Weekly Indicators for August 11 - 15 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is up at XE.com.

With increased geopolitical and international economic concerns, the US is benefitting once again from a flight to safety.

Industrial production and nonfarm payrolls: As Good as It Gets, Millennium edition

 - by New Deal democrat

The index of industrial production has grown at nearly a 5% rate in the past year (blue in the graph below), which is as good as it has been since the turn of the Millennium with the brief exception of 2010 vs. the 2009 depths of the recession:

Similarly, nonfarm payroll growth (red), at about 1.9% YoY, is also as good as it has been since the turn of the Millennium.

In other words, where we have been over the last 12 months is what passes for the economy firing on all cylinders at any point in the last 15 years.

Just to put that in perspective, here is the same data going back to 1983:

You can see that the last 15 years have been pathetic compared to the 15 years before that (and the 1980s and 1990s weren't as good as the 1960s and 1970s).

US consumers have been slowly tightening their pursestrings

 - by New Deal democrat

I have a new post up at XE.com, discussing the state of the American consumer in view of yesterday's flat retail sales report.  Time is running out on some fort of relief.

Weekly Indicators for August 4 - 8 at XE.com

 - by New Deal democrat

My Weekly Indicator column for this week is up at XE.com.  Here we are in the dog days of summer, and the numbers are like a lazily and happily snoozing pooch.

International Week in Review: The ECB Blows It Edition

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/international-week-review-ecb-blows-it-edition

A better measure of labor utilization

 - by New Deal democrat

Every month there seems to be a debate about the strength, or lack thereof, of the recovery in jobs since the depths of the Great Recession.  Professor Paul Krugman's back of the envelope measure has been the employment to population ratio in the 25 to 54 age group.  This takes care of the confounding issue of Boomer retirements, but on the other hand, it doesn't take into account changes in, for example, the trade off between work and child care costs in terms of employment decisions.

With that in mind, I've been working on a better, more detailed metric for labor utilization.

It seems to me that a better, more granular view of labor utilization can be obtained by measuring the hours of work available in the economy to those who are  working or want to work.  This can be obtained by dividing aggregate hours worked by the total of the civilian labor force plus those not in the labor force but want a job now. Here's what that looks like:

Even that can be improved slightly.  There are some people who only want to work part time (for example, older persons who no longer need a full time job for medical benefits, or to put aside money for their children's education).  This metric has changed slightly over time, and depending on economic conditions.  When we adjust by subtracting those people who only want to work part time, here's what our measure of hours available to those who want to work full time:

Even this measure isn't perfect, since we don't know how the average number of hours desired, or worked, by those who only want part time work, has changed over time. But as you can see, there is very little difference between the two graphs.

Both graphs show that, as compared with the tech boom in the late 1990s, even at its peak, the last economic expansion had a shortfall of 4% of hours available to work, and our current expansion is about 2% below that, or 6% less than the peak of a bona fide economic boom.  On the other hand, its current measure is equivalent to early 1996 or 2006, which weren't exactly awful.

In summary, not awful, but not a boom either.   We probably need to add at least 2% to the total hours available, i.e., exceed the 2007 peak, before we have a reasonably comfortable employment situation.

UPDATE:  Since series "Not in labor force, want a job now" only goes back to 1994, we can't trace the exact metrics back before that time.  But if we simply divide aggregate hours by the civilian labor force, we get a similar metric that takes us all the way back into the 1960s:

The net result is that we are probably about 2% shy of the aggregate hours that would be consistent with strong labor utilization.

Don't Expect a Rate Cut In Australia Anytime Soon

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/dont-expect-rate-reduction-reserve-bank-australia

DEATHMATCH! Hurricane vs. volcanoes

 - by New Deal democrat

As many of you probably recall, I frequently check the webcams at Kilauea volcano in Hawaii.  Usually the summit and the outlet cone quietly steam away, and the lava politely flows downhill towards the Pacific Ocean, but a few times a year, something of more interest like the opening of a new vent happens.

As to which, enter Hurricane Iselle.  Not only is this the first full fledged hurricane forecast to hit the Big Island since about forever, its currently forecast track takes it directly over Kilauea. Since Kilauea isn't having an explosive eruption, we won't see how a full fledged ash cloud interacts with hurricane wall clouds.  But, assuming the webcams stay in operation, we may see plenty of steam from the interaction with the lava flows and underground hot spots.

The bigger Deathmatch will probably be won by Mauna Kea and Mauna Loa, the two 15,000 foot high volcanoes that dominate the island. I imagine they will rip apart much of the upper architecture of the hurricane.

