October jobs report: solid improvement, except for discouraged workers

- by New Deal democrat

HEADLINES:

• 214,000 jobs added to the economy
• U3 unemployment rate fell from 5.9% to 5.8%

Wages and participation rates

• Not in Labor Force, but Want a Job Now: rose 188,000 from 6.349 million to 6.537 million
• Employment/population ratio ages 25-54: up 0.2% from 76.7% to 76.9%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.04 to $20.70 up 2.2% YoY

August was revised upward by 23,000 to 203,000. September was also revised upward by 8,000 to 256,000. The net revision was +31,000.

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 October continue to show a little progress on wages, and mixed results on participation.

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.  Since Congress cut off extended unemployment benefits at the end of last year, they have actually risen by over half a million, and this month were 6.537 million.

On the other hand, the participation rate in the prime working age group has made up over 40% of its loss from its pre-recession high.

After inflation, real hourly wages for nonsupervisory employees probably rose from September to Ocotbe. The  nominal YoY% change in average hourly earnings is 2.2% somewhat better than the inflation rate.

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

• the average manufacturing workweek was unchanged at 40.8 hous.  This is one of the 10 components of the LEI.


• construction jobs increased by 12,000. YoY construction jobs are up 464,000.  


• manufacturing jobs  were up 15,000, and are up 170,000 YoY.
• 
  
• Professional and business employment rose 37,000 and is averaging a 56,000 monthly gain for the last year.


• temporary jobs - a leading indicator for jobs overall - increased by 15,100.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - increased by 90,000 from 2,383,000 to 2,473,000, compared with last December's 2,255,000 low.

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

• Overtime hours were down from 3.5 hours to 3.4 hours.


• the index of aggregate hours worked in the economy rose sharply by 0.5 to 101.9


• The broad U-6 unemployment rate, that includes discouraged workers decreased from 11.8% to 11.5%


• Part time jobs for economic reasons decreased by -76,000 to a total of 7.027 million.

Other news included:

• the alternate jobs number contained in the more volatile household survey increased by 683,000 jobs.  This is a 3,8 million increase in jobs YoY vs. 2,643,000 in the establishment survey. 


• Government jobs increased by 5,000.

• the overall employment to population ratio for all ages 16 and above rose 0.2% from 59.0% to 59.2%,  and has risen by +1.0% YoY. The labor force participation rate rose from 62.7% to 62.8%, and is unchanged YoY - an actual improvement!  (and remember, this includes droves of retiring Boomers).

Oveall this was another solid report. Not only did unemployment go down,but it went down for the right reasons, i.e., employment was up and so was the civilian labor force participation rate.  Part-time for economic reasons also declined.    Revisions to past reports continued to be positive.

Of the important metrics I am watching now, adjusted for inflation, nonsupervisory wages probably also rose this month, albeit slightly.

Additionally, higher paying construction, manufacturing, and business and professional service jobs are showing consistent improvement.  In other words, with continued improvement in overall employment, it looks like the manta that the economy is only adding low paying jobs is beginning to give way.

The one big sore spot is the continuing increase in people who have completely stopped looking, but want a job now.  On the other hand, the  employment to population ratio among the prime 25-54 working age group made a new post-recession high, and is over 40% back to pre-recession levels - not great, but improvement nevertheless.

Hmmmm... I see a pattern here

 - by New Deal democrat

[Note:  regular economic blogging will resume with the Jobs Report tomorrow morning]

Gloria Borger, CNN:

Now voters demand change elections more often than they don't. Consider this: Republicans win the Senate in 2002, then lose it in 2006. The Democrats hold the Senate until losing control of it last night -- predictions are that they might be in a good position to take it back in two years.

At some point, someone might start listening: Voters are steaming. They're anxious.... .... [W]hat happened last night is not a communications problem. It's a governing problem. Almost 8 out of 10 voters who voted yesterday don't trust the government to do the right thing 

David Atkins, Digby's blog

[T]his was yet another wave election. The latest in a long string since 2006. It needs to be said again.

Turnout keeps declining in midterm elections as people lose faith in the political process. And the people who do vote, consistently vote for someone to change something. It's entirely likely that people will be fed up with Republicans fighting one another and putting terrible bills on the President's desk and vote again for change in the other direction in 2016--particularly with a larger, more progressive electorate. Not a given, of course, but likely.

And why not? The country is broken, and everyone who isn't already wealthy knows it. ....  And it seems like absolutely nothing is going to change any of that, no matter who gets into office....

 Eventually this will reach a breaking point. It has to. It'll break when some sufficiently large crisis occurs, and one side is fully prepared to use that seething rage for constructive outcomes. 

