Hiring Settles Into Steady Gains Hiring by U.S. employers remained robust in July, if a bit slower than previous months, with a broad-based rise in payrolls extending a half-year streak of strong employment gains. The jobless rate ticked up to 6.2%.
(…) That marked a downturn from the 298,000 jobs created in June, but was more than enough to yield the strongest six months of payroll gains since 2006. July was the first time since 1997 that employers added 200,000 or more jobs in six consecutive months. (…)
BloombergBriefs, using 12-month data, hits on the low wage growth hammer…
(…) of the 2.57 million jobs created during the last year, a mere 18,000, or 0.7 percent, were in the top wage earners. Three of the top four wage earning categories are also the smallest. Utilities boasts only 552,400 workers, while mining and logging employs 916,000. There are 2.6 million information workers and 7.9 million financial activities employees.
Not only are wages in the aggregate running at a flat real pace, but those high-paying industries are not creating many jobs. Until they do, a thriving economic recovery shouldn’t be expected.
But the WSJ says more recent data is more hopeful:
PARTICIPATION RATE BOTTOMING
If that is so, the labor force growth will accelerate to 190k per months vs 30k per month in the last 12 months. Mrs. Yellen would prove right in that the U Rate decline would slow, wage pressures would ease and the economy’s growth potential would increase.
(…) Everyone focuses on payroll employment. Debbie and I focus on our Earned Income Proxy (EIP), which is payroll employment times average weekly hours worked times average hourly earnings, all in the private sector. It is highly correlated with private wages and salaries (a major component of personal income), and also with retail sales.
The EIP rose 0.2% during July, following a jump of 0.5% the previous month. It is at a record high. So is private wages and salaries, which rose 0.5% m/m and 5.8% y/y during June. This augurs well for consumer spending during the third quarter. (…)
Car makers sold 1.435 million vehicles in the U.S. last month, up 9.1% from a year earlier and lifting the seasonally-adjusted annualized selling rate to 16.48 million, from 15.76 million vehicles in 2013, according to researcher Autodata Corp.
Underlying the momentum: bigger sales incentives. TrueCar Inc., TRUE -1.33% the Internet auto-pricing service and research firm, said incentive spending rose 8.4% overall from July 2013 and to the highest since July 2010.
I remain unconvinced that significant new highs will be seen this cycle (charts from CalculatedRisk)
(…) Overall revenue at the 500 largest U.S. companies by stock-market value is on track to climb about 4.3% from last year’s second quarter, based on earnings-season results for about three-fourths of the firms and analysts’ projections for companies that haven’t reported their results yet.
That would be the biggest percentage gain since 2012’s first quarter, according to Thomson Reuters. Profits are expected to increase 7.7% in the second quarter, the fastest growth since the fourth quarter of 2013. (…)
Revenue gains have been broad-based. The biggest improvements include revenue growth of 12% at big health-care companies, while technology firms are expected to have revenue growth of about 6.5%, according to Thomson Reuters. Revenue growth is expected to reach about 3% at telecommunications, basic materials and consumer-staples companies—and nearly 5% in the consumer discretionary sector.
The financial and utility sectors have lagged behind, with second-quarter revenue growth of 0.7% and 1.6%, respectively. (…)
S&P updated its database as of July 31 with 359 reports tallied. Beat rate: 66%, pretty much in line with recent years. Miss rate: 20.6%, lowest in at least 2 years (avg: 24.7%). Still, estimates for Q2 have come down to $29.18 from $29.47 one week ago and $29.64 two weeks ago. Go figure!
This is surprising given that
- Factset, with one additional day (17 companies) of data, calculates that companies are reporting earnings that are 4.1% above expectations.
- The revenue beat rate is 65%, well above the 1-year (55%) average and the 4-year average (57%), and that companies are reporting sales that are 1.9% above expectations.
- Factset finds that the blended earnings growth rate for the second quarter (blending actuals with estimates for companies yet to report) is 7.5% this week, above the growth rate of 6.6% last week, 5.4% the previous week and 4.9% at the end of the quarter.
- The blended revenue growth rate for Q2 2014 is 4.1%, which is above the estimated growth rate of 3.0% at the end of the quarter.
