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duminică, 6 aprilie 2014

Mish's Global Economic Trend Analysis

Framework for Understanding Market Tops and Bottoms
Investigating Spain's Pledge to Lower Taxes (It Won't Happen)
French Socialists Revolt Against Prime Minister, Threaten Vote of No Confidence

Framework for Understanding Market Tops and Bottoms

Posted: 06 Apr 2014 10:39 PM PDT

Last week I received an excellent article from Variant Perception on "Market Tops", and have permission to excerpt some of it.

Here is a link to the summary page of Understanding Market Tops. What follows are a few snips from the full report.

Framework for Understanding Tops

In the following table, we summarize the signs of market bottoms and tops.

The signs can be divided into the following categories: corporate, valuation, economic, market and sentiment. Clearly many signs of a top are in place, but there are many characteristics that are currently missing. In the coming pages we will look at each category separately.

click on any chart for sharper image

Today the market shows many of the elements that are present near market tops. In particular, sentiment is extremely bullish, investors are long and leveraged, and valuations are extended on a wide variety of measures. However, leading economic indicators are still not negative, and so far breadth and technicals have not deteriorated. The medium-term stock market returns are likely to be negative due to excessive valuation, but there is no imminent sign of a medium-term market top.

Tops are a process, not a single event. They tend to last a long period of time, and markets whipsaw traders and disappoint bears and short sellers. For example, many signs of a market top were clearly visible in late 1998, but it was not until the end of 2000 that most major market indices started to collapse. Likewise, many elements of a market top were evident in late 2006, but markets didn't begin to collapse until very early 2008.

CORPORATE ACTIVITY: WE'RE SEEING TYPICAL SIGNS OF MARKET TOPS

CEOs are bad capital allocators of corporate cash and provide contrarian clues, but insiders are much better at providing insight with what they do with their own cash.

A CEO should issue shares when they are overvalued and buy them back when they are undervalued. Likewise, a CEO should buy competitors when they are cheap and avoid overbidding when prices rise. Unfortunately, most share buybacks and most mergers and acquisitions happen at very high prices near market tops, and companies divest units and issue shares near market bottoms. Insiders, however, are smart. IPOs surge near market tops as insiders sell out. Also, near market bottoms insiders buy their own stocks.

The fewest buybacks in each cycle happened when stocks were cheapest. It is impossible to make this up. CEOs are just like "dumb money" retail investors, buying high and selling low.

If you look exclusively at the US, you can see that M&A levels are very frothy and are near where they were in 2007. Greed is alive and well in the US. They are significantly below levels seen in 2000, but that was the biggest M&A wave ever and marked the peak of telecom, media and internet bubble. It included the likes of AOL's purchase of Time Warner and other mammoth deals.

One area that currently is frothy is the biotechnology sector. The number of biotech deals is the highest it has reached since 2000, and the dollar value is the second highest in history.

During the final phases of bull markets, not only does the number of IPOs rise, but the quality of IPOs deteriorates. The following chart shows that only during the final phases of the internet bubble did we see such a high percentage of money-losing IPOs. Investors are chasing unproven business models.

In the past decade, private equity players have become more important "insiders", and the number of IPOs from private equity backed groups has now reached all-time highs. Furthermore, the follow-on deals from private equity sponsored groups are also at all-time highs. Smart firms were buying companies in the bad times and are now floating them and getting out while they can.

CEOs and managers tend to overpay for share buybacks and for M&A activity with shareholder money. They don't mind sticking it to investors. However, when it comes to their own personal money, they are much shrewder. Insiders consistently sell their own stock when markets are high and buy large quantities of their own stock when markets fall sharply and become cheap.

CREDIT SIGNS OF A TOP: TODAY LOTS OF JUNK DEBT AND VERY LOW QUALITY

In May 2013 Variant Perception wrote a report titled Credit Bubble, Toil and Trouble. We argued that ultra-low interest rates were already leading to a bubble in corporate debt. Investors were issuing large quantities of corporate debt at low spreads. The situation has only got worse since we wrote in our report.

As the following chart shows, in 2013 we saw the highest issuance of junk bonds ever. This was true in absolute numbers and as a percentage of all corporate debt.

Not only is the issuance of junk at record highs, but we have seen the highest LBO transaction volume since 2007. In fact, the market peak in 2007 is the only year where we saw more leveraged buyouts.

