US Market Review For the Week of October 6-10.

     For the last 3-4 years, central bank created liquidity has been pumped into the equity markets as investors sought higher returns.  There were other reasons for the post-recession rally as documented by Josh Brown over at the Reformed Broker:

1. Everyone was underinvested in stocks, overly invested in cash, gold and bonds.
2. The Fed was furiously pumping dollars directly into the investment markets, fueling all manner of buybacks, IPOs and raised dividends.
3. Sentiment was absurdly pessimistic, with Wall Street, institutional investment managers and retail players negative on equities.
4. US companies were consistently smashing expectations and raising guidance for the future.
5. The rest of the world began reporting improving economic fundamentals.

But while this week's sell-off has garnered headlines, it actually started in Europe over the summer:

 

 

 

Above is a performance chart of major EU ETFs.  Italy (red) started to sell off in June, followed by Spain (green), Germany (black) and France (purple) in July.  While Italy's early start could easily be interpreted as simple statistical noise, the follow-through from Germany and Spain in July should have alerted adept traders that something was up.

 

  

And by September, the sell-off was broad-based globally.  Canada, the UK and Australia (blue, green and black, respectively) all joined the sell-off.  Most of these markets have dropped at least 10%, placing them in correction territory.  And some (Australia in black, Canada in blue) are nearing bear market territory (a 20% correction).

 

     I documented the global change in investment calculus last week, highlighting the impact of increased geo-political risk and the declining economic prospects of the EU, Japan and to a lesser extent, Australia.  Over the last few weeks, these developments have been reflected in various equity indexes, leading to the overall decline in numerous global ETFs.  But the US economy has the ability to continue growing despite an EU slowdown.  True, it will be slower growth.  But it won't be fatal.  This is probably why the SPYs have not sold off to the same degree as the other international indexes (see the purple line in the above chart).

 

     Let's now turn to the charts.

 

 

 

     Perspective is a very important element of chart reading.  And to those who looked at the SPYs 30 minute chart (above) over the last few weeks, the latest market developments would have been less of a shock.  The index crossed below the 200 minute EMA on September 22 and have hit that level of resistance on four separate occasions since, only to fall back.  The biggest fail occurred on the 9th when the market continued its sell-off after a post-Fed Minutes rally.  But pay particular attention to the give and take between the bulls and bears in the above chart.  Sharp-sell offs have been met with strong buying activity which indicates there are plenty of people who see value at current price levels.

 

      But there are other more negative technical developments to consider as well coming from the weekly charts.

 

 

The biggest is the IWMs (Russell 2000) drop though support at the 106/107 level.  This index has been consolidating between the 106/107 level on the lower end and the 119/120 level on the upper side for most of this year.  Several bloggers have highlighted this development and done some great supporting research, with the following overall conclusion:

 

Like most things in the stock market, small cap underperformance is cyclical and quite common. There is no conclusive evidence that it has to lead to a big correction or end of the bull market. Perhaps the best we can say is: “2015 is likely to be a good year that is maybe possibly slightly less good than an average year”.

 

 

 

The Russell 2000, however, is not the only weakening technical chart.  Another potential technical victim is the SPYs, which are also nearing their multi-year trend line (see above).

 

 

 

And the weekly Dow has already broken through one support line (top chart) with the NASDAQ sitting at long-term support (bottom chart).  Although both charts have longer-term support lines available, bear in mind that both these longer-term trend lines are weaker as they are not connecting any lows occurring after the summer of 2013.

 

 

 

But the US equity sell-off is hardly fatal.  The worst hit is the Russell 2000 (red line above) which has dropped about 14%.  But the other indexes (DIA, SPY and QQQ) have only dropped between 4%-6% since the beginning of September, meaning that none are even in correction territory yet. 

 

But that doesn't mean we won't get there in the short run.  The global sell-off isn't going away soon, largely because of the degradation in international growth prospects.  Safe haven flows are increasing as well, as seen \by the rising US Treasury market:  

 

 

 

But in the longer run, the US economy is still in good shape.  There has been no meaningful negative economic events indicating an imminent slow-down.  Consider the following from the Conference Board:

 

The Conference Board LEI for the U.S. increased slightly in August. This month’s gain was driven by large positive contributions from the yield spread and the ISM® new orders index. In the six-month period ending August 2014, the leading economic index increased 3.9 percent (about an 8.0 percent annual rate), faster than the growth of 2.8 percent (about a 5.6 percent annual rate) during the previous six months. Also, the strengths among the leading indicators have continued to be very widespread.

