Saturday, October 11, 2014

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

 - by New Deal democrat

My weekly indicator post is up at  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.

Thursday, October 9, 2014

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

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.

Wednesday, October 8, 2014

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.

Tuesday, October 7, 2014

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.

Sunday, October 5, 2014

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.