Weekly Indicators for November 6 - 10 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

The near term forecast remains very strong, but there are crosscurrents among the long leading indicators.

Two thoughts on the Virginia election: it's the net strong disapproval,stupid! But is the primary driver education or age?

 - by New Deal democrat

It's a slow week for economic news, but we sure had some electoral fireworks on Tuesday! Since I am a data nerd, here are two metrics from Virginia that caught my attention, which I'll discuss in reverse order.

I. Is it education or is it age?

Here are two graphs showing how the elections broke down: 

First, by racial makeup of the legislative district (horizontal axis) vs. percent with college degree (vertical axis): 

Republicans were completely shut out in districts with less than 50% white populations. With one exception, they were also shut out in majority white districts with more than 50% holding college degrees.  On the contrary, the GOP won all but two districts with more than about 55%-60% white population where *also* less than 40%-45% hold college degrees.

Now let's look at the vote by age:

Senior citizens voted for Gillespie. Middle-aged adults split almost evenly between the two candidates.  

The younger than 45 you got, the bigger the share for Northam. 

Now let's look at turnout. Turnout was higher than in the previous elections both by younger people:

and by the college educated:

It's pretty clear that there are strong red-blue divides along the axes of age and education.

But which is more significant? For example, is a senior citizen with a college degree more or less likely to have voted Democratic vs. a Millennial without a college degree? The issue is confounded because the percent of those with college educations increased from the post-WW2 era into the 1980s at least:

Not only have I not seen this issue addressed for the Virginia vote earlier this week, I still haven't seen it addressed for last year's Presidential election! This has serious electoral implications.  If the primary driver is age (as in, those who formed their political opinions before the Civil and Voting Rights Acts of 1964 and 1965 were passed), well then (ahem) mortality will take care of the issue.  If it's education, the critical divide is going to persist, albeit with less intensity.

My guess is that education is the stronger driver, a point brought home by one of the Trump supporters in Johnstown, PA, re-interviewed by Michael Kruse recently, who lamented that all of the young people with prospects had moved away (probably to a growing metropolis where they were voting Democratic). But I'd like to see the data! 

2. It's the net strong disapproval, stupid!

Regardless of the answer to the first question, there is one metric that forecast the outcome of the Virginia election very well: net strong disapproval minus strong approval.

Three months ago, I wrote about this metric, indicating I thought it was a good way to look at midterm elections: 

I like K.I.S.S. methods, and I have decided that the easiest K.I.S.S. guide to the midterm elections is likely to be Rasmussen's "net strong disapproval" spread.  The theory is that while voters who even weakly approve or disapprove of a President are likely to come out and vote in the Presidential election years, only those with strong opinion -- a substantially smaller number -- come out to vote in midterm elections.

.... 

[O]n Election Days 2010 and 2014, for every 100 adults who strongly disapproved of Obama, there were only 60-65 and 55 adults who strongly approved of his performance -- enough for a GOP wave in each case.

In August, I noted that the same metric for Trump had fallen to similar levels.  It has remained fairly stable since:

There is one important difference, though. At its worst, strong disapproval for Obama was only about 40%, with strong approval languishing just under 20%. For Trump, both numbers are about 10% higher -- he has both bigger strong disapproval  (45%-50%), and bigger strong approval (23%-29%).

If strong opinions drive off-year turnout, then we should expect to see bigger turnout for both the party in national power as well as the party out of power.

And that's exactly what happened in Virginia.  For example, here's Larry Sabato:

 [T]his was an intensity surge for Democrats more than it was a falloff for Republicans: while it’s not exactly an apples-to-apples comparison because there was a bigger third party vote in 2013, Gillespie got about 160,000 more votes than Cuccinelli did four years ago. But Northam got 335,000 more votes than outgoing Gov. Terry McAuliffe (D).

Turnout increased for *both* GOP and Democratic voters, but comparatively the turnout was much, much higher on the Democratic side.