 

The Conference Board CEI for the U.S., a measure of current economic activity, also improved. The coincident economic index rose 1.4 percent (about a 2.8 percent annual rate) between February and August 2014, slightly faster than the growth of 1.1 percent (about a 2.2 percent annual rate) for the previous six months. The strengths among the coincident indicators have remained very widespread, with all components advancing over the past six months. The lagging economic index continued to increase but at a higher rate than the CEI. As a result, the coincident-to-lagging ratio is down slightly. Meanwhile, real GDP expanded at a 4.2 percent annual rate in the second quarter, after contracting by 2.1 percent (annual rate) in the first quarter of this year.

The leading and coincident indicators are rising, and doing so at a faster pace over the respective latest 6-month period with both are rising on broad-based support.  And the Federal Reserve is clearly in an accommodating mode as evidenced by the dovish tone of the latest Minutes. 

From a US equity perspective, we're really passengers on a global investment train where increasing volatility is caused by events beyond our borders.  But while this is leading to a US sell-off, it's actually a much needed market drop.  US valuations have been high; finding bargains since the first of the year has been a fool's errand.  And the level of investor complacency has needed a shake-up simply to put us back on a more alert footing.   I sincerely doubt the sell-off is over and wouldn't be surprised to see it continue through the end of the year.  But the strong fundamental US economic background indicates this is a time to take some profits and start looking for potential acquisitions that are more fairly priced.


   

 

Weekly Indicators for October 6 - 10 at XE.com

 - by New Deal democrat

My weekly indicator post is up at XE.com.  The data is more mixed than it was during the torrid summer, but I still see no grounds for any immediate concern about the US domestic economy, despite the sturm und drang in the stock market.

Quick Technical Look At The SPYs

Above is a 4 year weekly chart of the SPYs.  There are 10 corrections -- I've circled 3 in blue (I missed the one that occurred at the end of 2011).  There is a trend line that connects the lows of 2011 and 2012.  But there is no contact with that line since. 

The Oil choke collar: is the US on the verge of finally breaking free?

 - by New Deal democrat

I have a new post up at XE.com.

Back in 2011, I wrote that by about now, a combination of alternate fuels, technology, conservation and new exploration might together allow the US to finally break out of the Oil choke collar.

That might be happening.

Off topic: this incident shows why the militarization of police must be reversed

 - by New Deal democrat

Regular economic blogging will resume shortly.  But this article from the Huffington Post really caught my attention.

A 59 year old man who ran a construction company was shot and killed by a Georgia SWAT team that raided his house in the middle of the night.

HIs house had been burglarized a few days or weeks before, and his wife woke him up when she saw men dressed in black approaching their house, believing that the thieves had returned.  The man got his gun. Georgia swears he "aggressively brandished" it at them, justifying their shooting him 15 times and killing him.

Why was a SWAT team raiding his house?  The thief, a meth addict, gave them a bogus story:

The sheriff's office obtained a search warrant based on a tip from a thief who claimed he had found 20 grams of methamphetamine inside a bag he stole from a vehicle at Hooks' home, Georgia station WMAZ reports. According to the warrant, Rodney Garrett claimed that he thought the bag was filled with cash but that he later discovered it contained meth. Garrett said that he then turned himself into the sheriff's office because the drugs made him fear for his safety.

The thief also stole their SUV.

And the result of the raid? --

Authorities searched Hooks' home for 44 hours, but found no drugs, according to the Atlanta Journal-Constitution.

The wife swears they didn't identify themselves as law enforcement. They swear they did.

Here's my question.  The police had zero evidence that the man might be armed and dangerous.  They were searching his house for drugs, not weapons.

So why exactly was a SWAT team necessary?  Why not just regularly serve a warrant?  I have very little doubt that this completely law abiding citizen would still be alive had the police simply followed what once upon a time was normal police procedure.  I have little doubt that a SWAT team was used because the big police boys had their big military toys, and fully intended to use them.

The militarization of US police forces must be stopped.

Three updates on jobs, hours, and wages

 - by New Deal democrat

I wanted to update three series with the jobs data through September:

• 1.  The REAL real unemployment and underemployment rate;
• 2.  A better measure of labor utilization; and
• 3.  Real wages per capita

1.  The REAL real unemployment and underemployment rate.

Although I haven't seen them in a few months (did I manage to kill them?), there used to be a number of analyses that claimed to calculate "the real unemployment rate" by either pretending there was no onslaught of Boomer retirements, or were relying on decade-old Fed estimates.  The idea was that there was some dark pool of "missing workers" who were so discouraged they didn't show up in the monthly report.  This was nonsense, since every single month, the Household Survey includes a measure of those who have given up looking, and so aren't considered part of the labor force, but who still want a job now: series NILFWJN. If we add that to U-3, we get the "real" unemployment rate, and if we add it to U-6 (which includes, among other things, involuntary part time workers), we get the "real" underemployment rate.

