Category: US & Canada

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Containment 2.0 [podcast]

Always interesting to listen to James Sherr of Chatham House discuss global geo-politics.

http://www.rferl.org/audio/27310324.html

Can the West contain a Russia that is determined to upend the international order — but which at the same time is deeply integrated into the global economy?

The latest Power Vertical Podcast tackles these questions with guests James Sherr, an associate fellow with — and former head of — Chatham House’s Russia and Eurasia program, and Daniel Drezner, a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and author of the books Theories Of International Politics And Zombies and the recently published The System Worked: How The World Stopped Another Great Depression.

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Weak US retail sales belie strong fundamentals

Lucia Mutikani at Reuters writes:

U.S. retail sales barely rose in September and producer prices recorded their biggest decline in eight months, raising further doubts about whether the Federal Reserve will raise interest rates this year. The weak reports on Wednesday were the latest suggestion that the economy was losing momentum in the face of slowing global growth, a strong dollar, an inventory correction and lower oil prices that are hampering capital spending in the energy sector. Job growth braked sharply in the past two months.

Readers of the headline Weak U.S. retail sales, inflation data cloud rate hike outlook could be forgiven for believing the US economy is headed for recession. After all, retail sales growth has slowed to a crawl.

Retail Sales

And the producer price index is declining.

Producer Price Index

But if we strip out food and energy prices, PPI remains close to the Fed’s 2% inflation target. And low energy prices will eventually feed through as a stimulus.

Hourly earnings in the manufacturing sector are starting to grow.

Average Hourly Earnings Growth: Manufacturing and Total Private

“The overall message is that consumer spending has remained extremely strong. If sentiment had indeed shifted, it would be hard to explain why sales of cars, certainly among the more expensive items, jumped in September to their highest level since July 2005,” said Harm Bandholz, chief economist at UniCredit Research in New York.

Light vehicle sales continue their upward trajectory.

Light Vehicle Sales

And construction spending is decidedly bullish.

Construction Spending

Not much here to keep Janet Yellen up at nights. When it comes to rate rises, the sooner we get the economy back on a sound footing the better, I say. Otherwise we encourage further capital misallocation and dependency on Fed stimulus. There are no free lunches from central bankers. Everything comes at a price.

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Sen. John McCain on Russia’s airstrikes in Syria

Shades of Churchill in 1938:

Winston Churchill, denouncing the Munich Agreement in the House of Commons, declared:

“We have suffered a total and unmitigated defeat … you will find that in a period of time which may be measured by years, but may be measured by months, Czechoslovakia will be engulfed in the Nazi régime. We are in the presence of a disaster of the first magnitude … we have sustained a defeat without a war, the consequences of which will travel far with us along our road … we have passed an awful milestone in our history, when the whole equilibrium of Europe has been deranged, and that the terrible words have for the time being been pronounced against the Western democracies: “Thou art weighed in the balance and found wanting”. And do not suppose that this is the end. This is only the beginning of the reckoning. This is only the first sip, the first foretaste of a bitter cup which will be proffered to us year by year unless by a supreme recovery of moral health and martial vigour, we arise again and take our stand for freedom as in the olden time.”

On 3 October 1938, Churchill added:

“England has been offered a choice between war and shame. She has chosen shame, and will get war.”

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Not much wrong with the US economy

Profit margins in the US are contracting, with the second quarter showing a 6.0% decine in profit per unit of real gross value added (Nonfinancial). Contraction of greater than 10% would be cause for concern, but we need to dig a little deeper.

Declining US Profit Per Unit of Real Gross Value Added (Nonfinancial)

Earnings per share for the S&P 500 Index declined for the last two quarters and is projected to decline for the next two quarters as well (Q2 which is 98.6% complete and Q3 2015).

S&P 500 Earnings Per Share

The sharp fall in index earnings is primarily caused by losses in the Energy sector. Other sectors are reasonably healthy.

