August 11, 1943

Posted on August 11, 2015 by markinaustin

Previously Mark Clark had been promoted to Lt. General by Ike for his outstanding service in North Africa. Now he was to be the American commander of the Fifth Army for the Mediterranean push into Italy, the first Allied incursion onto mainland Europe. Thus, it was with great hope for the liberation of Europe that my dad named me “Mark” on August 11, 1943. Although he had to cover the naming with its relationship in Hebrew to someone else long dead in our family, I, like thousands and thousands of American male children, was named after a WW2 USA warrior.

Years later when I talked to my dad about it, he pointed out that after Salerno there was a big drop off in babies named “Mark”. That would have been in September of ’43. Salerno didn’t go so well. Missed that by a month. And the “Patton” craze died down after the stories of his slapping shell shocked casualties in hospital care went public. So it goes.

Clark was later criticized for taking Rome while allowing a German army to escape to the north. However, I have it on the authority of the late Cecil Cates, then a Captain in Army Intelligence in the invasion force, that encircling the retreating Germans would have been tactically impossible and the symbolism of taking Rome was worth a great deal to the Italian partisans, who harassed the retreating Wehrmacht.

My mother in law, then a farm girl in Calabria, remembers when the Germans first swept south through Italy, foraging from the fields and stealing as they came. They were hated. Before dementia caught up with her, she told the story of how her father hid their Jewish cousins in the barn when the Germans came. We think there were no Jewish cousins, but that her father, like many Italian farmers, hid local Jews when the Nazis came, and referred to them as “cousins” within the family so that no one would slip up and mention guests who were not relatives. That was a common practice in Italy to the point that almost all of Italy’s Jews survived the Holocaust, and the ones who died were generally young persons fighting with the partisans, or the oldest ones who refused offered hiding.

So that is what I am musing about, 10 days into retirement, on my 72d birthday.

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Morning Report: Worrisome trends in inventories 8/11/15

Posted on August 11, 2015 by Brent Nyitray

Markets are lower this morning after China devalued the yuan overnight. Bonds and MBS are up.

Wholesale inventories rose 0.9% in June, while wholesale sales rose only 0.1%. The ratio of inventories to sales rose to 1.3. This is a worrisome signal. A rising inventory to sales ratio is a harbinger of a cyclical recession. While there is a possibility that the West Coast Port strike from earlier this year is messing with the data, the trend is unmistakable.

Productivity rose less than expected in the second quarter, and unit labor costs were higher than expected, which was disappointing. The first quarter numbers were revised better (productivity up and unit labor costs down), however Q1 productivity was still flat and unit labor costs were higher than inflation. These two numbers can be volatile, so it makes sense to look at a moving average. The 12 month moving average for productivity is about 0.25%. The 12 month MA for unit labor costs is about 2.1%. Anyway, flat productivity and 2% wage inflation is not symptomatic of a great labor market, despite what the numbers say.

Small business optimism rose in July, according to the NFIB. Expectations for the economy accounted for about half the rise. Employment was flat. Increasing labor costs (not only wages, but regulatory burden) are depressing the bottom line as profits fall. In fact, most are reporting that the increase in labor costs is due to mandated benefits, not wage increases. This again speaks to the bifurcated market: the big S&P 500 companies are doing well, but much of that is due to (a) rock bottom interest rates and (b) overseas exposure. Those circumstances don’t really apply to the local dry cleaner. Which is why liberals can claim: “These hugely profitable companies refuse to pay a “fair” wage” and conservatives can claim “Regulation is strangling small business and those costs are manifested in stagnant wages.” Liberals are focusing their ire at the big multinationals and conservatives focus their ire at government. There is a bit of truth in both viewpoints.

Speaking of regulations, the American Enterprise Institute crunched the numbers and it turns out that Seattle lost about 1,300 jobs from Jan – June. Of course it is still early days, but it looks like the laws of supply and demand are still applicable in the labor market, regardless of what politicians think.

