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Morning Briefing 2018-12-12
Morning Briefing is also available. (1) Can Capitalism exist without HFT algorithms? (2) Information in a free market. (3) Leveling the playing field with supervision and regulation. (4) No answers, but lots of (rhetorical) questions. (5) Keynes on casinos. (6) Professor Gary Smith weighs in on HFT algos: Tax ’em. (7) Cooperman wants some answers from the SEC. (8) A short history of the uptick rule for short sellers. (9) Computers can’t read between the headlines.
Bonds, Stocks & the Latest Recession Scare
(1) Some irony in the bond yield’s recent drop. (2) The curse of the yield-curve curse. (3) Explaining the divergence between bond yield and nominal GDP growth with the help of the Bond Vigilante Model. (4) The Dow Vigilantes saddle up. (5) No recession signal yet in official yield-curve spread. (6) Inflation is moderating. (7) US bonds mighty attractive compared to comparable foreign alternatives. (8) Seeing eye-to-eye with Leon Cooperman on algos. (9) Transportation indicators remain robust, as does M-PMI.
Optimistic Analysts vs Pessimistic Investors
(1) Is the party over? (2) Analysts are still in a party mood. (3) S&P 500 forward revenues at another record high. (4) Analysts may finally be starting to curb their enthusiasm for earnings and profit margins. (5) Investors aren’t in a party mood. (6) Is the most widely anticipated recession imminent? (7) Fed’s expected rate pause is flattening yield curve and raising recession anxiety. (8) Tenuous trade ceasefire with China is also flattening yield curve. (9) Trump is a loose cannon. (10) Trump is glued to the tape. (11) Record full-time jobs. (12) Beige Book: Take this job and shove it.
Humans vs Machines
(1) Still Grinchy. (2) The algos that stole Christmas. (3) Do algos ever capitulate? (4) When algos sell ETFs, they sell everything. (5) The big problem for next year’s earnings is that the profit margin has been making record highs this year. (6) 2019’s earnings seasons: Not much to look forward to. (7) News flash: Trump is a “Tariff Man.” (8) The yield curve isn’t a problem yet. (9) Diamonds in the coal mine. (10) Taking sides in oil markets tug of war.
Trump Put
The next Morning Briefing will be sent on Thursday, December 6. (1) Santa’s workshop. (2) Two-year Treasury yield suggests one less rate hike next year. (3) Powell, Trump, and Xi are Santa and his two helpers. (4) Two corrections in 2018 about Fed and trade fears. (5) Dow Vigilantes. (6) Discussing the long good buy in London. (7) Hard to see more upside in profit margin. (8) Drilling down to the sectors. (9) The Fed’s new report on financial stability finds lots of it.
Restricting ‘Restrictive’
(1) Disinflating. (2) One more rate hike, then done until mid-2019? (3) Core consumer goods prices still deflating. (4) In consumer services inflation, rent looks toppy, while health care remains subdued. (5) Record-high real wages suggests productivity is fine. (6) So does record profit margin. (7) The Fed is less accommodative and also less restrictive. (8) A brief history of the Fed since late September. (9) Data dependent again. (10) Movie review: “Widows” (- - -).
Powell Put
(1) Fed getting the message. (2) Powell takes it back: Rates no longer a long way from neutral. (3) Buffett’s big buffet of financials. (4) Financials are cheap, and should be overweighted. (5) The debanking of America. (6) Biggest mortgage lender isn’t a bank. (7) Nonbank middle-market lenders are proliferating. (8) The Fed’s financial stability report isn’t raising a red flag about CLOs yet. (9) Deep pockets. (10) Car wreck, housing slump. (11) Faster 3D printing.
Brexiting Is Hard To Do
(1) Touring London. (2) The short-term case for Go Global. (3) Around the world, around the luncheon table. (4) Taxi and informed opinion for hire. (5) Can a deal that is not too hard and not too soft get enough votes? (6) The upfront costs are set, while the trade deals are TBD. (7) Brexit with lots of regulatory strings attached. (8) Moving out of the UK. (9) Churchill weighs in.
Corporate Debt Bombs?
(1) Record nonfinancial corporate debt. (2) Revisiting the bubble question. (3) Alarming headlines not supported by actual stories. (4) Yellen and Warren both worrying about CLOs. (5) Fed Governor’s lame response. (6) Meanwhile, the US economy continues to have the pedal to the metal. (7) "We bring good things to life”: GE dropped its famous slogan in 2013, and now is on life support. (8) Defaults remain low thanks to previous refinancings at low interest rates. (9) AA-rated CLOs have a solid credit history. (10) Distressed asset funds are the credit markets’ shock absorber.