The party that is more ready for that moment will be the one that makes real policy changes. Until then, we'll just keep surfing waves ....

 Markos Moulitsas:

In 2004, Republicans won big, and Democrats were left trying to figure out what went wrong.

Then in 2006, Democrats won big, and they decided everything was fine. Republicans merely shrugged it off as the 6-year-itch that bedevils parties that hold the White House in a president's last midterm.

2008, Democrats won big again, and Republicans were left fumbling for excuses, but mainly decided it was Bush's fault and an artifact of Barack Obama's historic campaign.

In 2010, Republicans won big, so they were validated. All was fine! Democrats were left fumbling.

In 2012, Democrats won big, so they decided everything was fine. Demographics and data to the rescue! Republicans decided to rebrand, until they decided fuck that, no rebranding was needed.

And now in 2014, Republicans are validated again in the Democrats' own 6-year-itch election. Democrats are scrambling for answers.  

And I'll tell you what the future looks like:

In 2016, Democrats will win big ....

In 2018, Republicans will win ....

Then in 2020, Democrats will win ....

.... And that cycle won't be broken until 1) the Democrats figure out how to inspire their voters to the polls on off years, or 2) Republicans figure out how to appeal to the nation's changing electorate.

Let me distill this down to its essence. In a legacy two party system from which there appears to be no escape, voters have no choice but to throw the current crop of bums out, and give the other crop of bums another chance, until one or other of the groups of bums actually starts addressing their problems.

Unit labor costs flat

 - by New Deal democrat

This morning the BLS reported Unit Labor Costs. This measures how productive labor is, by measuring it per unit of production.  The index rose slightly in the 3d Quarter, but 2nd Quarter ULC were revised downward, making the index essentially flat this year:

Note that over the last few years, however, unit labor costs have risen slowly (which is good for labor).   This is also shown when we measure ULC by their YoY% growth:

(ignore the upward and downward spikes from 4Q 2012 and 2013, which were due to tax strategies by corporations in anticipation of the ending of the Bush tax cuts).

Finally, corporate profits deflated by unit labor costs is a long leading indicator. Here it is measured YoY for the last 65 years:

A negative number doesn't guarantee a recession in the next year or so, but it does most of the time, and further, there has almost never been a recession without being preceded by a negative number.

Finally, let's zoom in on the last 10 years (note this only goes through Q2, but corporate profits have generally been positive, so we should see another positive number when this is reported next month).

This shows ULC growing slightly less than profits for the last several years.  While I'd like to see better improvement in labor's position, this does suggest strongly that 2015 will be another positive year for jobs.

Average weekly earnings and the Employment Cost Index have also risen off their post-recession bottoms.  Tomorrow in the jobs report we will get our first read on how that is carrying over into the 4th Quarter.

A disengaged oil choke collar + rising wage growth is almost pure good news

 - by New Deal democrat

I have a new post up at XE.com.  Falling commodity (gas) prices plus rising wages has been a sure sign of continued growth, going back 50 years.

A little post-election-day economic balm

 - by New Deal democrat

Perchance you would like to ponder something other than politics this morning.  In that case, let me offer you some economic balm.

The likelihood is that absolutely nothing is going to get done in Washington in the next two years.  In fact, I expect - and hope - that exactly one thing happens, and that is that the US does not default on its debts via a Debt Ceiling Debacle even worse than the one we had in 2011. (and please, pretty please, Obama, resist the urge to cave in to a "grand bargain" on your way out the door).

If Washington can simply manage to do absolutely nothing to the economy in the next two years, except to agree to pay already incurred debts (a/k/a lift the debt ceiling), then we are in the best position we have been in for nearly a decade for the economy by itself to improve the lot of the working and middle class appreciably.

Here's why:

• there is nothing in the long leading indicators to suggest that we are going to enter an economic downturn at any point in at least the next 9 months.  If interest rates continue to drift lower and housing starts improve as a result, you can extend that forecast into 2016.
• continuing economic growth means continuing positive monthly jobs reports
• so long as there is positive jobs growth, and initial jobless claims stay at or near their current levels, the unemployment rate is going to continue to decline -- and that's not just the usual rate, but all the other variations on the unemployment rate as well.
• Because the unemployment rate should remain below 6.5% for the foreseeable future, that means that nominal wage growth, which has been improving for the last 18 months, will continue to improve further - i.e., to 2.5% YoY or 3.0% YoY.
• Also, incremental tightness in the labor market is going to mean that better paying jobs become an increasing share of employment - my hypothesis is that this recovery is no different from previous recoveries, where low wage jobs get added first, and higher wage jobs get added later. Like the expansion after the deep 1982 recession, there was so much slack that it took a long time for those higher paying jobs to show up. There is evidence from the last few jobs reports that it is beginning to happen.
• Unless there is a reversal in gas prices, this is going to mean significant real wage growth to the average working family.