Anyway, tomorrow should be an interesting day to watch!

The apartment boom of 2014: more building, low vacancies, higher rents

 -by New Deal democrat

I have a new post up at XE.com taking a detailed look at the apartment boom, which is the only part of the housing market that has been growing in the last year.

My table didn't transfer correctly to XE, so read the story over there, and then come back and look at the table below:

Year	Median Asking Rent	Usual weekly earnings	Rent as % of earnings	Real median asking rent
1988	330	382	86	649
1992	401	437	92	677
1993	422	450	88	690
2000	478	568	84	658
2002	545	607	90	717
2004	620	629	99	777
2009	723	732	99	797
2012	721	765	94	740
2013   Q1	718	770	93	722
2013  Q2	735	776	95	741
2013  Q3	736	778	95	738
2013  Q4	746	782	95	746
2014  Q1	766	791	97	763
2014  Q2	756	782	97	746

The REAL "real unemployment rate" for July 2014

 - by New Deal democrat

This is a slow week for data.  That being said, there is some worthwhile updated information on labor utilization, the housing market, and wages.  There's actually a lot on wages, but I want to wait for Friday, when 2Q unit labor costs are reported, before writing up that grand tour.

Today, let's update the "real real unemployment rate" for July.  This is my corrective for those commentators who have put together metrics that either assume there is no retiring Baby Boom, or rely upon nearly decade-old estimates.  There's simply no need for doing so, when every month the Census Bureau publishes the seasonally adjusted number of people who have completely stopped looking for work, but would nevertheless like a job now.

The first important thing to note is that, since the US Congress cut off extended unemployment benefits at the end of last year, this number, which had been in significant decline in 2013, has completely stopped and in fact has started to rise again:

This means that the "real real unemployment rate" (red) has declined less than the official U3 unemployment rate (blue) as shown in the graph below:

Since last November, while U3 has declilned by -0.8% from 7.0% to 6.2%, the "real" unemployment rate has only declined -0.5% from 10.3% to 9.8%.  Here's the close-up of that:

 Aside from the thoroughly preventable human tragedy, this has negative multiplier effect on consumer spending, and so is a self-inflicted drag on the economy.  The U6 calculation of underemployed vs. the "real underemployment rate" follows the same trajectory.

Has the Russell 2000 ETF Formed a Double Top?

Weekly Indicators for July 28 - August 1 at XE.com

 - by New Deal democrat

This week's installment is up at XE.com.  The news remains positive, but less so in comparison with recent weeks.

July 2014 jobs report: excellent job creation, poor wage and participation omens

- by New Deal democrat

HEADLINES:

• 205,000 jobs added to the economy
• U3 unemployment rate rose from 6.1% to 6.2%

Wages and participation rates

• Not in Labor Force, but Want a Job Now: up 144,000 to 6.259 million
• Employment/population ratio ages 25-54: down from 76.7% to 76.6%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up +0.2% or $.04 from $20.58 to $20.61, up 2.0% YoY

May was revised upward by 5,000 to 229,000. June was also revised upward by 10,000 to 298,000. 

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 July show little progress being made on those two fronts.

Those who want a job now, but weren't even counted in the workforce were 4.3 million at the height of the tech boom, and were at 7.0 million a couple of years ago.  They have actually slightly risen this year. As noted above they were 6.3 million in July.  This is almost certainly due to the cutoff in extended unemployment benefits by Congress at the end of last year.

After inflation, real hourly wages for nonsupervisory employees were probably unchanged from June to July. The YoY change in average hourly earnings is +2.0%, essentially equal to the inflation rate, so workers are making no real progress at all.

Finally, while the unemployment rate rose, it rose for the "good" reason.  The civilian labor force rose measured by the household survey rose by 329,000, while the number of new jobs in the same survey rose by 131,000.

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

• the average manufacturing workweek fell by -2 hours from 41.1 to 40.9.  This is one of the 10 components of the LEI, and will have a significant negative impact.


• construction jobs increased by 22,000. YoY construction jobs are up 211,000, or about 4%.  This is good news.


• manufacturing jobs  increased by 28,000, and are up about 144,000 YoY.


• temporary jobs - a leading indicator for jobs overall - increased by 8,500.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - increased by 177,000 to 2,587,000 compared with December's 2,255,000 low.

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

• The average workweek for all nonsupervisory workers was unchanged at 33.7 hours.


• Overtime hours fell 0.1 hour to 3.4 hours.