There is much more in the 28-page report. You can request a copy from the link at the top.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Investigating Spain's Pledge to Lower Taxes (It Won't Happen)

Posted: 06 Apr 2014 09:41 PM PDT

Prime minister Mariano Rajoy is likely as serious about cutting taxes now as he was in December 2011.

Recall that at the start of the 2012 I noted Promises Go Out the Window as Spain Undertakes Huge Tax Increase Coupled With Biggest Budget Cut in History.

Via translation from El Economista, the director of the Foundation of Savings Banks (Func), Ángel Laborde says Government is "Not Serious" Regarding a Proposed Tax Cut.

Angel Laborde explained in the newspaper El Pais that "government revenues funded only 85% of the costs, excluding financial aid. The remaining 67,755,000, was the deficit had to be financed by increasing debt. This stood at the end of year to 960,640 million, 93.9% of GDP. recall that in 2007 the debt was 36.2% of GDP."

"Despite the widespread belief in our society that public spending is silhouetted sharply, the fact is that in 2013 slightly increased by 0.2% over the previous year. This, coupled with the decline in GDP, made weight representing the same GDP increased from 44% to 44.4%, "says Angel Laborde.

Tax revenues continue to grow by increasing taxes and not by the growth of economic activity, so any tax cut would lead to a reduction in spending or an increase in public deficit.

Anti-austerity promises are being made in Spain and France that have virtually no chance of happening. Of course, that is always the expected promise everywhere.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

French Socialists Revolt Against Prime Minister, Threaten Vote of No Confidence

Posted: 06 Apr 2014 11:28 AM PDT

Further compounding president Francois Hollande's problem with the European Commission Rejection of France's Proposal for Deficit Target Leniency, the socialists are in open revolt against new Prime Minister Manuel Valls.

The socialists consider Valls as too pro-business. They want less austerity and a reduction in personal taxes, not corporate taxes. And they are against Hollande's "responsibility pact" proposal that would reduce labor costs and cut government spending.

Via translation from Les Echos, please consider Socialist MPs Threaten a Vote of No Confidence on Account of Valls

Nearly a hundred of Socialist deputies signed a document calling for political change of course and threaten a vote of no confidence in the government on Tuesday. The members of parliament (MPs), groggy out of defeat in local elections, gain momentum to contest the elements of "pact of responsibility."

Jean-Marc Germain, leader of "rebuilders" and very close to the mayor of Lille Martine Aubry, warned Friday that 65 members wanted to get "insurance", including a stronger role for Parliament. Ranks have swelled with the release of a "contract of majority" launched by Pouria Amirshahi among others, Jean-Marc Germain or Laurence Dumont, Vice-President of the Assembly.

This text calls for the Government to consult further their majority and to reorient its policy and that of Europe to fight austerity, investing directly for employment and to favor a "demand shock" through measures favor of purchasing power.

President Francois Hollande promised on Jan. 14 to engage the responsibility of the Government to the pact of responsibility, which includes a reduction of labor costs by 10 billion euros. But the government reshuffle and increasingly hard criticism by the socialist majority have changed the situation.

The absence of policy change line has weighed heavily in the decision environmentalists and casts uncertainty over their vote Tuesday. François Hollande and his government are thus caught between two fires, the majority of which are increasingly demanding the end of austerity and that of the European Commission, for the moment, refuses to France a additional time to achieve its deficit reduction.

Demand Shock Spending Spree Not Coming

In light of the EC's rejection of Valls' request for more time to meet deficit reduction targets, it's safe to say a French spending spree is not coming. It will be amusing to see what sleight of hand magic Hollande proposes in his next budget proposal to Brussels.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Seth's Blog : Looking for validation in all the wrong places

Looking for validation in all the wrong places

Which people do you look to for criticism? Which metrics are you relying on to tell you if you're doing a good job? Who tells you if you're on to something?

Alas, most of us usually look in the wrong place.

Here are a few you might want to avoid:

easy-to-quantify and common metrics that lack granularity or insight (like pageviews, followers and heaven-forfend, likes)
critics who are loud, snarky and/or jealous
self-appointed gatekeepers looking for more power
the mass market
... the media they rely on for their opinion [including sportscasters and news anchors (in any field)]
people who never understand or appreciate work that's important and new
the cool kids

Change someone who cares.