In short, simply leaving the economy alone for the next 2 years is likely to mean a continued improvement in the jobs picture, and a significant improvement on the wage front. Or, if ever there was a time when laissez faire might be a perfectly decent policy, this point in the cycle is it.

Just the probabilities, I know. Lots could go wrong. But the above scenario isn't just plausible, among the plausible scenarios, it is the most likely.

Initial jobless claims forecast 280,000 +/-80,000 jobs created in October UPDATED

 - by New Deal democrat

The level of initial jobless claims has been doing a good job in this expansion of forecasting the general level and direction of both employment and the unemployment rate.  While I haven't been able to do a formal regression analysis, the below scatter graph, showing the level of initial jobless claims on the bottom axis, and the monthly change in employment on the left axis, shows that for every 10,000 monthly average decline in jobless claims, there has been an increase of 10,000 to 12,000 jobs in the monthly jobs report:



Keeping in mind that in October we had the lowest initial jobless claims reports since 2000, the midpoint of the distribution for the October jobs number is about 280,000.  With the exception of a few outliers, jobs reports have typically come within 80,000 of that midpoint, giving us a range of 200,000 at the low end and 360,000 at the high end.

Also, since initial claims tends to lead the trend in the unemployment rate by several months, I am expecting a further decline in that rate from 5.9% within the next two months.

And since the unemployment rate has been a good leading indicator for nominal wage growth, I am also expected nominal wages for nonsupervisory employees to improve from their present 2.2% YoY in the next several months as well.

========================

UPDATE Wed. Nov. 5

Many thanks to Craig Eyermann at Political Calculations, who via Doug Short ran the regression on the above data. Here's theactual mathematical  regression:

Eyermann cautioned: "On the  whole, I would describe the overall correlation as fairly weak - I wouldn't use the regression to attempt to predict either value."

Erm, uh, well, since I already did that, I guess we'll just sit back and see what happens on Friday!  FWIW, the regression does suggest a result centered on 261,000.

Consumers' (accurate) bifurcated take on the economy - and why that isn't good for Democrats

 - by New Deal democrat

 Naked Capitalism picked up a piece from Wolf Richter the other day (subsequently copied-and-pasted by the Pied Piper of Doom) entitled, The shrinking piece of a barely growing economy: why the Glorious Economy of ours feels so crummy.  It's ultimate conclusion is,

Since PCE is used to adjust GDP for inflation, “real” economic growth has been systematically overstated by understating inflation. If GDP had been deflated over the years with CPI, instead of PCE, that measly 2.3% growth of per-capita GDP since 2007, as crummy as it may appear, would likely benegative. And that explains why so many people – struggling with soaring rents, medical expenses, college costs, etc. – find that their slice of the economic pie has been shrinking since the financial crisis.

Is the economy actually "shrinking?"  Do consumers really think it's "crummy?"  Although the facts do not support either of these assertions, as we will see the benefits have skewed towards those whose incomes normally are associated with GOP voters.

The first clue that this is a cherry-picking Doomer piece is the use of the present progressive tense, to convey the sense of an ongoing trend, and the selection of a specific starting point.  Now, there are good reasons not to use GPI as the GDP deflater, since GDP measures a lot more than consumer activity, even though it is the largest component, but let's pass that.  Richter's claim that if GDP were deflated by CPI, "would likely be negative" since 2007, is easy to examine. It took be about 3 minutes to generate the graph at the St. Louis FRED.  And technically, if we simply compare Q3 2014 to Q3 2007 in that graph, indeed Q3 is 0.3% lower than the 2007 peak. 

Which make me wonder why he didn't do it.  Probably because when you graph real per capita GDP deflated by PCE (red) and compare it with real per capita GDP deflated by CPI (blue), and put it in the context of a longer term (here, 20 years), this is what you get:

Does this look like an economy that is "shrinking" to you?  Whichever way we measure, the economy per capita shrank (past tense) by 5% or 6% in 2008 and 2009, and has grown by about 6% to 7% since then, over 5 years. Since 2010, with the exception of 3   quarters in 2011, real per capita GDP has grown at a similar rate regardless of whether DPI or PCE is used as the deflator:

Not only that, but real per capita disposable income has made a new high as well:

So, if I were happy with GDP in 2007, why wouldn't I also be happy now, if on a per capita basis, it is less than 0.3% from the peak quarter of that year?

Assuming that is true, then the answer, presumably, is that the benefits of the expanding economy for the last 5 years have by no means been evenly shared, something Richter mentions in only one sentence, with no data in support.