This gives me confidence that I am on the right track using this metric to forecast the midterms. In other words, if one year from now strong disapproval vs. strong approval is about where it is now, almost every GOP officeholder in a jurisdiction or district that was carried by Hillary Clinton in 2016 is Doomed. 
  
Of course, approval vs. disapproval numbers can and do change with time and events. But it seems very unlikely that Trump is going to be less polarizing a figure one year from now than he has been for the last two years.  Which means that either war and/or changes in the economy are the likely determinants of meaningful changes in net strong disapproval between now and then.

I have no clue what might transpire on the international scene, but forecasting the economy one year out is right in my wheelhouse.  I'll address that shortly. 

This is Why Inflation Expectations Are So Important

Canadian Central Bank Head Poloz:

The underlying trend in inflation is driven by the laws of supply and demand, which are as applicable today as they ever were. Excess demand pushes inflation up; excess supply pushes inflation down. Central banks exploit this relationship, working to create excess demand or excess supply in the economy, to target the inflation rate.

A central role in this relationship between the economy and inflation is played by inflation expectations. The more anchored those expectations are, the more quickly the economy will find its way back to normal after an economic shock. This is known as the credibility dividend: a credible central bank will see inflation expectations well anchored at the target level and will have a relatively easy time restoring normality after a shock. What this means is that the underlying trend in inflation may become more stable as expectations become more anchored. In short, the more successful the inflation target is, the less obvious the relationship between economic shocks and inflation will become.

Currently, US expectations are very well-anchored:

The top chart shows the 5-year breakeven inflation rate while the bottom chart has the 10-year breakeven rate.  Both are actually a bit lower now than at the beginning of the expansion.    

     As a result, we've seen very stable inflation:

The top chart shows the PCE implicit price deflator -- the Fed's preferred inflation gauge.  The bottom chart shows the Dallas Fed's trimmed mean PCE inflation gauge, which removes extreme movements from the index, reasoning that these are short-term deviations from a longer-term norm.  Both measures have flummoxed the Fed as they have failed to hit their 2% target.  

     But the recent weakness in inflation expectations is probably contributing to this lower level of price pressure. 

Hormel (HRL) Is Worth a Look at These Levels

     Income is central to my investment philosophy.  Dividends help to mitigate risk, provide return when the overall market is stagnant, and provide income for reinvestment.  I follow a group of stocks that have a long history (25+ years) of raising dividends.  When a company is at or near 52-week lows, I look at the company's financials to determine if it is still a viable investment.  I detail this process in more detail in my book, The Lifetime Income Security Solution.  

    

     Currently, Hornel Foods is forming a bottom:

After gapping lower at the end of August, HRL consolidated losses between 30-32.  It is currently at the upper end of its recent trading range.  The MACD indicates momentum is shifting, implying a fair amount of upside potential.

     The company is in the consumer staples sector:

Hormel Foods Corporation, a Delaware corporation (the Company), was founded by George A. Hormel in 1891 in Austin, Minnesota, as Geo. A. Hormel & Company.  The Company started as a processor of meat and food products and continues in this line of business.  The Company’s name was changed to Hormel Foods Corporation on January 31, 1995.  The Company is primarily engaged in the production of a variety of meat and food products and the marketing of those products throughout the United States and internationally.  Although pork and turkey remain the major raw materials for its products, the Company has emphasized for several years the manufacturing and distribution of branded, value-added consumer items rather than the commodity fresh meat business.  The Company has continually expanded its product portfolio through organic growth, new product development, and acquisitions.

While this is certainly not the most exciting business, it is a necessity, which provides protection in weaker economic environments.  There is also a large amount of competition in this space.  Hormel's primary advantage is size, which means it not only has economies of scale but the ability to simply out-muscle or purchase competition.

     Hormel's financials (from Morningstar.com) are very encouraging. 

     Balance sheet: unlike other companies I've profiled, HRL has a nearly 2:1 current ratio.   While total assets have increased over the last five years, most of the increase comes in goodwill, a highly subjective concept.  But intellectual property has also increased, which means the company has been investing or buying new products -- an encouraging sign.  Total long-term debt is minimal for a company this size.  Finally, shareholder equity has increased from 61.78% in 2012 to 69.83% in 2016.  

