Saturday, January 10, 2015

Weekly Indicators for January 5 - 9 at

 - by New Deal democrat

My Weekly Indicators post is up at

A few more signs of weakness appeared this week.

US Market Review For the Week of January 5-9; Bond Market Is the Real Winner Edition

     In writing a market review, the natural assumption (OK -- my assumption) is that it will involve equities.  After all, this is the market that routinely gets the most headlines.  Bonds, in contrast, are invariably overlooked.  Yet when looking at this weeks numbers, I pulled up the relevant FRED graphs of the bond market yields and thought this was the logical place to start.  After all, we're closer to the end of QE than the beginning.  In fact, there are many who are arguing that we'll see rate increased in 2015.

     The bond market don't believe it.  At least, the long end doesn't

The 30-year yield has been dropping since the beginning of 2014, printing a large drop last week.  The implications are remarkably broad.  First, and as if this needs repeating, inflation is clearly not on the table in any meaningful way -- a fact all but confirmed by the massive drop in oil we've seen over the last 6 months.  In addition, we now have heightened risk awareness.  Adding to the economic issues presented by the EU and Russia (which was remarkably silent this week economic news wise), the terrorist attacks in France add that extra element of concern about personal and geopolitical safety.  This creates a flight to safety, meaning US bonds catch a bid. 

     As a result, we've seen the yield curve come in sharply over the last year, with the 30-2 year spread dropping from a little over 3.5% to under 2%.  This is not a yield curve of an expanding economy.  By this point in the economic cycle (6 of the last 7 quarters have seen positive growth with a solid 5% in the last quarter) we should be seeing a sell-off in the long-end as traders move away from safety and look for increasing growth.  That's just not happening.

     As a result, we've seen fixed income ETFs outperform equity ETFs:

The TLTS (20+ years) are up 4% for the year, the IEFs are up a little under 2% and the SPYs are down .5%.  Now, the chart above is only for the first week of a trading year.  So let's extend the time horizon out 6 months:

In that time frame, the 30 year is still outperforming, nearly tripling the SPYs returns while the IEFs are running neck and neck with the SPYs.

And over the last year, the TLTs are still outperforming the SPYs, nearly doubling their return. 

     And these gains are highlighted best in the weekly TLT chart:

The long end of the bond ETF world has been rallying since the beginning of 2014, printing a solid and consistent move higher.  There have been no true sell-offs (moves of say 10% of more lower), with the most severe occurring at the end of August and beginning of September.  Prices consolidated in June and between mid-October and mid-November; but these weren't corrections.  The chart above indicates that for capital appreciation, the long-end of the treasury curve was the place to be.




Friday, January 9, 2015

Wages are heading in the wrong direction

 - by New Deal democrat

Earlier today I red-flagged wages as an issue in the December jobs report, which was otherwise good.

Here's why.  Below is the graph of nominal YoY wage growth.  In other words, without factoring in inflation:

Even before this morning's report, the YoY rate of growth in wages had stalled in 2014, and appeared to be declining even in October and November.  While I suspect there will be a revision to the wage number from this morning, the fact is that the growth rate in wages is decelerating.  This is not what I expected to see, and obviously is not good.

I don't have a ready explanation.  I'll think about it.

My 2015 forecast for the US economy

 - by New Deal democrat

My 2015 forecast is up at

You probably won't be surprised.

International Week In Review; The Year Isn't Starting Off Well, Edition

This is over at

We start the year with several areas of concern, beginning with the EU.  As I noted at the end of last year, the region is mired in sluggish growth which this week’s economic numbers simply confirmed.  Japan is also facing potentially slower growth while Australia, although growing, has obvious internal weakness.  Canada is starting to see the bite from lower oil prices as well.  The only two economies that are printing solid numbers are the US and UK.

December Jobs Report: Good on jobs, but red flag on wages

- by New Deal democrat


  • 252,000 jobs added to the economy
  • U3 unemployment rate down -.2% to 5.6%
Wages and participation rates
  • Not in Labor Force, but Want a Job Now: down 111,000 from 6.556 million to 6.445
  • Part time for economic reasons: down 61,000 from  6.850 million to 6790 million
  • Employment/population ratio ages 25-54: up .1% to 77.0% 
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: down $.06 (or -0.3%) from $20.74 to $20.68, up 1.6%YoY
October was revised upward by 18,000 from 243,000 to 261,000. November was also revised upward by 32000 to 358,000. The net revision was 50,000.

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  December continue to show strong jobs growth, with nearly 3 million jobs added for the year of 2014.  Participation rates are barely budging. 

