The Bonddad Blog: 8/21/16

Saturday, August 27, 2016

Weekly Indicators for August 22 - 26 at XE.com

- by New Deal democrat

My Weekly Indicators piece is up at XE.com.

Amid a sea of improving, or at least less bad, data, the regional Fed manufacturing indexes stick out as measures that refuse to budge.

Friday, August 26, 2016

Bonddad's Friday Linkfest

Durable Goods Orders Increase 4.4%

1-Year Chart of XLIs

1-Year Charts of the 10 Largest XLI Members

Valuation Levels of the 10 Largest XLI Members

4-Week Moving Average of Initial Unemployment Claims

Thursday, August 25, 2016

Bonddad's Thursday Linkfest

Drug Prices in the Spotlight?

Members of Congress are in an unusual position as they demand an explanation for Mylan NV’s 400 percent price hike for the EpiPen and focus attention squarely on its CEO: Heather Bresch.

If lawmakers follow the usual script, Bresch could get called up to Capitol Hill next month to explain her company’s justification for raising the price on the life-saving allergy shot. But that could be awkward, since she’s the daughter of Democratic Senator Joe Manchin of West Virginia.

The scrutiny on EpiPen intensified Wednesday after Democratic nominee Hillary Clinton called the price increase “outrageous,” sending Mylan’s stock down as much as 6.2 percent. The intense political pressure could lead regulators to speed up their review of a rival product by Teva Pharmaceutical Industries Ltd., according to some analysts, or force Mylan to curb prices -- in both cases hurting revenue and profits.

Table of the 10 Largest Companies in PPH

1-Year Chart of the PPH ETF

Table of the 10 Largest IBB Members

1-Year Chart of the Biotech ETF

Declining Yields Are Hurting Pensions (FT)

Income from bonds, especially government and fixed-income bonds, is a bedrock of pension investing. Years of declining bond yields have made it far harder for funds to buy an income for their members, leading to desperation tactics like those seen at Central States.

..............

Bond yields have been falling globally since the early 1980s, initially in response to the US Federal Reserve’s success in bringing inflation under control. Meanwhile the returns on stocks, where pension funds put most of their assets, have been hurt by two major market crashes since 2000. In the US, the assets held by pension funds have roughly doubled — up 105 per cent — since 1999, but the cost of their liabilities to pensioners has almost quadrupled — up 278 per cent, according to the actuarial group Ryan ALM.

The result is enormous pension deficits. In the US, pensions run by companies in the S&P 1500 index were underfunded by $562bn by the end of last month, according to Mercer — nearly $160bn wider just seven months earlier thanks to further drops in bond yields.

Long Term Chart of the 30 Year CMT

Not Much Slack Left in the Labor Markets (Conversable Economist)

When the US monthly unemployment rate topped out 10% back in October 2009, it was obvious that the labor market had a lot of "slack"--an economic term for underused resources. But the unemployment rate has been 5.5% or below since February 2015, and 5.0% or below since October 2015. At this point, how much labor market slack remains? The Congressional Budget Office offers some insights in its report, An Update to the Budget and Economic Outlook: 2016 to 2026 (August 23, 2016).

I'll offer a look at four measures of labor market slack mentioned by CBO: the "employment shortfall," hourly labor compensation, rates at which worker are being hired or are quitting jobs, and hours worked per week. The bottom line is that a little slack remains in the US labor market, but not much.

The Oil Slump has Passed (Scott Grannis)

The collapse of oil prices that began about two years ago—from just over $100/bbl to just under $30/bbl—threw a wrench into the gears of the US economy by causing a sharp drop in oil exploration and drilling-related activity. In turn, this resulted in a slump in industrial production and a rash of layoffs, all of which subtracted meaningfully from the health of the US economy. The impact of the oil patch slump was most acute last February, when spreads on high-yield energy bonds soared to almost 2000 bps—a level matched only during the depths of the 2008 financial panic. From the beginning of the US economic recovery in mid-2009 through the third quarter of 2014, just before oil prices started to plunge, the economy grew at a 2.25% annualized rate. From September 2014 through last June, the economy grew at only a 1.7% annualized rate. Arguably, the oil price collapse subtracted half a percentage point of growth per year from the US economy for almost two years.

It now appears that the negative effects of the oil price collapse have passed. Drilling activity appears to have recovered in recent months, and oil prices have bounced from just under $30/bbl to almost $47/bbl today. High-yield energy bond spreads are back down to 740 bps, and the S&P 500 index is up almost 20% since mid-February. The ISM indices have bounced reassurringly.

6-Month Charts of the Larger Energy Sector ETFs

Wednesday, August 24, 2016

Housing got hot in July

- by New Deal democrat

The anticipated boost from lower interest rates seems to have really shown up in July new home sales and starts. My extended look at the most recent data from the housing market is up at XE.com.

Bonddad's Wednesday Linkfest

IWM (Russell 2000) Is In An Upward Sloping Channel

New Home Sales Up 12.4% M/M/31.3% Y/Y

Valuation of the 10 Largest Homebuilders by Market Capitalization

1-Year Chart of the Homebuilders ETF

Emerging Market Debt Is Looking Attractive

From the FT

This is now stabilising. Balance sheets of EM corporates look much healthier than those of their US counterparts and the strength differential is likely to increase further as US companies continue to add to their debt (figure 1).