Completed foreclosures fell to 43k in June, according to CoreLogic. This is up 4.8% from May but down 14.8% from a year ago. The foreclosure inventory remains the highest in the Northeast, where the judicial states are still working through their backlog.

Google is now going to be known as Alphabet. They are re-organizing into a holding company structure.  The Street seems to like it.

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Morning Report: Distressed sales fall 8/10/15

Posted on August 10, 2015 by Brent Nyitray

Markets are higher on M&A and strength in overseas markets overnight. Bonds and MBS are down.

This week promises to be slow as we are in the dog days of summer, the week after the jobs report inevitably has a dearth of data, and earnings season is winding down. I don’t see much in the way of potential market-moving data, except for unit labor costs / productivity tomorrow. I think we would have to see a big surprise for that to move bonds around. Think we continue with the risk-on / risk-off dynamic where stock prices drive bond market movements.

The Fed’s new index – the Labor Market Conditions Index – rose 1.1% in July, and June was revised upward. This index is a meta-index of 24 different indicators.

Consumer attitudes towards housing cooled somewhat in July, according to Fannie Mae’s National Housing Survey. This seems to be driven by deterioration in people’s financial situations and their attitudes towards the economy in general. Fannie Mae notes that the survey questions were being asked when we had both the Greek situation and the Chinese stock market meltdown going on, so perhaps that is coloring the data. Given the strong support of Bernie Sanders on the left and Donald Trump on the right, it looks like people are hopping mad about their financial condition and this isn’t a spurious reading based on Greece and China.

Commodities continue to drop as West Texas oil dips below $44 a barrel. Oil cannot get out of its own way, and if the Iran deal gets passed, another million barrels a day will hit the market. We have been watching Venezuela come apart at the seams as the state relies on high oil prices to provide revenue for social services. Another looming disaster is Norway, which not only is hurting from falling oil prices, but it also has a real estate bubble of its own. Another one reeling – just say the headine: Russian GDP contracted by 4.5% last quarter.

As we creep up on the September FOMC meeting, sovereign wealth funds are dumping Treasuries. Japan dumped almost $10 billion in June, the most in two years. Not sure if this sort of selling is going to impact US rates in any meaningful way – where are sovereign wealth funds going to put their cash? German Bunds, which yield 68 basis point? Portuguese bonds yielding 20 basis points more than Treasuries? Given the relative attractiveness of US Treasuries and the US dollar, I don’t see much in the way of foreign selling. As Bill Gross used to say: The US is the cleanest dirty shirt in the bunch.

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Morning Report: Jobs report data dump 8/7/15

Posted on August 7, 2015 by Brent Nyitray

Markets are flat after the jobs report. Bonds and MBS are up small

Jobs report data dump:

  • Payrolls 215k vs 225k expected
  • Unemployment rate 5.3% in line
  • Average hourly earnings 0.2% in line
  • Underemployment rate 10.4%
  • Labor force participation rate 62.6% in line

The jobs report is okay, nothing special. It shows the job market is slowly getting better. It doesn’t change anything with respect to the Fed’s thinking.

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Morning Report: The jobs report and the Fed 8/6/15

Posted on August 6, 2015 by Brent Nyitray

Stocks are flattish on no real news. Bonds and MBS are up small.

Initial Jobless Claims came in at 270k, a decent number. Challenger and Gray announced job cuts increased 125%. The drop in energy prices is forcing job cuts in the oil patch.These are not actual firings, just company announcements that they will cut X number of jobs. Often these job cuts don’t ever happen.

Consumer comfort slipped again last week to 40.3 from 40.5. 50 is considered normalcy.

Mohammed El-Arian has a good column summing up the state of the labor market and the Fed’s thinking. “With concerns lurking behind the scenes that the Fed has gone too far in decoupling financial markets from the economy’s fundamentals, just a slight strengthening of labor market conditions (particularly on the wage front) would be enough to increase the probability of a September rate hike.” This is the case even if the economy is not strong enough that people feel the economy is better. The thinking is also that the low labor force participation rate has more to do with structural issues in the economy, which means monetary policy is simply not an effective tool to change it.