The first important note about NILFWJN is that it stopped declining, and in fact has been increasing this year:

It is not a coincidence that this trend reversal happened exactly when the Congress cut off extended unemployment benefits at the end of last year.  About half a million people gave up, and simply stopped looking.

As a result, while the U-3 unemployment rate has declined by -0.8% so far this year (blue), the NILFWJN adjusted unemployment rate has only declined by -0.6% (red):

With that intro, here is the updated REAL unemployment rate (red) compared with U-3:

This currently stands at 9.6%.  Remember to compare apples with apples - this is very similar to where it was at the end of 1994, which was a neither great nor awful jobs environment.

Now, here is the REAL underemployment rate, adding NILFWJN to U-6:

This is currently 15.7%.  Again, very similar to the end of 1994.  It sounds awful, but note that at the peak of the best jobs boom we've had in the last 40 years, in the late 1990's, U-6 plus NILFWJN never got significantly below 10%.

2.  A better measure of labor utilization

Paul Krugman has used the employment to population ratio for the core employment ages of 25-54 as a proxy for slack in the labor market.  This metric avoids conflation by Boomer retirements, and at about 100 million people, is about 2/3's of the entire labor force.  Here's what it looks like now (for some reason the St. Louis FRED doesn't keep this data, so the graph is from the BLS website):

This is up about 2% from its post-recession bottom, but still off 3.5% from its pre-recession peak.

I think there is a better measure.  Instead of looking at the number of jobs in the economy, we look at the number of hours of work in the economy (thus taking care of the part-time worker issue), and divide that by the number of people in the labor force, plus our old friend NILFWJN.  Here's what we get:

We are currently at 94.9% of the number of hours available compared with the peak during the jobs boom of 1999, for those who are either employed or want a job.  This metric has been improving at the rate of about 2% a year.  If that pace continues, we should surpass the 2007 peak in about 9 months, and at least approach the 1999 peak in about 18 months.

3.  Real wages per capita

There is a lot of information about hourly wages.  But what is the average in total wages being made by American workers?  The number of hours worked by the average worker changes significantly over the economic cycle.

To see how much the average American worker is making, we start with aggregate amount of wages  paid (available in the monthly Household Survey), and divide that by population, and then take into account inflation.  This tells us the amount of real wages available to support each person in the population.  Here's the graph, first of the long-term over the last 60 years:

 This very clearly shows how great the 1960's and late 1990's were for wage growth, and the stagnation and even decline from 1974-1995, and again after 2000.

Now, here is a closer view from 1995 to the present:

This gives us qualified good news.  While hourly  wages are still stagnant (bad), the average American is working more hours (good or bad, depending), and thus at the end of the pay period, nearly as much buying power is available for each person as at the 1999 and 2007 peaks (good).  If the present trend continues, per capita real wages should set a new record at some point in the next 3-12 months.

SUMMARY:  We should exceed the 2007 peak in hours and real wages per capita witin the next year. If current trends continue, full employment is probably still about 24-36 months away.

Great minds think alike

 - by New Deal democrat

Prof. Tim Duy looks at the relationship between wages and the unemployment rate, and concludes that this time it isn't different, and in particular, is similar to the recovery in employment and wages after the severe 1982 recession.  The same conclusion I came to.

There is no mysterious dark pool of missing workers distorting the unemployment rate

- by New Deal democrat

As I noted yesterday,  Jared Bernstein recently said in a New York Times column:

So why not just look at the unemployment rate and call it a day? Because special factors in play right now make the jobless rate an inadequate measure of slack....

There are at least two special factors that are distorting the unemployment rate’s signal....

Bernstein's column predictably unleashed another brushfire of  "the unemployment rate is phony" commentary by the usual Doomers.  While I respect Jared Bernstein and generally find his commentary interesting and accurate, in this case I strongly disagree. And I have data in support of my point.

Let me take his two "special features" in order.  He says:

First, there are over seven million involuntary part-time workers, almost 5 percent of the labor force, who want, but can’t find, full-time jobs. That’s still up two percentage points from its pre-recession trough. Importantly, the unemployment rate doesn’t capture this dimension of slack at all — as far as it’s concerned, you’re either working or not. Hours of work don’t come into it.

Every single month for the last 60 years, the Census Bureau has  counted those "who want, but can't find, full-time jobs."  During that time, on 9 occasions the economy has gone through a recession where the unemployment rate exceeded 6%.  Nine separate times, the unemployment rate has thereafter declined to under 6%.