Turbulence
(1) A week in London. (2) Pence attacks China again. (3) Xi expects to outlive Trump politically. (4) Powell is Trump’s regrettable. (5) The Dow Vigilantes may not matter to Powell, but credit market stress cracks should get his attention. (6) Plunging oil prices depressing inflationary expectations. (7) Stock prices could stall along with our Boom-Bust Barometer. (8) Panic Attack #62 similar to #61, but with more of an attack on FAANGs. (9) Value likely to outperform Growth for a while. (10) Movie review: “Green Book” (+ + +).
Thanksgiving
We wish all of our readers a happy Thanksgiving. The next Morning Briefing will be sent on Monday, November 26. (1) Thank you. (2) An abundance of earnings. (3) Tax cut, revenues, and repatriated earnings all boosting earnings this year. (4) Q3 profit margins at record highs across the board, implying solid productivity gains offsetting rising costs. (5) Still not expecting price inflation to jump, but on the lookout. (6) ECI-based measure of unit labor costs remains remarkably subdued. (7) Strong dollar keeping a lid on import price inflation. (8) In the CPI, rent inflation is looking toppy, while medical care inflation remains below 2.0%. (9) Fed Governor Brainard discusses AI.
On Your Mark, Get Set, Pause
(1) Trump, Kudlow, Cramer, and moi. (2) Is neutral federal funds rate a long way off or getting closer? (3) Powell, Clarida, and Bostic weigh in. (4) Fed putting monetary policy under review until mid-2019. (5) Getting ready to do nothing? (6) Treasury yields fall on Clarida statement and drop in oil price. (7) Three and done? (8) During Q3, S&P 500 revenues and earnings jump 8.5% y/y and 27.5%, sending profit margin to yet another record high. (9) Joe sorts out the Q3 data for the S&P 500 sectors.
Better To Be Healthy Than Techie
(1) Old dog, new tricks. (2) A social media star is born, maybe. (3) Sonogram showing investors in fetal position. (4) Companies that build new headquarters are often cursed. (5) OPEC reports that oil supply exceeds demand. So does a chart of the price of oil. (6) For Energy industry analysts, it may be 2015 déjà vu all over again. (7) Quantum computing solves problems fast.
Volatile Situations
(1) Stock market volatility reflects bullish and bearish mix of Trump’s policies. (2) Meanwhile, Fed still tapping on the brakes. (3) An escalating trade war with China and an increasingly uncivil war at home. (4) Curbed enthusiasm. (5) Meet trade warrior Peter Navarro again. (6) “Globalists” to the rescue? (7) Lots of homegrown problems in China. (8) Lots of debt turning bad fast. (9) 50 million empty apartments. (10) Capital flight remains a big risk. (11) M2 confirming slowdown in real retail sales, which may be reflecting rapidly aging population. (12) One-day shopping spree.
Slowdown Ahead
(1) Bullish earnings and bearish guidance. (2) Nevertheless, analysts’ consensus estimates for S&P 500 earnings growth are 9.4% in 2019 and 10.2% in 2020. (3) We are projecting 4.9% and 5.3% comparable growth rates. (4) Revenues growth rates are bound to slow to 4.0% trend. (5) Profit margin very unlikely to move to new record highs, as implied by analysts’ revenues and earnings projections. (6) Crude oil is dropping, and back in sync with other declining commodity prices and stronger dollar. (7) Another sign of global slowdown on the demand side. (8) On the supply side, American and Canadian crude output is soaring.
The Hysteresis Hypothesis
(1) Deep recessions can damage economy’s potential output and weaken recoveries. (2) In 2016 speech, Yellen explained the benefits of running a “high-pressure economy” to reverse the damage done to potential output by severe recessions. (3) Powell isn’t convinced about benefits of “positive hysteresis.” (4) Five main channels of hysteresis. (5) Labor force participation rate showing signs of recovering finally, especially for prime-age workers. (6) Job openings exceed unemployed workers by 1.0 million. (7) A good explanation for flat yield curve and punk productivity growth. (8) Potential output has the potential to be greater again. (9) Trump to Powell: Stop tapping on the brakes! (10) A Powell press conference after every FOMC meeting should give Fed more flexibility in scheduling rate hikes.
‘Don’t Be Evil’
(1) Holiday treats following October’s tricks? (2) Consumers are ready to do what they do best during the holidays. (3) Consumer Optimism Index highest since 2000. (4) Consumer Discretionary sector among the leaders this year so far, and probably through year-end. (5) Tariffs will be next year’s problem. (6) Google’s don’t-be-evil mantra falls to bottom of its code of conduct. (7) Google has disgruntled employees, and is under scrutiny by the White House and EU. (8) League of Legends shows off AR on live stage.
