Saturday, January 17, 2015

Weekly Indicators for January 12 - 16 at

 - by New Deal democrat

My Weekly Indicators post is up at

I've been saying that at some point soon mortgage applications had better start turning positive.  Well, this week ....

US Equity Week in Review For the Week of January 12-16

     At the start of a new year, it's easy to fall into a pattern of thinking that the market will go up.  After all, it's the new year!  And, according to most analysts (myself included), the general consensus is the US economy ended the year with a bang that should continue forward into the new year. 

     Unfortunately, the markets are not cooperating with this sentiment.  But it's not the fault of the US economy.  Instead, global weakness is changing traders' risk calculations.  As I noted in my international week in review over at, Australia, Japan, Canada, the EU and Russia are all experiencing some type of weakness, which is increasing volatility and creating a safety bid in the market.

     Let's start by looking at the VIX:

The market was lulled into a sense of false complacency at the beginning of 2Q14, as the VIX readings moved to between 10 and 12.  There were two spikes in the second half -- one in early August and the second in early October -- but things quickly settled down toward the end of the year.  But in mid-December, volatility really picked-up.  As a result:

The treasury market has caught a strong bid at the start of 2015, with the long end (the TLTs) moving from 122.93 to 133.19, for an overall gain of 8.34%.   More importantly, notice the strength of the rally.  The 30 minute chart shows a continued move higher, with the ETF consolidating at several points and then making a disciplined advance on a regular basis.

But perhaps the real star of this latest move is the US dollar.  Starting in mid-July, the dollar started to rally and has continued on this path.  From the absolute July low to Friday's close, the dollar ETF has advanced 15.66%, indicating there is a very strong bid for US assets.  And considering the move in the treasury market, it's clear that investors are looking for safety.

     When looking at the US equity markets, things get a bit trickier because no really clear trend emerges.  The SPY's daily chart is a case in point:

On the one hand, the chart may be in the middle of a pennant pattern.  Or, we're in the middle of a downward sloping channel.  An argument could be made for either at this point.

     But several other markets may be indicating we're about to see at least a small move lower.   Consider the transports:

This index has clearly broken trend.  But, prices have not moved sharply lower. 

And the IWMs are back below their near-year long upper channel line at the 119-120 level.  But like the transports, the move lower is not sharp.  Instead, prices broke support and then consolidated right below that level.

     But in comparison to most other equity indexes, the US is the only one that is in positive territory for the last year (save for China):

Over the last year Europe, the UK, Canada, Australia and Japan are all at a loss.

So, after all of this meandering, what can we say with confidence?

1.) There is clearly a safety bid in the market.  The US dollar is rallying as investors convert other currency holdings into dollars to buy treasuries.

2.) While the US economy is in good shape, the weight of negative numbers from around the globe may pull the US indexes lower.  Or, at minimum, keep them from rallying strongly.

Friday, January 16, 2015

A "perfect" yield curve recession indicator: perfectly awful, that is

 -by New Deal democrat

I have a new piece up at, calling out some egregiously bad analysis regarding an allegedly perfect bond yield curve indicator, NOT!

Commodity Sell-Off Is A Demand And Supply Problem

This is over at

Demand is clearly contributing to the commodity sell-off.  After all, economies growing below potential obviously demand less of everything.  And with several regions experiencing economic problems (Russia, the EU and Japan), overall demand will be lower.  But there is also over-supply.  Shale oil exploded, adding to supply while also challenging the Saudi dominance of the oil market.  They responded as a classic oligopoly: crash the price to push out competition.  And copper is also over-supplied.  Producers invested heavily, betting on continued Chinese demand.  But as China has lowered their GDP growth projections, they are simply demanding a lower amount of raw materials.  The summation is that we’re looking at a demand and supply issue.    

Real retail sales for December: much better, thank you

 - by New Deal democrat

As promised, now that we know the CPI reading for December, here is a comparison of nominal retail sales (blue, left scale) with real retail sales (red, right scale):

In real terms, retail sales in December were higher than any other month in history, except for November.  The positive trend in consumer purchasing is firmly intact.

UPDATE:  And while we're at it, industrial production tells the same story. Down -0.1% in December after rising +1.1% in November:

In other words, up 1% over every other month ever, except for November.

Thursday, January 15, 2015

Herewith a blog post about stock prices that does not predict a crash

 - by New Deal democrat

I have a new post up at

Investment analysts almost always say that stock prices anticipate corporate profits.  History suggests it is the reverse that is actually true, at least in terms of tops and bottoms.

So what does the relationship suggest now?

About that awful retail sales report

 - by New Deal democrat

Yesterday saw the second anomalous horrible number in 4 days from the Census Bureau.  Last Friday it was a big decline in average hourly wages for December.  Yesterday it was a -0.9% drop in December retail sales.  Even ex-gasoline the decline was -0.3%.

OK, obviously this was not welcome.  At the same time, one of the best quotes I saw yesterday described it as -0.6% due to energy, and -0.3% noise.  That is, either the US suddenly went into recession last month, with no warning, or else we need to take the numbers with a grain or two of salt, and wait and see what January's revisions bring.  I'm inclined to the latter for several reasons.

