Daily Research Updates
Morning Briefings
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On the Road Again
(1) Playing country music backwards. (2) Willie Nelson and the economy. (3) Second Recovery scenario on track. (4) Employment rebounding. (5) So are housing and construction jobs. (6) Transportation stocks are cruising to new highs. (7) Restocking, and borrowing to do so. (8) Sentiment is wildly neutral. (9) Financial press advises investors to curb their enthusiasm. (10) Shiller says: “Who Knows Why?” (11) Analysts are rationally exuberant about earnings. (12) Valuation turning more exuberant too. (13) The secular bull case.
Bull's Anniversary
(1) Raging bull. (2) New highs despite all the headline risk. (3) Billy Joel, Fred Astaire, Ginger Rogers, and the market. (4) Record high stock prices and earnings. (5) Corporate cash assets at record despite record buybacks and dividends. (6) Fed’s doves want much lower jobless rate. (7) Wealth effect or asset bubble? (8) Payroll gains push earned incomes to new highs. (9) Consumers recoup their net worth losses. (10) Will the bull market’s leaders continue to be so? (11) “Emperor” (+).
Modest to Moderate
(1) Averting the cliff was stimulative and bullish. (2) Two shades of beige. (3) Fed’s national survey more positive than district surveys. (4) Latest employment indicators looking good. (5) Big rebound in machinery orders. (6) Good news for Industrials boosts their stock prices. (7) Weak economies weighing on the euro, pound, and yen. (8) Will rising trade-weighted dollar depress S&P 500 revenues and earnings?
Fairy Godmother
(1) The bull has a powerful friend. (2) Yellen thinks that even 6.5% is too high. (3) The wealth effect vs. asset bubbles. (4) Yellen wants more risk-taking as long as it is prudent! (5) CNBC Flash: Buffett says NZIRP is bullish for stocks. (6) US economy displays resilience. (7) Purchasing managers surveys upbeat for revenues outlook. (8) Consumers are taking recent hits in stride. (9) Construction upturn giving green light to light truck sales. (10) Joe reviews overweight-rated Financials.
Happy Anniversary!
(1) Jumping the gun. (2) So close, and not so far. (3) Is sentiment too bullish? Short answer: Nope. (4) Bull/Bear Ratio works better at bottoms than tops. (5) Four years ago, skeptics doubted revenues could grow. (6) Must profit margins revert? Yes, but no rush. (7) Forward earnings at record highs yet again for S&P 500/400/600. (8) S&P 500 Blue Angels flying high. (9) Still targeting 1665.
Pagliacci
(1) The clowns. (2) The sequel. (3) Beppe & Silvio. (4) Mario’s pledge isn’t unconditional. (5) Ben wants to take it easy for a long time. (6) Republicans won’t shut the government down. (7) Same old Kabuki? (8) China set for another round of massive urbanization. (9) Are the clowns bullish? (10) Will US economy pass latest stress test?
Dancing With Bulls
(1) Singing in the rain. (2) The view from Boston on retail investors. (3) Draghi may actually have to do whatever it takes. (4) Bernanke’s nightmare scenario. (5) A fourth anniversary for the bull? (6) Bernanke remains dovish. (7) Economy remains bullish. (8) Capital spending rebounds after fiscal cliff averted. (9) Good for Industrials that make machinery.
Home on the Range
(1) Frustrated in Rhode Island. (2) Italians elect to be dysfunctional. (3) Draghi’s pledge was conditional. (4) Bond Vigilantes will now do whatever it takes. (5) Back home, housing is looking better and better. (6) A housing shortage? (7) Rising home prices reduce negative equity. (8) Homeowners’ equity rising faster than prices. (9) Building opportunities for construction workers. (10) Good for confidence. (11) More upside for housing-related stocks.
Echo Panic
(1) A fourth year of same-old-same-old worries? (2) Euro Mess, Sequester Drag, and China Syndrome--again. (3) The Italian job. (4) Monti is no longer so super. (5) Spending cuts will weigh on US GDP. (6) China will grow. (7) Bernanke will be dovish this week. (8) Revenues had a good Q4. (9) Forward earnings at new record highs again.
Catch-22
(1) Sanity and insanity. (2) Problematic situations. (3) Suspending logic. (4) Bernanke, Yellen, and Dudley likely to prevail. (5) Draghi’s financial success fails to revive economy as reform movements falter. (6) Italy’s comedian. (7) Hollande’s policies weighing on French economy. (8) Tapping on the brakes again in China? (9) What if Abe loses his big bet on weaker yen?
