Yesterday morning's employment report was, at first glance, disappointing. While payroll employment was expected to show a net change of about 125,000, the actual change was only 56,000, less than half the expectation. A good story describing this is in Money.com. While the payroll employment change was disappointing, the unemployment rate fell slightly from 5.1% to 5.0%. All of this is detailed in the official report by the Bureau of Labor Statistics.
A few things to note. Virtually all newspaper/Internet articles describing this are WRONG -- they state that the 56,000 number was the addition to employment. It was actually the net change in employment -- the difference between jobs added and jobs lost. In a post-manufacturing economy like ours, job loss occurs every month (unfortunately). About 15 or 20 years ago, what the newspapers described would have been accurate.
Note also how much of the discussion about this report centered on the unemployment rate. Did you hear anyone say (or write) that the labor force fell last month? A falling unemployment rate caused by a lower labor force (the unemployed dropping out of the labor force) is little cause for celebration! More importantly, the unemployment rate is a lagging indicator.
One last point. Average hourly wages rose more than expected, providing fuel to "inflation hawks," part of a bond market sell off yesterday. I wonder how much of this is caused by the fact that a number of the persons no longer employed as the result of the hurricanes had low and below-average earnings (tourism workers, etc.). Hmmm.
Returning to the bond market, the 10-year bond rose by 1.3 basis points yesterday to 4.66%, the dollar strengthened, and the stock market continued its recent rally. As an extra credit exercise (due at the beginning of class on Tuesday), graph the ten-year bond using daily data for the last year. Add comments, support/resistance, and indicator information, etc. with the StockCharts annotation tools (Note: when adding comments, leave a space after the last character before closing the box). Then do the same thing with two years of weekly data on the 10-year bond. In a short paragraph (a Word document where you can also paste the two graphs) contrast what the daily and weekly charts are showing.
Saturday, November 5, 2005
Saturday, October 29, 2005
GDP Report
Friday morning, the preliminary Q3 GDP report was released. While the growth rate, 3.8%, was slightly higher than expected, the media has attributed the large stock market rally to this report.
Screen the media in a situation like this. Everyone knows that Q3 is history and Q4 growth will be slower than the Q3 value. Why the stock run-up then? Partially it was a short-covering rally, where shorts, persons who are betting that the market and individual stocks will be declining, sell borrowed shares of these stocks from their brokers. IF all goes as planned, and the stock prices decline, they can then purchase the shares of these stocks to replace their borrowings at a lower price, giving them profit. On rally days like yesterday, stock prices rise, meaning they will have to pay more to buy the replacement shares, either limiting profit or resulting in an outright loss. So, they often "pull the trigger" and purchase the stocks, leading to further increases. If you graph the Dow-Jones Index ($INDU), you will see two major resistance hurdles for the next couple of weeks: the 50-day MA at 10,437 and the 200-day MA at 10,500. Beyond this, the declining resistance line is at 10,640. Will another bounce off this resistance occur? Stay tuned.
Look at the dollar on days like this. The dollar was higher, and both stock and bond prices rose. What does this indicate? A capital inflow from overseas investors whose overall fears about the future course of the US economy were temporarily pushed aside (remember, they are still unsure about Fed Chair designee Bernarke).
Read about the Q3 GDP report, and remember the "tricks" I showed you about how to summarize all of this data. Look for the significant changes in items from last quarter (Table 1 is % changes, Table 2 notes contributions of individual elements). Remember: this is a preliminary report, where inventories are estimated (September data is not in yet). The same is true for Net Exports.
Keep an eye on Government -- its contribution rose significantly in Q3 as Gulf Coast relief efforts began. This will intensify in Q4, helping that quarter's final value. For durable goods, especially auto sales, sales were higher in Q3. I doubt they will do as well in Q4 as the big discount programs are largely over and they "borrowed" some sales that would have occurred in Q4.
Screen the media in a situation like this. Everyone knows that Q3 is history and Q4 growth will be slower than the Q3 value. Why the stock run-up then? Partially it was a short-covering rally, where shorts, persons who are betting that the market and individual stocks will be declining, sell borrowed shares of these stocks from their brokers. IF all goes as planned, and the stock prices decline, they can then purchase the shares of these stocks to replace their borrowings at a lower price, giving them profit. On rally days like yesterday, stock prices rise, meaning they will have to pay more to buy the replacement shares, either limiting profit or resulting in an outright loss. So, they often "pull the trigger" and purchase the stocks, leading to further increases. If you graph the Dow-Jones Index ($INDU), you will see two major resistance hurdles for the next couple of weeks: the 50-day MA at 10,437 and the 200-day MA at 10,500. Beyond this, the declining resistance line is at 10,640. Will another bounce off this resistance occur? Stay tuned.