But the nasty surprise is the deterioration in wages. YoY wages in the last few months have actually started to trend lower.  In real terms they are holding steady, but only due to lower inflation.  Participation rates are barely budging.

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.  Since Congress cut off extended unemployment benefits at the end of last year, they have actually risen, and are still  700,000 higher than they were in November 2013.

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

After inflation, real hourly wages for nonsupervisory employees are probably flat from November to December, because lower gas prices will show deflation. The  nominal YoY% change in average hourly earnings is 1.6%.

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were improved, with the notable exception of the average manufacturing workweek.

  • the average manufacturing workweek fell from 41.1 hours to 41.0.  This is one of the 10 components of the LEI, and will be a negative.

  • construction jobs increased by 48,000. YoY construction jobs are up 295,000.  

  • manufacturing jobs  were up 17,000, and are up 193,000 YoY.
  • Professional and business employment (generally higher-paying jobs) rose 52,000 and is averaging a 61,000 monthly gain for the last year.

  • temporary jobs - a leading indicator for jobs overall - increased by 14,700.

  • the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - decreased by 130,000 from 2,505,000 to 2,375,000, compared with last December's 2,255,000 low.

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

  • Overtime hours rose 0.1 hour to 3.6 hours

  • the index of aggregate hours worked in the economy rose .2 from 102.2 to 102.4.

  • The broad U-6 unemployment rate, that includes discouraged workers decreased from 11.4% to  11.2%.
Other news included:
  • the alternate jobs number contained in the more volatile household survey increased by 111,000 jobs.  This represents a 2,771,000 million increase in jobs YoY vs. 2,952,000 in the establishment survey. 

  • Government jobs increased by 12,000.
  • the overall employment to population ratio for all ages 16 and above remained steady at 59.2%,  and has risen by +0.6% YoY. The labor force participation rate fell .2% to 62.7%, and is down -0.1% YoY  (remember, this includes droves of retiring Boomers).

Overall, while this was a another solid report on jobs and the unemployment rate, continuing to signal ongoing growth, I am getting increasingly concerned that wages are not doing what they should be doing.  With a 5.6% unemployment rate, we should be seeing some significant nominal wage growth.  Instead, in the last few months wages YoY have gone in the opposite direction.  We really need to see this reversed in the next month or two, because it is beginning to look like a real trend and not just monthly noise.

Thursday, January 8, 2015

Ambarella, Inc. A Solid Growth Story

     Before reading further: this article is my opinion.  I'm not asking you to buy or sell this security.  Do you own research to figure out if this company makes sense for you.  Heck, you might actually learn something in the process.

     AMBA came up on one of my FINVIZ growth screens a few months ago.  I've being watching the chart and slowing combing through the fundamentals and have concluded this is a good company for a long position.

Technical Position

The stock hit a low of 21.6 in early May.  Since then, it has been in a solid uptrend, printing a nice series of higher lows and higher highs.  Since the end of November, prices have consolidated in a triangle consolidation pattern.  Yesterday, prices printed a solid bar on very strong volume that closed above previous highs.

Fundamental Analysis

AMBA is involved in the high definition video market.  From their 10-K:

We are a leading developer of semiconductor processing solutions for video that enable high-definition, or HD, video capture, sharing and display. We combine our processor design capabilities with our expertise in video and image processing, algorithms and software to provide a technology platform that is designed to be easily scalable across multiple applications and enable rapid and efficient product development. Our system-on-a-chip, or SoC, designs fully integrate HD video processing, image processing, audio processing and system functions onto a single chip, delivering exceptional video and image quality, differentiated functionality and low power consumption.

No one is an almost ran in their own company report, so take their "leaking developer" language with a large grain of salt.  However, this is a market that is growing due to the increased proliferation of devices that can record this type of video, the overall increased acceptance of this technology and the growing ability to store the data associated with making these films. 

    At this point, I have to admit that I don't have the technical capability to understand their technology.  Frankly, all I use my phone for is calls, email and web surfing.  This means I can't properly evaluate their technology.  However, the increasing revenue figures posted by the company indicate the market feels this technology is very good.

     The company has a very important drawback, due to the following two points also from the 10-K: 

Our sales cycles typically require a significant investment of time and a substantial expenditure of resources before we can realize revenue from the sale of our solutions, if any. Our typical sales cycle consists of a multi-month sales and development process involving our customers’ system designers and management and our sales personnel and software engineers. If successful, this process culminates in a customer’s decision to use our solutions in its system, which we refer to as a design win. ..... Volume production may begin within six to 18 months after a design win, depending on the complexity of our customer’s product and other factors upon which we may have little or no influence. Once our solutions have been incorporated into a customer’s design, they are likely to be used for the life cycle of the customer’s product. Conversely, a design loss to a competitor will likely preclude any opportunity for future revenue from such customer’s product.


