October jobs report: great utilization, decent growth, poor wages

- by New Deal democrat

HEADLINES:

• +261,000 jobs added
• U3 unemployment rate down -0.1% from 4.2% to 4.1%
• U6 underemployment rate down -0.3 from 8.2% to7.9%

Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates

• Not in Labor Force, but Want a Job Now:  down -443,000 from 5.628 million to 5.135 million   
• Part time for economic reasons: down -369,000 from 5.122 million to 4.753 million
• Employment/population ratio ages 25-54: down -0.1% from 78.9% to 78.8%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: down -$.0.1 from $22.23  to $22.22, up +2.4% YoY.  (Note: you may be reading different information about wages elsewhere. They are citing average wages for all private workers. I use wages for nonsupervisory personnel, to come closer to the situation for ordinary workers.)  

Holding Trump accountable on manufacturing and mining jobs

 Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise?  

• Manufacturing jobs rose by +24,000 for an average of  +14,000 a month vs. the last seven years of Obama's presidency in which an average of 10,300 manufacturing jobs were added each month.   
• Coal mining jobs were unchanged for an average of +250 a month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month

August was revised upward by +39,000. September was also revised upward by +51,000, for a net change of +90,000.   

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

• the average manufacturing workweek rose +0.2 hours from 40.8 hours to 41.0.  This is one of the 10 components of the LEI.
 
• construction jobs increased by +11,000. YoY construction jobs are up +187,000.  

• temporary jobs increased by +18,300. 
 
• the number of people unemployed for 5 weeks or less decreased by -97,000 from 2,226,000 to 2,129,000.  The post-recession low was set al,ost two years ago at 2,095,000.

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

• Overtime rose +0.2 hours to  3.5 hours.
• Professional and business employment (generally higher- paying jobs) increased by +50,000 and  is up +546,000 YoY.


• the index of aggregate hours worked in the economy rose by 0.2  from 107.4 to  107.6   

•  the index of aggregate payrolls rose by 0.8 from 176.5 to 177.3 .    

Other news included:           

• the  alternate jobs number contained  in the more volatile household survey decreased by  -484,000  jobs.  This represents an increase of 1,959,000  jobs YoY vs. 2,004,000 in the establishment survey.     
     
• Government jobs rose by 900.      

• the overall  employment to  population ratio for all ages 16 and up fell -0.2% from 60.4% to  60.2 m/m  and is up +0.5%  YoY.        
• The  labor force participation  rate fell -0.4% m/m and is down -0.1% YoY from 63.1% to 62.7%.        

 SUMMARY  

  This was an excellent report in terms of labor utilization, decent in terms of jobs growth, and poor in terms of wages.

The big declines in unemployment, underemployment, involuntary part time employment, and persons who want a job now but haven't looked have nudged us very close to what has been "full employment" in the past two expansions.  We may be as little as 1.5 million jobs away.

The total gain in employment in the last two months is 279,000, or an average of 140,000 per month for the hurricane-affected month and the recovery. This is no better than mediocre or average.

That hourly wages for nonsupervisory workers actually *fell* month over month, and are still only up 2.4% YoY quite simply is awful this late into an expansion.

Bottom line: the late cycle deceleration in YoY employment gains is continuing, and outright wage deflation come the next recession looms ever larger. 

-- From Bonddad

Here's my inflation-adjusted 2 cents.

First, the 3, 6 and 12 month moving average of establishment job growth is slightly above 150,000/month:

These numbers have been declining since the end of 2014.  As we are now late-in-the-game of this recovery, I wouldn't expect more than 150,000 average month growth going forward.

We're seeing some weak Y/Y numbers.

Total service producing jobs (top chart), while still positive, are declining Y/Y.  Both retail (middle chart) and information jobs (bottom chart) are declining.

     Overall, the wage picture is weak:

The top two charts were released earlier this week in the BEA's personal income data.  Real DPI and real DPI less transfer payments are barely getting about 1% on the Y/Y basis.  Average hourly earnings (bottom chart), which are part of the employment report, are still weak on a historical basis.

