Optimistic Beige Book
Posted by Eddy Elfenbein on June 3rd, 2015 at 2:20 pm

The Fed’s “Beige Book” report is one of those wonky things put out by the Fed that’s actually fairly interesting. The one that came out today had mostly good things to say about the economy.

The informal survey of anecdotal business contacts’ views is conducted by each of the central bank’s 12 regional districts, and paints a fairly rosy picture of the outlook. The latest beige book report finds “overall economic activity expanded during the reporting period from early April to late May.”

Growth was characterized as “moderate” in the Chicago, Richmond, Minneapolis and San Francisco districts; “modest” in New York, Philadelphia and St. Louis regions; mixed in the Boston district; “slight” in Cleveland and Kansas City; holding steady in Atlanta; and slowing “slightly” in Dallas. The latter could be associated with falling business spending in the energy sector.

In a hopeful sign for the housing market, the Fed reported “residential and commercial real estate activity and construction improved since the last report.”

Overall loan demand increased, the report said, particularly in the New York district.

Quiet Rotation Today
Posted by Eddy Elfenbein on June 3rd, 2015 at 1:02 pm

The big jobs report comes out Friday but we got a sneak preview this morning. ADP said that the economy created 201,000 private sector jobs last month. For Friday’s report, the consensus on Wall Street is for 220,000 net new jobs.

Also, the Department of Commerce reported that the trade deficit fell to $40.9 billion in April. That was less than consensus. Bill McBride notes that exports are 14% higher than their pre-recession peak, while imports are right at their pre-recession peak.

This is an interesting day in the markets and it’s a continuation of what I discussed before; interest rate-sensitive stocks are lagging. This is a classic Quadrant I day. Industrial cyclicals are up, especially transports. The top-performing sector so far today is trucking.

What’s interesting is that the broader market is up modestly so it’s masking the dramatic rotation that’s happening under the surface.

Morning News: June 3, 2015
Posted by Eddy Elfenbein on June 3rd, 2015 at 7:07 am

OECD Gives Global Economy ‘B Minus’ As Cuts Forecast

OECD Calls US Dip A Blip But Chops World Growth Forecast

Greece in Last-Ditch EU Talks To Break Debt Deadlock

The Secret Money Behind Vladimir Putin’s War Machine

How OPEC Hurt Big Oil

US Congress Pushed China Into Launching AIIB, Says Bernanke

Korean E-commerce Leader Coupang To Raise $1 Billion From SoftBank At $5 Billion Valuation

Amazon Debuts Free Shipping on Small Goods, No Minimum Order

In Bid to Cut Costs, J.P. Morgan Cuts Voicemail For Some Employees

Fitbit IPO Could Top $500 Million When it Makes NYSE Debut

Perrigo Plays European Defense

Huffington Post In Limbo At Verizon

Deutsche Bank Partners With Microsoft, HCL, IBM in Tech Lab Launch

Cullen Roche: Does A “Liquidity Trap” Ever End?

Jeff Miller: How To Think About Risk

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6-Month/1-Year Spread Rises
Posted by Eddy Elfenbein on June 2nd, 2015 at 6:27 pm

The spread between the six-month and one-year Treasury yields recently hit 0.20% for the first time in more than five years. That’s up from four basis points in November.

This is yet another sign that the market thinks higher rates are coming soon.

The one-year Treasury closed today at 0.26% while the six-month bill stood at 0.07%. That implies that the six-month bill will yield 0.45% six months from now.

Auto Sales Reach 10-Year High
Posted by Eddy Elfenbein on June 2nd, 2015 at 3:37 pm

U.S. auto sales were very strong last month:

The U.S. auto industry remained on track for the best sales year in almost a decade as consumers bought cars and trucks at the fastest monthly pace since early 2006.

Sales of pickup trucks and SUVs in May again led the way, which bodes well for profit margins of the major automakers. Consumers are shying away from cars and snapping up trucks and sport utility vehicles as the national average price of gasoline, at $2.75 a gallon, is nearly a dollar less than at this time last year.

As has been the case since the 2008-2009 recession, the auto industry’s recovery continues to outpace that of the overall economy, which is on course to grow 0.8 percent in the second quarter, according to Federal Reserve forecasts.

Consumers are finding it easier to obtain auto loans – another factor in boosting sales, analysts have said. Experian reported the average length of U.S. loans for new and used vehicles in the first quarter hit record highs, and nearly 30 percent of new-vehicle loans have payback periods longer than six years.

This probably represents a rebound from the cold winter. Sales at Ford (F) dropped by 1.3% (Wall Street had been expecting a bigger drop), and the F-Series trucks fell by 10%. Demand is still high for the F-150 as Ford is ramping up production.