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sâmbătă, 5 aprilie 2014

Mish's Global Economic Trend Analysis

Brussels Says "No" to France Proposal for Deficit Target Leniency

Posted: 05 Apr 2014 07:07 PM PDT

Francois Hollande's new government is of to a shaky start.

The European Commission told Manuel Valls, Hollande's new Prime Minister to "be more like Spain", and impose more austerity to meet deficit targets. The irony of course is that Spain has failed at least three times to meet repeatedly watered-down deficit targets.

Via translation from El Pais, please consider EC Says No to Valls Deficit Request.

The flamboyant French Prime Minister, Manuel Valls, asked the European Commission to grant him leniency on meeting deficit targets in exchange for reforms, cuts to public spending, and tax breaks. Valls received yesterday the Commission response: No. No way. There will be none of that.

German Finance Minister, Wolfgang Schäuble, suggested that France had been given leeway twice already, and a third time could be counterproductive. The vice president even Economic Affairs Commission Olli Rehn, yesterday got out the glove and categorically ruled out more time to Paris.

"An extension of the deficit targets for France would be justified only if there are negative surprises. And there is nothing like that on the horizon. The eurozone is in full recovery, "he told Reuters. That view is shared by President José Manuel Durão Barroso and Jean-Claude Juncker.

Rehn cited as models for France to countries that have made reforms, such as Germany and more recently, Ireland, Latvia and even Spain, although in three cases the results still leave much to be desired.

In April, Paris must send their tax plans to Brussels. And that's when the mess really starts.

Olli Rehn's notion that the eurozone is in full recovery is of course laughable. As for negative surprises, expect to see plenty of them.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Australia's House Prices 'Flashing Red', Debt to Income at Record Level

Posted: 05 Apr 2014 09:09 AM PDT

Australia's housing bubble is back in full swing. Prices rose almost 11 percent over the past year to record levels in absolute terms and near-record levels as a share of household income. Prices in Sydney rose 15 percent.

Household debt as a percent of income surpassed the previous record.

WAtoday reports Australia's house prices 'flashing red', debt to income ratio at record levels.

Australian household debt has hit a record 177 per cent of annual disposable income while housing valuations are "flashing red", according to Barclay's chief economist, Kieran Davies.

"House prices now equate to 4.3 times annual income and 28 times annual rent, both within a fraction of their historic highs," Mr Davies said.

Home Prices to Income

Household Debt as Percent of Income

In March RBA governor Glenn Stevens warned "we need to be alert to the possibility that the past year of strong rises in dwelling prices leads people to assume that this is the norm".

"Were such an assumption to lead to increasing speculative activity, accompanied by a renewed increase in household leverage with all the associated risks to the housing market ... that would be unwelcome," Mr Stevens said.

That home prices and debt-to-income are back up at record levels is a sign that speculation is already back in full swing already.

Is there any central bank governor anywhere that can spot speculative bubbles before they burst? Apparently not.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

The President’s Budget Ensures Opportunity for All Hardworking Americans

Featured

Weekly Address: The President's Budget Ensures Opportunity for All Hardworking Americans

In this week's address, the President highlighted the important differences between the budget he's put forward -- built on opportunity for all -- and the budget House Republicans are advocating for, which stacks the deck against the middle class.

Click here to watch this week's Weekly Address.

Weekly Wrap Up

7.1 Million Americans: Covered

The numbers don't lie -- the Affordable Care Act is working. By the end of open enrollment on March 31, 7.1 million Americans had signed up for coverage.

In a Rose Garden speech, President Obama celebrated the news. "The bottom line is this: under this law, the share of Americans with insurance is up and the growth of health care costs is down, and that's good for our middle class and that's good for our fiscal future."

Spring is definitely here as the White House Kitchen Garden is growing again. First Lady Michelle Obama invited local students to join her for the sixth-annual planting of the garden earlier this week, making sure the White House will have a fresh crop of healthy fruits and vegetables in the months ahead.

The First Lady started planting the garden in 2009 to start a nationwide conversation on healthy eating and, according to a report released by the National Gardening Association, 2 million more households are engaging in community gardening now than in 2008 -- a 200 percent increase.

The President traveled to Ann Arbor, Michigan on Wednesday to speak to a crowd filled with University of Michigan Wolverines about his March Madness bracket, a famous local deli named Zingerman's, and, of course, the importance of raising the national minimum wage.

"Nobody who works full-time should be raising their family in poverty, right? If you're working, if you're responsible, you should be able to pay the rent, pay the bills," said President Obama. "But... all across the country you can work full-time on the minimum wage and still be in poverty."