Bonddad Economic Potpourri

The anecdotal comments from the latest ISM report are strong:

• "Raw material costs on the rise, but purchasing operation has navigated shortages caused by hurricanes." (Chemical Products)
• "Incoming orders are strong, mainly due to recovery efforts in the wake of Hurricanes Harvey and Irma. Backlogs are up due to operating inefficiencies." (Machinery)
• "Hurricanes have caused shortages in the resin market, resulting in price increases, inventory constraints and increased lead times." (Computer & Electronic Products)
• "Ongoing market growth. Minimal impact expected from hurricanes so far in this season." (Miscellaneous Manufacturing)
• "Business seems to be a bit depressed due to the storms last month, but is picking back up." (Fabricated Metal Products)
• "Business continues to be better than expected." (Transportation Equipment)
• "Business is good. Supplier deliveries have extended. Things are really picking up." (Food, Beverage & Tobacco Products)
• "Our plants are sold out for 2017 — we can’t take any new orders." (Nonmetallic Mineral Products)
• "In plastics processing, Hurricane Harvey is the reason for every price increase being announced — and virtually all suppliers are announcing price increases." (Plastics & Rubber Products)

The hurricanes are causing some shortages, lengthening delivery times, raising some prices and increasing demand from Texas and Florida.  But all of these effects are temporary and should dissipate in the coming months.

     The Fed's preferred inflation measure is still weak:

Both measures of PCE inflation are below 2% -- the Fed's target.  

     Auto sales enjoyed a solid month of growth as consumers replaced cars destroyed in recent flooding:

Expect a few more months of this.  But sales should return to their weaker position in by 1Q18.  

     Consumer staples, discretionary and now utilities are under-performing:

The economy is firing on just about all cylinders

 - by New Deal democrat

The "nowcast" over the last few months has been pretty darn good, and it is showing up in the data.

This post is up at XE.com.

AT&T is Worth a Look at These Levels

            Income streams are an essential component to my investment philosophy.  They help to lower portfolio volatility, provide returns in a stagnant or declining market, and continually provide funds for reinvestment.  I provide more detail in my book, The Lifetime Income Security Solution. 

            I’m also a big fan of companies that have a long history of raising their dividend, which is one of the best ways management can reward shareholders.  I maintain a list of stocks that have a 25-year history of raising their dividends.  When these companies approach lows on a 6 or 12 months basis, it’s time to look at adding them to a portfolio. 

            Recently, AT&T (T) qualified by falling to a 52-week low:

Last week, the stock gapped lower on earnings news (more on that in a minute).  It looks like it’s trying to form a short-term bottom at current levels.

            Let’s take a look at T’s financials (as reported by Morningstar.com).

Balance Sheet: their balance sheet could be a lot cleaner.  Their current ratio has been below 1 for the last 5 years, which offends my inner “Graham and Dodd.”  But, large companies also have the financial capabilities to maintain lower capital ratios and get away with it in the marketplace.  At the same time, total equity has increased from $92.3 billion in 2012 to $123 billion at the end of last year – a nice increase for shareholders.  Long-term debt has also increased substantially, climbing from $66.3 billion in 2012 to $113.6 billion in 2016.  However, according to the company’s revenue statement, income expenses have dropped from 2.7% of income to 2% in 2016 – which is largely due to declining interest rates.

Cash Flow: The company – like other large companies – has the ability to self-fund plant, property and equipment purchases from net income.  This means that the primary “play” on their case flow statement occurs in the financial section.  Here, we see a lot debt refunding over the last 5 years (which is to be expected) along with a share repurchase plan.

Income Statement: this contains very positive information.  First, total revenue increased from $127 billion in 2012 to $167 billion in 2016.  While the cost of goods sold increased over the same period (rising from 43.3% of revenue to 46.94%), operating expenses declined from 46.47% to 38.19% and net income rose from 5.7% to 7.92%.  Best of all, net income from continuing operations was up from 5.92% to 8.14% over the same time period.

So – why is the stock low?  Two reasons.

Cord cutters: from the last earnings release: Importantly, in the domestic market, net additions of its postpaid wireless subscribers declined a massive 44.8% year over year.  AT&T lost 251,000 satellite TV customers and 134,000 U-verse TV customers. However, it gained 296,000 DIRECTV NOW connections.