• the index of aggregate hours worked in the economy rose by 0.2% from 108.5 to 108.7. 


• The broad U-6 unemployment rate, that includes discouraged workers increased from12.1% to 12.2.


• The workforce creased by 329,000.  Part time jobs for economic reasons decreased by -33,000.

Other news included:

• the alternate jobs number contained in the more volatile household survey increased by 131,000 jobs.  The household survey jobs numbers had been lagging the establishment survey numbers, but as expected this difference has now been almost entirely made up, with the household survey showing a 2,066,000 increase in jobs YoY. 


• Government jobs increased by 11,000.

• the overall employment to population ratio for all ages 16 and above rose 0.1% from 58.9 to 59.0%, and has risen by +0.3% YoY. The labor force participation rate rose from 62.8% to 62.9, and has fallen by -0.5% YoY (but remember, this includes droves of retiring Boomers).

In summary, the excellent news is that the headline employment number was good once again.  Jobs are increasing so far this year at the rate of 2.76 million, or nearly 2% of the workforce.  This is the 12th best rate in the last 40 years, and the best since 1999.

The bad news is that no progress at all is being made on the discouraged long term unemployed, or on wages.  Only the prime working age participation rate is increasing.  The likelihood of a return to decent wage growth and full employment before the next recession hits is fading.

Russell Index Down For the Month

Japanese Industrial Production Is Sending Concerning Signals

This is over at XE.com

http://community.xe.com/blog/xe-market-analysis/japanese-industrial-production-sending-concerning-signals

2nd quarter GDP: good report, more later UPDATED

 - by New Deal democrat

Obviously, at +4.0% annualized, this was a good report (but if you have been reading the Weekly Indicators, you already suspected as much).  Plus, I have reason to believe the adjustments in the next couple of months are more likely to push it higher rather than lower.

I'll have more in a few hours over at XE.com, and I'll update with a link below when that happens.

UPDATE: My extended comments are now up at XE.com.  I think there is a 50/50 chance Q2 GDP is revised upward to over 5.0%.  But there are reasons for concern about 2015.

Will Housing Market Weakness Keep the Fed on the Sidelines Longer?

This is up over at XE.com.

CLFD: When Bad Things Happen to Good Companies

To completely date myself, I have an old copy of Graham and Dodd's Securities Analysis in my bookshelf.  This is the Fifth edition which I purchased in the late 1980s and is heavily dog-eared   I also have the sixth edition on my Kindle.  What I love about these books is they really teach you to focus on the company as a whole, rather than just looking at the top line of the earnings statement. 

In fact, the book places far more emphasis on the balance sheet than most other analysis books out there.  This makes a tremendous amount of sense to me, as it really focuses on how management is going about the business of growing the company. 

This explains why I love companies that have strong balance sheets, which brings me to Clearfield Communications.   This company has a very strong balance sheet, with a current ratio of 5.4 and a cash ration of 2.5.  These numbers are indicative of their performance over the last five years.  And their defensive interval ratio has increased from 147 in 2009 to 187 in their latest annual report.  Return on assets is just as impressive averaging 15% over the last five years.

And earnings have been strong.  In their first quarter they reported strong year over year growth:

Revenues for the three months ended December 31, 2013 were $16,148,000, an increase of approximately 57% or $5,883,000 from revenue of $10,265,000 for the first three months of fiscal 2013.  Revenues to broadband service providers and commercial data networks customers were $15,077,000 in the fiscal 2014 first quarter, versus $8,912,000 in the same period of fiscal 2013.  Revenues to build-to-print and OEM customers were $1,071,000 in the fiscal 2014 first quarter versus $1,353,000 in the same period of fiscal 2013.  General softness in the U.S. telco market was more than offset by a large, ongoing build of a U.S. based existing customer.  Also, international sales increased over 160% compared to the first quarter of fiscal 2013 to more than a million dollars.  In addition, increases were driven in part by new product offerings in the access network that drives fiber closer to the home, business and cell tower (FTTx). Operating results for the first quarter of fiscal year 2014 are not necessarily indicative of results to be expected for future quarters or the entire year, due to variability in customer purchasing patterns, seasonality of the business, and operating and other factors.