This is also easy to examine.  Here's a graph of the labor share of GDP.  This has sunk like a stone since the turn of the Millennium, before stabilizing at a very low level in the last 4 years:

Now let's deflate real GDP per capita by this labor share, and see how the average worker is experiencing GDP:

Since the labor share has not significantly improved after plummeting in the recession, the average worker, unlike GDP as a whole, has not returned to their level of financial well-being in 2007 - although even for them the situation has improved significantly since the bottom.

 Here's an alternate way of looking at the same thing. This is average hourly wages, deflated by the CPI, and deflated further by the unemployment rate.  This gives us a good measure of the average income received those who are working plus those who want to work, but haven't found a job:

Note that after flatlining pretty much since the Millennium, it has turned up in the last 18 months or so.

And that's what consumers are telling the pollsters. Here's the Conference Board's consumer confidence measure:

And here's the similar measure by the Univesity of Michigan:

Note that the present conditions index for each, while not all the way back, is close to where it was in the last expansion.  And here's a look at Gallup's economic confidence index as well, first over the longer term:

And now for the last year:

Note the improvement here as well.

And remember this graph, when Pew Research recently asked people if they though the economy was recovering:

All of these measures are similar to what we saw above when we looked at the hard economic data.

So, on the whole, consumers don't think the economy is "crummy," either.  More like "meh," neither particularly good nor particularly bad.

But here is the most telling and interesting breakout of that confidence, from Bespoke Investment via Cam Hui, comparing confidence among those earning more than the median (red), and $30,000 - $50,000 (blue):

Note the big difference - in fact, the biggest divergence in the history of the series. The choice of colors is appropriate. The more affluent tend to be Republican, the less so, Democrat.  Affluent  Republican voters - who usually have higher turnout anyway - appear to be reasonably satisfied with the economy, and thus likely to support GOP incumbents. Democratic leaning members of the working class are still as pessimistic as they were 10 and 20 years ago - with no compelling reason to reward Democratic candidates, who haven't been touting any program to deal with the ongoing malaise.

US Equity Market Review For The Week Of October 27-31

     Texans have a saying: if you don't like the weather, wait 10 minutes and it will probably change.  So, too, is the character of the current US equity markets.  Three weeks ago the market experienced a sell-off, leading some commentators to once again argue the market was over-valued and that the long-awaited correction (which was going to be large) was upon us.  In response, I argued that the underlying economic fundamentals didn't support that conclusion (Last week, I also theorized that the US markets were in a slow-motion downward rally to their 200 day EMA last week, so I'm certainly not perfect).  Two weeks ago, the markets formed a v-shaped bottom from which they have been rallying ever since. 

     The rally has gained momentum from two important sources.  The first is a very strong initial 3Q US GDP reading:

Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 3.5 percent in the third quarter of 2014, according to the "advance" estimate released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 4.6 percent.
And the second is a massive liquidity injection from the Bank of Japan:

Bank of Japan Governor Haruhiko Kuroda yesterday expanded what was already unprecedented monetary stimulus, delving deeper into financial markets to boost purchases of assets from government debt to real-estate investment trusts. Hours later, the Government Pension Investment Fund, helmed by Takahiro Mitani, said it would put half its holdings in local and foreign stocks, double previous levels. The Topix index soared the most in a year, leading a rally in equities around the world, as the yen plunged to the weakest since January 2008. 

Both of these events are very equity positive, contributing to the current rally. 

     The 30-day SPY chart really highlights this rally.  Prices started at a low of 181.92 mid-way through trading on the 15th.  Since then they've been rallying, using various EMAs as technical support.  There have been five intra-day gaps higher and several consolidation areas to support these gains.  Also note there have been no major sell-offs along the way; prices have continued to move higher in a solid technical manner.  This is a very impressive technical rally.

     The daily chart also shows a solid rally.  Prices have quickly rebounded from below the 200 day EMA and are now in record high-territory.

     Adding to the upward momentum is a very bullish development in the micro-cap index.  The overall trend shown in its daily chart has been downward since the beginning of February.  But prices last week ended just about technical resistance.  Underlying indicators -- the rising MACD and CMF along with a strengthening RSI index -- point to a continued move higher. 

     And last week's overall performance is also very encouraging.  Tech, financials, industrials and cyclicals all did well. 

     The primary areas of concern are still in the bond market.  Last week, the Fed announced it was ending QE -- although they will still be reinvesting principal payments.  This statement  takes one of the largest bids out of the fixed income market.  But the bond market didn't meaningfully sell-off.  Instead, both the 7-10 year charts (top) and 20+ year charts (bottom) continued a slow but consistent move lower.  Both also remain above their respective yearly trend lines.  This is not fatal, but simply something to keep an eye on.