President Obama gave a long speech yesterday defending his Iran deal. Polls continue to show the public is skeptical about it. He accused people who have reservations of making common cause with the hardliners in Iran. Note that there are numerous side deals with the agreement that no one has seen yet.

The SEC passed a rule on a 3-2 basis yesterday mandating that companies disclose the ratio of CEO pay to worker pay. This is pretty much a sop to the unions and liberal activists and it is a pretty game-able number. Stock compensation doesn’t count, and the unintended effect will probably be to increase share buybacks.

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Morning Report: The paradox of the millennials 8/5/15

Posted on August 5, 2015 by Brent Nyitray

Stocks are higher this morning as overseas markets rallied overnight. Bonds and MBS are down small.

 

Stocks got a boost when the ADP  Employment  Number came in weaker than expected. The ADP Employment number is often a decent forecast for the big payroll number on Friday. According to ADP, (the big payroll processing firm) the economy added 185k jobs last month, which was lower than the 215k forecast.  We  might be entering a “bad news is good news” cycle where weak economic news is considered bullish because it keeps the Fed on hold.

 

FRB Atlanta President Dennis Lockhart said yesterday the economic data would have to deteriorate a lot to get him not to vote for a Sep hike. Lockhart’s voice is important because he is considered more of a centrist.

 

Mortgage Applications rose  4.7% last week, according to the MBA. Purchases rose 3.3% while refis rose 5.9%.

 

Interesting take on the Millennial generation and the paradox of the labor market. How come, this far into the recovery, are Millennials still living at home with their parents? How is this possible with an unemployment rate of 5.3%? Historically, a 5.3% unemployment rate was associated with booming economies. This speaks to the disconnect between the data and what people actually perceive (and why, despite the data, people think we are still in a recession). According to the data, the labor market is strong, and those that put a lot of stock in that data believe that wage inflation is right around the corner, and therefore the Fed should start hiking rates. On the other hand, some point to the situation with the Millennial generation and say the data is, if not misleading, just not capturing the whole picture. They believe the underemployment rate (which is around 10.5% and represents people who have part-time jobs and want full-time jobs) is a better representation.

 

 
 

I would add, the quality off the full-time job matters. If a recent grad is working as a barista full time, they count as employed according to the Bureau of Labor Statistics. However, that grad should be working at an entry-level white collar job, which pays more than Starbucks. They aren’t and that is why they are still living at home.

 

Just for fun, I subtracted the unemployment rate from the underemployment rate to get a different picture on the economy. We are still at near recessionary levels, at least compared to past recoveries. Note the data only goes back to 1994. Still, an interesting chart:

 

 

IMO, that tells a different story. We are still at levels associated with the 91-92 recession, where recent grads were working in retail and unable to get jobs, This job market seems similar. It also speaks to the just-in-time labor management style companies use nowadays. Where does this leave the Fed? Well, the last time the spread was this high, the Fed waited another two years to start hiking rates.

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Morning Report: Puerto Rico defaults 8/4/15

Posted on August 4, 2015 by Brent Nyitray

Stocks are higher this morning on no real news. Bonds and MBS are down small.

The ISM New York Survey increased from 63.1 to 68.8 last month.

Factory orders rose 1.8% in June. May was revised downward to -1.1%.

The IBD / TIPP Economic Optimism Index fell to 46.9 from 48.1.

Puerto Rico officially defaulted on its debt yesterday. The Obama Administration has said that there will be no Federal bailout of the U.S. commonwealth. Want to know where the bodies are buried? Here is a list of the muni funds that hold PR debt. Recovery rates could be as low as 35 cents on the dollar, according to Moody’s.

July auto sales were brisk, as SUVs and luxury vehicles sold well. Pretty much everyone reported an increase of sales from 2.4% to 10.5%.

