(Click on image for larger version)
Friday, May 9, 2014
And Then There Were Four
Hard to believe that back in the 1990's there were over 35 large banks or banking related companies in the U.S. and now we are down to just four. The chart below shows the progression over the last few decades.
(Click on image for larger version)
(Click on image for larger version)
Friday, May 2, 2014
Jobs Increase Significantly
Total nonfarm
payroll employment increased by 288,000 in April, best number in over a year. Employment growth was
widespread, led by gains in professional and business services, retail trade,
food services and drinking places, and construction.
Professional and business services added 75,000 jobs in April. Employment in this industry had increased by an average of 55,000 per month over the prior 12 months. In April, employment growth continued in temporary help services (+24,000), in management of companies and enterprises (+12,000), and in computer systems design and related services (+9,000).
It was a solid beat overall surpassing estimates calling for roughly 200,000 new jobs. We should be happy to see that more Americans are finding work. However, quantity isn't enough. For things to really improve there needs to be quality behind the payroll growth. Average hourly earnings went nowhere. Combine this with no increase in the average hourly workweek and the drop in the participation rate, it's cause for a bit of concern.
Interestingly, long-duration bonds aren't so sure about the strength of the number and after selling off immediately following the release, rose to a new high for the year. We are at one of those unusual junctures in the markets. Bonds have rallied this year, commodities are up, and many stocks and sectors are undergoing serious corrections, while at the same time the broad large-cap indices, like the Dow Jones Industrial Average, have held on strong. Past research shows that when Treasury bonds do well, we tend to have higher volatility in stocks right after strength has occurred. Of course this isn't always a guarantee, but the probability of continued volatility remains high.
Professional and business services added 75,000 jobs in April. Employment in this industry had increased by an average of 55,000 per month over the prior 12 months. In April, employment growth continued in temporary help services (+24,000), in management of companies and enterprises (+12,000), and in computer systems design and related services (+9,000).
It was a solid beat overall surpassing estimates calling for roughly 200,000 new jobs. We should be happy to see that more Americans are finding work. However, quantity isn't enough. For things to really improve there needs to be quality behind the payroll growth. Average hourly earnings went nowhere. Combine this with no increase in the average hourly workweek and the drop in the participation rate, it's cause for a bit of concern.
Interestingly, long-duration bonds aren't so sure about the strength of the number and after selling off immediately following the release, rose to a new high for the year. We are at one of those unusual junctures in the markets. Bonds have rallied this year, commodities are up, and many stocks and sectors are undergoing serious corrections, while at the same time the broad large-cap indices, like the Dow Jones Industrial Average, have held on strong. Past research shows that when Treasury bonds do well, we tend to have higher volatility in stocks right after strength has occurred. Of course this isn't always a guarantee, but the probability of continued volatility remains high.
Friday, March 28, 2014
First Quarter Comes To A Close
As this first
quarter draws to a close the equity market continues to dance around the 1850
level (as measured by the S&P 500 Index) and it’s beginning to look as if
it may be some time before stocks start moving up again. This would not be the first time that this market
has become stalled around a price level.
Back in 2011, the S&P 500 Index was trading around the 1250 level for
the entire year and ended the year flat versus the closing price on December
31, 2010. We don’t expect another year of a market
trapped in a range and ending the year unchanged, but we wouldn’t be surprised
if the markets went through the first half of this year without much progress
being made.
Fortunately, we haven’t suffered any deep declines in the broad indices, although on a sector by sector basis the returns have been very wide for what has been a flat quarter. One sector which has been particularly disappointing has been retail, which started the year as one of the most widely favored groups in the whole index. Thus far the Retail Index has fallen over 5.5% in the quarter, while the Utilities Index is the best performing so far in 2014 ,up 6.8%, after it was expected to be one of the worst performers in 2014.