Goldfinger
(1) Attacking Fort Knox. (2) Gold was a great buy. (3) Central banks hoarding gold. (4) Bulls on the run. (5) Not enough fear for gold. (6) Easing off easing. (7) Draghi’s immaculate intervention has been a drag for gold. (8) Abe talks down the yen. (9) QE has lost its punch. (10) The debate has started at the Fed. (11) Gold and TIPS. Gold. One of my favorite movies is “Goldfinger.” Released in 1964, it is the third in the James Bond series and also the third to star Sean Connery. Who can forget the famous scene where Bond asks Goldfinger: “Do you expect me to talk?” Goldfinger responds: “No, Mr. Bond, I expect you to die.” Needless to say, Bond lives to die another day and foils Goldfinger’s plot to increase the value of his gold by dropping an atomic bomb on Fort Knox. Over the past few years, I’ve been asked on several occasions about my opinion on gold. I responded that my problem with gold is that I only know how to value assets with coupons, dividends, or earnings. I also observed that the price of gold had already increased sevenfold since January 20, 2001. That was when George W. Bush gave his first inaugural address. It was $265 per ounce back then, and soared to a record high of $1,895 on September 5, 2011 (Fig. 1). It was even a better buy in 1964, when "Goldfinger" was released and gold's price was pegged at $35 an ounce, as it had been since 1934 and remained until Nixon took the US off the gold standard in 1971. Yesterday, the price tumbled $41 to $1,563, down $229 from last year’s high and $332 from the record high (Fig. 2). (Add our Gold to MyPage by clicking .) The recent plunge in the price of gold happened despite a bullish Valentine’s Day press release just last week from the World Gold Council, the London-based industry group. It reported that central banks boosted gold purchases by 29% to 145 metric tons in Q4-2012, an eighth successive quarter of net buying. In the full year, the central bank bought 534.6 tons of the precious metal--the most since 1964, when Goldfinger plotted to nuke Fort Knox! On the other hand, demand for gold in India was down 12% last year and flat in China. ETF demand rose 51% last year, but was down 16% q/q during Q4-2012, as many hedge funds bailed out. Other than profit-taking, what might be the fundamental reasons behind gold’s weakness? It has been a crowded trade, as evidenced by the high levels of net long positions held by both large speculators and small traders, according to the Commodity Futures Trading Commission (Fig. 3). With so many bulls around, the lack of upside price momentum since late 2011 must have convinced some of them, especially the big hedge funds, to lighten up.
A Walk in the Park
(1) FDR’s investment strategy. (2) A depressing headline with an upbeat twist. (3) Volatility:1930s or 1990s? (4) Low VIX, volume, and valuation. (5) 2003-2007 again? (6) Earnings boost buybacks, which boost EPS. (7) Virtuous and vicious spirals. (8) The bright side of revenues & earnings. (9) G20 group hug in Moscow. (10) Easy money is still the only solution to all the problems. Strategy I. As I wrote at the end of January, we seem to have nothing to fear but nothing to fear. In his first inaugural address on March 4, 1933, Franklin Delano Roosevelt famously said, “[T]he only thing we have to fear is fear itself--nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” Actually, the bull market in stocks since March 9, 2009 has converted plenty of retreats into a solid four-year advance with the S&P 500 up 126.3% since then, and only 2.2% from its record high. Yesterday, Bloomberg posted an article titled, “Volatility Falls Most Since 1930s as Stock Funds Gain.” It was an attention grabber because it seemed to imply that stocks could crash again as badly as back then. However, the actual article was a very well balanced analysis, which is typical of Bloomberg. The bottom line of the article appeared in the second paragraph: “Average daily price moves for the Standard & Poor’s 500 Index have fallen to 0.43 percent in 2013 from an average 1.08 percent the past five years, the steepest decline for any corresponding period since the 1930s, according to data compiled by Bloomberg. The last time the annual average was this low was 1995, when the S&P 500 surged 34 percent and doubled in the next four years. Stocks gain an average 17 percent during years when the gyrations are so small, the data going back to 1928 show.” Got that? It’s either the secular bear market of the 1930s or the secular bull market of the 1990s. I pick Door #2. Let's have a closer look at some of the latest stock market indicators: (1) Vix. Sure enough, the VIX of both the S&P 500 and NASDAQ 100 are the lowest they have been since the start of the current bull market (Fig. 1 and Fig. 2). The former is the lowest since the spring of 2007, while the latter is the lowest since the summer of 2005. Those were both good times to buy stocks as long as you sold them right at the market top during October 2007. (2) Volume. On the other hand, NYSE volume was much greater back then than it is now (Fig. 3). The bears are warning that this combination of low volatility and volume is bearish. There is too much complacency and not enough trading to confirm the bullish trend of the market. (Add our Put/Call, Volatility, & Volume to MyPage by clicking .) (3) Valuation. Maybe so. However, low volatility, low volume, and relatively low valuations all support
Innovation & Its Malcontent