Many EM companies are reducing their financing needs and capital expenditure levels, and turning their attention to efficiency and cost optimisation programmes, with business models shaped around return generation over expansion. All of these measures will translate into stronger cash flow generation and a more rapid deleveraging process.

From ETF.com

Demand for exposure to emerging markets has been on the rise in recent months, and one fund that has captured a lot of that interest is a fixed-income ETF, the iShares JP Morgan USD Emerging Markets Bond ETF (EMB).

So far in 2016, EMB has raked in $4.35 billion in net assets—huge inflows for a fund that has $9.7 billion in total assets today. EMB was the fifth-most-popular ETF in July based on creations, and is ranked among the 10 biggest creations we’ve seen year-to-date.

The fund’s performance has a lot to do with its popularity. Compared to the U.S. stock market and an aggregate bond strategy such as the iShares Core U.S. Aggregate Bond ETF (AGG), EMB has seen impressive gains after being stuck in a sideways rut for most of 2014 and 2015.

Mexican Economy Contracts Slightly in 2Q

“We have an economy in which the internal market has been working in line with expectations but there’s also a difficult scenario globally, especially weakness in the United States’ industrial sector growth,” Mr Aportela said during quarterly press conference.

The Mexican economy continues to be beholden to negative factors abroad. According to Mr Aportela, the primary drags in Q2 were low oil prices, low global growth, and lower than expected growth and industrial activity in the US. As such, Mexico’s industrial sector, which includes manufacturing and oil, contracted 1.5% from the previous quarter.

But looking elsewhere, the Mexican economy is solid. Unemployment was 3.9 per cent in the second quarter, down from 4.4 per cent a year before. Real wage growth was 1.6 per cent in the first half of the year, the largest growth for a six-month period since 2001. This is partly thanks to a streak of low inflation, which was 2.65 per cent in July. Foreign direct investment grew 4.6 per cent in the first half of the year.

Weekly Chart of the Mexican ETF

1-Year Charts of the Major Latin American ETFs

Tuesday, August 23, 2016

Bonddad's Tuesday Linkfest

EU Composite PMI Up Slightly

The euro area economy continued to expand at a steady pace in August. At 53.3, up from 53.2 in July, the flash estimate of the Markit Eurozone PMI® inched up to a seven-month high. With the index only slightly above the average seen throughout the year to date, growth in the third quarter is likely to be similar to that seen in the first half of the year

1-Year Chart of the IEV ETF

Smaller Charts of the Largest EU ETFs

Fed President Fisher on Fed Policy

The Fed's dual mandate aims for maximum sustainable employment and an inflation rate of 2 percent, as measured by the price index for personal consumption expenditures (PCE). Employment has increased impressively over the past six years since its low point in early 2010, and the unemployment rate has hovered near 5 percent since August of last year, close to most estimates of the full-employment rate of unemployment. The economy has done less well in reaching the 2 percent inflation rate. Although total PCE inflation was less than 1 percent over the 12 months ending in June, core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent--and the core consumer price index inflation rate is currently above 2 percent.1

So we are close to our targets. Not only that, the behavior of employment has been remarkably resilient. During the past two years we have been concerned at various stages by the possible negative effects on the U.S. economy of the Greek debt crisis, by the 20 percent appreciation of the trade-weighted dollar, by the Chinese growth slowdown and accompanying exchange rate uncertainties, by the financial market turbulence during the first six weeks of this year, by the dismaying pothole in job growth this May, and by Brexit--among other shocks. Yet, even amid these shocks, the labor market continued to improve: Employment has continued to increase, and the unemployment rate is currently close to most estimates of the natural rate.

Is It Time to Replace GDP?

Gross domestic product is so 20th century.

The measure has risen from humble beginnings during the Great Depression to be an essential gauge for governments and central banks the world over. Long-term investors allocate capital based on its findings; traders buy and sell stocks, bonds, currencies and commodities in the blink of an eye after readings flash on their screens. One such closely-watched report comes this Friday, when the U.S. releases its revised estimate of second-quarter GDP.

Problem is -- whether compiled by production, income or expenditure approaches -- GDP is increasingly struggling to keep up with the pace of economic change.

In an age where $10 can buy one compact disc or a month of unlimited music streaming, it’s getting tougher to put a price on economic output. And as an aggregate measure that ignores distribution effects, GDP has masked rising inequalities that helped fuel anti-establishment politicians like Donald Trump or the backlash that contributed to Brexit.

Monday, August 22, 2016

Real wage income per capita

- by New Deal democrat

On Friday I updated the measure of real aggregate wages, which in my opinion tells the best story of how well an economy is delivering an increase in buying power to average Americans.

But in order to see how that is benefitting the average American individually vs. the economy as a whole, we want to take a per capita measure. Ideally we want to exclude those receiving Social Security and Medicare benefits, since typically these people are not relying on wages -- and as the graph below shows, there is a burgeoning number of the demographic over 65 years old:

Ideally I would want to measure all ages below 65, but since that statistic isn't readily available on FRED, I picked the next best number, which is total population between age 16 and 65. Measured thus, here is real wages per capita: