Sunday, February 8, 2015

Your Weekly Update

The good news on oil is that its price is up nearly 20% off the January 29 bottom. The bad news on oil is that its price is up nearly 20% off the January 29 bottom (I really like $2.something gas). When we hear, as we have lots lately, that the stock market is up due to the bounce in oil prices, the underlying suggestion has to be that oil is cheap because the economy's in trouble and, therefore, a spike in its price denotes good news for growth going forward. Well, if we're talking the U.S. economy, clearly, it ain't in trouble. Europe? Yeah, definitely some weak spots there. Asia? Depends on where you're looking. Bottom line, if you just landed on earth after a seven-month tour of deep space to find oil prices 60% cheaper than they were when you took off, you'd almost have to conclude that we're in the midst of a great global recession. And you'd be wrong. So, no, higher oil prices---given present dynamics---are not good news for the stock market. Unless, that is, a rally in oil sector stocks inspires the broader market to follow. Perhaps, but no...

As I've been reporting, the drop in oil is not about weak global demand, it's about huge global supply. And while rig counts in the U.S. are declining rapidly (as producers, for now, abandon their least profitable assets), global production continues to outpace global demand---although I expect that to change in the coming months. Plus, crude inventories are at a multi-decade high.

So what explains the dramatic jump in the price over the past few days? Well, while oil is indeed a commodity with much transparency in terms of the fundamentals, in the short-run its price is dictated by traders playing the headlines, covering shorts, and/or anticipating future market conditions. In the long-run it's all about the latter (which is predicated on the fundamentals). And, yes, ultimately, we should assume that the current glut will subside and the price will move sustainably higher---perhaps during the latter half of this year. Given the gluttyness of the current glut, however, I can't help but wonder if the recent spike isn't a bit of a head fake. We'll see...

Current themes:

Central Banks:

As I've reported, outside the U.S. it seems that central bank officials are in the mood these days to make friends with their people. I mean everybody likes an easy-(as in easy credit conditions)-going soul. Last week Australia's central bank cut interest rates a quarter of a percent and China's lowered bank reserve requirements (creates more money for lending). This makes for optimism over their respective stock markets and, if not optimism, complacency over their bonds. When it comes to investing, complacency, by the way, can be a very dangerous thing.

Oil: see above

The Consumer:

Friday's jobs number confirms that the U.S. consumer indeed has reason to feel good. The really striking consumer-related statistic of last week, however, was the huge jump in revolving credit---up $5.8 billion in December alone. American consumers increased their revolving debt by a whopping $30 billion in 2014, versus $10 billion in 2013. Yeah, I know, from a you-and-me standpoint, that doesn't sound so good---I've been counseling folks for years to pay off those damn credit cards every month. But as an indicator of how the consumer at large feels about his/her prospects going forward, this is huge.

When we drill down into the employment number, we find that retail and construction took the top two spots in job gains. Which speaks to what I've been reporting on the consumer and the housing market of late.

Average hourly earnings are up 2.2% over the past year. While that doesn't sound like much, it beat the rate of inflation by a good 30%. Look for wages to trend higher as the labor market continues to tighten. And look for signals from the Fed that they're fixin to raise interest rates, albeit ever so slightly, in the not too distant future.


The new Greek government's struggle to hold its fragile economy together, which will require a serious reneging on its campaign promises, will be no small contributor to the headlines in the weeks to come. As those headlines hit, expect those sounding optimistic to result in a rising Euro and rallying stock markets, and those sounding pessimistic to provoke the opposite.

Germany's Merkel and France's Hollande reported to have had a constructive dialogue with Russia's Putin while paying him a visit last week. While recent evidence suggests that Putin is nowhere near conceding on the Ukraine, a legitimate deal, resulting in a ceasefire and a lifting of sanctions, would be huge for the Eurozone---not to mention Russia itself. And it would surely spark, at least for a moment or two, a global rally in stocks.

While heavy skepticism is warranted, the three parties are at work this weekend formatting an agreement that could, they say, ultimately resolve the conflict.

As for the day-to-day in the Eurozone, some things are beginning to look up for the major economies. Last week's Eurozone Manufacturing Purchasing Managers Index (PMI) (a survey of manufacturing executives) came in at 51 (above 50 denotes expansion), with Spain registering an impressive 54.7 and Germany hovering just above the expansion line, at 50.9---while Italy and France remain in contraction mode, at 49.9 and 49.2 respectively. As for the services sector, the Services PMI for the zone came in at 52.7, with Spain, Italy and Germany all showing expansion (56.7, 51.2 and 54 respectively) and France lagging at 49.4. And, lastly, Germany's factory orders rose 4.2% in December, against expectations of 1.5% and a decline of 2.4% in November.