So, let's do a true apples-to-apples comparison.   When the unemployment rate crossed the 6% threshold to the downside, what percent of the civilian labor force "wanted, but couldn't find, full-time jobs?"  That's what the below graph shows.  The unemployment rate is in red, and I've subtracted 6 so that it crosses the black 0 line at 6% unemployment.  The percentage of the civilian labor force that is working part-time, but wants full-time work is in blue.  As of yesterday, that was ~4.55%, so I have subtracted that percentage to place that at zero as well:

In 7 of the 8 prior cases, when the unemployment rate crossed 6%, involuntary part-time employment was about 1% less than it is now.  The 8th time is telling:  following the 1982 recession, which at its trough featured an employment rate even worse than that of the Great Recession, it took until August 1987 for the unemployment to fall to 6%.  That month the percentage of the labor force that were involuntarily working part time jobs was ~4.43%, only 0.1% lower than yesterday's rate.

In other words, what we are seeing now is conquerable to what we saw in the recovery from the severe 1982 recession, and only 1% higher than during recoveries from less severe recessions.  If we use a back-of-the-envelope approximation that part time workers are averaging about 1/2 the number of hours of full time workers, that gives us an increase in the unemployment rate compared with recoveries from more typical recessions of about 0.5%, or a hypothetical 6.4% unemployment rate with a typical mix or full time to part time employees in an apples to apples comparison.

Next, Bernstein says:

The second special factor masking the extent of slack as measured by unemployment has to do with participation in the labor force. Once you give up looking for work, you’re no longer counted in the unemployment rate, so if a bunch of people exit the labor force because of the very slack we’re trying to measure, it artificially lowers unemployment, making a weak labor market look better.

While we only have data going back 20 years, still in every single month since then, the Census Bureau counts those who have entirely stopped looking, and dropped out of the labor force, but want a job now.

In the graph below, I have again subtracted 6 from the unemployment rate, so that it crosses the 0 line at 6%.  Percentage of those who have left the civilian labor force, but still want a job now, compared with the labor force (blue) as of yesterday was about 4%, so I have subtracted that percentage to show it at 0 as of yesterday:

Note that while there are about 0.8% more who fit in this category now compared with 2003, the percentage of those who are so discouraged that they have left the labor force altogether is about 0.5% lower than it was in 1994.   In other words, there is no reason to think this is unusual at all, in an apples to apples comparison with other times of 6% unemployment.

In summary, there is no reason to think that the unemployment rate is underestimating labor slack compared with prior severe recessions, and in is likely only undercounting slack by about 0.5% compared with recoveries from milder recessions.

US Market Review For the Week of September 29-October 3

     Although the uptrend is still in place for both the SPYs and QQQs, weakness in the IWMs, mid-caps and micro-caps is at minimum adding to downside pressure.  Changes in the international risk calculus (see here) are also adding to concerns.   

     From a fundamental perspective, there are few indicators pointing to anything but a continued moderate expansion in the U.S..  Let's start with the long leading indicators.  The worst of the four is building permits which have been moving sideways for about a year.  Corporate earnings dropped in the first quarter largely as a result of a very bad winter, but they rebounded in the 2Q.  M2 Y/Y growth is hovering around 5% and the inverted corporate yield curve is still in an uptrend.  The leading indicators have been in an uptrend for the last 6 months, and all concurrent indicators (industrial production, establishment jobs, income less transfer payments and real manufacturing and trade industry sales) are moving higher.  The total effect of these data points is one of continued growth for the US.

     Also, consider last weeks ISM manufacturing and service sector reports, both of which were solidly positive, especially the anecdotal comments. 

     I asked NDD to add some comments about the market as well; here are his thoughts:

I rarely comment on the stock market from an investor point of view.  Normally I look at it from the point of view of a short leading indicator for the economy.

The selloff this week has been pretty tame - less than 5% of the value of the market.  And while there are a few divergences, I see only one issue qualifying as a genuine yellow flag.

The first divergence is the cumulative advance decline line.  I would expect a significant decline in the a/d line before I would expect to see a major market decline.  In prior recent selloffs, the a/d decline, like the market, moved to higher highs and higher lows.  This time it has established a lower low than the selloff in August:

Still, it's not anything major at this point.

Next, consider bond yields compared with the S&P index.  Since 1998, bond yields and stock prices have typically moved in tandem.  Only when the economy has been strong, as in 2004-05, have yields moved sideways or lower when the market moved higher.  But that is what has happened for nearly all of this year:

The S&P is up about 20% from a year ago, while yields have been generally declining since January. Only briefly during the August selloff, and again this week, have bonds demonstrated a"flight to safety" downturn in yields matching stock rice declines.

Again, a divergence, but hardly an established trend at this point.