The second quarter was rough for the mortgage REITs. American Capital Agency reported a 6% drop in book value last week (a staggering number), and MFA Financial missed as well. Mortgage REITs are big investors in mortgage backed securities, which are sold by your friendly secondary folks. They have been de-leveraging ahead of the Fed’s normalization process, which means that they have less appetite for new paper. This means that mortgage rates will be slightly higher, at the margin. Interestingly, the mortgage REIT sector seems to have found an angle for cheap financing by joining their local Federal Home Loan Bank. You can see how the sector has gotten smacked around by looking at the chart of the iShares Mortgage Real Estate ETF.

Home prices continue to rise on tight inventory, according to CoreLogic. Home prices rose 6.5% in June and are now 7.4% below their April 2006 peak. Tight inventory remains an issue – nationwide, the average supply of homes for sale was 4.8 months. 6.5 months is considered a balanced market. In highly desirable areas, like San Jose and Denver, the supply was 1.6 months. Colorado led the country with almost 10% home price appreciation, while the People’s Republic of Taxachussetts brought up the rear by falling 5%. The Northeast still has a clogged foreclosure pipeline to deal with.

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Morning Report: Personal Spending / Incomes rise 8/3/15

Posted on August 3, 2015 by Brent Nyitray
Markets are lower this morning after Chinese and Greek stocks fell overnight. Bonds and MBS are down small.
Personal Incomes rose 0.4% in June, beating the 0.3% street forecast. Personal spending rose 0.2%, in line with estimates. May’s blockbuster 0.9% increase was revised downward to 0.7%. The PCE Deflator (the inflation measure preferred by the Fed) rose 1.3%, still well below their 2% target rate.
Auto sales will be coming in drip-by-drip during the day. Ford reported 5% increase in light vehicle sales, better than the 1.8% estimate. Auto sales have been doing well as of late as the average age of a car on the road in the US has hit 11.4 years, which is a record. The next big “tell” on spending will be the back-to-school shopping season, which is right around the corner.
Obama is set to unveil new emissions limits for utilities today. Supposedly they go farther than earlier proposals. Will undoubtedly raise prices and slow the migration of manufacturing back to the US. Note industry and states aren’t taking this lying down. Cheap energy is the US offset to cheap labor overseas. Note that coal miner Alpha Natural Resources filed for Ch. 11 bankruptcy this morning..
The ISM July Manufacturing Index fell to 52.7 in July. Production-related indicators rose, however employment and exports fell.
Construction spending rose 0.1% in June, much lower than expectations, however May was revised upward from 0.8% to 1.8%. Residential construction is up 0.4% month-over-month and 13% year-over-year.
We will get the all-important jobs report on Friday. The Fed will get one more jobs report before the September FOMC meeting. The Street has handicapped the chance of a hike as a coin toss. The stock market remains sanguine about rate hikes – the VIX (a measure of fear in the marketplace) is bouncing along the bottom. There is an old market saw: “VIX is high, time to buy. VIX is low, time to go.” There is a lot of complacency with stocks right now. Below is a chart of the VIX over time. It hit 80 during the financial crisis. Given the short shelf life of traders (by the time you are 40, you are a senior citizen), there is an entire generation of traders who have never been through a tightening cycle. This could get interesting.

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Morning Report: Employment Cost inflation lowest since 1982 7/31/15

Posted on July 31, 2015 by Brent Nyitray

Stocks are flattish after the Employment Cost Index comes in lower than expected. Bonds and MBS are flat

The Employment Cost Index rose 0.2% in the second quarter, the lowest increase since BLS started keeping track, which began in 1982. On a 12-month basis, employment costs are up 2%. This number includes salaries and benefits, so we still have wage inflation barely keeping up with inflation in general. Given the low ECI and falling commodity prices in general, the Fed has an excuse not to move in September. Bonds rallied hard on the announcement.

Note that in 1982, the US was in the worst recession since the Great Depression. This was the recession caused by Paul Volcker’s tightening to conquer 1970s inflation. It also corresponded to the first wave of globalization, where US industry had to deal with international competition for the first time since WWII. Given that we are 5 years into an expansion, that number sticks out like a sore thumb.