While in no way should we break out the bubbly on Europe just yet, sentiment, at least, appears to be improving.

Q4 Earnings:

Of the 323 of the S&P 500 companies having thus far reported, an impressive 77.7% have bested analysts' expectations. On the revenue side, 55.9% did better than expected. The rate of growth however has been nothing to write home about, 5.6% and 1.1% respectively. Of course the energy sector, seeing declines of 19% and 17% in earnings and revenue respectively, is no small influence on the overall numbers.

The Stock Market:

Last week saw the best performance in U.S. stocks in quite some time. According to CNBC, the Dow was up 3.84%, the S&P 500 rose 3.03% and the NASDAQ Composite gained 2.35% on the week. Using ETFs as our proxies, non-US markets did fine as well: EFA (tracks the Morgan Stanley Europe, Australia and Far East Index) was up 2.09% on the week, while FEZ (tracks the Euro Stoxx 50 Index) gained 1.25%. VWO (tracks the FTSE Emerging Markets Index) was up 1.95%.  (The non-US data is in U.S. dollar terms)

Here's a look at each of the above on a year-to-date basis:

Dow Jones Industrials:  +0.01%

S&P 500:  -.07%

NASDAQ Comp:  +0.18%

EFA:  +2.73%

FEZ:  +1.33%

VWO:  +1.75% 

Sector by sector:

Energy, as you might expect (given the spike in oil prices), saw the biggest gains last week. XLE (tracks the S&P Energy Sector Index) rallied 5.65%. XLF (tracks the S&P Financial Sector Index)---on the back of a rise in interest rates---came in a close second at 4.9%. XLB (tracks the S&P Materials Sector Index) came in 3rd with a 4.68% gain.

Other sectors worth noting: Consumer Discretionary, based on the performance of XLY (tracks the S&P Consumer Discretionary Index), jumped 4.21%, while IYH (tracks the Dow Jones U.S. Healthcare Index) came in flat on the week, at +0.46%. The big loser---on the back of a rise in interest rates---was utilities, with XLU (tracks the S&P Utilities Sector ETF) posting a 3.64% decline.

Here's a look at those sector ETFs, and a few others, on a year-to-date basis (according to CNBC):

XLE (ENERGY):  +0.83%


XLB (MATERIALS):  +2.76%


IYH (HEATHCARE):  +2.26%

XLU (UTILITIES):  -1.40%



XLK (TECH):  -0.60%

IYT (TRANSP):  -2.27%


In last weekend's commentary I attempted to put a rough January into proper perspective by urging you to view the stock market as an "antifragile" (benefits from stress) entity. Again, periodic market downturns are an essential aspect of the long-term investing process. As I stated in our year-end letter, and several commentaries since, I expect financial markets in 2015 to exhibit the kind of volatility that will challenge the resolve of many a short-term investor. Good thing you and I think long-term!

The Bond Market:

As I suggested above, complacency can be a very dangerous thing. In my view U.S. bond investors have been the definition of complacent for a very long time. And who can blame them when the U.S. economy, until recently, has delivered probably the most sluggish expansion in its history and the rest of the developed world is sporting interest rates near zero, or below. I.e., there's been little risk of inflation here at home, and the U.S. treasury has offered the most attractive yields among the world's safest debt issuers. Not to mention how the strengthening dollar has enticed foreign investors into the U.S. bond market.

So what might alter the debt investor's paradigm and inspire him to give up his treasury bonds? Well, it could be a number of things. Not the least of which would be signs that the U.S. economy is gaining momentum and that the Fed will have to begin raising interest rates sooner than later. Bond prices took it in the chin last week as the yield on the 10-year treasury jumped from 1.66% to 1.95% (that's a 17% increase). Another excuse would be a sudden decline in the dollar (I know, that contradicts the present economic backdrop and the prospects for higher interest rates. But the consensus lives in that camp, and the consensus is very often wrong). Should, let's say, the Eurozone begin to show real signs of life and, thus, the Euro begin to gain against the dollar, we could see money fly out of treasuries in a big way as those carry-traders (they borrow in low-yielding, declining currencies and invest in higher yielding, strengthening currencies) rush to exit their positions: A reversal in the currency exchange trend can be a killer (say you borrowed 1 Euro and lent it in the U.S. at a $1.12 exchange rate. If the dollar moves to $1.20/Euro, you no longer have enough dollars to pay back your Euro loan).

Suffice it to say that the bond market (as well as other interest-rate-sensitive sectors [think utilities]) is in a precarious position these days. Short-term rates at zero while the economy is gaining momentum is an utterly unsustainable scenario.