Next, I am not seeing a big divergence between insiders and the public.  If I saw insiders selling hand over fist, coupled with a complacent public, I would be more concerned.  As you can see from this graph taken from last saturday's Barron's:

insiders really aren't hoisting a red flag  Again, at least not yet.

Finally, there is one divergence worthy of a yellow flag:  corporate profit growth vs. stock prices. Because corporate profits are a long leading indicator, and stocks a short leading indicator, typically on an averaged quarterly basis, stocks reflect corporate profits.  Here are corporate profits measured by YoY% change (blue) vs. the quarterly average for stock prices, also as a YoY% change (red), for the last 10 years.

Typically stocks follow bonds with a lag of several quarters.

Only twice has that not been the case: in 2006-07 and this year.  Since corporate profits have only been up by about 5% YoY for the last 4 quarters, stocks should follow, but they haven't -- so far.

I fully expect stocks to revert to that mean.  Like 2006-07, there are signs that this might be a blowoff top.  But the same was true 3 and 6 months ago (remember the great margin scare of March 2014?). This last divergence is worthy of a yellow flag.  But that doesn't mean the correction is going to happen right now.

Bonddad Here:

Now, let's start with the charts that are sending warning signals.

The micro caps were trading in a symmetrical triangle pattern for most of the last year.  Prices moved through the lower trend line a few weeks ago on higher volume and are now below the 200 day EMA; momentum is declining and volatility is increasing.  And, once prices broke through support, momentum to the downside increased as indicated by the longer candles. 

The mid-caps were still in a slight uptrend until this week.   But prices have moved through support.  They also dipped below the 200 day EMA before rebounding a bit on Thursday and Friday.  But the last two candles are weak and printed on declining momentum and a weakening price structure. 

And the mega-caps (S&P 100) were not immune either, as they too briefly fell below their long-term trend line.

But on the plus side we have the NASDAQ which is still in very solid technical shape.  Prices are over 5% above the long term trend line.  While the underlying technical indicators are declining, prices would have to fall a fair amount before this average was in any way endangered.  And the fact it didn't drop sharply last week when other indexes were tells us traders are not so concerned as to sell their larger tech positions (at least not yet).

     And, considering that the underlying backdrop is still at least moderately bullish, the number of stocks below their 200 day EMAs is at a bullish level:

     So, let's sum up the basic points from above.  First, the underlying US economic condition is still positive.  No series of economic indicator (long, leading and concurrent) is pointing to a contraction or even recession.  Last week's ISM numbers for both sectors of the economy (manufacturing and service) point to continued expansion.  There are concerns about several other economies, most notably the EU and Japan.  But the core of the US is still solid.  And given its size, it can continue to grow at a moderate pace while other world regions experience a slowdown.
    
     There has been technical degradation of several sub-indexes.  This sell-off was triggered by international concerns and a re-calibration of traders risk calculus.  The charts indicate the sell-off is most likely to continue for at least the coming week, based on the weakening micro and mid-cap indexes.  But several other indicators (stocks below their 200 day EMA) indicate the market is approaching over-sold territory.  And when we place that data point against the fairly decent US economic environment, it's difficult to see the sell-off reaching panic proportions.

 
    






 

   

Weekly Indicators for September 29 - October 3 at XE.com

 - by New Deal democrat

First, the good news:  the Oil choke collar has disengaged to the point where it is already close to its 2011 and 2012 lows.

Now, the bad news:  there was more deceleration this week.

Yes, Doomers, we "can* compare 5.9% unemployment now with previous recoveries

 - by New Deal democrat

Beginning with Jared Bernstein's piece in the NYTimes this week, there's been another spasm of allegations that there is a dark, uncounted pool of secret unemployed that aren't showing up in the official numbers.  Culminating with a post at the usual DOOMER place claiming that the job report this morning, and in particular the decline to 5.9% unemployment, was not a good report.  

Nonsense.

Every single month, the Census Bureau counts those who have entirely stopped looking, and dropped out of the labor force, but want a job now.

Every single month, the Census Bureau counts those who are working part time jobs, but would like a full time job.

Thus, it is pretty easy to compare this jobs recovery with the prior two jobs recoveries.

Following the 1991 recession, the unemployment rate first dropped below 6% in September 1994.  That month here are the numbers for those who were out of the job force, but wanted a job (NILFWJN) and who were part time for economic reasons (PTER):

NILFWJN 6.104 million

PTER 4.332 million

Following the 2001 recession, the unemployment rate first dropped below 6% in November 2003.  Here are the numbers for that month:

NILFWJN 4.534 million

PTER 4.882 million

Now here are the numbers for this month:

NILFWJN  6.349 million

PTER 7.103 million

Especially considering that the labor force has grown, the number of those who have completely stopped looking is equivalent to 1994.  The number of part time jobs is about 2.5 million higher than in those two prior recoveries.