Look at the dollar on days like this. The dollar was higher, and both stock and bond prices rose. What does this indicate? A capital inflow from overseas investors whose overall fears about the future course of the US economy were temporarily pushed aside (remember, they are still unsure about Fed Chair designee Bernarke).
Read about the Q3 GDP report, and remember the "tricks" I showed you about how to summarize all of this data. Look for the significant changes in items from last quarter (Table 1 is % changes, Table 2 notes contributions of individual elements). Remember: this is a preliminary report, where inventories are estimated (September data is not in yet). The same is true for Net Exports.
Keep an eye on Government -- its contribution rose significantly in Q3 as Gulf Coast relief efforts began. This will intensify in Q4, helping that quarter's final value. For durable goods, especially auto sales, sales were higher in Q3. I doubt they will do as well in Q4 as the big discount programs are largely over and they "borrowed" some sales that would have occurred in Q4.
Sunday, October 23, 2005
Assignment #1 Answers
I will provide a brief overview of questions #1 and #2.
#1) The MPC falls, so the MPS rises. This causes AE to be less steep, lowering the equilibrium value of Y. Also, the multiplier falls. With a flatter AE curve, monetary tightening, which raises r and lowers autonomous C and Ip, will cause smaller declines in equilibrium Y.
#2) As foreign income rises relative to that in the US, this stimulates US exports to these countries. At the same time, US equities become relatively less attractive, depressing equity prices here. This results in the dollar depreciating relative to foreign currencies (whose economies are growing more rapidly than the US). The capital outflow will also affect fixed income markets here, resulting in a sell off, and higher interest rates.
#1) The MPC falls, so the MPS rises. This causes AE to be less steep, lowering the equilibrium value of Y. Also, the multiplier falls. With a flatter AE curve, monetary tightening, which raises r and lowers autonomous C and Ip, will cause smaller declines in equilibrium Y.
#2) As foreign income rises relative to that in the US, this stimulates US exports to these countries. At the same time, US equities become relatively less attractive, depressing equity prices here. This results in the dollar depreciating relative to foreign currencies (whose economies are growing more rapidly than the US). The capital outflow will also affect fixed income markets here, resulting in a sell off, and higher interest rates.
Tuesday, October 18, 2005
Inflation and Earnings
Today on CNBC I saw something very interesting. In light of high inflation rates implied by both the CPI and PPI (today), Steve Liesman noted (correctly) that publicly traded companies generally report earnings, etc. without taking inflation into account (translation: they report NOMINAL values not REAL values). I have been saying this for years in my MBA class. I guess when earnings growth is far above inflation, it isn't so bad to overlook real values.
Still, remember what we talked about in class: WHEN WORKING WITH DATA OVER LONG PERIODS, NEVER RELY ON NOMINAL VALUES. ONLY REAL VALUES ARE COMPARABLE OVER SUCH A TIME SPAN.
So, with inflation currently running around 2.5%, any company whose year-over-year (nominal) earnings growth (or revenue growth, etc.) is below 2.5% is experiencing a decline in its real earnings or revenue.
Still, remember what we talked about in class: WHEN WORKING WITH DATA OVER LONG PERIODS, NEVER RELY ON NOMINAL VALUES. ONLY REAL VALUES ARE COMPARABLE OVER SUCH A TIME SPAN.
So, with inflation currently running around 2.5%, any company whose year-over-year (nominal) earnings growth (or revenue growth, etc.) is below 2.5% is experiencing a decline in its real earnings or revenue.
Saturday, October 15, 2005
How Strong is the Economy?
There are many ways to gauge the economy's momentum. GDP reports are important, but dated -- we won't have the data for Q3 for another month, and that will be a "first pass." There are other indicators used: the Index of Leading Economic Indicators; Consumer Confidence; Retail Sales; and many others.A very good real time read on this is given by the Cyclicals Index ($CYC). We have discussed ways to look at short-term and intermediate-term trends. How can we determine the long-term trend? The way I will suggest here is to look at daily data using a very long moving average. How long? Long enough to capture the current trend without having many "bounces" below or above in the short-term. In the diagram of Cyclicals, the MA that works for this is the 400-day (=80 weeks).
The potentially startling result using the 400-day MA, is that the long-term trend has just recently turned negative (early October). Note this on the graph. Also, short-term support has also been violated in the past few days. So, no matter what you hear on CNBC, or Bloomberg, the rosy picture painted by my fellow economists is not shared by asset markets. The message of the Cyclicals is that we are already experiencing a "soft patch." And, as asset markets are leading indicators, this paints a not-so-rosy picture for the upcoming months. Note that this is consistent with what the bond market has been saying for some time now (the bond markets are saying the Fed is tightening too much).
