Weekly Indicators for April 7 - 11 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com. The run of springtime positive data continues.

Putting stock margin debt in a longer term historical context

 - by New Deal democrat

I have a new post up at XE.com discussing the issue of record margin debt in stocks.  The CHARTS OF DOOM that you've probably seen only go back to about 1990.  What happens when we go back to the 1960s and 1970s, or even the 1920s and compare?

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For those of you who are long-term readers and remember us from our Daily Kos days, I wanted to add a note. One thing that makes my blood boil is when a person of modest means and very limited financial knowledge is panicked by a Doomer post, and asks them questions like, "I'm so scared.  What should I do with my 401k?  Should I cash it out?"

Literally I have messages bookmarked where the Doomers were bearish on stock in June 2009.  That's how bad the level of analysis has been.  I recall a top ranked diary from someone called "Stranded Wind" who argued that the FDIC was about to go bankrupt in July 2008 and actually wrote

Run, don’t walk, to your bank and get the funds you have clear of this mess before it gets any worse.

That diary got 610 comments and 345 recommends.  People actually followed his advice.  A full three years later he got banned after it was discovered that he apparently had a much darker side.

Well, the diaries in the last couple of weeks have given rise to some similarly panicked comments.  Anything is possible, but the panic these people spread has some real world consequences among their less informed readers.

QQQ's In Short Term Downtrend

The QQQs have broken their nearly year-long uptrend and are currently trading in a downward sloping channel.

Japan's Slow Growth Continues

This is over at XE.com

http://community.xe.com/forum/xe-market-analysis/japans-slow-growth-continues

Why isn't growth in the EU's LEIs leading to meaningful economic growth?

This is over at XE.com

 http://community.xe.com/forum/xe-market-analysis/why-isnt-growth-eus-leading-index-translating-meaningful-economic-growth

"Prices will fluctuate:" why progressives (and everybody else) should care about corporate profits and stock prices

 - by New Deal democrat

I was minding my own business yesterday when my attention was called to a diary on the Rec list at Daily Kos.  Didn't I disagree?

Well, actually, not really.  Although the conclusions hardly call out for breathless Doom-and-Gloom OMG IT"S GONNA CRASH!!!

Which is in stark contrast to the "stocks don't matter" (but only if they are going up) mantra of the Pied Piper of Doom.

But this is a good time to point out why, even if you are a card carrying leftie progressive, you ought to care about the direction of corporate profits and stock prices:  because for as long as records have been kept, they have reliably foretold the direction of jobs.  If corporate profits and stock prices are going up, there is an extremely high probability that jobs are going to be added to the economy.  If corporate profits and stock prices are going down, there is an excellent chance that a lot of people are going to be laid off, soon.

Although the data goes back many decades, here is a close up of the last 10 years of corporate profits (red, right index) and jobs (blue, left index):



And here is a close up of the last 10 years of stock prices (red, right index) and jobs (blue, left index):



The problem progressives (and many others too) have with the economy is that almost all of the gains have gone to producers, and almost none to labor.  We could have profits and stock prices going up at a slower rate, and still have increasing jobs as well as increased middle and working class incomes - not to mention spending on improving our infrastructure.

At the moment there is some concern among the financial press that corporate profits in the 1st quarter actually declined.  And because I care a lot about jobs, that means I am concerned too.

Before I conclude, a few comments about that diary yesterday.  Here's the conclusions the diarist actually made:

 [E}very time the overall price of stocks have gotten this expensive in the past there has been a crash.

 So is it really a radical suggestion to say that we are overdue for a severe stock market correction/crash?

Like stocks, when [houses] get expensive the risks switch to the downside.

Does this mean that the economy is about to collapse? That there is nothing ahead but doom-and-gloom?  No. But it does mean that there is almost no chance that we will avoid a serious stock market correction before the 2016 election. What's more, housing will soon be topping, if it hasn't topped already. Both of these things will be putting pressure on the banks and the economy in general.

Except for the breathless invocation of a "crash," I don't really disagree with this person.  Later on he defined "crash" to mean a 20% correction in stock prices at some point in the next 2 1/2 years.  Since stocks have corrected by at least 19% in more than half of the last years where there has been a midterm election alone, as shown by this graph:



And since stocks have declined by 20%+ on average about once every 4 years going back to 1900, a prediction of a 20% correction at some time before the end of 2016 is really just saying "stock prices will fluctuate normally."  Indeed, I've described in several posts how corporate profits tend to lead stock prices, and prices have increased about 20% more than corporate profits in the last 18 months.  Unless there is a real surge in corporate profits this year, a 20% correction in stock prices would hardly be unusual.  As to the increase in margin debt, that tells us nothing about timing.   All it does show - and it is significant - is that the more the leverage, the faster the decline might occur, when it does (because leveraged players in trouble have to unwind positions quickly, and can't hold them).