Europe Splintering
(1) The party is over for Merkel. (2) Immigration is a top issue in Germany. (3) Chancellor through 2021? Unlikely. (4) Three contenders. (5) Macron alone trying to keep EU from disintegrating? (6) Germany’s economic indicators rapidly losing their oomph. (7) German stocks may stay weak as long as political uncertainty remains a problem.
All About Inflation
(1) Faster pay increases heighten price inflation concerns. (2) Is the Phillips curve finally in gear? (3) Tight labor market boosting productivity and real wages perhaps? (4) Wage vs price curves. (5) Inflation has been subdued for a very long time, and may remain so. (6) Disinflation remains a global trend. (7) Latest employment gains belie labor shortage fears. (8) More rapid increases in wages for goods producers aren’t showing up in goods prices. (9) In services, rent inflation is looking toppy thanks to multifamily house-building boom. (10) Healthcare inflation remains very low even excluding impact of government programs, which tend to keep a lid on pricing.
Relief Rally #62?
(1) Center-stage worries. (2) Still bullish but curbing our enthusiasm. (3) Whether Fed is turning from neutral to restrictive remains a worry. (4) Lots of confusion about Trump’s China policy should clear up after mid-terms. (5) Santa vs the two Grinches. (6) Goldilocks was a moocher with bad taste. (7) When wage “inflation” isn’t really inflation. (8) Productivity may finally be heating up, which is heating up economic growth while cooling price inflation. (9) No pickup in unit labor cost inflation. (10) Lowest short-term unemployment rate on record! (11) Bonds are not having fun. (12) Movie review: “Bohemian Rhapsody” (+ + +).
Morning Briefing 2018-11-01
(1) Aspirin sales rose last month. (2) FANG holders had the biggest headaches in October. (3) A Facebook that’s hard to forget. (4) Zuckerberg admits he needs to spend more on security, less on emojis. (5) The EU puts FANGs in the Peoples’ Republic of GPDR. (6) The EU wants to pick FANGs’ deep pockets. (7) Aging is a drag. (8) Growth at a price. (9) How fitting: Semis crawl back from the dead on Halloween. (10) Blob material feeds on CO2.
Consumers Getting Older
(1) Is 3M stock price a reliable indicator of global economic activity? (2) Not a perfect barometer, though it is correlated with M-PMI in US and Eurozone. (3) Is the global slowdown Trump’s fault? (4) Can’t blame Trump for aging demographics. (5) China’s slowing retail sales growth showing country’s aging trend. (6) Italians want to retire earlier. (7) Brazilians are retiring young. (8) Happy consumers once meant high P/Es. Not this year. (9) Misery Index remains near cyclical lows. (10) Investors fear low jobless rate will lead to higher inflation and interest rates. (11) Despite plentiful jobs, wage inflation remains subdued.
Lowering Our Targets
(1) Powell did say what he reportedly said on Oct. 3. (2) It was a big mistake, since he contradicted 9/26 FOMC statement and suggested Fed had a ways to go in raising rates. (3) Powell gets the most blame for having triggered October stock market rout, in our book. (4) Year-over-year comps for real GDP, revenues, and earnings will be lower in 2019. (5) Good earnings, bad guidance. (6) Analysts’ optimistic outlook for earnings doesn’t add up given likely slower growth of revenues and prospect of flat profits margin. (7) Lowering our outlook for earnings growth for the next two years. (8) Now shooting for S&P 500 at 2900 by year-end, 3100 next year, and 3500 in 2020. (9) Escalating trade war with China worsening the correction.
Trump’s Regrettables
(1) Kashkari’s plea. (2) What’s the rush to raise interest rates? (3) Slower GDP growth ahead in response to recent rate hikes. (4) Regional surveys mostly show inflation topping. (5) Trump probably regrets not reappointing Yellen. (6) Did Powell really say that? (7) New Fed vice chairman is yet another fan of r-star who admits it’s unobservable. Says rates still accommodative. (8) What is normal? What is neutral? What is the meaning of life? (9) Yield curve has flattened, so why does FOMC still estimate NAIRU at 4.5%? Why not 3.7%? (10) Fed’s Beige Book still has plenty of green. (11) Movie review: “Beautiful Boy” (+).
‘Something Has To Give’
(1) Awful close. (2) Ugly technical picture. (3) Not too late to sell, or buying opportunity? (4) The accelerator and the brakes analogy. (5) Analysts remain bullish on S&P 500 revenues! (6) Earnings outlook remains upbeat according to analysts. (7) Investors seeing more trick than treat in earnings outlook. (8) Forward P/Es fall to fair value around 15 for S&P 500/400/600. (9) Uncivil war. (10) Cyclicals lead the way down on prices and up on analysts’ earnings expectations. (11) Back to the future.