Since S&P is the official stat provider, I must go with their numbers. Maybe Howard Silverblatt will eventually explain why his numbers are dropping while others are rising.
Trailing 12-month EPS are now estimated at $111.67 after Q2. With inflation at 2.0%, the Rule of 20 says that fair P/E is 18 giving a fair value of 2,010 for the S&P 500, 4.4% above current levels. (Click on charts to enlarge)
Investors have again balked at crossing the “20” level, something they have done merrily in 7 out of 8 bull markets since 1956. The S&P 500 is currently sitting uncomfortably on its 100-day moving average. In February and April, it temporarily went through it only to strongly bounce back before even coming close to its 200-d m.a. (currently 1860, 3.4% lower). Note that all moving averages are still rising.
On June 2, I wrote Showtime! in which I argued that
It is thus showtime for earnings and margins, showtime for the economy and showtime for P/E multiples.
The earnings show is actually underway and getting better, drawing a larger crowd. If margins actually break out and enter the show, the crowd should keep growing, especially if the economy also gets in the act.
But the big show, the one with fireworks, is the powerful spectacle of rising earnings, rising margins and rising confidence (P/Es), a combination not sighted for over a decade but which is typical of end-of-cycle shows.
Or, we may be in for an early sixties performance in which rising earnings and stable inflation steal the show to the economy and geopolitical risks and carry equities higher on multiples stabilized around fair value.
The worst case would be hints of a sustained economic slowdown potentially generating weaker revenue growth and declining margins. This is actually the bear narrative that has refused to materialize so far in this cycle.
The show is going quite well, indeed:
- Earnings are better than expected, rising in the high single digits with accelerating revenue growth and still higher margins.
- U.S. economic data is stronger without fostering much higher inflation, so far. Only housing remains weak. The news is good enough to keep earnings rising, and weak enough to keep the Fed patient and cooperative. Goldilock!
- China is also looking better.
- Only Europe looks weaker with a bleaker outlook given the harsh geopolitics in that region. The potential fallout on the U.S. is not significant enough to hurt the domestic economy. Meanwhile, the US dollar is rising.
But equity investors are nervous, trigger happy, one way or the other.
Mark Hulber’s WSJ column last Saturday:
Over the past 45 years, the stock market has lost more than 20% each time three warning signs flashed simultaneously.
After a selloff this past week dragged the Dow Jones Industrial Average into negative territory for the year, it’s worth noting that all three are flashing today.
The signals are excessive levels of bullish enthusiasm; significant overvaluation, based on measures like price/earnings ratios; and extreme divergences in the performances of different market sectors.
They have gone off in unison six times since 1970, according to Hayes Martin, president of Market Extremes, an investment consulting firm in New York whose research focus is major market turning points.
The S&P 500’s average subsequent decline on those earlier occasions was 38%, with the smallest drop at 22%. A bear market is considered a selloff of at least 20%, with bull markets defined as rallies of at least 20%.
In fact, no bear market has occurred without these three signs flashing at the same time. Once they do, the average length of time to the beginning of a decline is about one month, according to Mr. Martin.
The first two of these three market indicators—an overabundance of bulls and overvaluation of stocks—have been present for several months. As long ago as December, for example, the percentage of advisers who described themselves as bullish rose above 60%, a level Investors Intelligence, an investment service, considers “danger territory.” Its latest reading, as of Wednesday, was 56%.
Also beginning late last year, the price/earnings ratio for the Russell 2000 index of smaller-cap stocks, after excluding negative earnings, rose to its highest level since the benchmark was created in 1984—higher even than at the October 2007 bull-market high or the March 2000 top of the Internet bubble.
The third of Mr. Martin’s trio of bearish omens emerged just recently, which is why in late July he advised clients to sell stocks and hold cash. That’s when the fraction of stocks participating in the bull market, which already had been slipping, declined markedly.
One measure of this waning participation is the percentage of stocks trading above an average of their prices over the previous four weeks. Among stocks listed on the New York Stock Exchange, this proportion fell from 82% at the beginning of July to just 50% on the day the S&P 500 hit its all-time high. (…)
Another sign of diverging market sectors: When the S&P 500 hit its closing high on July 24, it was ahead 1.4% for the month, in contrast to a 3.1% decline for the Russell 2000. (…)
A few observations are needed here:
- “They have gone off in unison six times since 1970” and “In fact, no bear market has occurred without these three signs flashing at the same time.” Well, that does not jibe with the fact that since 1970, there have been 7 bear markets. Just for the record.