On the other hand, in this recovery, we have created a lot more jobs than would previously have been suspected with a 2% average GDP. It appears the trade-off for that is that a significant number remain part time jobs, and wage growth has suffered.

International Week in Review: The Sky Is Not Falling, But the Calculus Has Changed

This is over at XE.com.

http://community.xe.com/blog/xe-market-analysis/international-week-review-sky-not-falling-calculus-has-changed

September jobs report: Now that's better! (but still not good enough)

- by New Deal democrat

HEADLINES:

• 248,000 jobs added to the economy
• U3 unemployment rate declined from 6.1% to 5.9%

Wages and participation rates

• Not in Labor Force, but Want a Job Now: up 45,000 from 6.304 million to 6,349 million
• Employment/population ratio ages 25-54: down -0.1% from 76.8% to 76.7%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: minus -$.01 from  $20.68 to $20.67, up 2.-% YoY

July was revised upward by 31,000 to 243,000.  August was revised upward by 38,000 to 180,000. The net revision was thus 69,000.  This means the "speed bump" that jobs hit last month has been almost renirely revised away. 

Since the economic expansion is well established, in recent months my focus has shifted to wages and the chronic heightened unemployment.  The headline numbers for August show a little progress on wages, and mixed results on participation.

Those who want a job now, but weren't even counted in the workforce were 4.3 million at the height of the tech boom, and were at 7.0 million a couple of years ago.  They have actually risen for the first eight months of this year. As noted above they are presently 6.349 million.  This is almost certainly due to the cutoff in extended unemployment benefits by Congress at the end of last year.

On the other hand, the participation rate in the prime working age group has made up 40% of its loss from its pre-recession high.

After inflation, real hourly wages for nonsupervisory employees probably were close to unchanged from August to September. The YoY change in average hourly earnings is +2.-%, somewhat better than the inflation rate.

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were flat to slightly positive

• the average manufacturing workweek rose by +0.1 hours to 40.9.  This is one of the 10 components of the LEI, and will have a positive impact.


• construction jobs increased by 16,000. YoY construction jobs are up 230,000.  


• manufacturing jobs  were up 4,000, and are up 161,000 YoY.


• temporary jobs - a leading indicator for jobs overall - increased by 19,700.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - decreased by 226,000 from 2,609,000 to 2,383,000, compared with December's 2,255,000 low.

Other important coincident indicators help us paint a more complete picture of the present:

• Overtime hours were up from 3.4 hours to 3.5 hours.


• the index of aggregate hours worked in the economy  fell by -0.1% from 109.2. to 109.1


• The broad U-6 unemployment rate, that includes discouraged workers decreased from 12.0% to 11.8%.


• Part time jobs for economic reasons decreased by 100,000 to a total of 7.103 million.

Other news included:

• the alternate jobs number contained in the more volatile household survey increased by  232,000 jobs.  The household survey jobs numbers had been lagging the establishment survey numbers, but as expected this difference has now been almost entirely made up, with the household survey showing a 2,330,000 increase in jobs YoY vs. 2,645,000 in the establishment survey. 


• Government jobs increased by 12,000.

• the overall employment to population ratio for all ages 16 and above was unchanged at 59.0%, and has risen by +0.4% YoY. The labor force participation rate declined slightly from 62.8% to 62.7, and has fallen by -0.5% YoY (but remember, this includes droves of retiring Boomers).

.This wass a good report, which also almost completely revised away last month's subpar report.  The economy is still adding over 200,000 jobs a month.  The unemployment rate declined due to a big increase in jobs, with only a small (-97,000) decline in the civilian labor force.  At 5.9%, it is finally back in what used to be considered a nomral, non-recessionary range.

The internals to the report were only mildly positive.  Involuntary part time jobs did decrease, although those who have stopped looking but want a job now increased.

The bottom line is, we continue to make slow, grinding progress towards normalcy.  Wages are still a big disappointment.  This was a very good post-Great Recession report. It would be a mediocre report for virtually any othere economic expansion since World War 2.

John "Trillion Dollar Loss" Hinderker, Employment Redux

Ol' TDL (Trillion Dollar Loss) likes to complain about the US employment situation, and, more specifically, blame it on Obama.  While the US jobs market clearly has tons of slack, this is in fact a world-wide situation.  How do we know this?  By r-e-a-d-i-n-g economic reports like this one from the OECD: 

Despite some recent improvement, slow recovery from the financial crisis means that many G20 economies still face a substantial jobs gap, which will persist until at least 2018 unless growth gains momentum.

With more than 100 million people still unemployed in the G20 economies and 447 million 'working poor' living on less than $2 a day in emerging G20 economies, the weak labour market performance is also threatening economic recovery because it is constraining both consumption and investment.