However, its defensive nature and small size make it a very unlikely candidate for market leadership. Its interest rate sensitivity counts against it as any move in interest rates can quickly change this positive return into a negative one. But this is not true of the second best performing group which is the bank index, which has also returned 6.8% in the quarter. This group would actually benefit from rising short term interest rates, since these would help expand lending margins.
Fortunately, we haven’t suffered any deep declines in the broad indices, although on a sector by sector basis the returns have been very wide for what has been a flat quarter. One sector which has been particularly disappointing has been retail, which started the year as one of the most widely favored groups in the whole index. Thus far the Retail Index has fallen over 5.5% in the quarter, while the Utilities Index is the best performing so far in 2014 ,up 6.8%, after it was expected to be one of the worst performers in 2014.
However, its defensive nature and small size make it a very unlikely candidate for market leadership. Its interest rate sensitivity counts against it as any move in interest rates can quickly change this positive return into a negative one. But this is not true of the second best performing group which is the bank index, which has also returned 6.8% in the quarter. This group would actually benefit from rising short term interest rates, since these would help expand lending margins.
Healthcare
and technology sectors also performed well during the quarter, up until the
last few weeks when the sectors have given back most of their first quarter
gains, as investors rotate sectors.
The start
of the second quarter will bring about the beginning of earnings season. The actual earnings results from companies
during the first quarter should tell us a great deal about where markets and certain
sectors could be headed as we head into summer.
Buckle up, we could be in for a bumpy ride.
Friday, March 7, 2014
Employment Near Pre-Recession Levels
Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7 percent, the U.S. Bureau of Labor Statistics reported today. ...
The change in total nonfarm payroll employment for December was revised from +75,000 to +84,000, and the change for January was revised from +113,000 to +129,000. With these revisions, employment gains in December and January were 25,000 higher than previously reported.
Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99
The change in total nonfarm payroll employment for December was revised from +75,000 to +84,000, and the change for January was revised from +113,000 to +129,000. With these revisions, employment gains in December and January were 25,000 higher than previously reported.
Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99
Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7 percent, the U.S. Bureau of Labor Statistics reported today. ...
The change in total nonfarm payroll employment for December was revised from +75,000 to +84,000, and the change for January was revised from +113,000 to +129,000. With these revisions, employment gains in December and January were 25,000 higher than previously reported.
Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99
The change in total nonfarm payroll employment for December was revised from +75,000 to +84,000, and the change for January was revised from +113,000 to +129,000. With these revisions, employment gains in December and January were 25,000 higher than previously reported.
Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99
Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7 percent, the U.S. Bureau of Labor Statistics reported today. ...
The change in total nonfarm payroll employment for December was revised from +75,000 to +84,000, and the change for January was revised from +113,000 to +129,000. With these revisions, employment gains in December and January were 25,000 higher than previously reported.
Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99
The change in total nonfarm payroll employment for December was revised from +75,000 to +84,000, and the change for January was revised from +113,000 to +129,000. With these revisions, employment gains in December and January were 25,000 higher than previously reported.
Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99
Total nonfarm payroll employment increased by 175,000 in February,
and the unemployment rate was little changed at 6.7 percent, the U.S. Bureau of
Labor Statistics reported today. The change in total nonfarm payroll employment
for December was revised from +75,000 to +84,000, and the change for January
was revised from +113,000 to +129,000. With
these revisions, employment gains in December and January were 25,000 higher
than previously reported.
The headline number was above expectations of 150,000 payroll jobs added.
The graph below shows the job losses from the start of the
employment recession, in percentage terms, compared to previous post
WWII recessions. The dotted line is ex-Census hiring. As you can see we are very close to getting
back all the jobs lost since the recession officially began. We need 667,000 new jobs created before
getting back to the zero line.
This chart illustrates the depth of the recent employment recession - worse than any other post-war recession - and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.
The next chart shows the employment population ration and the participation rate, both of which are finally starting to tick upward at the same time. Very good news on the jobs front.
The headline number was above expectations of 150,000 payroll jobs added.