     While the rally has been impressive, the S&P 500 still faces strong headwinds in the form of high valuation.  According to the WSJ's market data report, the PE ratio stands at 18.68 with a dividend yield of 1.96%.  While this isn't over-bought, it's a pretty hefty current valuation.  And according to the same source, the forward PE is 16.65 -- again, not overbought but a not exactly a value proposition.  Earnings are growing, but not at a blockbuster rate.  From Zack's Research:

Including all of this morning’s earnings announcements, we now have now Q3 results from 245 S&P 500 members that combined account for 60.2% of the index’s total market capitalization. Total earnings for these 245 companies are up +4.3% from the period last year, with 70.2% beating earnings estimates. Total revenues for these companies are up a much stronger +4.6%, with 52.7% beating top-line estimates. 

But starting next quarter, we'll start to see a negative impact as companies with a moderate to high level of international sales exposure will have a higher dollar lowering their earnings.

     So, in conclusion, we're where we were a few weeks ago: a market that is pretty expensive that has decent earnings growth potential but whose various companies also face some a weak international environment and a stronger dollar.  That limits the upside potential a bit.

Weekly Indicators for October 27 - 31 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com . It may have been Halloween yesterday, but there was nothing scary in this week's economic data.

Average US gas price falls to below $3 a gallon!

 - by New Deal democrat

According to price graphs from GasBuddy, in the last 24 hours average gas prices in the US nationwide have fallen to $2.99 a gallon:

Here's the same graph expanded to the last 4 years:

This may seem tiny.  After all, if I bought $50 of gas a week one year ago, and the price falls by 10% compared with a  year ago, that only means an additional $5 in my pocket.  But for many lower income families, that $5 is a significant addition to the ability to support themselves.  Now multiply by about 130 million households for just one week's impact on the economy.

I have no idea how long this will last.  But for now, this is about as close to unalloyed good news as you can get.

Employment cost index shows some improvement on the wage front

 - by New Deal democrat

This morning the BLS released its quarterly Employment Cost Index. And the news was pretty good. Overall compensation, including benefits, rose 0.7% in the quarter.  Wages rose 0.8%.  Since consumer prices actually fell ever so slightly during the quarter, the entire increase was seen in workers' paychecks.  And it is a median, rather than mean, measure, so it is not skewed by high earners.

On a YoY basis, wages rose 2.1%, and overall compensation 2.2%.  This is the best YoY improvement during the entire recovery:

On an absolute basis, and adjusted for inflation, median wages are still below their 2009 peak, but are at their best level in 3 years:

For contrast, here are inflation adjusted average hourly wages for nonsupervisory workers, a monthly measure from the jobs report:

These have also improved and are less than 1% from their 2010 high.

Not worth three cheers, or Happy Day are Here Again.  But definitely one cheer.  As the labor market slowly tightens, as predicted wages are beginning to improve.

Apartment rents still not in a bubble, despite record low vacancy rates

 - by New Deal democrat

I have a new post up at XE.com.

Apartment vacancy rates are lower than they have ever been since the series started being kept, but median asking rents, both in inflation-adjusted terms and also as a percentage of median wages, are still relatively subdued.

Weekly Indicators for October 20 - 24 at XE.com

 - by New Deal democrat

My Weekly Indicators piece for last week is Up at XE.com

The recent theme of positve, but less strongly so continues.

September housing reports: interest rates show their effect

 - by New Deal democrat

Aaaannnd, I'm back!  Didja miss me?

Anyway, I have a new post up at XE.com, discussing how lower interest rates are showing up in slightly improving housing reports.

John "Trillion Dollar Loss" Hinderaker's Stunning Ignorance of Economics Revealed

     Over at Powerline, John Hinderaker is stating that Hillary Clinton is ignorant of economics. 

     So, let's just review Mr. Hinderaker's absolute and demonstrable history of having literally zero clue about the same topic. 

     Hinderaker was one of the numerous people who argued that the Fed's QE program would lead to a massive spike in inflation.   As we all know now, this didn't happen.   Bloomberg calculated the net investment returns a Hinderaker portfolio would have earned and came up with a net loss of $1 trillion. 

     So, before you give any credence to Hinderaker's statement, remember that if you'd followed his advice, you would have lost money.  BIG MONEY. 

    

US Equity Market Review For the Week of October 20-24

     Since mid-September, the US markets have been in a downward trajectory.  Until the 2nd week of October, this sell-off was contained; it consisted of discplined moves lower with counter-trend trades driving the market back up.  However, the week of October 13-17 saw a large sell-off on high volume as the markets sold-off in the ~5%-6% range.  This created an oversold situation at the beginning of this week, leading to a reverse trend rally as traders saw undervalued securities. 

