Tuesday, October 25, 2016

Bonddad's Tuesday Linkfest

For those of you who follow me on Twitter, I'm moving from @captivelawyer to @originalbonddad.  

I'm a Financial Adviser with Thompson Creek Wealth Advisers and an attorney with the Law Office of Hale Stewart

Demographic Changes Will Keep Rates Lower Longer

However, there are exceptions to this rule, and we may be living through an important exception at the present time. It seems that the Federal Reserve is starting to recognise that the decline in the equilibrium interest rate in the US (r*) has been driven not by temporary economic “headwinds” that will reverse quickly over the next few years, but instead has been caused by longer term factors, including demographic change.

Because these demographic forces are unlikely to reverse direction very rapidly, the conclusion is that equilibrium and actual interest rates will stay lower for longer than the Fed has previously recognised. Of course, the market has already reached this conclusion, but it is important that the Fed is no longer fighting the market to anything like the same extent as it did in 2014-15. This considerably reduces the risk of a sudden hawkish shift in Fed policy settings in coming years.

Is Wage Growth Increasing?

The Atlanta Fed's Wage Growth Tracker came in at 3.6 percent in September, up from 3.3 percent in August and 3.4 percent in July, but the same as the 3.6 percent reading for June. By this measure, there are no obvious signs of an acceleration in wage growth for continuously employed workers during the last few months.

However, the headline wage growth tracker is a three month moving average of each month's median wage growth. Interestingly, for September, the median wage growth (using data that are not averaged, sometimes called "unsmoothed") was 4.2 percent, up from 3.6 percent in August, and the highest since late 2007. This pop in median wage growth can be seen in the following chart, which compares the median wage growth (smoothed using a three-month average) with the unsmoothed monthly median.

Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to –0.14 in September from –0.72 in August.  All four broad categories of indicators that make up the index increased from August, but in September, all four categories made negative contributions to the index for the second straight month. 

Latin America's Weekly ETF Charts Are Bullish

Oil's Hitting Resistance in the Lower 50's

Monday, October 24, 2016

Gas prices turn higher YoY

 - by New Deal democrat

I've called the current state of the economy "Indian Summer," a spate of positive news during a period substantially after mid-cycle.  But eventually Indian Summer must give way to the Gales of November.  We just got our first chilly breeze.  

In the last few days, according to GasBuddy, the price of gas has turned higher YoY:

A tailwind to consumers has ended.  The problem is, it may turn into a significant headwind in the next 6 - 12 months.

Normally, gas prices fall during the autumn into winder, and then rise in spring into summer, as in the graph below from 2005-06:

The problem arises when gas prices fail to decline, or decline just a small amount, during the autumn and winter, as happened during the prior winter of 2004-05:

Gas prices rose about $1 YoY from just over $2/gallon to over $3/gallon between summer 2004 and summer 2005;

As a result, consumer inflation (red, left scale in the graph below) rose from about 2%+ to over 4%:

Now let's take that same graph and apply it to the last 12 months:

*IF* gas prices follow a similar trajectory to that of 2004-05, we should expect con sumer inflation to rise to more than 3%, and gas prices will be north of $3/gallon again.
Since YoY nominal wage increases are still averaging only about 2.7%, a similar increase in inflation will mean that real wages decline by next summer.  And that would be an important harbinger of the onset of the next recession.

Bonddad's Monday Linkfest

For those of you who follow me on Twitter, I'm moving from @captivelawyer to @originalbonddad.  

XLIs Are Starting to Outperform the SPYs

XLIs Turned Slightly Positive in the Last 10-Week Period

General Dynamics, Caterpillar, Union Pacific and UPS are the Winners So Far

UNP Has A Great Profit Margin

Earnings season picked up its pace this week, and commentary was a bit stronger this week than last week. The first week of earnings is always filled with banks and most reported good results. Their performance is especially impressive given how difficult it is for financial services companies to operate in this low interest rate environment.

The election is also front of mind for many CEOs. Almost everyone expects that the end of the presidential race will lift a cloud of uncertainty over the economy. Whether or not the election will be a lasting catalyst though depends in large part on what the next President actually does. Either way, a new President will bring change, but perhaps one more than the other.

Saturday, October 22, 2016

Weekly Indicators for October 17 - 21 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is up at XE.com.

Recently a number of indicators have wobbled.  This week both some positive and negative indicators wobbled towards neutral.

Little Stevie Hayward of Powerline Is Still an Economic Jackass

Like the other writers at Powerline, little Stevie Hayward thinks he's economically literate.  I'll pause in my writing so you can laugh.

On September 26th, he did a standard cut and paste article, citing the recent string of weak profits as a sign that the economy was in real trouble.  In a rebuttal published the next day, I noted that that the answer was actually far more nuanced.  As anyone who actually watches the market knows,  energy and basic materials sectors are largely responsible for the earnings weakness.  

Well, we're now a few weeks into the 3Q16 earnings season.  And what's happening?  Let's go to the Zack's website:

First, earnings growth for these 81 index members is not only tracking better relative to what these same 81 companies reported in the preceding quarter, but also the 4- and 12-qurater averages. In other words, the earnings growth pace has notably improved relative to the recent past.

Second, the improvement in growth on the revenue side growth is even more notable, with Q3 revenue growth for these 81 index members notably better relative the preceding quarter as well as the 4- and 12-quarter averages.

Third, positive EPS surprises for this group of companies are tracking notably above historical periods. This could be interpreted to mean that estimates may have been too low ahead of the start of this reporting season. But the reality is that Q3 estimates didn’t fall as much as had been the case with other recent quarters.  

Fourth, positive revenue surprises are also notably tracking above historical levels. Given the earlier comment about the modest negative revisions to Q3 estimates ahead of the start of this earnings season, it is reasonable to interpret the revenue trends (both growth as well as surprises) as a sign of improvement in the overall earnings picture.


The improvement in Q3 growth following the strong recent results indicated that we could very well end up modestly in positive territory for the quarter. But there is no question about expectations for Q4 and beyond, with positive growth is expected to resume in Q4 and ramp up in the following quarters. Earnings growth is expected to be in double-digits in 2017 and the following year.

We're only about 20% of the way through the season right now, so we shouldn't get too excited.  But the trend is clearly improving.  

So, will Mr Hayward write a retraction/correction/a "gee I was really wrong" piece?  Of course not.  I'm sure he thinks he's still economically literate.  But at least there's yet another piece that shows how incredibly wrong the Powerline guys are at economics.  

Thursday, October 20, 2016

September housing starts and permits give sharply conflicting signals

 - by New Deal democrat

On Monday I said that housing permits and starts for September would be of more than usual importance. So of course the signals were as clear as mud!

A more detailed examination, with a forecast for the last three months of the year, are up at XE.com.