The first graph shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions. The dotted line is ex-Census hiring.
This shows the depth of the recent employment recession - worse than any other post-war recession - and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.
Employment is 0.5% below the pre-recession peak (666 thousand fewer total jobs).
NOTE: The second graph is the change in payroll jobs ex-Census - meaning the impact of the decennial Census temporary hires and layoffs is removed to show the underlying payroll changes.
The third graph shows the unemployment rate.
The unemployment rate increased in February to 6.7% from 6.6% in January.
Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99
The first graph shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions. The dotted line is ex-Census hiring.
This shows the depth of the recent employment recession - worse than any other post-war recession - and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.
Employment is 0.5% below the pre-recession peak (666 thousand fewer total jobs).
NOTE: The second graph is the change in payroll jobs ex-Census - meaning the impact of the decennial Census temporary hires and layoffs is removed to show the underlying payroll changes.
The third graph shows the unemployment rate.
The unemployment rate increased in February to 6.7% from 6.6% in January.
Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99
Friday, January 31, 2014
Change In Character
The market could be experiencing a change in character that marked the good news is good news and bad news is good news market for the past several months. The potential for a catalyst to rattle the markets was there and looks like the emerging market complex is set to deliver such a catalyst to the US equity markets. It of course remains to be seen whether this is just a temporary blip in an ongoing march higher by the markets or whether it develops into something that proves more troubling, similar to what happened in 1998. Unfortunately we don't have any certainty on this matter, but we suspect to will fall somewhere in between the best case and absolute worst case scenario.
The Fed continues its plan to taper asset purchases by another $10 billion per month. The committee expects to continue the taper process for the balance of the year bringing asset purchases to zero by the end of 2014. We suspect this liquidity drain out of the system will impact the economy as well as the stock market in the coming months. 2014 is setting up to be an interesting year.
Friday, January 17, 2014
2014 Predictions
As we begin a new
year, it’s time for the various market predictions. Analysts and markets strategists have made a
number of projections for the S&P 500 for 2014. Below is a summary of these projections and of
recent historical trends in the data.
- Where will the market close in 2014?
For 2014, industry analysts in aggregate see the index closing higher in
2014, while market strategists on average see the index closing lower by
year-end.
- What is the projected EPS estimate
for 2014? As of December 31, industry analysts in aggregate were
projecting record-level EPS in 2014 of $119.80. However, they have
overestimated the final EPS for the index on average over the past 15
years.
- Industry analysts ($119.80) and
market strategists ($118.15) had similar EPS estimates for 2014 on
December 31. This marks the smallest absolute spread between the EPS
estimates in five years.
- Is the index overvalued? Based in the closing price and forward 12-month EPS estimate on December 31, the forward 12-month P/E for the index is 15.4. This P/E ratio is well above the 5-year and 10-year averages, but still below the 15-year average.
- In terms of earnings for the index,
industry analysts project growth of 10.5% for 2014. All ten sectors are
predicted to see earnings growth, led by the Consumer Discretionary,
Materials and Telecom Services sectors.
- In terms of revenues for the index,
industry analysts project growth of 4.0% for 2014. All ten sectors are
predicted to see revenue growth, led by the Health Care, Consumer
Discretionary, and Information Technology sectors.
Friday, December 13, 2013
S&P 500 Earnings Update
Summary
Earnings Scorecard: Of the 496 companies that have reported earnings to date for Q3 2013, 73% have reported earnings above the mean estimate and 52% have reported sales above the mean estimate.
Earnings Growth: The blended earnings growth rate for Q3 2013 is 3.5%. The Consumer Discretionary has the highest earnings growth rate for the quarter, while the Energy sector has the lowest earnings growth rate for the quarter.
Earnings Guidance: For Q4 2013, 92 companies have issued negative EPS guidance and 11 companies have issued positive EPS guidance.
Valuation: The current 12-month forward P/E ratio is 15.0. This P/E ratio is above the 10-year average of 14.0. See Factset.com chart below for historic view.