 

 

This situation is best seen in the 30 minute SPY chart, which shows that the sell-off actually began on October 8 when the market hit a peak of 196.92, which also represented the 200 day EMA.  Prices them moved into a solid downtrend, with declining momentum and increased volatility.  The decline eventually totaled 7.6%.  The rally actually started on Wednesday the 15th, as prices broke the downtrend line on the 16th and then traded sideways on the 17th.  The big move up came on Tuesday with prices printing a gap higher at the open followed by a continuing rally for the rest of the day.  For the rest of the week, prices meandered higher.

 

 



The 5-minute weekly chart shows a continued uptrend lasting for entire week.  The big move higher was on Tuesday,  where we see the gap higher followed by a solid rally that lasted through the early morning on Wednesday.  Prices also gapped higher on Thursday, but they couldn't keep their momentum through the close.   On Friday we see a meandering rally as prices inched higher at week end.

The daily chart places everything in perspective.  The biggest event of the last month was the dip below the 200 day EMA on high volume.  But last week there are several gaps higher as prices move through all the EMAs and resistance, albeit on weaker than desires volume.

But I'm not at all convinced we're in for a continued rally, largely because of the treasury market. As the above daily chart of the TLTs shows.  Yes, prices did move lower last week, which would be expected as traders moved assets from bonds into equities to take advantage of the rally.  But there is still a year-long uptrend in place, which prices have broken once only to rebound within the same week.

And the same technical situation exists on the shorter end of the curve.

Given the price action and overall macro environment, I'm thinking we'll see the following through the end of the year:

     As I noted in the international news round up, there was an absence of bad news last week, not a plethora of good news.  That's not a recipe for a strong rally.  And there have been some pretty negative earnings news, including Amazon, IBM, McDonalds and Coke.  Here's Josh Brown on the topic:

IBM, Coca-Cola and McDonalds are three of America’s largest corporations and most well-known brands. They are true multinationals in every sense of the word and they dominate their industries both at home and abroad. They are numbers 23, 58 and 106 on the Fortune 500 list, respectively. Together, they make up 12 percent of the Dow Jones Industrial Average’s total weighting.     

This is not to say all the news has been bad; as with any earnings season, there have been some upside surprises as well.  But given the degrading international situation, the lens through which we look at events has darkened a bit, making traders more likely to see things negatively.  And that's the primary reason why I think we're in for a slow but disciplined grind lower through year end.



   

   

US Market Review For the Week of October 13-17; The Rebound Potential Is Increasing

     Last week put to rest any doubt about whether or not the market was in the middle of a correction.  Although the SPYs ended the week down only 1.09%, the index broke key support at the 200 day EMA, with the NASDAQ falling to that key technical line.   While the IWMs rebounded, closing right at the previous support level in the 106/107 level that defined their near year-long sideways consolidation, that indexes momentum (MACD) is still declining.  And the mid-cap and small cap ETFS confirmed the downtrend.  But the sell-off is hardly in bear market territory as the SPYs are only down 5.7% with the QQQs and IWMs down a bit over 6%.

     But the most important charts of the week come from the treasury market, beginning with the weekly IEFs:

 

After hitting the 98 level at the beginning of the year, prices have been on a slow but steady climb.  Notice the lack of any meaningful correction.  Instead, prices simply continued to grind higher with a slight but noticeable increase in volume since the first of the year with increasing momentum. 

And the TLTs which represent the long end of the curve, are telling the exact same story.  But both the IEFs and TLTs are nearing resistance levels established earlier this year.  And the 10 year is at 2.22 with the 30 year at 2.98 -- pretty high levels.  This may indicate the treasury rally is nearing its high.

While he's not a trader per se, Krugman hits the nail on the head in explaining the importance of the above chart:

Most obviously, interest rates on long-term U.S. government debt — the rates that the usual suspects keep telling us will shoot up any day now unless we slash spending — have fallen sharply. This tells us that markets aren’t worried about default, but that they are worried about persistent economic weakness, which will keep the Fed from raising the short-term interest rates it controls.

     In fact, with the exception of the junk bond market which has sold off recently, the other bond markets are in the middle of a decent rally:

The best-performing bond ETF for the last year has been the TLTs which have risen 17%, with the municipal market a distant second coming in a bit below 10%.  The intermediate corporate market has gained ~7.5% with the 7-10 year treasury up 6%. 