And the results from their latest report were just as impressive:

Net sales for the second quarter of fiscal 2014 ended March 31, 2014 were $13,214,000, an increase of approximately 26% or $2,700,000 from net sales of $10,514,000 for the second quarter of fiscal 2013.  Net sales to broadband service providers and commercial data networks customers were $12,170,000 in the second quarter of fiscal 2014, versus $9,563,000 in the same period of fiscal 2013.  Among this group, the Company recorded $2,197,000 in international sales, versus $623,000 in the same period of fiscal 2013.  Net sales to build-to-print and OEM customers were $1,044,000 in the second quarter of fiscal 2014 versus $951,000 in the same period of fiscal 2013.  The Company allocates sales from external customers to geographic areas based on the location to which the product is transported.  Accordingly, international sales represented 17% and 6% of total net sales for the second quarters of fiscal 2014 and 2013, respectively.

So, we have a company with a rock solid balance sheet and strong earnings.  I bet the stock has been rallying, right?

Not really:

Since posting a high of 26.59, the stock has moved lower, closing yesterday at 13.08. 

Let's take a longer look at the chart to get an idea for what's happening.

At the end of 2012, Clearfield was trading between 4 and 5 per share.  For most of 2013, Clearfield rallied very strongly, increasing a whopping 564% from their low of 4 to their absolute high of 26.59.  While I seriously doubt most investors made that much money, there were probably a fair amount that did very well. 

While the earnings reports were very strong, they did miss estimates, although the second miss was by a mere 2 cents.

What's really happening is this: traders and investors who made money in 2013 are unloading their shares, handing them over to the next round of Clearfield bulls.  Let's take a look at some basic, back-of-the-envelope calculations using some of the basic methodology presented by Gann in his book Truth of the Stock Tape and Wall Street Stock Selector to determine when this process might be done.

The company has 13.42 million shares outstanding.  According to NASDAQ, they have a roughly 27% institutional ownership and a 50 day average volume of 190,000.  Let's assume that institutions are buy and hold, meaning the actual effective float is about 9.796 million.  At a 190,000 average volume the complete available float will turn over in 51.55 days which is 2.5 months in trading time (the trading week is only 5 days).  Obviously, it will take a bit longer for the shares to change hands from the investors who purchased during the 2013 rally, so we're probably looking at around 5-6 months for this handoff. 

However, this time calculation is only an estimate.  And, of course, you should keep your eyes on the chart for other potential entry points.  But, assuming that Gann was right, we have a few more months at least of this process.

The information contained herein has been obtained from sources or data that we believe to be reliable, but we do not offer any guarantees as to its accuracy or completeness. Market information is subject to change without notice and past performance is no guarantee of future results. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security or other instrument.



 

The housing market halfway through 2014: a comprehensive report

 - by New Deal democrat

Wtih this morning's report on pending home sales, housing data from the first half of 2014 is in the books. At the end of last year, I politely disagreed with Bill McBride a/k/a Calculated Risk, about the direction of the market this year.  Bill thought average starts and sales would be up 20%.  Based on increased interest rates, I believed they would be down by about -100,000 at some point this year.  Except for one outlier in housing starts in April, neither has panned out so far, with data coming somewhere in the middle.  With that summary, let's take a detailed look at housing through midyear.

As I wrote last month, the housing market tends to cycle in a regular order:

• 1st, interest rates turn
• 2nd, permits, starts, and sales turn
• 3rd, prices turn
• 4th, inventory turns

Because of the time lag, prices and inventory may still be reacting to a move in interest rates that has since reversed - and that appears to be the case now.  Let's look at where each of those points in the cycle stands.

Interest rates

First, here is a graph, covering the last 30 years, of the YoY% mortgage rates (inverted so that higher rates give a lower value, blue) vs. housing permits, YoY change in 100,000's (red):

Here's a close-up of the last 5 years:

Interest rates on mortgages went up from 3.4% in early May 2013 to a high of 3.6% in August of last year.  On 16 of 19 occasions since the end of World War 2, that big a change led to a YoY decline of at least -100,000 in permits. In this case, housing permits have since drifted back lower, down to 4.1% at the end of June of this year, and in the last month have been on average about -0.3% lower than they were at this time last year.

The YoY decline in interest rates indicates that we should shortly start to see some improvement in permits, sales, and starts, although probably muted since rates have not returned to 2013 lows.

Permits, starts, and sales

Here is a graph of the change, in thousands, YoY of starts (blue), permits (red), new home sales (green), and existing home sales (orange) (note that the St. Louis FRED does not track pending home sales):

Next, here is the YoY% change in the same four statistics:

Both of these graphs show the clear deceleration in the housing market through 2013 and into 2014.  With the sole exception of housing starts in April (a more noisy series than permits), which may have been a bounce-back from an unexpectedly dismal winter, all of the major series have been dead in the water this year. New and existing home sales have been consistently negative, and permits up only +2% in the first half of 2014 compared with the first half of 2013.