This is an important development, but not fatal.  Entertainment revenue comprises 32% of all income, according to the latest 10-Q.  In addition, it appears the company is working on new products to mitigate this loss of revenue.

The Time Warner Merger: AT&T and Time Warner are trying to merge.  This looks eerily similar to the AOL/Time Warner deal from years ago – which was a tremendous flop.  But that deal simply came too early.  Time Warner has content that AT&T could bundle with its other services.   While there are calls from some groups to halt the merger, or at least give it very close scrutiny, it’s difficult to see the current administration giving this deal the thumbs down.

Finally, there is the dividend, which is 5.85% -- a more than healthy reward for owning this stock.  The only drawback is the payout ratio is very high – 94%, indicating the company needs to grow revenue to continue raising the dividend.

Overall, a stock with a 5.85% yield trading at a PE of 16 is worth a look when it’s near a 52-week low.

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.

   

Halloween potpouri

 - by New Deal democrat

Some comments on the economic data from yesterday and this morning...

1. Personal income and spending.

Real, inflation adjusted income was flat, while real spending was up +0.6%. Which means the personal saving rate declined to a new expansion low:

We've had a steep decline in the savings rate in the past year.  That is something that, as the above graph shows, tends to happen in mid- to late expansion. The upshot is that consumers have less room in their budgets to absorb a future negative shock.

2. The employment cost index.

This is some good news. The employment cost index is a median measure, and it tracks payment for the same job over time, and it improved 0.7% q/q, and the longer term trend is positive:

YoY growth of wages, at 2.5%, is just below the expansion peak of 2.6%. At least in terms of measuring payment for the same job, there actually is some improving wage growth.

3. Apartment rents.

The median asking rent for apartments rose by $2 to $912 in the third quarter

Rental price pressures are accelerating!

4. Regional manufacturing.

The Dallas Fed and the Chicago PMI both improved even more from September to October:

As a result, even taking into account that these have been outperforming industrial production this year, it is likely that manufacturing production when it is reported for October several weeks from now will be a positive, and most likely slightly better than last month's.

These releases are all consistent with an economy that is doing extremely well right now, while laying the groundwork for the ultimate downturn in the form of additional pressures on the consumer.

Dividend Yields Are Outperforming Inflation

This chart is from the Financial Times:

As I point out in my book The Lifetime Income Security Solution, dividends are a key component to investing.  They lower overall volatility, steady performance and provide a constant stream of reinvestment income .  The above chart partially explains why.  Treasury yields started to drop in the early 1980s and have continued to plumb new lows since.  While many people have correctly noted that yields have nowhere to go but up from their current position, it's doubtful we'll see a major advance with inflation so low.   Add all this information together and you have a powerful argument for focusing on dividends.      

     You can read all about it in my book (shameless plug):

Gimme shelter: the real cost of renting vs. homeownership

 - by New Deal democrat

What is the real cost of shelter?

Over the last decade there has been lots of discussion of housing prices in isolation. Sometimes that discussion includes an inflation adjustment -- which is problematic, since housing constitutes nearly 40% of the entire consumer price index, so in essence housing is being deflated largely by the cost of housing itself! From time to time there has also been a little -- but not much -- discussion of rental prices. 

But I have never seen a discussion of the relationship between the relative cost of homeownership vs. renting, particularly as a function of the household budget.

That is a curious void. For the choice (or ability) to live in the residence one desires isn't a matter of its cost by itself, but also the relative cost of the type of residence.  What is the cost of a house compared with the cost of an apartment? How expensive are each of them compared with a household's income?  If both are too expensive, maybe the choice is made to live with mom and dad as an extended family.

The purpose of  this post is to fill that void. Herein I compare the cost of home ownership -- in terms of the down payment, but also in terms of the monthly mortgage payment -- with the cost of renting, and further, compare each to the median household income (since by definition, the people renting the apartment or living in the house are a household!).

Let's start with the "real" cost of a down payment on a house. The first choice of most people is to reside in a single family house.  Most people who follow economics are familiar with the housing bubble, bust, and recovery in the past 15 years.  Here's what the median house price looks like measured in comparison with median household income:

In the above graph I've divided house prices by 10, to measure the share of annual household income needed for a 10% down payment.  The graph would look exactly the same, just with different nominal values, assuming a different percentage of down payment.