The ECI is just another demonstration of the strange state of affairs in the US labor market. People who have jobs are keeping them, as demonstrated by the multi-decade lows in initial jobless claims and the low unemployment rate. Job openings are at the highest since BLS started keeping track in 2001. The labor force participation rate is the lowest since the late 1970s and wage inflation is the lowest since 1982. Definitely a perplexing environment for the Fed to navigate.

Lost in the GDP data from yesterday, GDP growth was revised downward from 2.3% to 2% for the years 2011-2014. Apparently the government overestimated what government spending was during those years. Kind of funny, actually.

The Chicago Purchasing Manager’s index rose to 54.7 in July from 49.4.

Consumer Confidence slipped slightly in July, according to the University of Michigan Consumer Sentiment Survey. The current conditions index rose while the expectations index fell. The number of people who say their household financial situation is worse than a year ago ticked up to 29%. Interesting to say the least, given that these consumer confidence indices often are influence by gasoline prices and those have been falling as oil has been taken to the woodshed.

Speaking of oil prices, both Exxon-Mobil and Chevron reported weaker than expected numbers this morning, and both stocks are getting whacked. Surprisingly, D.R. Horton (who has a lot of TX exposure) has not seen any evidence of this hitting homebuyer demand.

Chart: West Texas Intermediate:

Ocwen missed earnings estimates and the stock is down about 16% on the open. The UPB of its servicing portfolio fell 26% to $322 billion. They unveiled a new plan to cut costs as their assets fall.

The House Financial Services Committee passed a “hold harmless” period for TRID, which basically says the CFPB won’t be able to enforce TRID and impose penalties until Feb 1 2016, provided the issuer is making a good-faith effort to comply with the regulation. There is a competing bill in the Senate which would have a shorter period, ending on Jan 1. The CFPB has already delayed the implementation once.

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Morning Report: Q2 GDP disappoints, Q1 GDP revised upward 7/30/15

Posted on July 30, 2015 by Brent Nyitray

Markets are lower this morning after 2Q GDP disappoints. Bonds and MBS are flat

The advance estimate for second quarter GDP came in at 2.3%, missing the 2.5% street estimate. However, that may have been due to the fact that the first quarter number was revised upward from -0.2% to 0.6%. In essence, people were expecting a big bounceback from the weak first quarter, however some of that bounceback was pulled back into Q1. The consumption number was better than expected at 2.9%, and the core PCE (personal consumption expenditure – the Fed’s preferred measure of inflation) was 1.8%, just below the Fed’s target. Government spending was flattish as was private investment. This pretty much says that consumption is getting better with the labor market, however business investment is still depressed, which is probably more due to overseas concerns than domestic ones. The next big economic “tell” will be the back-to-school shopping season, which is right around the corner.

The FOMC statement was a non-event yesterday. They noted continued improvement in the labor market, although they want to see further improvement before they raise rates. Given the GDP report (especially the inflation data), it is looking more probable that the Fed moves in September.

Initial Jobless Claims rose to 267k after hitting a multi-decade low last week. The big question for the Fed is when wage growth begins to happen. That will be a function of whether some of the people who have exited the labor force want to (and are able to) return to the labor market. If not, then we should start seeing wage inflation sooner. FWIW, hearing anecdotally that the job market for recent college grads is strong this year.

Michael Feroli, Chief US Economist at J.P. Morgan draws parallels between the current economy and that of 1966, with regards to inflation. The Fed got behind the curve and ended up chasing inflation throughout the 1970s. IMO, there are big differences between 1966 and today, most notably the lack of international competition back then. Europe and Asia really didn’t rebound from WWII until the 1970s, so the US had no competitive forces pushing prices down. That simply isn’t the case today. If anything, the strength in the U.S. dollar is keeping commodity and import prices low, which is keeping a lid on inflation. Wage growth will be key. No wage growth, no wage-price spiral.

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