READ MORE

Team USA Stops by the White House

U.S. Olympians and Paralympians who competed in Sochi earlier this year visited the White House this week, spending time touring the grounds, playing with Bo and Sunny, and hearing from the President and First Lady.

Read on to watch the President and First Lady's remarks to the athletes and to see some of Team USA's tweets and Instagram posts.

Are you a social butterfly? Do you have kids ages 5-13? Want to visit the White House? The 136th-annual White House Easter Egg Roll is just around the corner, and you are invited.

READ MORE

As always, to see even more of this week's events, watch this week's episode of West Wing Week:

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Seth's Blog : Search vs. discovery

Search vs. discovery

They're not the same, in fact, they couldn't be much more different.

Search is what we call the action of knowing what you want and questing until you ultimately find it. Duckduckgo is a search engine that is mostly invisible--tell it what you want, here it is.

Discovery, on the other hand, is what happens when the universe (or an organization, or a friend) helps you encounter something you didn't even know you were looking for. (I had originally typed find but then replaced it with encounter. Search is such a dominant paradigm that we use search-related words even when we don't intend to.)

Amazon and Google have done an incredible job of providing the answer to search. It's not obvious, though, that we've made nearly as much progress in helping people discover ideas, hidden gems, friends, opportunities, places, important issues or the truth (about anything).

Are you working to help your clients, patrons, customers and colleagues find what they already know what they want? Or teaching and encouraging them to find something they didn't know they needed?

Seems like a huge opportunity.

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vineri, 4 aprilie 2014

Mish's Global Economic Trend Analysis

Millennials Mired in "Wealth Gap" as Older Americans Gain; Housing Crash Continues to Overshadow Young Families' Balance Sheets

Posted: 04 Apr 2014 10:52 AM PDT

Thanks to Fed printing presses coupled with an extreme case of irrational exuberance, those over 40 years old have recovered losses from the great financial collapse.

However, Millennials Remain Mired in Wealth Gap, as Others Recover.

For households headed by someone 40 years old or younger, wealth adjusted for inflation remains 30 percent below 2007 levels on average, according to research by economists at the Federal Reserve Bank of St. Louis. Net worth for older Americans has already recouped the losses.

Such a generational divide has negative implications for consumer spending, which accounts for almost 70 percent of the economy. Younger households tend to spend a greater share of their incomes in furnishing new homes and buying automobiles, in contrast to their older counterparts who save more as they inch closer to retirement.

Homeownership rates for 35 to 44 year olds dropped 6.3 percentage points to 60.9 percent as of the fourth quarter 2013 from the end of 2007, Census data show. For households under 35, the rate dropped 4.2 points to 36.8 percent. Meanwhile, 71.3 percent of 45 to 54 year olds and 77 percent of those 55 to 64 own a home.

The average value of housing on young families' balance sheets remains about 35 percent below its 2007 level, the St. Louis Fed paper estimates.

"These changes going on with individual balance sheets could have impacts on the whole economy," said William Emmons, an economist at the St. Louis Fed who co-authored the study published in February with Bryan Noeth. "Maybe this is one of the reasons that it's been so hard to understand this weak recovery. Not enough people are looking at these."

Weak Recovery Easy to Understand

There is nothing hard to understand about the weak recovery. I predicted this outcome years ago. On May 22, 2008 I wrote "Boomers will be competing with their children and grandchildren for jobs that in many cases do not pay living wages."

Many young kids are mired in student debt, working on jobs that should not even require a degree. Those kids postpone household formation, and in record numbers still live with their parents. Millennials had little to no assets for Bernanke to inflate in price.

Housing Crash Continues to Overshadow Young Families' Balance Sheets

And so here we are.

For further analysis, please see the Fed report Housing Crash Continues to Overshadow Young Families' Balance Sheets. Here are a couple of charts from the report, followed by my comments.

Real Net Worth

Since 1989 real net worth of those under the age of forty is down 8.5%.

Home Ownership Rates

For all age demographics, home ownership rates peaked right as the bubble burst. However the steepest percentage increases in ownership at the time of the collapse was those under 40.

Home prices have recovered much of their losses in many areas, but that has not done anything to alleviate the massive student loan problem. Worse yet, the home price recovery has a negative benefit for those still trapped living at home with their parents as well as those with a job but still mired in student debt, hoping at some point to buy.