What is surprising here is that house prices now are even higher than they were at the peak of the bubble in 2005 as compared with median household income.  As we'll see below, there are good reasons to believe even these lofty prices do not mean we are in another bubble. But perhaps they are an important reason why, even more than eight years into the current economic expansion, home sales are barely above where they were at the bottom of previous recessions:

But if down payments are so dear, why have people chosen in increasing numbers to purchase houses?  Perhaps that's because, when we compare monthly payments, and compare them with the alternatives, the picture looks entirely different.

Let's start with the most obvious comparison.  Here is the median asking monthly rent for an apartment in the US since 1995 (note: the series goes back to 1988):

In 1988 the median rent averged $343 per month. In the second quarter of this year it was $910.

Now, here is what it looks like in comparison with median household income:

If house prices have risen to new highs several times since the turn of the Millennium, so have apartment rents -- almost relentlessly. 

In percentage terms, in 1988, the median rent for an apartment was 14.5% of median household income. That rose to slightly over 16% in the mid 1990s before falling to the series' low of 13.7% in 2000. Since then it has risen to a record 18.4% of median household income in the 2nd quarter of this year.

Now let's take a look at the monthly cost of living in a house. The below graph shows the median monthly mortgage payment for a house  (blue) compared with median household income (red). Median monthly mortgage payment is calculated by using the median house price and the 30 year mortgage rate for each quarter, and consulting an amortization table using those values:

Notice that the monthly payment for the median house isn't extreme at all! In fact, currently it is very moderate in terms of the long term range. Let's break that down by showing the percentage of median monthly income (1/12 of the annual) that one month's mortgage payment consituted (note: I am assuming a 10% down payment, with 90% mortgaged to be consistent. Using a different down payment does not change the shape of the comparison at all, only the nominal values):

• Going back to 1988, the median mortgage payment was slightly over 40% of median monthly household income. 
• This fell back under 28% at the end of 1998 before rising to 32% in 2000. 
• After falling briefly, at the peak of the housing bubble in early 2006 it had reached a secondary peak just over 35% of median monthly income.
• At the bottom of the bust at the end of 2011 it made a new low of 23%.
• Even now, with the real cost of a house at all time highs, the median monthly mortgage payment is still less than 24% of median household income.

Monthly mortgage payments are moderate because, even as house prices have risen, mortgage rates fell to new lows not seen in over half a century several times during this expansion, most recently in the summer of 2016:

In our final comparative graph, let's see how median monthly rent compares with median monthly mortgage payment:

Most notably, the overall trend in the last 30 years has been that monthly mortgage payments have fallen from over 3 times median rent to about 1.5 time median rent now. Put another way, even at the peak of the housing bubble, the monthly carrying cost of a house was about 2.3 times the median cost of renting an apartment. At the bottom of the bust, that fell to 1.4 times the cost to rent. For the last five years, monthly mortgage payments have hovered near 1.5 times the median asking rent.

By comparing the "real" cost of housing to renting, both in terms of down payments and monthly mortgage payments, we can make sense of some of the biggest trends in the market for shelter.

Record down payments are keeping an increasing number of prospective buyers, especially first time buyers, shut out of the market for buying a house. An enormous number are living in apartments instead. This explains both the multi-decade lows in the homeownership rate as well as the recent 30 year lows in the apartment vacancy rates, as a disproportionate number of adults are forced out of home ownership and into apartment dwelling.

With both real house prices and real apartment rents at new highs, perhaps it is no surprise that a record number of young adults are choosing, or maybe stuck with, continuing to live with mom and dad:

Note, by the way, that these adults are included as part of their parents' household for purposes of the homeownership rate above.

On the other hand, with monthly mortgage payments at such relative lows compared to both rental payments and median incomes, if one can get past the down payment, home ownership is clearly the better choice. Thus single family home construction continued to rise until at least the beginning of this year, and has declined only slightly with the roughly 1% increase in mortgage interest rates:

Finally, that being said, it is hard for me to imagine how home sales could continue to grow much further if house prices continue to outpace even their 2005 multiple of median household income. But if rental prices also continue to grow relative to median household income, then we can only expect to see even more involuntary extended family households.