That report contains this graphic information (pictures may help ol' TDL because economic writing is obviously a bit advanced for him)

The employment problem is hitting a lot of countries, not just the US.  That means that either the Obama's polices have magically had a global impact (much like the CRA somehow leading to a global housing crisis) or there is something happening at the macro level that is beyond the scope of partisan US politics.

John "Trillion Dollar Loss" Hinderaker Attempts Economic Analysis; Fails

In case you're wondering, John Hinderaker was one of the many people who said the Fed's policies would lead to hyper inflation and spiking interest rates.  Bloomberg calculated the net investment returns a Hinderaker portfolio would have earned and came up with a net loss of $1 trillion.  Hence, from here on out, I will refer to Hinderaker as Mr. Trillion Dollar Loss of Mr. TDL for short.

Now we have Mr. TDL using Senate Republican slides to demonstrate how bad things are.  As you might guess, they are extremely misleading.

Let's start with this:

 
Notice very carefully the starting date for the graph: 2005.  Yet just a few weeks ago, Hinderker posted a more complete graphs of the same data:

As I wrote at the time:

Except, of course, that isn't what the graph shows.  It shows the incomes rose in the 1980s and 1990s (Democrats and Republicans) and then moved sideways under Bush (who Hinderaker called a genius) and down under Obama.   In other words, it rose under a Republican and Democrat, stagnated under Bush and fell under Obama.  This is called chart reading, which Hinderaker obviously can't do.

Notice that Hinderaker's hero Bush also had a drop in median income.  Interesting that nothing was mentioned about that.

And then there is this:

Obama is no Reagan!  Of course, this is also a misleading graph.  I'll let Barry Ritholtz explain why:

Consider an ordinary recession: The economy begins to heat up as wages rise and consumers borrow and spend. The Fed, concerned about increasing inflation, raises interest rates. As credit becomes more expensive, sales slow, putting the economy at risk of slipping into a recession.

But fear not! After six months or so, the Fed then lowers rates, unleashing all that pent-up demand. Consumers and businesses begin spending again, folks get hired and the entire virtuous cycle begins anew.

That approach is what we have seen in the 15 or so post-World War II recession-recovery cycles. An overheating economy leads to rising rates leads to a slowdown leads to falling rates. Rinse, lather, repeat.

That isn't what occurs after a credit crisis such as the Great Recession. Assets purchased with cheap and widely available credit become worth significantly less once the bubble bursts. But the debt remains. All of that leverage used to purchase all of those assets -- regardless of whether it's subprime mortgages or dot-com stocks -- sticks around.

Hence, a post-credit-crisis recovery is dominated not by the release of pent-up demand, but by massive corporate, household and government deleveraging. Even before the financial crisis, Reinhart and Rogoff were detailing how and why recoveries from such events were such slow, protracted and painful affairs.

It's an apples to oranges comparison.  

Ol' "Trillion Dollar Loss" Hinderaker fails again. 

SPYs and DIAs are Getting Near Key Support Levels

Both the SPYs and DIAs have strong, nearly year long trend lines in place.  Current price action has placed prices very near to these levels.  Should prices break through these levels, the next price target would be the 200 day EMAs.

The unemployment rate as a leading indicator for wage growth

 - by New Deal democrat

One of the most pronounced issues in the US economy generally is the stagnation of wages since the turn of the Millennium, and specifically the lack of wage growth since the current economic expansion began over 5 years ago.

Several months ago I undertook to explore whether there were one or more leading indicators for wage growth.  While I have not found any Holy Grail, the exercise has begun to bear fruit.

In this post, I'm going to explore nominal wage growth.  Because most employers probably determine raises without reference to the inflation rate, and partly because raises are usually only given once a year, nominal wage growth is much less subject to noise than real wage growth.  This makes it easier to distill signal from noise.  I'll deal with real wage growth in one or more subsequent posts.

Here's what I'll show in this post:

• nominal wage growth makes a good "mid-cycle" indicator
• the unemployment rate typically makes tops and bottoms months before nominal wage growth
• the exception, following severe recessions, is where the unemployment rate peaks at a number higher than 8%.  In those cases nominal wage growth has bottomed when the unemployment rate has fallen to about 7.5% +/-1%.

This rule allows us to make useful predictions.  I'll test the rule with a forecast at the end of this post.

To begin with, I have been looking for some worthwhile "mid-cycle" indicators, i.e., data series that typically have an inflection point about midway through an economic expansion.  The YoY% change in nominal wages appears to be such an indicator.