S&P 500 Energy Sector - Earnings Per Share

Another cause for concern is bellwether transport stock Fedex. Commencement of a primary down-trend normally warns that economic activity is contracting. Freight revenue for the fiscal fourth quarter increased by only 1%, while ground revenue increased by 19%. Slower earnings growth due to a lag in fuel surcharges and integration challenges with the acquisition of TNT may both be weighing on the stock.

Fedex

The Freight Transportation Services Index, however, has turned upwards.

Freight Transportation Services Index

And the LoDI Index continues to climb.

LoDI Index

The LoDI Index uses linear regression analysis to combine cargo volume data from rail, barge, air, and truck transit, along with various economic factors. The resulting indicator is designed to predict upcoming changes in the level of logistics and distribution activity in the US and is represented by a value between 1 and 100. An index at or above 50 represents a healthy level of activity in the industry.

Spending on durables remains promising, with light motor vehicle sales rising.

Light Motor Vehicle Sales

And construction spending (adjusted for core CPI) climbing steeply.

Construction Spending

The ISM Manufacturing PMI Composite Index remains above 50, indicating expansion, but is softer than it has been for a while.

ISM Manufacturing: PMI Composite Index

The Leading Index from the Philadelphia Fed, however, at a healthy 1.57%, continues to project a healthy economic outlook.

Philadelphia Fed Leading Index

Despite the falling Fedex stock price and softer PMI, there does not appear to be much wrong with the US economy. The positives outweigh the negatives. Analysts’ optimism about an fourth quarter upturn may be a little premature, but does not appear far off-track.

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S&P 500: Market risk remains elevated

NYSE daily volume and short sales declined Thursday & Friday, indicating selling pressure is easing.

NYSE Daily Volume & Short Sales

There is no sign yet on the daily chart, however, with 21-day Twiggs Money Flow respecting the zero line from below. Breach of support at 1900 would warn of another decline. Follow-through below 1870 would confirm. Recovery above 2000 is unlikely at present, but would suggest that the correction is over.

S&P 500

Daily VIX indicates market risk remains elevated.

VIX

The market is closed Monday 7th for Labor Day.

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NYSE Short Sales

NYSE short sales and daily volume are only published 24 hours after the close of trade, but are still a useful indication of where the market is headed. Short sales over 500 million on Monday, remain elevated. Keep an eye out for any increase above 600 million this week — which would warn of rising selling pressure and a likely breach of support.

NYSE Daily Volume & Short Sales

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S&P 500: Dead cat bounce?

After Friday’s narrow consolidation between 1970 and 1990, S&P 500 September 2015 E-mini futures broke support at 1970, indicating moderate selling pressure.

S&P 500 September 2015 E-mini

Sound domestic economic performance is likely to ensure that the S&P 500 returns to its primary up-trend in the medium- to long-term, but upheaval in international financial markets may have sapped investor confidence in the short- to medium-term. The doji star on the daily chart reflects indecision. A close below 1970 would suggest another test of support at 1870, with respect of resistance at 2000 a bearish sign. A 21-day Twiggs Money Flow peak below zero would also warn of selling pressure. Follow-through above 2000 is less likely, but would indicate light selling and a snappy recovery.

S&P 500

NYSE volumes reflect the increase in activity, starting Friday August 21st, with daily volumes over 2 billion and short sales jumping to 800 million. It will be worth keeping an eye on short sales this week. Recovery above 600 million would warn of rising selling pressure.

NYSE Daily Volume & Short Sales

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S&P 500 during the 1997 Asian financial crisis

Here is the performance of the S&P 500 during the 1997 Asian financial crisis and the ensuing Russian financial crisis in 1998.

S&P 500 1996-1998

The index gained 31% in 1997, and 26.7% in 1998, despite the upheaval in Asian markets. Global markets are nowadays a lot more interconnected, however, than in 1997/98.

S&P 500

All the same, gradual decline on 13-week Twiggs Money Flow suggests medium-term selling pressure — a secondary rather than a primary movement.

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