- The author may have conveniently left out the fact that in 5 of the 6 occurrences a recession hit the U.S. economy. Recessions are always accompanied with bear markets.
- It follows that Mr. Martin’s trio of bearish omens should also be great in forecasting recessions, a claim he is not making.
- The reason may be that there are two pretty good recession warning indicators, the Conference Board’s LEI and the U.S. yield curve. None are close to indicating high recession risks for the next 9-12 months.
- To me, using the Investors Intelligence bull ratio as a market timing tool is not serious. Just peek at this chart from Ed Yardeni:
Not to totally dismiss Mr. Martin’s work. I have been flashing some of these excesses numerous times in the recent past and advising some caution given high valuations, particularly on small cap stocks and high yield bonds.
Here’s a more frightening chart:
Just in case you are wondering, the Rule of 20 P/E at pre-bear market tops was 20.2 in 1973, 16.5 in 1976, 19.0 in 1981, 23.1 in 1987, 19.2 in 1990, 29.7 in 2000 and 21.3 in 2007. It is currently 19.2. That said, there are numerous instances when the rule of 20 P/E was at 20 without being followed by a bear market:
To repeat myself: the Rule of 20, like all other valuation tools, should not be used as a market timing tool. It is rather an objective way to assess market risk against potential reward in order for each investor to structure his/her investment portfolio accordingly. A good case in point is high yield bonds which have been challenging their historical low spreads against treasuries for a while. Something finally cracked lately as this Bespoke Investment chart shows:
Why It’s Too Early to Call the Bottom After Thursday’s 317-point drop for the Dow Jones Industrial Average, the stock market is selling off again on Friday, further illustrating how the calm that pervaded financial markets for months has evaporated.
(…) “The market is modestly oversold, but we’re not ready to make the tradeable bottom call,” said Chris Verrone, head of technical analysis at Strategas Research Partners in New York. He noted that August is historically a difficult month of the year for stocks. “At the moment, we would be more inclined to fade a near-term bounce,” he wrote Friday morning before the jobs report. (…)
“We’re still ultimately in the ‘buy the dip’ camp, but it may take lower prices first,” he said. “Next S&P 500 support is in the 1900-1910 range, with the upward sloping 200-day average near 1860.”
But it’s a good idea to buy a floating device: Buoyant market for yachts as rich return Sales of luxury crafts at highest level since the financial crisis
(…) Lured by the higher returns on offer from investing in the risky debt, investors have poured $80.7bn into US “high-yield” bond funds since the Federal Reserve began its emergency economic policies in 2009 – not far from the $126.3bn that went into global stocks in the same period. (…)
“We have been in extreme valuations for months,” says Marty Fridson, chief investment officer at LLF Advisors. “Investors are well aware that they’re not being compensated particularly well for their risk, but they don’t have a good alternative to meet their return requirements.” (…)
Average yields on junk bonds touched a record low of 4.82 per cent in June, according to Barclays data – a far cry from the 22.9 per cent seen in 2008. At the same time, sales of the debt totalled $210.8bn in the first seven months of the year – the highest period of issuance since at least 2000, according to Dealogic. (…)
Compounding matters is the fact that more than a third of US corporate bonds are now owned by “mom and pop” investors who have piled into fixed-income funds and exchange traded funds (ETFs) that offer instant access to the debt.
“There is no underlying bid in the [high-yield] market once people decide to start selling. That is compounded by the amount of ETFs issued backed by high-yield debt,” says Raymond Nolte, managing partner at SkyBridge Capital.
“A lot of that is in the hands of retail, which see ETFs as a resolution to liquidity problems. And they will be able to sell in a down market, but at what price?”
Despite such concerns, many fund managers say it may be too soon to fear a sell-off. Corporate default rates remain low and the Fed has said it is committed to keeping rates near zero until at least mid-2015.