Tough Times for Dividend Stocks
Posted by Eddy Elfenbein on June 2nd, 2015 at 2:16 pm

The WSJ recently noted that high-dividend stocks have been losing out in the market recently. Utility stocks badly lagged the market in February and haven’t done much since. REIT stocks, which tend to have generous yields, have followed a similar path.

Utilities, real-estate investment trusts and master limited partnerships have been lifted since the financial crisis by a flood of money from portfolio managers and retirees starved for steady investment income amid low bond yields. Investors plowed $48.4 billion into mutual and exchange-traded funds tracking utilities and REITs from 2010 through 2014, according to Morningstar Inc.

But portfolio managers are pulling back from these shares in 2015, as the prospect of the first short-term interest-rate increase by the Federal Reserve in nine years makes high-dividend stocks less attractive. Investors reason that higher rates will boost the payout—and therefore the appeal—of more stable income-paying investments, like government and corporate debt.

Check out this chart. This shows the REIT index divided by the S&P 500 (in blue) along with the utility index divided by the S&P 500 (in black).

This is a good example of what I described two weeks ago in my “Elfenbein Theory” on the market. What we’re seeing is an anti-Quadrant III rotation.

The underlying message of this rotation is that the market is preparing itself for higher interest rates.

Morning News: June 2, 2015
Posted by Eddy Elfenbein on June 2nd, 2015 at 7:13 am

Greece Calls on Lenders to Accept ‘Realistic’ Plan Sent on Monday

Paul Krugman: That 1914 Feeling

Raghuram Rajan: We Are Under No Illusion That The Economy Is Up And Running

Justices Curb Bankruptcy Filers’ Ability to Have Second Mortgages Canceled

The Potential $1.5 Trillion Stimulus Plan Investors Are Missing

Manufacturing Growth Speeds Up for First Time in 6 Months

Seeking Rate Increases, Insurers Use Guesswork

For UAW Members, Two-Tier Wage Issue Is Personal

Mega Deals Send Merged Companies Up the Ranks of World’s Largest

Intel Agrees to Buy Altera for $16.7 Billion

Ford to Make 40,000 More Vehicles By Cutting Summer Downtime

Takata Says It Will No Longer Make Side Inflater Linked to Airbag Defect

Pinterest Just Revealed How It Is Going To Start Making Some Serious Money

Jeff Carter: All Markets Are Frothy

Roger Nusbaum: Working In Retirement Is A Hope?

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The Trendline of Real GDP
Posted by Eddy Elfenbein on June 1st, 2015 at 3:24 pm

Friday’s GDP report was not a good one. The government revised its estimate of Q1 GDP growth to non-growth, down 0.7%. In the 23 quarters of expansion, this is the third time growth has been negative. They’ve all been Q1s.

This expansion has been far below average. In the last 23 quarters, the economy has averaged 2.2% annualized growth. The economy used to average 4% or 5% growth during expansions followed by -2% or 3% in sharp pullbacks during recessions. Now it’s sluggish growth all the time.

Here’s a good way of expressing just how poorly the economy has done. This is real GDP and I divided it by a trendline that grew at a constant rate of 3.28% per year.

It’s been 15 years since the economy expanded faster than its long-term growth rate. To be fair, I think slower population growth also plays a role.

The Dividend Bull Market
Posted by Eddy Elfenbein on June 1st, 2015 at 10:54 am

I get annoyed at much of the sloppy talk about the stock market incessantly being “in a bubble.” Here’s Robert Shiller making yet another noncommittal forecast. It seems sophisticated to say that stock prices are too high when in fact, true bubbles are quite rare.

Here’s another way to look at the current market. This is the S&P 500 (blue, left) along with its dividends (black right). I scaled the two lines at a ratio of 50-to-1. In other words, whenever the lines cross, the S&P 500’s dividend yield is exactly 2%.

The chart shows that the market has tracked a 2% dividend yield for a few years. My point is that this has been a bull run in dividends as much as it’s been one in stock prices. That, it seems, rarely gets mentioned.

The stock line runs through May but I don’t have the Q2 data point yet for dividends. But I expect it will be a continuation of the trend.

Let me be clear on two points. I’m not saying that dividends are the only measure of valuation, nor am I saying that 2% is some platonic fair value. But dividends have the benefit of being steady and reliable. You’re never quite sure how much money a company has earned, but you do know exactly how much they’ve paid out in dividends.

If there’s any distortion, it may be to the low side since the Federal Reserve must approve capital allocation plans for major banks.

May ISM = 52.8
Posted by Eddy Elfenbein on June 1st, 2015 at 10:20 am

This morning, the May ISM index came in at 52.8. That’s a bit above expectations. It’s also the first monthly increase since October.

Construction spending rose 2.2% in April to hit $1 trillion. That’s the highest in six years.

The BEA also said that personal income rose 0.4% in April. Spending was flat. That means Americans are saving a little more.