sales, NZ Trade Balance

Recap 2014-08-15

Commentary:

The S&P bounced sharply off intraday lows, which appears to be a positive, but on the daily candles, it has not been able to rally above resistance, which is a combination of the previous support area prevailing during most of July, as well as the 50 day moving average. With the positive bias from option expiry week over, the risk is another downturn next week:

Price action in sovereign yields look exhaustive. A bounce seems likely next week, although for how long and how far remains an open question:

Very interesting:

http://www.nytimes.com/interactive/2014/08/15/magazine/bad-paper-debt-collector.html

Notable:

  • Canadian Employment Revision:
  1. Employment +41.7k vs 20k prev, driven by part timers
  2. UER declined to 7.0% vs 7.1% prev, participation rate was stable as exp

US Empire Mfg declined to 14.69 vs 20 exp and 25.6 prev

UMichigan Confidence declined to 79.2 vs 82.5 exp and 81.8 prev

US Core PPI declined to 1.6% YoY as exp vs 1.8% prev

Upcoming:

  • Mon: US NAHB, RBA Minutes
  • Tue: UKCPI, USCPI, US Housing Starts, Building Permits,
  • Wed: BoE Minutes, Fed minutes, Japan PMI, China HSBC PMI
  • Thu: EU PMI, US Jobless Claims, Markit PMI, Philly Fed, Existing Home Sales, EU Consumer Confidence