Here are nominal wages from 1965-83:

and here they are from 1984 to the present:

In each case, there has been a sudden surge in nominal wage growth of about 2% close to the midpoint of the economic expansions.  In other words, there are no false negatives.  Further, there are only 2 false positives, in 1974 and 1976.  Since we had a turnaround and a 2% gain that began in mid-2012, that suggests that late 2012 was close to the midpoint of this economic cycle.

But more importantly, I want to be able to forecast whether or not we can expect improvement in wages going forward.  Since nominal wage growth appears to have an inflection point near mid-cycle, I wondered if a normally lagging indicator like the unemployment rate might be a worthwhile leading indicator for wage growth.  It turns out that it is.

In the below graphs, the unemployment rate is in blue, and is inverted, so that post-recession peaks show as downward spikes.  Expansion lows in the unemployment rate are broader affairs and show as rounded peaks.  Average hourly earnings are shown in red. I've normed the series for relative ease of viewing, particularly in the case of the inflationary 1970's.

Here is the unemployment rate compared with average hourly earnings for 1965-1983:

and here it is from 1984 to the present:

These show that the unemployment rate peaked before nominal wage growth bottomed in 5 of 7 cases.  Similarly the unemployment rate bottomed before nominal wage growth peaked in 5 of 7 cases. The worst contrary result was only -7 months.

Next, note that the unemployment rate is subtracted from 7.5.  This means that a declining unemployment rate from, e.g., 9% to 6%, shows as a rising line crossing 0 at the point where the unemployment rate is 7.5%.  Of the three cases (1974, 1982, and 2008) where the recession peak in unemployment was worse than 7.5%, nominal wage growth bottomed when the unemployment rate was 8.4% (1975), 7.0% and 6.6% (two months in 1986), and 8.1% and 7.8% (two months in 2012).  This gives us a rule of thumb that all it takes is for the unemployment rate to fall to 7.5% +/-1% to generate sufficient tightness for nominal wage growth to begin to rise.

As I said at the beginning of this post, the relationship is consistent enough to be able to generate useful forecasts.  Since we know that (1) initial jobless claims lead the unemployment rate, and these have still been improving over the last 6 months; and (2) nominal wage growth generally does not peak until after the unemployment rate has made its expansion bottom; then (3) over the next 6 months or so, we should expect nominal wage growth to continue to rise, and make a new YoY% high for this economic expansion.

That's my prediction.  We'll see if it pans out or not.

Markets Are Breaking Down

 

 

The transports have broken through a year long trend line with a decreasing MACD.  There is also the increase in volume on the sell-off.  

 

 

The Microcaps have broken through support and are moving lower, printing stronger bars on increasing volume.  Also note the increasing volatility.

 

 

The Russell 2000s are approaching long-term support.  Today's sell-off was on increasing volume with increasing volatility. 



Sadly, Ed Yardeni is the Wanker of the Day - wage stagnation edition

 - by New Deal democrat

Dr. Ed Yardeni has some clickbait up at his blog titled, The Wage Stagnation Myth.

Yardeni is a highly-regarded financial markets analyst, but this is just sad.

He writes that

There is a widespread myth that real incomes have been stagnating for many years.  That's apparently true based on real median income for households.... [but]

real pre-tax compensation per payroll employee (including wages, salaries, and supplements) is up ... 16.8% since the start of 2000.

Real wages and salaries in personal income is ... up 14.6% since the start of 2000.  Real average hourly earnings of production and nonsupervisory workers i sup ... 13.4% since the start of 2000.

 In the first place, like so many others, he starts by conflating wages and income, setting up a straw man.  No, Dr. Ed, the fact of wage stagnation is not based on income metrics, but on wage metrics.  To give you a head start, here are 7 of them I helpfully catalogued in a post only one month ago.

Secondly, note that all of Yardeni's metrics appear to be mean, not median, measures.  You remember the old saw about Bill Gates walking into a bar, and now the mean wealth of the patron is $1 billion.  That's what Yardeni does. When you measure in median, not mean terms, wage stagnation is blazingly apparent.

The only measure he cites which might possibly be a median measure ("real pre-tax compensation," he doesn't name the data series), includes "supplements." Whether these are management bonuses or e.g., health benefits, they hardly are contrary evidence.  We know that health cost inflation has soared for several decades.  That companies may have picked up some of these has nothing to do with actual wages.

That a premier Wall Street analyst is so blind to the blazingly bright evidence is, sadly, not shocking at all.

Housing sales and construction show slight improvement to stagnation

 - by New Deal democrat

I have a new post up at XE.com discussing this month's housing sales and construction releases.

There is a very slight uptrend, but by and large, the market has stagnated. I also comment on what I expect in the next 6 months or so.  Housing is crucially important, because more than anything else, it forecasts the economy 12-18 months out.