The interesting thing now is to see if the markets are right or whether the optimistic TV "talking heads" are correct.
Q: What do you think is the likelihood of being invited to Larry Kudlow's 5:00 show if you believe what the Cyclicals chart is saying?
A: DUH!
Friday, October 14, 2005
A Troubling Combination
Over this past week, we have observed several days where stock prices fell, interest rates rose, and the US dollar index also fell. From our discussions in class, this should be part of a reasonable and easy to understand sequence -- foreign investors moving some of their money out of US asset markets.
If foreign investors see better investment opportunities elsewhere, they will liquidate some of their US investments. This causes a selling of US stocks and bonds. As a result, stock prices fall as do bond prices. Recall that lower bond prices mean higher interest rates. As these foreign investors then convert their dollar balances into other currencies, the US dollar weakens. Thus the combination we have been witnessing.
Will this continue? Think of what will make US asset markets attractive, as well as the likely changes in interest rates that will be occurring.
If foreign investors see better investment opportunities elsewhere, they will liquidate some of their US investments. This causes a selling of US stocks and bonds. As a result, stock prices fall as do bond prices. Recall that lower bond prices mean higher interest rates. As these foreign investors then convert their dollar balances into other currencies, the US dollar weakens. Thus the combination we have been witnessing.
Will this continue? Think of what will make US asset markets attractive, as well as the likely changes in interest rates that will be occurring.
CPI Release
At 8:30 the CPI numbers were released. While the overall number was a bit of a surprise (+1.2%), the highest rate in 25 years, the core inflation rate (which excludes both food and energy) was very tame (+0.1%). A good reference for market reaction is at MarketWatch.com. An article on the report itself is also at that site. The initial reaction by the fixed income market was very favorable -- the 10-year bond rate fell by 5 basis points.
As I watched CNBC, I was amused by the reaction to the CPI number by both Mark Haines and Becky Quick -- both refused to believe the number. They cited how high the levels of prices have become, and cited the obvious examples in their lives. Steve Liesman, the economics person (but not economist) correctly pointed out that inflation reflects the rate of change in prices, not their level. This is a critical and often midunderstood point. So, if prices rise to a "high" level and remain there, the inflation rate from that point would be 0%!
The critical issue here is called "pass-through." While the core inflation rate nets out the direct changes in food and energy prices, the overall effects of energy and food prices can and do spill over into core inflation. Note the recent price hikes by shipping companies (UPS and FedEx). The Federal Reserve pays the most attention to pass-through. They are betting that there is enough underlying strength in the economy to allow them to fight the inflationary effects in motion (pass-through) without causing a recession. I have some serious reservations about their strategy. Read about today's release on Industrial Production -- hardly cause for celebration. The Consumer Sentiment Index also showed weakness.
For the Fed, they still see a problem because they want to contain core inflation at below 2% annually. Even with the favorable report this morning, core inflation is running around 2.1%. Remember from our multiplier discussion yesterday, that there are lags in monetary policy. So, as spending is hurt by monetary tightening, it takes time, about 2-3 quarters, for the multipliers to work. This means that for the Fed to head off future inflation, it must act ahead of time. This fact is what confuses so many people.
As I watched CNBC, I was amused by the reaction to the CPI number by both Mark Haines and Becky Quick -- both refused to believe the number. They cited how high the levels of prices have become, and cited the obvious examples in their lives. Steve Liesman, the economics person (but not economist) correctly pointed out that inflation reflects the rate of change in prices, not their level. This is a critical and often midunderstood point. So, if prices rise to a "high" level and remain there, the inflation rate from that point would be 0%!
The critical issue here is called "pass-through." While the core inflation rate nets out the direct changes in food and energy prices, the overall effects of energy and food prices can and do spill over into core inflation. Note the recent price hikes by shipping companies (UPS and FedEx). The Federal Reserve pays the most attention to pass-through. They are betting that there is enough underlying strength in the economy to allow them to fight the inflationary effects in motion (pass-through) without causing a recession. I have some serious reservations about their strategy. Read about today's release on Industrial Production -- hardly cause for celebration. The Consumer Sentiment Index also showed weakness.
For the Fed, they still see a problem because they want to contain core inflation at below 2% annually. Even with the favorable report this morning, core inflation is running around 2.1%. Remember from our multiplier discussion yesterday, that there are lags in monetary policy. So, as spending is hurt by monetary tightening, it takes time, about 2-3 quarters, for the multipliers to work. This means that for the Fed to head off future inflation, it must act ahead of time. This fact is what confuses so many people.