[Special thanks to Mike KImel for preparing the customized comparative graphs used in this article.]

My Weekly Columns Are Up at XE.com

US economic week in review

Bond Market Week in Review

International Week in Review

Weekly Indicators for October 23 - 27 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

This week there was a surge in interest rates, causing mortgage rates to turn into a negative again.

Weekend Pit Bull

          I started this blog in 2006 -- over 10 years ago (where does the time go?).  NDD started blogging over here a few years after that.  About three years ago, we started writing over at XE.com, which we still do.  I pretty much bailed on this site after the shift, largely because of time considerations.  Since then, NDD has kept the BD blog going, providing consistently great content to the readers on a regular basis.  I owe him a great debt of thanks and gratitude for all his work.

         For a number of reasons, I started back here a few weeks ago.  We still have some new things brewing, but they're going to take a bit longer to bring to market.

          When I started the blog, I had two Weimaraners - Kate and Sarge.  Unfortunately, both are now gone, as are a few other pups that I and Mr$. Bonddad have taken care of.  Now we have two pit bulls -- Pibbles -- named Mumph and Lita. 

          Your weekend pit bull means the week is over; it's time to think about anything except economics and financial markets.  To that end, here's Lita (top) and Mumph (bottom, with Elmer the pig).

          

Leading indicators in GDP report negative for second straight quarter

 - by New Deal democrat

Three months ago, when the preliminary read on second quarter GDP was released, I started out with, "While Q2 GDP increased at a smart rate, there was bad news in both of the long leading indicators that are contained in the release."

Today's preliminary report on Q3 GDP makes it two quarters in a row.

There are two long leading indicators in the GDP report: real private residential investement and corporate profits. Since the latter is not released until the second or third revision, the less leading proxy of proprietors' income serves as a placeholder.

Real private residential investment declined at a -6.0% annual rate, following a revised -7.8% annual rate for Q2 (blue in the graph below).  That's even worse when you take into account that the best measure is housing investment as a share of GDP (red). Since housing investment declined and GDP rose, that's an even bigger hit.

Secondly, proprietors' income rose slightly, only +0.2% overall and +0.6% on a nonfarm basis, before adjusting for inflation, which ran over 1% last quarter, meaning that on a real basis, both declined.  The below graph compares nominal proprietors' income with corporate profits adjusted for unit labor costs, which had increased very slightly in Q2 (and hasn't been reported yet for Q3): 

One quarter could just be noise. But two quarters in a row later in the expansion is at very least a yellow flag.

In the last month I have downgraded my long leading forecast from positive to neutral. I'm NOT negative now, but any further significant spreading or deterioration will cause me to turn negative for the first time since late 2006.

I'll update later with graphs once FRED posts the info. UPDATED

September new home sales: the back end of the hurricanes

 - by New Deal democrat

As promised yesterday, here is my detailed post at XE.comon the September new home sales report.

The bottom line is that, when you do a three month moving average, and account for the transfer of many sales in the South from August to September, you have a metric that is no longer declining, but is not advancing either.

I had a problem posting the final graph, and rather than continue to fight with that platform, here is the graph that compares monthly with quarterly YoY changes in median prices:

The trend in new home prices is outpacing median household income growth this year.

About the "Treasury Market is Predicting Doom" Argument...

 

The top chart is the IEIs, which represent the 3-7 section of the treasury curve.  The middle chart is the IEFs, which are the 7-10 year section of the curve, while the bottom chart is the TLTs, which represent the 20+ year section of the curve.  All three fell through technical support yesterday; all are below their respective 200-day EMAs.  

There are two reasons for this.  First, the market believes Trump will nominate a more hawkish Fed governor, probably John Taylor.  Second, the market is betting the Republicans will pass a large tax cut.  Traders believe this will lead to higher growth and more inflation.  Therefore, they are selling bonds, which under-perform in a higher growth, higher inflation environment. 

If this trend continues, we'll see the treasury curve widen.  That sends the "yield curve is at its lowest level in years, we're doomed" argument out the window.

A quick note on new home sales

 - by New Deal democrat

I don't know why, but FRED always seems to take its time posting data from the monthly new home sales report.

