Daily Research Updates
Morning Briefings
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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.
Geopolitics Matters
(1) Panic Attack #62 isn’t over just yet. (2) October has been a spooky month for stocks around the world, even in the US. (3) More geopolitical worries than usual unnerve investors. (4) Quadruple whammy for emerging markets: interest rates, the dollar, oil prices, and trade war. (5) Halloween and the mid-term elections will come and go. (6) Stocks are cheap in the US if economy continues to grow. (7) IMF report about global financial stability finds that current emerging markets crisis is relatively contained. (8) Our net capital flows proxy remains bullish for the dollar. (9) IMF sees relatively stable banking systems around the world. (10) Fed Chairman Powell says he isn’t worrying about emerging market economies.
Crouching Tiger, Hidden Dragon
(1) Trump is a tiger. (2) China’s dragon has lots of secrets hidden in plain sight. (3) China’s most obvious syndrome is aging demographics. (4) China’s Q3 real GDP growth at 5.8%, (saar), lowest since Q4-2008. (5) Getting less bang per yuan. (6) Real retail sales growth showing China’s aging demographics. (7) Breaking China: Trump team rooting for and getting lower Chinese stock prices. (8) Trump’s policies boosting US, while depressing the rest of the world. (9) Good as gold?
The Fed: Mind Games
(1) Goldilocks growth, especially on y/y basis. (2) No recession here: Both CEI and LEI at record highs during September. (3) Yield curve spread still positive contributor to LEI. (4) Two identical strangers: The yield curve spread and the unemployment rate. (5) Stock market confused by conflicting fiscal and monetary policies and mixed Q3 corporate earnings reports. (6) Fed’s confidence in the economy spooking investors, who now fear that 3.40% fed funds rate is more likely in 2020. (7) Fed replaces “accommodative” with “restrictive” lingo. (8) FOMC remarkably gloomy about long-run economic growth. (9) We pick a quarrel with Fed Governor Quarles.
Bankers, Truckers & Fakers
(1) Taking it to the Street: JPM’s Dimon and BAC’s Moynihan have much good to say about their banks’ Q3s. (2) Expanding bank behemoths with cheery CEOs can’t be bad for the rest of us. (3) S&P 500 Diversified Banks’ earnings expectations are up and share prices down: Does opportunity knock? (4) S&P 500 Trucking index has been lagging its Railroad counterpart; 3Q earnings reports confirm why. (5) Reading between the line items. (6) When deepfakes stop being funny.
Brazil & Italy: From Right to Left
(1) Hot, hot, hot: Brazilian stock market is world’s only gainer mtd. (2) Gains reflect high hopes for Latin America’s biggest economy. (3) High hopes rest on fiery, ultra-right presidential frontrunner Jair Bolsonaro, “Trump of the Tropics.” (4) Yet a Bolsonaro administration’s economic policy remains uncertain. (5) Debating Brazil’s stock market runup: “Bolsonaro bump,” fundamentals, or both? (6) Spaghetti western: Stay tuned for a Rome-vs-EU showdown over Italy’s 2019 budget. (7) Proposed budget would hike social spending, cut taxes, and boost the deficit in defiance of EU rules. (8) Rising Italian bond yields threaten a dangerous debt spiral, pressuring euro.
Stepping on the Accelerator and the Brakes
(1) A most bullish and bearish fellow. (2) The accelerator: deregulation plus tax cuts. (3) The brakes: deficits, interest rates, oil prices, and tariffs. (4) A very big bet on supply-side economics. (5) A 15% boost to earnings. (6) Small business sentiment soars on deregulation and tax cuts. (7) A big boost to corporate cash flow from Trump’s expansion of depreciation allowance. (8) Monetary and fiscal policies clashing. (9) A long-term conflict with China. (10) Bad news for emerging economies. (11) Still recommending “Stay Home.”
Panic Attack #62?
(1) Panic Attack #62 or something more bearish? (2) Unlike past selloffs, there are lots of explanations but the main cause is elusive. (3) A broad consensus: the 10-year US Treasury yield is going to 4.00%. (4) Dow Vigilantes vs Bond Vigilantes. (5) Policies in conflict: Supply-side fiscal stimulus vs Fed’s monetary tightening. (6) Saturday morning with Jim Cramer, who blames the Fed for last week’s selloff. (7) PPG earnings warning set stage for last week’s stock market plunge. (8) Threat to supply chains running through China could be troublesome for tech hardware companies. (9) ETFs didn’t have a meltdown, but they spread the pain. (10) FANG ache. (11) Valuation multiples get Banksy-ed. (12) Movie review: “First Man” (-).