Before the CPI Release
A look at the stock market yesterday revealed some depressing techncial trends. The major markets were all trading below their 200-day moving averages (MA). For the Dow Jones Industrial Average ($INDU), the 50-day moving average moved below the 200-day moving average. That is a very negative development. For the NASDAQ and the S&P 500, the 50-day MA is still above its 200-day MA, but both are trading below these two MA's.
In general, when a market (or stock) is trading below its 50-day MA, its short-term trend is negative. When it is below its 200-day MA, the intermediate term trend is also negative. For some large institutional buyers, a movement of a stock or index below its 50-day MA is a sell signal.
RECOMMANDATION: before making a final determination on trends, EXAMINE THE WEEKLY CHART.
For the Dow-Jones, the weekly chart is far less negative than the daily chart. $INDU has just recently moved below its 50-day MA, but remains above its 200-day MA, so while the short-term trend is negative, the intermediate-term trend remains positive. More importantly, the price relative (to $SPX) has just turned up -- so on a weekly basis the Dow-Jones is beginning to outperform $SPX.
In general, when a market (or stock) is trading below its 50-day MA, its short-term trend is negative. When it is below its 200-day MA, the intermediate term trend is also negative. For some large institutional buyers, a movement of a stock or index below its 50-day MA is a sell signal.
RECOMMANDATION: before making a final determination on trends, EXAMINE THE WEEKLY CHART.
For the Dow-Jones, the weekly chart is far less negative than the daily chart. $INDU has just recently moved below its 50-day MA, but remains above its 200-day MA, so while the short-term trend is negative, the intermediate-term trend remains positive. More importantly, the price relative (to $SPX) has just turned up -- so on a weekly basis the Dow-Jones is beginning to outperform $SPX.
Friday, October 7, 2005
Post announcement reaction by 10-year bond (click to enlarge).
Post-announcement 10-year bond market (click to enlarge). Graph courtesy of StockCharts.com
Employment Data -- First Look
The employment data were released at 8:30 and the change in employment, -35,000, was far better than expected. Read two articles about this, one from MarketWatch, the other from Money.com.
A few things to note.
(1) The payroll employment number is derived from a sample of employers. The unemployment rate is based on a survey of households.
(2) The payroll employment value, -35,000, does NOT indicate that only 35,000 jobs were lost as the result of Hurricane Katrina (Rita's effects are in next month's report). The loss is the difference between what the job total would have been, around +200,000, and this morning's number of -35,000 -- Katrina-related loss of around 165,000.
(3) Jobless claims (released on Thursdays) have painted a very different picture of the job loss from Katrina, indicating around 300,000 jobs lost. Will this show up next month? Was today's number a "bad" estimate? Stay tuned.
(4) The unemployment rate, which is derived from a survey of households, rose only slightly, from 4.9% in August to 5.1% in September.x
The early reaction to the job data is that it indicates more strength to the economy than what many thought, raising the likelihood that the Fed will continue to raise rates, up to the current view of 4.75% (my value is still 4.5%). As I am writing this, the stock market (DJIA) is up 38 points, a bullish response to the data, while the fixed income (bond) markets are less than thrilled, with the 10-year bond yield rising to 4.42% - taking out initial resistance. Next stop for $TNX - 4.65%.
For those doing the mortgage rate as their forecast topic, note that even before today's numbers, the 30-year fixed rate mortgage had risen to just under a 6% national average.
A few things to note.
(1) The payroll employment number is derived from a sample of employers. The unemployment rate is based on a survey of households.
(2) The payroll employment value, -35,000, does NOT indicate that only 35,000 jobs were lost as the result of Hurricane Katrina (Rita's effects are in next month's report). The loss is the difference between what the job total would have been, around +200,000, and this morning's number of -35,000 -- Katrina-related loss of around 165,000.
(3) Jobless claims (released on Thursdays) have painted a very different picture of the job loss from Katrina, indicating around 300,000 jobs lost. Will this show up next month? Was today's number a "bad" estimate? Stay tuned.
(4) The unemployment rate, which is derived from a survey of households, rose only slightly, from 4.9% in August to 5.1% in September.x
The early reaction to the job data is that it indicates more strength to the economy than what many thought, raising the likelihood that the Fed will continue to raise rates, up to the current view of 4.75% (my value is still 4.5%). As I am writing this, the stock market (DJIA) is up 38 points, a bullish response to the data, while the fixed income (bond) markets are less than thrilled, with the 10-year bond yield rising to 4.42% - taking out initial resistance. Next stop for $TNX - 4.65%.
For those doing the mortgage rate as their forecast topic, note that even before today's numbers, the 30-year fixed rate mortgage had risen to just under a 6% national average.
Subscribe to:
Posts (Atom)