First of all, when we place the retail sales number in context, as in this graph below of nominal (blue) and real (red) retail sales:

we see that November and December combined will probably still prove to average higher than any other month or pair of months once December CPI is reported tomorrow.  I'll revisit this graph then.

Next, there is the problem that seasonality is particularly hard during the holiday season.  Since both of these number originate with the Census Bureau, and it has already been suggested that the number of workdays in December may have affected the wage number, there may be a glitch in their seasonal adjustment.  This makes the personal income and savings report that will be issued later this month by the Bureau of Economic Affairs an important comparison.

Similarly, the private sources of information about December sales don't paint nearly so gloomy a picture:
  • Thomson Reuters'December same store sales were up 5.1% YoY.
  • Shoppertrak reported YoY same store sales for the holiday season were up 4.6%.
  • The National Retail Federation reported that YoY same store sales for the holiday season were up 4.0%.
  • Redbook reported that YoY same store sales for December rose by 5.2%.
  • The average weekly same store sales reports for December by the ICSC were up +2.3% YoY.
  • Gallup reported that December consumer spending was up 2.1% YoY ($98 vs. $96 in 2013).
One caveat is that YoY measures can mask m/m drops.  The Census Bureau itself noted that YoY retail sales for December were up 3.2%.  But the tone of all of the private reports of holiday shopping was uniformly positive.  

Gallup does offer one bit of confirmation for the poor Census Bureau number.  In the last week of December, spending was unchanged YoY, and in the first 10 days of January, spending actually declined slightly YoY.  On the other hand, if consumers were suddenly pulling in their horns in spending, that isn't supported by Gallup's Economic Confidence measure, which continues to show Americans, on net, feel positive about the economy for the first time since 2007.

The bottom line is, I'm going to take yesterday's report with several grains of salt, see how it looks after tomorrow's CPI report, compare it with the BEA's personal spending and saving report for December later this month, and see what happens with revisions next month.

Wednesday, January 14, 2015

SPYs Clost At Important Technical Levels

The SPYs have been in a consolidation pattern since the beginning of December.  At the close today, prices were right below key technical support.

Ruble and Copper Are Dropping, Signaling Weakness

These are over at



Tuesday, January 13, 2015

More thoughts on wages from Friday's jobs report; the NFIB report as a leading indicator for wage growth

 - by New Deal democrat

As promised, I've put more thought into the decline of -0.2% in average wages in last week's December jobs report.  I've also read other analyses.  So, here are some more considered thoughts.

First of all, last Friday's number is quite an anomaly, and it is likely to be revised higher.  Here's a graph showing m/m% change in production and nonsupervisory workers (blue), the m/m% change in the aggregate wages paid to them (green), and the m/m% change in average wages (red), during the last two expansions. Here it is from 2002-07:

and then from 2009-14:

Only in one other month, in 2003, when everything was weak and people were worried about a "double-dip recession," did average wages decline by even -0.1%.  In short, December's number was a huge outlier, and is likely either simply due to being the occasional nonrepresentative sample, or likely to be revised away in the next month or two.  An analysis by Golman Sachs (h/t Business Insider) notes the same, and further notes that it may be noise generated by there being one fewer working day than is usual in the December sample.

Another article today in Business Insider references a Deutsche Bank note that the "Companies planning to raise worker compensation" metric from the NFIB report this morning is a good leading indicator, with an approximate 9 month lag, of the Employment Cost Index.  Here's the graph of that relationship (note the NFIB metric is moved back 9 months in this graph):

The Employment Cost Index is a median measure of worker compensation, reported quarterly.  The 2014 Q4 report will be released at the end of this month.  I wondered if the relationship might also work with the monthly average wage measure from the jobs report, and it appears it does.  Compare the blue line in the above graph, dating from 1985, with the similar blue line in nominal average hourly wages, also from 1985 to the present, in the below graph:

I've been looking for good leading indicators for wages.  This NFIB metric looks like and excellent candidate. For comparison purposes, I've noted that the unemployment rate appears to be a good leading indicator for nominal wage growth.  Here's the update on that graph through December:

Note that, unlike the unemployment rate, the NFIB metric was flat in 2012-13, appearing to accurately forecast the flatness of the YoY% growth in nominal wages in late 2013-14. 

Now, however, both the unemployment rate and the NFIB measure of companies planning to increase workers' compensation are forecasting significant increased growth in wages.

I remain concerned that the last few months have actually shown a decline in the YoY growth in wages.  This time could always be different.  But at least the forecasting tools give reasonable grounds for continued optimism.

Yes, Virginia, the Republicans Are Economic Idiots

We're not the only people noting how completely clueless the Republicans are about economic analysis:

Virtually everything GOP critics have told us would follow from the policies put in place has not come to pass. You would think that this would occasion a few mea culpas, some rethinking, an admission of poor prognostication. But, alas, it continues. Rep. Paul Ryan is now warning in a column that Obamacare “is weighing down our economy and discouraging hiring” and will ultimately “collapse under its own weight.”