So, graphy goodness tomorrow, but in the meantime, the bulletpoint takeaway:

• Needless to say, a good report, with a new expansion high, and
• the three month moving average has stopped declining, BUT
• the big increase this month was all about the hurricane affected South, which contributed over 80,000, and 
• the three month moving average is nevertheless below its high from this past March, and
• keep in mind that outliers in this report are frequently revised largely away come the next month

Stay tuned!

Linkfest

What if NAFTA becomes a Zombie deal? (FT)
About the Phillips Curve breakdown (Gavyn Davies)
The 3-Equation New Keynesian Model (PDF)
Have smartphones destroyed a generation? (the Atlantic)
Trump nixes cutting 401(k) contributions (NYT)
China's business leaders are having a difficult time with the government (NYT)
The 7 men now run China (NYT)
Xi is now one of the most powerful leaders in China's history (NYT)
It's looking like treasuries want to rally higher (BB)

Why does anybody pay attention to Deutsche Bank's economic forecast?

 - by New Deal democrat

So this morning I read  that OMG yield curve tightest since 2007!!!! Head for the hills!!! Recession coming!!! from Mike "Mish" Shedlock.

And here is the accompanying graph:  

Sure enough, yes, if we focus strictly on the time period from 2008-present, (and don't you dare let your eyes wander to the left of the graph!), the yield curve now is the tightest it has been.

But unless you think the universe came into existence in 2007, you really *should* cast your eyes to the left of the graph, where you will see that the spreads among the various treasury maturities are about where they were in early 2005. Two and one-half years before the last recession.

Oh.

This made me remember a similar recession call by Deutsche Bank almost two years ago:

What are plummeting interest rates saying about the outlook for the economy? The spread between the yield on 10-year U.S. Treasury notes and two-year notes is the narrowest since 2007. A model maintained by Deutsche Bank analyst Steven Zeng, who adjusts the spread for historically low short-term interest rates, suggests the yield curve is now signaling a 55 percent* chance of a U.S. recession within the next 12 months. That marks the highest probability generated by the model so far in this expansion ....

[*That was in February 2016. When long term rates made new lows in July, they upped the chances to 60%!]

Here is a graph which accompanied Deutsche Bank's presentation:

In response, I noted the following:

Here's the problem. Cast your eye to the left end of the graph, the 1960s. You know, probably the best economy the US has had since, well, forever? What does the graph show then? 

Apparently, the US was teetering on the edge of recession throughout the entire decade. Hoocoodanode? 

Next look towards the middle. There is the 1990s tech boom, second only to the 1960s as the best US economy of our lifetimes. Well, apparently the US was teetering on the edge of recession through that period as well! 

So here is a helpful hint. When your Killer App for foreceasting recessions forecast a recession during the two best economies that the US has had in the last 60 years, your Killer App is crap.

Apparently Deutsch Bank figures that once the Fed starts tightening, it will continue pretty much until it sees a recession looming like an iceberg dead ahead.  That may have made sense half a century ago when the US was primarily a manufacturing economy, which was much more volatile -- a GDP that fell from 4% to 2% quarter over quarter was likely headed to 0 or below in another quarter.  That's simply not the case in our service based economy now.

So what was Deutsche Bank saying just a few months ago?  This:

[Deutsche Bank] estimated the probability of a U.S. recession from now to June 2018 at less than 10 percent. 

Here's their updated graph (which, note, now conveniently omits the entire 1960's):

They're back to extreme bearishness now.  Who cares? Why should anybody be paying the slightest bit of attention to a model which has 5 false positives for 6 correct ones?

If Deutsche Bank wants be right, how about hiring me? I'll accept 1/4 of your current crew's pay. Sounds like a win-win move to me. 

--From Bonddad

I haven't read Mish is forever.  Now I remember why; this analysis is, well, ridicules.  

Here's a long-term chart of one of my favorite indicators: the 10-year CMT - Fed Funds:

The curve inverts somewhere between 12-24 months before a recession.  Right now, the spread is 123 basis points.  So, we need 123 points of compression before inverting, after which time there's a strong possibility that that we'll see a recession within the next 1-2 years.  Usually, it's the Fed's raising short-term rates that causes the most compression.  As NDD notes, that's just not going to happen in the current environment, thanks to low inflation and a Fed now beginning to debate why inflation is so low. 

