Saturday, November 22, 2014

Weekly Indicators for November 17 - 21 at

 - by New Deal democrat

My Weekly Indicators piece is up at

The conclusion this week was pretty simple and straightforward.

US Equity Market Review For The Week of November 17-21

     One of the main points I've made over the last few weeks is the market is expensive by most valuation models.  This is hardly a revolutionary assertion; many traders have been looking to various metrics (PE, Forward PE, Dividend Yield) and making the same observation for the last few years.  What this means is the that, for the market to move higher in a meaningful way, we ultimately need fundamental change; something in the basic economic calculus has to be altered for the market to move higher. 

     And that's exactly what we got last week from two central banks.  Mario Draghi of the ECB has pledged to use central bank policy to increase inflation:

Mario Draghi strengthened his stimulus pledge for the euro area by saying the European Central Bank can’t hold back in its fight to revive the economy.

“We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires,” the ECB president said at a conference in Frankfurt today. Some inflation expectations “have been declining to levels that I would deem excessively low,” he said.

And on the other side of the globe is the PBOC lowering rates:

China cut benchmark interest rates for the first time since July 2012 as leaders step up support for the world’s second-largest economy, sending global shares, oil and metals prices higher.

The one-year lending rate was reduced by 0.4 percentage point to 5.6 percent, while the one-year deposit rate was lowered by 0.25 percentage point to 2.75 percent, effective tomorrow, the People’s Bank of China said on its website today.

The net effect of this move on the US markets is clear from a daily chart of the SPYs:

The chart above clearly shows Friday's price movement as a gap higher, with the SPYs printing a solid candle on a nice increase in volume.  There are some technical drawbacks to the above chart, however.  The MACD and RSI are both already at strong levels, indicating prices are already at the top of a buying cycle.  While both of these indicators can stay pegged at higher levels while prices continue to move higher due to fundamental factors, they do bear watching.

     There are some other cautionary developments, however, in the 5-minute chart:

On Friday morning, prices gapped higher by over 1%.  But they moved lower in a disciplined manner until after lunch, when they slowly moved a bit higher into the close.  Some of this move is understandable; the market is already expensive, so an opening gap higher would probably be met with more valuation based selling.  However, in an ideal rally, prices would gap higher and then continue on that path. 
     This is hardly fatal.  And, when we look at the 30 minute chart, its importance diminishes:
After the sell-off about a month ago, prices made a continued move higher, forming a price arc.  For the last week and a half, prices have been consolidating right around the 204 level.  Friday's move was a push higher from this base, meaning the most likely interpretation is that we're looking at a new move higher, which is confirmed by the price action in other indexes:

The Russell 2000 (IWMs, top chart), transports (IYT, middle chart) and mid-caps (IJH, bottom chart) all confirmed the move higher.

     In addition to the international events driving the market higher, there is also the fundamental condition of the US economy.  Employment growth is strong and regional manufacturing numbers have been solid, corporate earnings are expanding.  The general consensus is that, in contrast to much of the developed world, the US is in good shape.  This means that, overall, the US equity market has the wind at its back -- at least for another week.


Thursday, November 20, 2014

Failure to deflate: flat consumer prices only slightly help real wages, sales

 - by New Deal democrat

Usually changes in the inflation rate are all about the price of gasoline.  Not in October.  Although gas prices fell -6.4% (compared with a decline of -5.0% a year ago), unlike one year ago net consumer price failed to decline, instead remaining flat.

Over a two month period, a -8.6% decline in gas (vs. -6.1% in 2013) coincident with a 0.1% increase in prices, vs. a gain of +0.2% in 2013.  There seems to have been no single culrpit.  A wide variety of other prices slightly more than expected.

As a result, while measures of real sales and real wages did increase, they did not do so as much as expected.

First of all, here are real retail sales:

These returned to August levels.

Real retail sales per capita are a long leading indicator, typically turning one year or more before the economy as a whole.  October's increase still leaves these below August's level:

Real wages also increased, but are still below February's level, and are still about 0.7% below their 2010 post-recession peak:

Of course, even that level was below virtually the entire 1970s peak for real wages:

Wednesday, November 19, 2014

New post-recession high in building permits

 - by New Deal democrat

October building permits came in at the highest level since January 2008.

This is unequivocal good news, not just for now, but for the economy going through 2015.

I'll have more later at, and I'll update with a link. And here it is.  This has important implications for 2015.

Trends in wages - some comments

 - by New Deal democrat

My biggest focus now is what is happening with wages.  I've done quite a bit of number-crunching, but I have to do more time consuming number crunching in order to make the results more presentable.

In the meantime, let me tell you what the general results are:

1.  It isn't just a low wage recovery any more.  In the last 18 months, 1/3 or more of all jobs created have been high wage jobs.  Mid wage jobs, however, are still lagging.

2.  Almost all measures of wages, both average and median, have been slowly rising this year, and in particular rose in the third quarter.

Once I have the inflation adjusted charts and graphs ready, I'll post in more detail.

In the meantime, the Economic Policy Institute published an update on wages through the first half of this year, indicating that real wages fell slightly compared with the first half of 2013 across almost all income classes.  Although I question the metric - why measure first half to first half of years, if the data is seasonally adjusted? -  this is a good and thorough read.  I suspect the EPI arrived at a contrary result - wages slightly falling vs. slightly rising - because their source data was from the same panel that the BLS used in its "usual weekly earnings" series.  This data had an anomalous big decline in the second quarter, that wasn't present in any other series.  BTW, it rebounded in the third quarter.

In the larger view, I share the dismay that wages have been stagnant since the turn of the Millennium, and even as far back as since the 1970s, especially where so much income and wealth has been funneled to the very topmost segment of society.  It is simply not an economy which is functioning well if most of its participants do not benefit, or benefit very little, from its growth.  In the 1980s, the middle class coped by spouses joining the workforce, and by refinancing debt at lower interest rates.  The refinancing at lower rates continued periodically throughout the 1990s and 2000s.  Some people benefitted - temporarily at least - from participating in the stock or housing market bubbles.

This is not going to happen any more.  Income gains by the middle and working class in the US has since 2009 and will in the future continue to happen, when it happens, the old-fashioned way: by actual real growth.

Tomorrow October consumer inflation will be reported.  If it declines as expected, that may mean a significant jump in real average wages.  I'll follow up then.