Friday, December 6, 2013
Are The Models Broken?
Recently I read an article about several investment firms that were making changes to their quantitative process for their models. Just last month, GMO, a highly regarded investment institution, published a report noting changes they made to their quantitative model, which had stated the S&P 500 index is about 50% overvalued! Even the popular firm Vanguard is launching a new Quantitative Strategy as part of their line up.
So why all of the changes? Our guess is that there is a profound disconnect between current asset prices and economic fundamentals that has rendered the models useless.
A good deal of the disconnect seems to be with the decline of the U.S. dollar. When the global currency system was established several decades ago with the U.S. dollar as the reserve currency, the US was more than 50% of the world's GDP. It is now around half of that amount, causing their to be more dollars in the world then there is demand for them. Also QE by the Fed has accelerated this process and threatens the long-term value of the dollar. One has to wonder if the new models will be able to handle the disconnects that will likely manifest in an economic environment where monetary policy is not as accommodative.
We must also keep an eye on inflation versus deflation debate as the central banks around the globe face great challenges in resurrecting but containing inflation while making sure a deflationary spiral does not take hold.
So why all of the changes? Our guess is that there is a profound disconnect between current asset prices and economic fundamentals that has rendered the models useless.
A good deal of the disconnect seems to be with the decline of the U.S. dollar. When the global currency system was established several decades ago with the U.S. dollar as the reserve currency, the US was more than 50% of the world's GDP. It is now around half of that amount, causing their to be more dollars in the world then there is demand for them. Also QE by the Fed has accelerated this process and threatens the long-term value of the dollar. One has to wonder if the new models will be able to handle the disconnects that will likely manifest in an economic environment where monetary policy is not as accommodative.
We must also keep an eye on inflation versus deflation debate as the central banks around the globe face great challenges in resurrecting but containing inflation while making sure a deflationary spiral does not take hold.
Friday, November 15, 2013
Real Income versus Fed Balance Sheet
Since just before the start of the last recession, median household income has been declining at a significant rate. At the same time, the Federal Reserve's balance sheet has exploded to just shy of $4 trillion.
It is increasingly clear that the primary beneficiaries of Ben Bernanke’s wealth effect are financial assets not median income or employment. Unfortunately, the Federal Reserve seems to have learned nothing from the aftermath of the dot-com and housing bubbles of the recent past. Like politicians, they never ever admit wrongdoing or acknowledge the negative effects or unintended consequences of their policies.
Friday, November 1, 2013
U.S. Balance Sheet In The Red
The picture painted by the federal balance for fiscal year 2012 (which was recently released) shows a nation with a negative net worth of more than $16 trillion, according to the Treasury Department's year-end reports and calculations from banking analyst Dick Bove. Hopefully Congress can come up with some solutions to our fiscal dilemma. Balance sheet details are below.
The United States Balance Sheet ending on September 30, 2012
| Assets | Billions | Liabilities | Billions | |
| Cash & other monetary assets |
$206.20 | Accounts payable | $65.20 | |
| Accounts and taxes receivable |
$111.20 | Federal debt securities held by the public | $11,332.30 | |
| Loans receivable and MBS |
$859.60 | Federal empl. and veteran benefits payable | $6,274.00 | |
| TARP direct loans and equity investments |
$40.20 | Environmental and disposable liabilities | $339.00 | |
| Inventories and related property |
$299.00 | Benefits due and payable | $166.20 | |
| Property, plan t and equipment |
$855.00 | Insurance and guarantee program liabilities | $156.40 | |
| Debt and equity securities |
$110.20 | Loan guarantee liabilities | $74.60 | |
| Investments in GSEs | $109.30 | Liabilities to GSEs | $9.00 | |
| Other assets | $157.60 | Other liabilities | $432.60 | |
| Total | $2,748.30 | Total liabilities | $18,849.30 |
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