Using this chart as a basis, we're at least 2 years from a recession.  

Or, you could simply go to the Cleveland Fed's website, where they employ a probit model to predict recessions based on the yield curve.  Here's their conclusion

The slightly steeper yield curve did lead to a slightly decreased probability of recession, but the change was minor. Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate the expected chance of the economy being in a recession next September at 12.0 percent, down from the August probability of 12.5 percent (an even one-eighth chance), itself a tiny drop down from July’s 12.9 percent. So the yield curve is optimistic about the recovery continuing, even if it is somewhat pessimistic with regard to the pace of growth over the next year.

Kimberly Clark (KMB) Is Worth a Look at These Levels

            Dividends are central to my investment philosophy.  They not only lower portfolio volatility but also provide a continued source of funds for reinvestment.  In that vein, I continually monitor a small list of companies that have consistently raised dividends for at least 25 years.  When these companies are weak technically, it’s an appropriate time to examine them as a potential addition to a portfolio.  I detail this process in my book The Lifetime Income Security Solution.

            Kimberly Clark is currently looking attractive from a technical perspective:

The weekly chart (top chart) shows a double-top in the first half of this year followed by a consistent downtrend.  Weekly prices are currently approaching the 200-week EMA.  The daily chart (bottom chart) is very weak; it is below the 200-day EMA and recently gapped lower. 

            According to their latest 10-K, KMB has three lines of business:    

•      Personal Care brands offer our consumers a trusted partner in caring for themselves and their families by delivering confidence, protection and discretion through a wide variety of innovative solutions and products such as disposable diapers, training and youth pants, swimpants, baby wipes, feminine and incontinence care products, and other related products.  Products in this segment are sold under the Huggies, Pull-Ups, Little Swimmers, GoodNites, DryNites, Kotex, U by Kotex, Intimus, Depend, Plenitud, Poise and other brand names.
•        Consumer Tissue offers a wide variety of innovative solutions and trusted brands that touch and improve people's lives every day.  Products in this segment include facial and bathroom tissue, paper towels, napkins and related products, and are sold under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Neve and other brand names.
•       K-C Professional ("KCP") partners with businesses to create Exceptional Workplaces, helping to make them healthier, safer and more productive through a range of solutions and supporting products such as wipers, tissue, towels, apparel, soaps and sanitizers. Our brands, including Kleenex, Scott, WypAll, Kimtech and Jackson Safety, are well-known for quality and trusted to help people around the world work better.

The company faces intense competition.  This means KMB must very efficient.

            Their balance sheet (as researched on Morningstar.com) isn’t as clean as I would like.  But a high asset/liability ratio is less important for a multi-billion dollar company.  Over the last 5 years, total assets have decreased about $5 billion, thanks to a modest decline in receivables along with a larger decline in property, plant, and equipment (about $800 billion) and inventories (about $900 billion).  Turning to liabilities, the company has increased its debt levels by about $1.4 billion, which is to be expected during a period of record-low interest rates.  According to their revenue statement, their interest expense is 1.75% of gross income – a manageable level.

            Expenses demonstrate that management is top-notch.  Over the last 5 years, their gross margin has improved by 450 basis points, their operating income has risen nearly 550 basis points and their net margin has increased almost 390 basis points.  And then there is EBITDA, which is up 525 BPs.  Considering the intense competition in their market, these are very important and impressive numbers.

            The company is large enough to fund current expansion out of net income.  This means the primary play on their cash flow statement is in their financing structure.  Over the last 5 years, they’ve done a large amount of debt-refunding, which is prudent in a low rate environment.  They have also been buying back stock at a solid pace – another great way to reward shareholders.

            According to FINVIZ, their current yield is 3.42% -- which is about 60 basis points higher than the AAA effective yield and on par with a BBB effective yield (according to FRED) data.  Their dividend coverage ratio is just south of 62%, which means they have room to raise it further.          

              Technically, the company is weak, which means it’s time to look at this company.  While the balance sheet isn’t that impressive, the rising margins show management is very good at its job.  The company has taken advantage of low interest rates to refund its debt; interest rate expenses are under control.

            Overall, this KMB is currently 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 details.

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