(1) Professor Gordon and Reverend Malthus. (2) The worst forecast on record. (3) No more productivity-enhancing innovations? (4) Dismal scientists vs. street-smart contrarians. (5) Does the Energy Revolution matter? (6) US net petroleum imports cut in half since 1985! (7) Head in the Cloud. (8) The 10K-B.A. (9) Holding pattern: Stocks set to land or refueling for another climb? (10) Fiscal speed bumps. (11) M&A is in fashion. (12) Talking Fed heads. Innovation I. Robert Gordon is channeling Thomas Malthus, both renowned economists and social scientists. Gordon is currently a professor at Northwestern University. Malthus was the original “dismal scientist,” who lamented in his An Essay on the Principle of Population, published in six editions from 1798-1826, that famines and diseases were nature’s way of keeping population growth from outpacing the food supply: “That the increase of population is necessarily limited by the means of subsistence, That population does invariably increase when the means of subsistence increase, and, That the superior power of population is repressed, and the actual population kept equal to the means of subsistence, by misery and vice.” It was probably the most spectacularly wrong economic forecast of all times, and a classic for contrarian thinkers. Grain production soared during the 1800s thanks to new technologies, more acreage, and rising yields. During the first half of the century, chemical fertilizers revived the fertility of European soil, and the milling process was automated using steam engines. During the second half of the century, vast new farmlands were opened in the US under the Homestead Act of 1862, and agriculture’s productivity soared with the proliferation of mechanical sowers, reapers, and threshers. Professor Gordon isn’t worrying about unsustainable population growth and food shortages. Rather, he believes that the age of productivity-enhancing innovation is over. He has written a couple of thoughtprovoking articles on this subject recently in advance of a book he is publishing soon: (1) In a 12/21/12 WSJ article titled, “Why Innovation Won’t Save Us,” he grimly predicted: “Nothing has been more central to America's self-confidence than the faith that robust economic growth will continue forever. Between 1891 and 2007, the nation achieved a robust 2% annual growth rate of output per person. Unfortunately, the evidence suggests to me that future economic growth will achieve at best half that historic rate. The old rate allowed the American standard of living to double every 35 years; for most people in the future that doubling may take a century or more.” (2) Last year, in a widely discussed September study, Gordon claimed that the three industrial revolutions since 1750 might have fueled a "one-time-only" increase in standards of living and productivity over the past 250 years. It really is a very interesting paper, positing that smartphones and
Asia's Bubble
(1) From Shanghai to Toronto. (2) Canada’s condo bubble is leaking. (3) China’s balance of payments math shows capital outflows. (4) Are manufacturers outshoring from China? (5) Capital inflows invading China’s neighbors. (6) US business sales growth held up well last year. (7) Retail sales are not so weak. (8) Investors remain bullish on retailers, and so do analysts. China. The Chinese bubble is bursting! It isn’t doing so in Shanghai’s stock market, which has soared 31% since late last year, but rather in Toronto’s condo market, which has been inflated by lots of Chinese money. Nevertheless, China’s foreign exchange reserves and merchandise trade data suggest that money is pouring out of China, and probably inflating bubbles elsewhere and closer to home. Let’s have a look at the latest developments: (1) Toronto’s condo mania. Last year, on Monday, April 23, I wrote: “Toronto is experiencing a condominium bubble, with 132 or so high-rises under construction. I learned that on Friday, when I visited our accounts in that fast growing cosmopolitan city. It is attracting 500,000 new residents a year. It Is also attracting lots of hot money from Chinese buyers, some of whom are reportedly buying entire floors in the new condo developments. Vancouver has also been hit with condo mania. Last week, Bank of Canada Governor Mark Carney said that higher interest rates ‘may become appropriate.’” Yesterday’s WSJ reported, “The once red-hot condominium market here [in Toronto] is suddenly teetering, as sales plummet and prices ease.” Currently, about 150 high-rise buildings are going up in the city. The glut of new units has been exacerbated by a 23% y/y drop in sales during Q4-2012. After increasing 119% since early 2000, the average price of a Toronto condo unit fell 1% y/y. That’s not much, but it could be the beginning of the end for Toronto’s bubble. The Chinese might be looking for other places to invest their money abroad, thus setting the stage for more bubbles. (2) A new imbalance in China’s balance of payments. China doesn’t provide monthly data on its international balance of payments, but there are enough clues in the monthly merchandise trade and foreign exchange reserves to conclude that something big is happening in China. Capital stopped pouring into China last year, and started to leave. Official data show that the merchandise trade surplus, on a 12-month sum basis, has widened by $70 billion y/y through January, when it totaled $235 billion, the highest since October 2009 (Fig. 1). Yet China’s non-gold international reserves, as tallied by the IMF, have been flat since early 2011 following many years of gains (Fig. 2). There are lots of missing data that I need to assess China’s balance of payments properly. In addition,
Hot & Sour
(1) Macro picture improving for global growth, revenues, and earnings. (2) Tracking global growth with oil demand, production, and exports. (3) Emerging economies are doing most of the heavy lifting. (4) Mixed bag for EM stocks. (5) Some EMs can decouple from advanced economies better than others. (6) Brazil and India have some issues. (7) China has lots of bank loans. (8) Japan joins the easing party in Asia. (9) India's woes. (10) Raining on Brazil's carnival.