In addition, a healthier US economy and buoyant stock market has traditionally been beneficial for junk-rated companies.
“High-yield bonds tend to do well in a stronger-economy, rising stock market environment,” says Sabur Moini, high-yield fund manager at Payden & Rygel. (…)
Mr. Moini obviously does not read me nor Moody’s. From last week’s New$ & View$:
Junk Bonds Sink on Fears Rally Will End as Economy Picks Up Investors retreated from risky corporate debt, sending prices tumbling and deepening fears of an end to a long rally in junk bonds.
- Higher Ratio of Debt-to-Profits Warns of Wider Spreads
China Official Nonmanufacturing PMI Slips in July China’s official nonmanufacturing purchasing managers index fell to 54.2 in July from 55.0 in June, data from the China Federation of Logistics and Purchasing showed.
The subindex for services fell to 53.2 from 53.5 in June and the subindex for construction fell to 58.2 from 60.6, the federation said in a news release Sunday.
The new-orders subindex for the entire sector was unchanged at 50.7.
The federation’s official manufacturing PMI rose to 51.7 in July from 51.0 in June, it said Friday.
PBOC’s $162 Billion Loan Spurs Speculation on Easing A Chinese central bank loan that’s almost the size of the U.S. bailout of American International Group Inc. has spurred speculation that policy makers have adopted a new form of monetary easing to shore up growth.
While the People’s Bank of China warns debt is rising quickly, and credit expansion is already high, that didn’t stop it from extending what Chinese media reported is a 1 trillion yuan ($162 billion), three-year loan to a state development bank. By comparison, the AIG rescue amounted to $182 billion.
The loan, designed to lower financing costs for government-backed housing projects, marks a “qualitative” easing by Governor Zhou Xiaochuan, according to Citigroup Inc. economists. The move, which the PBOC has yet to confirm publicly, also takes the central bank deeper into fiscal-policy territory after it gave quotas for discounted lending for agriculture, small businesses and low-income housing. (…)
China repeats promise to increase investment, speed up reforms China will increase investment in areas including the property sector, while authorities will advance wide-ranging economic reforms such as changing the fiscal and pricing systems, the country’s powerful economic planning agency said on Monday.
China will increase investment in areas including the property sector, while authorities will advance wide-ranging economic reforms such as changing the fiscal and pricing systems, the country’s powerful economic planning agency said on Monday.
The remarks from the National Development and Reform Commission were a reiteration of existing government policies.
(…) Bundesbank President Jens Weidmann estimates that wage increases negotiated by German unions are averaging about 3 percent this year. With the central bank forecasting inflation (ECCPEST) of 1.1 percent in 2014, that’s equivalent to a real rise in pay of 1.9 percent. Data compiled by theFederal Statistics Office shows that would be the highest since 1992.
It is “to be welcomed that wages and salaries are rising more strongly than in the days when the German ec nomy was in much poorer shape,” Weidmann said in comments published on the Bundesbank website last week. “We have close to full employment in a number of sectors and regions, and we are seeing more and more reports of labor shortages.”
(…) German chemical companies agreed early this year to a 3.7 percent pay rise over 14 months, after a union demand for 5.5 percent. The IG Metall labor union reached an agreement for an increase of 2.3 percent effective last month and 1.7 percent in May 2015 for about 75,000 steel workers in northwestern Germany. (…)
The government says it has identified labor shortages in 20 industries as diverse as nursing and machine fitting, and plans to start an initiative for skilled workers this year.
Growing French-German Divergence
(…) Germany was the only large euro-area economy to see its PMI manufacturing index improve in July. The reading rose to 52.4 from 52 in June. The new orders
component rose to its highest level since April. In stark contrast, the French index continued its free fall, dropping to 47.8 from 48.2 in June. That is the lowest level
since December and the third consecutive month indicating a contraction in activity.
The gap between the indexes for the two largest euro-area economies — together they make up almost half the currency union’s GDP — has been widening since
the end of the first quarter. It now stands at 4.6 points, up from 1.6 in March. This is because the French manufacturing PMI has declined every month in the period,
losing 4.3 points since its March peak of 52.1. In June, the French index even ranked worst of all the countries surveyed worldwide by Markit.(…) (BloombergBriefs)