     Let's take a step back and look at some of the factors that may lead to a bond market rally:

     1.) When there is no or little fear of inflation.
     2.) When economic growth will be insufficient to provide an environment in which companies can increase revenues. 
     3.) When the annual yield payments will be at least on par with and hopefully higher than the combination of dividends and capital gains associated with comparable equities
     3.) When the risk premium offered by equities is insufficient compensation
     
Clearly number 1 is in play, as global inflation is minimal: the EU is near deflation, with no major economy is experiencing even an inflationary spike (Inflation is an issue in Russia, Brazil and India, but their respective central banks have acted aggressively in raising rates).  With inflation low, even a 2%-3% is a fair return in a slow growth environment, which leads directly to point number 2.  International markets have realigned to a "risk off" trade, caused by a realization that the EU may be in or near a deadly combination of recession and/or deflationary spiral.  This has been exasperated by negative news from Japan and Russia, leading investors to rethink their global growth calculus.  While the S&P is yielding a little over 2%, it is also fairly expensive by other multiple valuations.  Combine the high valuation levels with a potential global slowdown on the table -- and a corresponding slowdown in earnings -- and a safe asset with a comparable yield looks a bit more attractive.  And the risk off trade has already been alluded to.  Over the last month or so it's just gotten riskier.  Major international organizations have lowered their growth forecasts, military conflict is increasing and we have a bona fide global health problem.  Those three factors combined would scare any trader at least a bit.         

     All that being said, let's now turn to the equity markets, beginning with the weekly SPY chart:

 

 

Technically, the underlying environment is clearly bearish with a declining MACD and RSI, increased volume on the sell off, rising volatility and prices breaking the 200 day EMA.  But the 200 day EMA often acts as a center of gravity; when prices break below that level, they usually respond by rallying back to that point (which they did on Friday).  In the current market, that's usually because of trading programs.  But, irrespective of the reason behind Friday's bounce, bounce it did.

 

And breaking the 200 day EMA is not the bearish indicator you might think:

 

In fact, some technical analysts consider breaking below the 200-day moving average to be the official end of a bull market. So, at least according to this definition, we’re now in a bear market. (The usual definition is a 20% or more decline.)

The situation may not be that dire, however. While market-timing systems based on the 200-day moving average had impressive records in the earlier part of the last century, they have become markedly less successful in recent decades — to the point that some are openly speculating that they no longer work.

In fact, since 1990 the stock market has actually performed better than average following “sell” signals from the 200-day moving average.

 

	Next four weeks	Next 13 weeks	Next 26 weeks	Next 12 months
Following ‘sell’ signals from 200-day moving average	2.5%	5.4%	6.1%	9.7%
All other days	0.9%	2.7%	5.6%	11.7% 

 

The full article is definitely worth a read.

 

    Other charts are also pointing to the possibility that we may see at least a stabilization around these levels.

 

 

Above is a 30 minute chart of the IWMs -- the average that led the market lower, making it a decent potential leading indicator.  Since trading on the 9th, prices have been moving a bit more sideways, consolidating between the ~104 and 109 level.  Prices aren't forming a definitive pattern, making this a fairly week technical observation. 

But we're also seeing it in the IWCs -- a micro-cap ETF.  Both it and the IMWs (above) also broke through their respective 200 minute EMAs as well, a potentially bullish sign.

Adding onto the theme of a potential rebound next week, consider this chart:

Above is a three year graph of both the NASDAQ and NYSE stocks below the 200 day EMA (ignore the right hand side).  Both are at very low levels, indicating the market, at least from this metric is very oversold.  These types of conditions usually lead to traders nibbling on what they consider to be undervalued shares, as shown in the following chart:

Above is a chart with the SPYs on top and the percentage of stocks below the 200 day EMA on the bottom.  For the last three years, this level of oversold (at least on the stocks below their 200 day average indicator) has usually led to a market rebound.  And the current level on the 200 day EMA -- which we see at the end of 2011 (far left of the chart), led to the strong spring rally in 2012.

And finally, let's place this sell-off against the general US economic backdrop as expressed in the Fed's Beige Book which was released on Wednesday:

Reports from the twelve Federal Reserve Districts generally described modest to moderate economic growth at a pace similar to that noted in the previous Beige Book. Moderate growth was reported by the Cleveland, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco Districts, while modest growth was reported by the New York, Philadelphia, Richmond, Atlanta, and Kansas City Districts. In the Boston District, reports from business contacts painted a mixed picture of economic conditions. In addition, several Districts noted that contacts were generally optimistic about future activity.

The market is a leading indicator.  But there is nothing in the fundamental US economic picture indicating we're near a recession.  As I noted earlier this week, the leading and coincident indicators are in good shape, and consumer spending is at decent and sustainable levels.  That means traders aren't selling because a recession is around the corner.  Ultimately they're readjusting portfolios.  That arguably puts a higher potential bottom on the chart.