Here are last week’s U.S. economic highlights:

FEBRUARY 2, 2015

THE GALLUP CONSUMER SPENDING MEASURE shows daily spending dropping to $81 in January, from $98 in December. January, however, generally sees a big drop, given the holidays. This January's estimate is stronger than those from January 2009 to January 2012.

MARKIT'S MANUFACTURING PMI shows steadiness when compared to December's reading (53.9 vs 53.9). The strong readings came from output and employment. Softer readings came from exports and new business growth. Oil and gas prices were cited as a factor holding down new business.

PERSONAL INCOME AND OUTLAYS for December paints a relatively positive picture of the consumer and inflation. Here's Econoday's commentary:
The consumer sector has been volatile on a monthly basis for spending while income growth has been steadier. Meanwhile, inflation has been weak. Personal income grew 0.3 percent in December after advancing 0.3 percent in November. Market expectations were for a 0.3 percent rise. December matched expectations. The wages & salaries component increased a modest 0.1 percent, but followed a jump of 0.6 percent the prior month.

Personal spending decreased 0.3 percent, following a boost of 0.5 percent in November. Analysts projected a dip of 0.2 percent for December.

Durables fell 1.2 percent on a swing in auto sales, following a rise of 1.8 percent in November. Nondurables, tugged down by gasoline prices, decreased 1.3 percent after decreasing 0.3 percent the prior month. Services edged up 0.1 percent, following a 0.5 percent spike in November.

PCE inflation remained weak-largely due to lower energy costs. Headline inflation decreased 0.2 percent on a monthly basis, following a drop of 0.2 percent in November. Forecasts were for a 0.3 percent drop. Core PCE inflation was flat in both December and November. December matched expectations.

On a year-ago basis, headline PCE inflation decelerated to 0.7 percent in December from 1.2 percent the prior month. Year-ago core inflation posted at 1.3 percent in December compared to 1.4 percent in November. Both series remain below the Fed goal of 2 percent year-ago inflation.

Overall, the consumer sector on average remains moderately healthy. The next key number for the consumer sector is Tuesday's data on motor vehicle sales. Meanwhile, the Fed can be comfortable with remaining loose with inflation so low.

 THE ISM MANUFACTURING INDEX confirms what other surveys have been reporting of late, which is a slower pace of growth in the sector. January came in at 53.5 vs December's 55.5. Still, readings above 50 denote expansion. It'll be interesting to see how the sector reports, with the optimistic consumption backdrop, in the months ahead.

CONSTRUCTION SPENDING in December rebounded .4%, after declining .2% in November. Year over year shows a 2.2% increase. The private residential component rose .3% after rising .1% in November. If I'm right in my optimism over the housing market going forward, this component will show continued strength in the months to come.

FEBRUARY 3, 2015

MOTOR VEHICLE SALES came in in line with estimates, at 16.7 million. This was .2 million down from December's reading.

THE JOHNSON REDBOOD RETAIL SALES result shows the  year over year increase back in expansionary mode (above 3.5%) at 3.8%... I anticipate better readings on this one going forward (on balance)...

US FACTORY ORDERS came in weak at -3.4%. Ex-ing out defense goods and civilian aircraft (2 volatile components), durable goods orders actually rose .1%, which is the first positive reading in 4. Non-durable goods were lower for the 6th straight month; of course oil would be the major influencer here.

FEBRUARY 4, 2015

MBA PURCHASE APPLICATIONS last week slipped for the third week in a row, down 2.0%. Year over year, however, they're up a modest 3%. Refinances were up 3% last week, after dropping 5% the week prior. My optimism over housing suggests that we'll see purchase apps pickup in the months to come.

THE ADP EMPLOYMENT REPORT shows yet another 200k+ reading (213k) for January. While this is off the 220k consensus estimate, this is healthy job growth. December's number was revised up to 253k, from 241k.

THE GALLUP U.S. JOB CREATION INDEX for January came in at 28, up from December's 27, and just below last September's seven-year high reading of 30.  U.S. workers' perception of hiring at their places of employment are the most positive for any January since Gallup began this survey back in 2008. Also, the consumer's confidence regarding the U.S. economy is up noticeably from December...

THE EIA PETROLEUM STATUS REPORT shows a crude oil build of 6.3 million barrels. I have been skeptical of the recent jump in oil prices, citing short-covering and reactions to the rumor over fighting in Kirkuk, Iraq. Despite the falling U.S. rig count, global oil production continues to exceed demand, although the two are getting closer. There's no doubt that reducing capacity, all things being equal/or demand picking up, will lead to a bottoming of the price. But given present production and inventories, it doesn't make sense that oil will rebound significantly in the very near future. Oil prices are down a whopping 7.6% today. Gasoline and distillate inventories are also higher, 2.3m and 1.8m respectively.  This is good news for the consumer of course...