We derive a significant portion of our revenue from a limited number of ODMs who build products on behalf of a limited number of OEMs and from a limited number of OEMs to whom we ship directly. .... In fiscal year 2014, sales directly and through our logistics providers to our five largest customers collectively accounted for approximately 55% of our total revenue, and sales to our 10 largest customers collectively accounted for approximately 67% of our total revenue. In fiscal year 2014, sales to our largest ODM customer was approximately 29% of our total revenue.

     So, the sales cycle is long, complex and expensive.  And once a sale is make, the company still has to wait 6-18 months for "volume production."  Assuming a 6 month sales cycle (which, given the complexity of the product is a fairly aggressive assessment), it will take the company at least 12 months for volume production to begin, making the true payoff from a new product a very long time in coming.  In addition, there are obviously only a limited number of companies who can not only benefit from the technology in a financially meaningful way, but also provide the platform for AMBA's products.  This means that if a newer and better technology come along, AMBA could lose revenue very quickly.

     Their annual report admits as much with this very important warning:

Achieving design wins is subject to lengthy competitive selection processes that require us to incur significant costs. Even if we begin a product design, a customer may decide to cancel or change its product plans, resulting in no revenue from such expenditures.

     In addition, they rely extensively on a single company for their Asian operations:

We sell most of our solutions through a single logistics provider, Wintech Microelectronics Co., Ltd., or Wintech, which serves as our non-exclusive sales representative in all of Asia other than Japan. Approximately 56%, 63% and 80% of our revenue was derived from sales through Wintech for the fiscal years ended January 31, 2014, 2013 and 2012, respectively. ... Our current agreement with Wintech is effective until September 2015, unless it is terminated earlier by either party for any or no reason with 90 days written notice or by failure of the breaching party to cure a material breach within 30 days following written notice of such material breach by the non-breaching party. Our agreement with Wintech will automatically renew for additional successive 12-month terms unless at least 60 days before the end of the then-current term either party provides written notice to the other party that it elects not to renew the agreement.

     The report contains numerous other warnings, all of which can be summed up by noting this is a n early stage growth company.  Right now, it's products are hot.  But, they are only one 13-year old tech genius away from obsolescence.

Balance Sheet

     Over the last five years, AMBA has been building up their cash position, which has risen from $26.5 million in 2010 to $143 million in 2014.   Unfortunately, over the last few years, their cash conversion cycle has increased from 40 to 60 days.   The large increase in the cash position helps to alleviate concerns with this increase and the growth nature of the company allows a certain amount of latitude with internal management.  And investors can breath a bit easier with both the cash and quick ratio over 5.  However, this number is a bit concerning, though hardly fatal.

     Also, their AR more than doubled between 2012 and 2013, although it decreased about 10% from 2013-2014.

     But the most impressive balance sheet statistic is their remarkable increase in overall book value, which has increased form a -$17 million in 2010 to $156 million in 2014.  This is very solid growth of overall company value.

Income Statement

     This is what originally attracted me to this company.  Their overall YOY revenue growth rate has been very strong:  for the years 2011-2014, these rates have been 32.46%, 2.66%, 24.48%, 30.18  respectively.  And their operating and an net margins have also been increasing, with the former rising from 11% to 17% and the latter rising from 10% to 16% (both of these increases are for the years 2012-2014).  And SGA expenses have dropped a bit as well.  Overall, this is great revenue growth with a wonderful combination of controlled expenses.

Cash Flow

     Usually growth companies obtain their cash position from the issuance of additional equity or debt.  This is not the case with AMBA.  Over the last five years, their free cash flow has fluctuated between $8.9 and $32 million -- which goes a long way towards explaining the company's strong balance sheet.  Their most expensive capital expenditures year was 2013 when they spent $1.7 million.  But that was easily dwarfed by their cash from operations.


     The top line growth numbers of this company are excellent.  And, they are keeping expenses in check.  Their cash flow is more than adequate to fund current operations.  And their balance sheet is rock solid.

     There are some serious drawbacks.  First, their product development cycle is long.  And, should they fail at closing a deal, they don't have many other potential suitors for their technology.  There is also the over-reliance on a single sales agent for Asia.

     But, as of now, this is a good growth play with upside potential.


The bottom in gas prices is close

 - by New Deal democrat

There is good reason to believe that we are close to, if not at, the bottom in oil and gas prices.