     A rebound certainly isn't guaranteed.  There is clearly a big change in the risk calculus caused by the EU, Japan and increased military conflict.  And those external events can have a domestic impact in an increasingly inter-connected world leading to lower corporate earnings and, by extension, equity prices.  It's also possible that there is simply too much downward momentum baked into the current market environment to stop now.  And, honestly, considering the overvalued nature of most shares, that wouldn't be a bad thing.  But the US markets are getting caught up in a sell-off that is arguably more globally based, while the US economy isn't showing any recessionary signs.  And there are also very important indicators pointing to oversold conditions.   Overall, the possibility for a rebound has at least increased.



    

Weekly indicators for October 16-20 at XE.com

 - by New Deal democrat

My Weekly Indicator post is Up at XE.com.

This week, at least, it turns out the US really is exceptional.

Housing permits still say: deceleration not DOOM

 - by New Deal democrat

Housing permits are one of the best long leading indicators there is.  They give us a good read on the economy 12-18 months out.

Here's a graph of permits since the beginning of 2011:

As you can see, the pace of growth started to slow down heading into 2013, and for the last 15 months they have gone sideways with a slight upside bias (in September, like almost every other month this year, they were just slightly positive YoY).

The bad news is, this is strong evidence that the economy is probably decelerating by now, and that deceleration will continue for awhile.  The good news is, there has never been a recession without permits falling at least 175,000 from a recent high.  At their worst reading this year, they were only down about -130,000 from their 2013 high.

The recent economic news, whether retail sales, or industrial production, or jobless claims, or interest rates, or whatever else you can think of, simply is not consistent with any actual downturn in the US in the near future.

US consumers paying the least for gas in nearly 4 years

 - by New Deal democrat

This post is up at XE.com.

The best way to look at this is,how much of their disposable income do US consumers have to spend on gas?  When gas prices go up, consumers have less to spend on everything else, and according to research performed by UCSD Professor James Hamilton, if there is a sharp spike, consumers tend to cut back spending by about $2 for every $1 more they spend paying for gas.

Conversely ....

Quick Technical Update on the SPYs

 

 

Above is a yearly chart of the SPYs with Fibonacci lines and fans drawn from the lowest point to the highest on the chart.  Prices are now in the middle of both the Fib lines and fans.  In addition we are just a bit below the 200 day EMA, which usually works like a center of gravity for prices.

 



Jobless claims at 264,000 set new low

 - by New Deal democrat

The 4 week moving average also set a new post-recession low.

But, oh yeah, we're sliding into recession. Sure.  Sweet jeebus, Doomers are stupid.

Neil Irwin of the New York Times has never heard of this thing called "gasoline"

 - by New Deal democrat

Today Neil Irwin of "the Upshot" tells his readers in the NYT that:

You knew all that back in December, so you would have expected that interest rates would be steady or even up significantly this year. And you would have been very wrong: Ten-yearTreasury bonds yielded 3 percent to start the year, a figure now down to 2.2 percent.

So something else is going on unrelated to the Fed or to the growth picture in the United States. And it seems to involve the outlook for inflation. 

O]the last few months [there] has been ... a sharp drop in inflation expectations. But why would that be? After all, standard economic theory would suggest that if the economy is strengthening, it should push up inflation. Workers have a better shot at getting a raise now that the unemployment rate is under 6 percent than they did when it was double digits, for example.

 That’s true, of course, but the United States is no island. And right now, there are some powerful forces pulling prices down from around the world.

Hers's a clue as to what "something else is going on."  First of all, my long leading indicators are mixed, and literally none of the short leading indicators have rolled over.

Now, to the point:  when the Fed announced it was considering the "taper" in May of 2013, Treasury yields jumped from 1.5% to over 3.0%.  In short, they grossly overreacted and have been compensating for that all of this year.

Since 1974, consumer inflation in the United States has always and everywhere been about the price of Oil.  Here's a graph of core (i.e., ex-food and energy) vs. headline inflation from Doug Short:

With Europe and possibly China weakening, the US looks pretty good.  Hence the flight to the safety of US Treasuries.

As a result of which, there has been a boomlet in refinancing mortgages, not to mention the money people who buy gas are now keeping in their pockets to be saved or spent otherwise.

Apparently Neil Irwin has never heard of this.

The US Economy Is In Decent Shape

This is over at XE.com

In saying the US economy is in "decent shape" I am not saying it is without problems.  Like most advanced economies, the employment situation could use improvement, and the lack of meaningful wage growth could crimp the expansion going forward.  But, the leading and coincident indicators say that for the next 6-9 months we can expect slow but steady growth.

The bond market: deceleration not DOOOOM

 - by New Deal democrat

I have a new post up at XE.com discussing the message of the bond market.

Russia: The next Big Problem Economy

This is over at XE.com