This morning, pending home sales were reported as down -1.1%  from May to June, and down -7.3% from June of last year, which was also the index's post-housing bust high.  It further appears that February of this year was the subsequent low in reaction to higher interest rates. The index is up +9% on a seasonally adjusted basis since that time.

In summary, through June 2014:

• Permits are down -10% from their October 2013 high
• Starts are down -19% from their November 2013 high
• New home sales are down -10% from their January 2013 high
• Existing home sales are down -6% from their July 2013 high
• Pending home sales are down -7% from their June 2013 high

As I noted a month ago, May new home sales were as big an outlier to the upside as March was originally reported to the downside, so a significant revision was very possible.  March was subsequently revised about 10% higher, and May has now been revised over 10% lower than as originally reported.

The impact of demographics on permits, starts, and sales

I suspect the situation this year is analogous to the late 1960's (one of the four exceptions to the rule that rising interest rates cause an actual decrease in sales), when Boomers first reached adulthood and the existing apartment stock was nowhere near adequate to the task.  Multi-unit starts skyrocketed, despite higher interest rates, while single family homes languished. It was an era of generally rising interest rates, and any temporary decline in interest rates was met with heightened housing activity.

Now it is Millennials. Now as then, it is only multi-unit (apartment) construction that is carrying the recovery in housing this year. Single family home starts and sales have completely stalled.  Here is a graph of the YoY% change in single family house permits (blue) and multi-unit permits (red) since the beginning of 2011:

Since late 2013, multiunit construction has been entirely responsible for any increase in residential construction. Single family home construction has completely stalled.

Prices

Prices continue to increase, but YoY the price gains are decelerating at various rates depending on the index.  Let's start by showing the YoY% change in median prices in the Case Shiller 20 city index:

The YoY% change in median prices for new homes (red) and existing homes (blue): shows even further deceleration:

Finally, it is worth noting that the same deceleration is also showing up in the data at Depatment of Numbers Housing Tracker. I used this database of asking prices, which is updated weekly, to call in real time both the top of the housing boom in 2006, and the bottom of the housing bust in 2012.  What is particularly noteworthy is that in 2006, it was the asking prices for houses in the 75th percentile (more expensive homes) which turned first.  Now prices for those same more expensive houses are showing the most deceleration of all, as shown in this table, which shows the YoY% change for each percentile of houses for sale nationwide:

Month	25th percentile	50th percentile	75th percentile
Jun 2013	6.3	7.4	7.5
Sep 2013	12.0	10.9	7.9
Dec 2013	13.3	11.2	7.8
Mar 2014	13.8	10.7	6.3
Jun 2014	14.3	10.9	5.9
Jul 2014	12.0	9.1	4.7

Inventory

With housing prices still increasing, albeit at a reduced rate, we would expect to find more inventory entering the market, as potential sellers hope to take advantage of the improved pricing situation.  And that's exactly what we find. Below is the graph of combined new and existing home inventories:

The inventory of houses for sale is not just increasing, but it is increasing at an accelerating rate YoY.


In summary, through midyear 2014:

• Higher interest rates since May 2013 have brought growth in single family home building and sales to a complete halt. Only demographics-driven building of apartments and condos is supporting growth.  With interest rates turning slightly lower YoY as of June, there will probably be renewed vigor in housing permits, starts, and sales by the end of this year.  We have either already seen the interim bottom in permits, starts, and sales, or will shortly.
• Decelerating and/or YoY declining sales have existed long enough for prices gains to decelerate, although they haven't turned negative on a YoY basis.  Since prices are seasonal, it is difficult to tell, but the peak may already have occurred. 
• Although prices are decelerating, they are still higher YoY and thus inventory is continuing to pour onto the market.  This will probably continue, but will begin to decelerate between now and the end of this year.

In short, as of midyear 2014, the trends in the housing market are reacting in their normal order. Interest rates have turned positive, sales are bottoming, prices are increasing at a quickly decelerating rate YoY and may actually have peaked, while inventory is still increasing smartly and is likely to continue to pour onto the market for a while longer.

Dollar Tree Buying Family Dollar

On June 12th, I explained the reasoning behind Icahn's buying a 9.4% stake in Family Dollar.  Today, Dollar Tree has agreed to by Family dollar at a solid premium. 

Nice trade, Carl.