As to housing, for almost 6 months already, I've been forecasting an outright decline at some point this year, to the tune of -100,000 in permits or starts.  Last month starts were -62,000 YoY, and on a seasonally adjusted basis, all housing series have declined from their recent peaks.  As this graph of housing permits vs. the Case Shiller house price index shows:



sales peak and trough before prices.  If prices overshoot (and in at least some metro areas they almost certainly have), they will correct once sales start to dry up and inventory accumulates, as may already be happening in, e.g., Phoenix (h/t Calculated Risk:



So yes, there is reason to be concerned about housing, and reason to be concerned that stock prices will fall.  At some point housing, stock prices, and corporate profits are all going to have peaked, and then layoffs will cause an actual loss of jobs in the economy.  But the odds of an actual downturn in the economy with actual sustained job losses this year are virtually nil.

Staples Outperforming Discretionary

Above is a chart showing the ratio of consumer discretionary stocks to consumer staples stocks.  Discretionary stocks were outperforming from 04/13 until recently when the relationship broke down.  This indicates a change in the risk appetite among traders, at least in the short term.

More Signs Of A Short-Term US Market Top

On the weekly charts below, notice that all the MACDs have given a sell signal and "rolled over," meaning they are moving lower.

International Week in Review: The ECB Drops the Ball (Again) Edition

This is up over at XE.com

Weekly Indicators for March 31 - April 3 at XE.com

 - by New Deal democrat

My Weekly Indicators column is up at XE.com.

The spring rebound is continuing.

The ECB's Over-Reliance On Future Projections At the Expense of Current Data

This is over at XE.com

http://community.xe.com/forum/xe-market-analysis/ecbs-over-reliance-economic-projections-expense-current-data

March jobs report: new highs in aggregate hours worked, private sector jobs

- by New Deal democrat

In March 192,000 jobs were added to the US economy.  The unemployment rate was unchanged at  6.7%. January and February were revised upward by +35,000.

As usual, first, let's look at the more leading numbers in the report which tell us about where the economy is likely to be a few months from now. These were mixed but with a tilt towards positive.

• the average manufacturing workweek rose from 40.8  hours to 41.1, returning to its 2013 high. This is one of the 10 components of the LEI, and will contribute towards a strong positive number.


• construction jobs increased by 19,000. YoY 151,000 construction jobs have been added.


• manufacturing jobs fell by -1,000.


• temporary jobs - a leading indicator for jobs overall - increased by 29,000.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - rose to 2,461,000, compared with December's 2,255,000 low.

Now here are some of the other important coincident indicators filling out our view of where we are now:

• The average workweek for all nonsupervisory workers rose by 0.3 hours from 33.4 hours to 33.7 hours.


• Overtime hours increased from 3.4 to 3.5 hours.


• the index of aggregate hours worked in the economy rose by 0.7 from 106.4 to 107.1. This is a new post-recession high and close to an all-time high.


• The broad U-6 unemployment rate, that includes discouraged workers increased from 12.6% to 12.7%.


• The workforce rose by 503,000. Part time jobs rose by 434,000.

Other news included:

• the alternate jobs number contained in the more volatile household survey increased by 476,000 jobs.  The household survey jobs numbers had been lagging the establishment survey numbers, but as expected this difference has now been entirely made up, with the household survey showing a 2,351,000 increase in jobs YoY.


• Government jobs fell by -1,000.


• January was revised up from 129,000 to144,000.  February was also revised up by 22,000 to 197,000  Upward revisions happen in expansions, and after a weak spot in late 2013, these revisions in the last several months have all been positive.


• average hourly earnings decreased  $.01 to $24.30. The YoY change is +22%.  As a result, YoY average real wages probably fell slightly in March, given the expected slight rise in consumer prices due to the weakening of the Oil choke collar.


• the employment to population ratio rose from 58.8% to 58.9%, and has risen +0.4% YoY. The labor force participation rate also from 63.0% to 63.2%, but has declined 0.1% YoY.  The usual  caveats about discouraged workers and Boomer retirements apply.

• the number of people who are not in the labor force but want a job now (the best measure of long time discouragement) totals 3,050,000.