Until that dynamic changes, household formation will remain weak.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Nonfarm Payrolls +192,000, Unemployment Rate Steady at 6.7%; Economy Poised to Accelerate?

Posted: 04 Apr 2014 08:17 AM PDT

Initial Reaction

Nonfarm Payrolls rose by 192,000 nearly matching the Bloomberg Consensus expectation of 200,000. Revisions to January and February added another 37,000 jobs. Private employment, which excludes government jobs, surpassed the pre-recession peak for the first time.

Beneath the surface, this was a solid report for a change as the household survey shows a strong gain in employment of 476,000.

March BLS Jobs Statistics at a Glance

Nonfarm Payroll: +192,000 - Establishment Survey
Employment: +476,000 - Household Survey
Unemployment: +27,000 - Household Survey
Involuntary Part-Time Work: +225,000 - Household Survey
Voluntary Part-Time Work: +189,000 - Household Survey
Baseline Unemployment Rate: +0.0 at 6.7% - Household Survey
U-6 unemployment: +0.1 to 12.7% - Household Survey
Civilian Non-institutional Population: +173,000
Civilian Labor Force: +503,000 - Household Survey
Not in Labor Force: -331,000 - Household Survey
Participation Rate: +0.2 at 63.2 - Household Survey

Additional Notes About the Unemployment Rate

The unemployment rate varies in accordance with the Household Survey, not the reported headline jobs number, and not in accordance with the weekly claims data.
In the past year the population rose by 2,253,000.
In the last year the labor force rose by 1,128,000.
In the last year, those "not" in the labor force rose by 1,134,000
Over the course of the last year, the number of people employed rose by 2,349,000 (an average of 195,000 a month)

The population rose by over 2 million, but the labor force rose half as much. People dropping out of the work force accounts for much of the declining unemployment rate.

March 2014 Employment Report

Please consider the Bureau of Labor Statistics (BLS) March 2014 Employment Report.

Total nonfarm payroll employment rose by 192,000 in March, and the unemployment rate was unchanged at 6.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment grew in professional and business services, in health care, and in mining and logging.

Click on Any Chart in this Report to See a Sharper Image

Unemployment Rate - Seasonally Adjusted

Nonfarm Employment January 2003 - March 2014

click on chart for sharper image

Private Employment January 2003 - March 2014

click on chart for sharper image

Nonfarm Employment Change from Previous Month by Job Type

Hours and Wages

Average weekly hours of all private employees rose 0.2 hours to 34.5 hours. Average weekly hours of all private service-providing employees rose 0.2 hours to 33.3 hours.

Average hourly earnings of private workers fell $0.02 to $20.48. Average hourly earnings of private service-providing employees fell $0.04 to $20.25.

For further discussion of income distribution, please see What's "Really" Behind Gross Inequalities In Income Distribution?

Birth Death Model

Starting January, I dropped the Birth/Death Model charts from this report. For those who follow the numbers, I keep this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid. Should anything interesting arise in the Birth/Death numbers, I will add the charts back.

Table 15 BLS Alternate Measures of Unemployment

click on chart for sharper image

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 6.7%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 12.7%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Labor Force Factors

Discouraged workers stop looking for jobs
People retire because they cannot find jobs
People go back to school hoping it will improve their chances of getting a job
People stay in school longer because they cannot find a job
Disability and disability fraud

Were it not for people dropping out of the labor force, the unemployment rate would be well over 9%.

Synopsis

This was a solid jobs report. Weather-related effects were taken back and then some. The only negatives were falling hourly wages and a rise in involuntary part-time employment. Finally, if people start looking for jobs, further declines in the unemployment rate will be difficult to come by, even if job reports are generally favorable.

Economy Poised to Accelerate?

Is the economy out of the woods and poised to accelerate? I don't think so. Global imbalances are still growing, Europe is generally a basket case and China is due for a rather hard landing.

I did not believe the widely-held China decoupling theory in 2007, and I do not believe the widely-held US decoupling theory today.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

duminică, 6 aprilie 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Seth's Blog : Looking for validation in all the wrong places

Looking for validation in all the wrong places

More Recent Articles

sâmbătă, 5 aprilie 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

The President’s Budget Ensures Opportunity for All Hardworking Americans

Seth's Blog : Search vs. discovery

Search vs. discovery

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vineri, 4 aprilie 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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