     Cash flow: HRL has refunded a lot of its existing debt over the last five years, while also engaging in a stock repurchase plan.  Like other large companies, HRL can fund their PPE expenditures from cash flow.

     Income Statement: here there is good and bad news.  On the good side, the company has expenses under control.  Over the last 5 years, the gross margin increased 649 basis points; operating income was up 461 bps, while net income increased 327 BPs.  This is fortunate because top-line revenue growth has been slowing.  The three-year average has declined from 6.6% to 2.8% over the last 4 years.  

     Finally, according to Finviz.com, the current dividend is 2.16% with a payout ratio of 38.2%.

     Overall, this is a solid company.  The balance sheet is pristine.  They have adequate cash flow and expenses are under control.  At these levels, Hormel is worth a look.

This post is not an offer to buy or sell this security.  It is also not specific investment advice for a recommendation for any specific person. Please see our disclaimer for additional information.  

September JOLTS report: hurricanes do not disrupt late cycle trend

 - by New Deal democrat

Take yesterday's JOLTS report with an extra grain of salt, as it was affected (particularly in the South census region -- more on that later) by Hurricanes Harvey and Irma.

That being said, the disconnect between the "soft data" of openings in this survey and the "hard data" of actual hires and discharges continues. As I have pointed out many times, openings can be just chumming the water for resumes, or even laying the groundwork to hire foreign workers. The disconnect betrays an unwillingness to pay new hires more, or to engage in on the job training.

In September. openings continued to run about 10% higher than actual hires, which have been basically flat for the last year:

To reeiterate, the major shortcoming of this report is that it has only covered one full business cycle. In that cycle, hires peaked and troughed before separations: 

Further, hires stagnated, and shortly thereafter involuntary separations began to rise, even as quits continued to rise for a short period of time as well:

 

[Note: above graphs show quarterly data to smooth out noise]

Here are hires vs. separations on a monthly basis for the last several years:

Once again for this report, even while quits remain at expansionary high levels, involuntary separations bottomed a year ago, and have risen  on a quarterly basis ever since.  Here's the monthly view of the last several years: 

Finally, because September data has all been affected by the hurricanes, the BLS attached a note explaining that they made no special adjustments, and that the data is not broken up by states, so it is impossible to know the precise impact. But because the data is broken down by Census Region, we can exclude the Southern Region and see what was going on in the rest of the country, which was not affected.  I've prepared that for openings, hires, quits, and layoffs and discharges below (and helpfully marked the expansion highs (low for layoffs)  with an "H" (and "L") symbol): 

Month	Openings	Hires	Quits	Layoffs/ discharges
9/16	3595	3158	213	975
5/17	3640	3350	237	922 L
6/17	3882	3224	219	1078
7/17	3897	3416 H	253 H	1113
8/17	3965 H	3253	250	1127
9/17	3935	3174	247	1070

The "soft data" openings have remained very close to their high of one month ago, while quits are down a little more  (about 2%) from their recent highs, but hires are down significantly from their recent high (about 7%) and up only slightly (less than 1%) from one year ago.   Meanwhile layoffs and idscharges declined significantly compared with the last several months, but remain substantially higher  than they were one year ago. 

There is nothing in yesterday's data that portends any imminent recession, but on the other hand, it continues the slew of data that says we are late in the cycle. 

One fundamental sign is flashing caution

 - by New Deal democrat

In addition to my economic cycle paradigm of long and short leading indicators, I also have several "fundamental" systems to corroborate the result.

Onr of those, focusing on producer vs. consumer prices, is flashing a yellow caution signal.

This post is up at XE.com.

Bonddad Linkfest: Jerome Powell, Edition

The continuity candidate (FT)
Wall Street expects steady stream of regulatory wins (BB)
Powell is aware of Fed's ability to move markets (BB)
Powell inherits a Fed that is slowly gaining markets trust (BB)
For Powell, it's really about liquidity (FT)
A list of Powell's speeches over the last 2 years (Fed)