MARKIT'S SEVICES SECTOR PMI is showing strength, at 54.2 vs 53.3 in December. Employment remains a very positive component.

THE ISM NON-MANUFACTURING (I.E. SERVICES) INDEX is holding solid at 56.7, was 56.2 in December. New orders came in at a strong 59.5. Interestingly, employment dropped a noticeable 4.1 points to 51.6. That's inconsistent with most other surveys.

FEBRUARY 5, 2015

THE CHALLENGER JOB CUT REPORT registered a big increase in December. 40% of the $53,041 announced layoffs came from the energy sector, and 12% from retail (coming off of the holidays).

THE GALLUP US PAYROLL TO POPULATION RATE stayed virtually steady in January, 44.1%. It is, however, the highest January since 2010...

THE US TRADE DEFICIT widened to 46.6 billion in December, from 39.0 billion the prior month. This tells us that demand is healthy in the U.S... It should, however, serve to lower the Q4 GDP estimate... It also, I'm sure, speaks to the increasing value of the U.S. dollar.

WEEKLY JOBLESS CLAIMS came in at a very positive 278k last week. The prior week's very good 265k number was somewhat attributed to the four-day workweek. Last week's low number, however, represented a full 5 days. The four-week average dropped to 292,750. This represents a reversal of trend, as prior to the 265k week, the number had been trending higher.

Continuing claims, reported with a 1-week lag, rose 6,000 to 2.4 million, with a 4-week average of 2.421 million. The unemployment rate for insured workers remains at 1.8%, a recovery low.

NONFARM PRODUCTIVITY declined at an annualized 1.8% in Q4 vs a .2% estimate and a 2.3% rise in Q3... Output increased by 3.2% against a huge 5.1% gain in hours worked (the biggest since Q4 1998). Productivity was flat over  the past year with output and hours worked both increasing 3.1%. UNIT LABOR COSTS increased 2.7% (.9% increase in hourly compensation plus the 1.8% decline in productivity). Unit labor costs increased 1.9% over the past year.

The manufacturing sector's productivity increased 1.3% in Q4, as output increased 5.7% against an increase in hours worked of 4.3%. For the past year manufacturing productivity grew 2.8%, as output increased 4.8% and hours worked increased 1.9%. UNIT LABOR COSTS in manufacturing increased .2% in Q4.

THE BLOOMBERG CONSUMER COMFORT INDEX edged lower last week, at 45.5 vs 47.3 the previous week. Despite the decline, 45.5 is still a very healthy read---the second best since July 2007. It's been my observation over the years that consumer sentiment surveys are influenced by the state of the stock market. January marked the worst month in a year for the S&P 500. According to the survey, the stock market reflected most in the attitudes of top wage earners. Of the various income groups tracked, just one, $50-75k, showed an increase in optimism.

NAT GAS INVENTORIES fell 115 billion cubic feet last week to 2,428 bcf.

THE FED BALANCE SHEET grew .3 billion to $4.5 trillion last week.

M2 MONEY SUPPLY grew by $67.5 billion last week.

FEBRUARY 6, 2015

THE BLS JOBS REPORT (THE EMPLOYMENT SITUATION SUMMARY) showed an increase in payrolls of 257k in January.  November and December were revised substantially higher, +70k to 423k in November and +77k to 329k in December. Unemployment ticked up slightly to 5.7% from 5.6%, which reflects an increase in the labor force participation rate of .2%: I.e., an economically positive increase in the unemployment rate. Retail and Construction offered the two biggest contributions, which speaks to recent consumer optimism and a positive outlook for housing...

Clearly, labor market slack is beginning to wane, although the number of part-time employed who would prefer  full-time work remained essentially unchanged. Among the marginally attached to the workforce, the number of discouraged workers (those who aren't currently looking for work because they believe no jobs are available to them) dropped by 155k from a year ago.

Average hourly earnings are up 2.2% over the past year.

CONSUMER CREDIT jumped $14.8 billion in December which speaks to the optimism of today's consumer. Revolving credit soared by $5.8 billion, that's a big jump for this component. The rise in revolving credit speaks volumes about the consumer's present level of of optimism.


  1. […] from imploding, which resume on Monday, will bear fruit kick the can further down the road. Like I said last week, expect good news out of Russia to spark a rally in global stocks, and good news out of Greece to […]

  2. […] on February 8th, I suggested that the then spike in oil prices (up to the mid-50s) could turn out to be a head fake. I […]