The main reason is inexorable seasonality.  Refiners start switching from winter to summer blend at some time by mid-February.  Gas prices start their usual seasonal climb towards summer at that time. Gas prices did sometimes fall during the first half of the year in the 1990's, and there with only one exception by less than 5%:

They have only done so twice since 2000, both times towards the end of or in the immediate aftermath of recessions:

In short, the odds are very good that prices will start to rise with the regular seasonality starting at some point in the next month.

In fact, it is possible they have already reached their bottom. Here's Gas Buddy's daily price graph for the last month:

Gas prices have stayed at $2.18/gallon for the last 4 days - a first since the collapse started in earnest after Labor Day.  This is how declines ended previously - i.e., abruptly.

But I think there is a little more to go.  Today West Texas crude prices are just over $48/barrel.  In the past, as shown in the graph below, this has correlated with gas prices of about $2.00/gallon:

Since it takes a week or two for prices to filter through to the pump, it looks likely that there will be a further decline to about $2/gallon by late January.  The seasonal low is normally set by that time.

If my surmise is correct, then if we follow the patterns set previously at important declines, there will be a quick rebound of about $0.25 to $0.30/gallon, followed by a slower increase into late spring or early summer of about $0.90 to $1.25/gallon.  A good rough estimate is $1/gallon, which would put us at about $3/gallon sometime between early May to early July.

At that point we will presumably stop being DOOMED because of deflation, and will start being DOOMED because of high prices.  With both forecasts probably having the same accuracy.

Energy Price Drop Starting to Impact Canada

This is over at

Tuesday, January 6, 2015

Is the Oil Sell-Off Overdone?

This is over at

Are we now in a similar situation?  Not yet.  China is slowing, but is still growing at a 7% rate.  Japan will probably come out of their recession in the next two quarters.  The EU is hovering at 0% growth, but they are not crashing through the floor.  The biggest problem is Russia, as the combination of cheap oil and economic sanctions will lead to a recession next year.  But they're a special situation.

Sunday, January 4, 2015

Equity Market Review For the First Week of 2015

The Economic Backdrop

     Let's start the new year by looking at the market's value, first by looking at the S&P 500's PE ratio from a historical perspective:

With an overall PE of a little under 20, the S&P 500 is historically expensive.  As the economy is currently expanding at a strong rate, the downside potential of the market is somewhat limited (barring an extraordinary shock).  However, corporate earnings and overall growth need to expand to move the market higher beyond say 5%-10%.

Other indexes are also pricey.  The NASDAQ is at high levels as is the transportation index.  The Dow is pretty expensive as well. 

     The above valuation metrics mean that if we want to see a strong upside move in the market -- one supported by fundamentals -- we need to see economic growth and an increase in corporate profits.  This is more than likely.

The overall rate of economic growth is strong, coming in at a 5% annual rate in the latest reading.  And, we've only seen one quarter of contraction in the last seven quarters -- a contraction that was largely caused by inclement weather.  In addition, both the leading and coincident indicators are moving higher:

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.6 percent in November to 105.5 (2004 = 100), following a 0.6 percent increase in October, and a 0.8 percent increase in September.


“Widespread and persistent gains in the LEI point to strong underlying conditions in the U.S. economic expansion,” said Ataman Ozyildirim, Economist at The Conference Board. “The current situation, measured by the coincident economic index, has been improving steadily, with employment and industrial production making the largest contributions in November.”

The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.4 percent in November to 110.7 (2004 = 100), following a 0.2 percent increase in October, and a 0.3 percent increase in September.

     And, corporate profits are also increasing:

Overall profits have increased from $1.4 trillion at the beginning of 2011 to their current level of a little under $1.9 trillion. 

     To conclude this introduction, the market is expensive.  However, the economy is growing at a strong clip, leading to an increase in corporate profits which not only supports the current price levels but future price advances.

The Technical Picture


     The weekly SPY picture is very bullish.  There is a clear trend line connective lows of mid-2012 and the fall of 2014.  There are nine "corrections" which are circled.  And there is a clear trend of prices printing higher highs and higher lows.


     The daily picture also show a solid rally with a trend line connecting the lows of early February and mid-December.  There is a price drop through this trend line in early-mid October.  However, the drop was extremely brief and prices rebounded almost immediately, making this a failed correction.  There is also an upward sloping wedge pattern (outlined with two red trend lines).  However, don't get too excited,

Rising wedges, especially for downward breakouts, are some of the worst performing chart patterns. Downward breakouts have unacceptably high failure rates and small post breakout declines. Also, pullbacks occur almost two-thirds of the time and throwbacks happen almost three-quarters of the time.

It's probably best to consider the wedge a consolidation pattern.

     So, we start the year with an expensive market, but a solid economy with a strong corporate earnings environment.  That means we have a higher likelihood of moving higher.



International Preview For the Week of January 5-9

This is over at