Respecting the Tape
(1) Triple whammy: rising interest rates, oil prices, and the dollar. (2) China’s spooks are spooking supply chains. (3) Trump stepping on accelerator and brakes at the same time. (4) Bad vibrations in auto industry. (5) Homebuilding has the shakes. (6) Building overcapacity in hotel industry. (7) Canary is gasping in the copper mine. (8) Too much capacity in semi equipment industry. (9) Mind reading.
Looking for Stress Cracks in Corporate Debt
(1) Cool-Hand Jay not too worried about NFC debt. (2) Corporate debt rising to record highs, led by bond debt. (3) Corporate cash flow in record-high territory, boosted by depreciation allowance. (4) NFC liquid assets at record high, with or without equity holdings. (5) NFCs have spent the past several years refinancing and borrowing at record-low bond yields. (6) Fed study sanguine about the impact of a 3% federal funds rate on corporate debt. (7) Credit quality is a mounting issue for NFC debt. (8) Are leveraged loans the new subprime problem? (9) Any credit market blowup would be more likely in private lending than public banking, taking down just rates of return, not the financial system.
Trump’s Poison Pills
(1) Gift for the holidays. (2) Short wait to get confirmation of our China thesis. (3) Veep Pence is Trump’s new hit man on China. (4) US has a long list of grievances over trade and many other issues with China. (5) There’s a poison pill in trade deal with Canada and Mexico. (6) Trump’s bullets hitting one of his targets: Chinese stock market. Will they ricochet to the US? (7) The Big Hack likely to alter global supply chains. (8) Trump’s sanctions against North Korea and Iran seem to be hitting their marks too. (9) Lots of poison pills out there!
Stocks Tracking Earnings Higher
(1) Bonds: Six reasons to fold them and one reason to hold them. (2) US bonds’ tether to bunds and JGBs may be fraying. (3) Bond Vigilantes model is most bearish of them all. (4) Latest wage inflation data remain subdued. (5) Industries with highest wage inflation are among most competitive. (6) Phillips curve on life support. (7) Powell says Fed remains on course. (8) Fed is adding an annualized $360 billion to Treasury supply. (9) Fed data show big buyers of Treasuries so far this year have been households, foreigners, and pension funds. (10) US PMIs outpacing the rest of the world’s PMIs. (11) Will bond yield top out at 3.50% or 4.00%? (12) Movie review: “A Star Is Born” (+ +).
On the Road Again
(1) Why have rail stocks been leaving trucking stocks in the dust? (2) Business is brisk for both, but labor costs and fuel-efficiency favor rails. (3) Amazon materializes, bursting into the “real” world with stores, smart homes, and delivery trucks (for starters). (4) Internet retail industry is a projected 80% 2018 earnings grower valued at a forward P/E in the 50s—add to cart? (5) Elon Musk, Houdini of the business world, escapes from self-made scrapes again. (6) Tesla says it met Q3 production goals—defying critics.
Stocks Tracking Earnings Higher
(1) USAF and the S&P 500. (2) Bull market’s jets fueled by earnings. (3) Remarkably strong revenues since mid-2016 still remarkably strong. (4) Could profit margins possibly go any higher? (5) What if the supply-side fairy tale comes true? (6) Animal spirits remain spirited. (7) Nothing to fear but wage inflation? (8) Powell says don’t worry, be happy about higher wages. (9) Buybacks rose to record high during Q2.
The World According to Jay
(1) FOMC is no longer accommodative, as interest rates gradually have normalized. (2) Normal may be a 3.00% federal funds rate. (3) Brainard says that shifting from headwinds to tailwinds might blow neutral rate higher for a short while. (4) Williams says that r-star’s light is getting “fuzzy.” (5) Powell has a short worry list: escalating trade war, high asset valuations, too much corporate debt, and unstable emerging markets with dollar-denominated debt. (6) Powell endorses supply-side economics, sort of. (7) FOMC’s forecasts suggest Phillips curve is dead at the Fed. (8) National and regional price surveys show September dip from high readings during the summer. (9) Everyone agrees that labor market is tight.