Breakout or Breakdown?
(1) Riding the bull isn’t easy. (2) Silvio the spoiler? (3) Janet’s cheerleading didn’t charge up the bulls. (4) Seeking a catalyst for new highs. (5) Gushing about oil output in US and Canada. (6) Saudis are still the swingers. (7) World oil demand confirming better global economic growth. (8) Oil still has a geopolitical risk premium. (9) China's oil demand suggests faster economic growth.
Bernanke’s Check List
(1) Give the credit guy credit. (2) Obama picked the bottom. (3) Fed fed the bull. (4) Ben’s missions accomplished and unaccomplished. (5) Is the big wealth effect just an illusion? (6) Cranking up the asset-inflation machine. (7) Stein’s “overheating mechanism.” (8) Evans: QE could stop before 7% jobless rate. (9) Cleveland’s concerns. (10) Global positives. (11) “Side Effects” (+ +).
The Future Is Back
(1) Paradise lost and found. (2) The future is making a comeback. (3) Corporate flows feeding the bulls. (4) The Great Rotation? (5) The fiscal cliff turned out to be bullish. (6) Yearend bulge in bonuses and dividends. (7) The January Barometer. (8) Three major positive trends for the future.
Purchasing Managers: Our BFFs
(1) Insightful friends. (2) Been around for a while. (3) Are they seeing an upturn in the US and global economies? (4) PMIs are useful leading indicators for S&P 500 revenues and earnings. (5) US may be leading global upturn. (6) Services strong in Germany and China. (7) Export orders and employment weak in China's manufacturing sector.
Latest Worry List
(1) Back to the wall. (2) Same old, same old. (3) Accentuating the negatives again? (4) Three scenarios: Rational exuberance (60%), irrational exuberance (30%), and panic attack (10%). (5) Hitting the payroll tax wall? (6) Gasoline prices making the news again. (7) Middle East rattling oil market, as usual. (8) Spain and Italy again.
Goldilocks Is Back
(1) Not too cold, not too hot. (2) The downside of a melt-up. (3) Goldie’s shoes. (4) Too many charging bulls? (5) Room for more bullish sentiment and spreads. (6) P/E of 14 = 1600 on S&P 500 & 15 = 1700. (7) Payroll report was just right. (8) Next big debate at the Fed: Blowing bubbles again? (9) Inflation remains on ice, but expectations are heating up. (10) Barrage of bullish data sends bears packing. (11) Go With the Flow. (12) What’s leading and lagging the 2013 rally?
Silver Linings Playbook
(1) King of Prussia. (2) Silver linings in Philly. (3) The new hot topic: An inflationary boom. (4) The Success Scenario. (5) Global Boom-Bust Barometer looking up. (6) Not so fast: What about all that fiscal drag? (7) Putting the air back in the housing bubble. (8) If labor market continues to tighten, wage inflation will rise. (9) Bond yields rising along with inflationary expectations. (10) No boom in revenues yet. (11) Margin expectations may be too optimistic.
Too Much Good News?
(1) Jeremiah was bearish. (2) Today’s bears: Prophets or spoilsports? (3) A misleading leading index. (4) S&P 500 forward earnings confirms good economic news on orders and sales. (5) What’s troubling consumers? (6) No surprises in economic surprise index. (7) Regional surveys don’t jibe with upbeat national PMI. (8) Draghi’s “whatever it takes” triggers “positive contagion.” (9) Euro-TARP winds down. (10) TARGET2 balances less imbalanced. (11) Lending still falling in euro zone.
Nothing to Fear but Nothing to Fear
(1) Fully invested bears worrying about too many bulls. (2) A red flag signaling that the bull will be gored? (3) Bull makes front page of NYT. (4) The fourth phase of the bull: Exuberance. (5) Worrying about missing a melt-up. (6) Corporate cash flows, not investor flows, driving bull up to now. (7) S&P 500 tracking buybacks plus dividends. (8) Retail investors may be ready to join the party.
Energy Independence Dividends
(1) Declaration of energy independence. (2) Independence dividends include less spending on oil imports and defense. (3) Reshoring of manufacturing and a secular bull market in stocks are also big dividends. (4) Chinese can defend Saudis. (5) US oil output soaring. (6) US is the new Saudi Arabia of oil and gas. (7) Matt Damon’s dry hole. (8) Obama will fix the climate. (9) Carbon tax? (10) “Quartet” (+).