This report had the best internals of any report in the last six or so months. Aggregate hours, overtime hours, and the manufacturing workweek, all of which had been weakening, made up all of their losses and in at least one case set a new high.  Counting by hours vs. jobs, almost all of the losses in the recession have been made up. Private sector jobs have now also made up all of their recession losses.

Wages remain a weak point, and the usual participation rate debate will continue.  We still are in the hole by several million jobs considering the population increase in the working age population since 2007, and the decline in wages in March does nothing to help consumer spending.

A maturing expansion: auto sales; PCE's v. real retail sales

 - by New Deal democrat

One of the themes of economic data this year is that the expansion is mature.  I'm not expecting to get materially better than it has been for the last several years, and while I see continued expansion throughout this year, I am on the lookout for signs of longer term deterioration.

Which brings me first of all to March vehicle sales.  The good news is, these made a new post-recession high of 16.4 million annualized.  Here's Bill McBride's graph:



New vehicle sales have in the past peaked at least half a year before any economic downturn.  So the new high is yet more evidence that the expansion will continue through this year.

But even taking March into account, first quarter 2014 vehicle sales were essentially equal to fourth quarter 2013 sales.  So if there was pent-up demand because of the hard winter, there was no evidence of an increase of demand in the last 6 months.

Even this isn't really bad.  Vehicle sales can plateau for a long time during an expansion without materially declining.  It simply emphasizes the point that this looks like a mature expansion.

Which brings me secondly to an update of my comparison of PCE's and real retail sales.  In all cases since World War 2, in the earlier part of an expansion the YoY% increase in real retail sales exceeded that of PCE's.  In the latter part, the reverse is true.  Since PCE's include more spending on necessities compared with retail sales, it makes sense.  People cut down more on discretionary spending first, before they cut back on necessities.

Here, the news is that for the second month in a row in March YoY PCE's have now exceeded YoY real retail sales:



This is absolutely not a sign of DOOOOM!!!  But it is the kind of thing I expect to see late in an expansion.

This month as usual I will pay a lot of attention to housing reports. And first quarter earnings will start to be reported, and the reports I have read so far are forecasting relative weakness in this long leading indicator.  We'll see.

A cautionary note about employment

 - by New Deal democrat

A lot of positive anticipation seems to be building about Friday's employment report, with many people predicting 190,000 or even above 200,000.  Most of these optimistic scenarios seem to be built around the recent weeks' rebound in weekly and March data, e.g., vehicle sales.

There may indeed be a post-winter rebound, but I remain cautious about the next few months.

In the first place, initial claims have a good record of anticipating the unemployment rate with a one or two month lag:



While initial claims dropped to near post-recession lows by the end of March, the unemployment rate is more likely to reflect the January and February increases in layoffs.

Secondly, the jobs report tends to move in the direction of real retail sales with a few months' lag.  Let's first look at jobs and real retail sales as a YoY% change averaged by quarter to cut down on some of the noise:



Since the above quarterly look ends with last December, now let me show the same data on a m/m basis:



In December through February, real retail sales took quite a hit on a YoY basis.  It's likely those poor comparisons are like to show up in the monthly jobs report at some point between now and mid-year. A negative month is well within the range of reasonable probability.

Reported corporate profits as a leading indicator for stock prices: an updated look

 - by New Deal democrat

I have a new post up at XE.com updating a previous comment on corporate profits as a long leading indicator for the economy compared with stock prices as a shorter leading indicator.

Is It Time To Become Positive About the EU?

This is over at XE.com

Italian And Spanish ETFs Break Though Resistance

Both the Italian and Spanish ETFs have been consolidating for the last 2-3 months.  The Italian (top chart) in an upward sloping wedge and the Spanish in an ascending triangle.  Right now, neither break is particularly convincing.  The break out days' candles are crosses rather than strong bars.  The lack of a strong bar is more problematic because of the high volume of the Spanish break-out day.

Adding to the concern is the broader EU ETF, which has yet to break out. 

Before making a move here, wait until we get broader confirmation.

Yellen Looks At A Far Broader Set of Employment Data

This is over at XE.com

Defensive Sectors Outperforming Since January 1

 

Since the first of the year, utilities and health care have outperformed consumer discretionary, consumer staples and the financial ETFs.

US Markets Appear to be Making A Short-Term Top

The IWMs have fallen through short-term support.  Momentum is declining and the CMF is showing a slight volume outflow.  Prices are below the short-term EMAs.  The logical target is the upward sloping trend line.

The QQQs are right below the trend line on declining momentum with a slight volume outflow.  Prices are below the short-term EMAs with the shorter EMAs all moving lower.

The DIAs appear to have printed a double top with momentum declining and the CMF weak.