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Shut Down Shoddy Debt, Report 21 Jan 2018

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Shut Down Shoddy Debt, Report 21 Jan 2018

By: Keith Weiner | Mon, Jan 22, 2018


We have been discussing the consumption of capital. We again must say:

“We see people eating more of the seed corn.”

Right now as we write this on Saturday afternoon, the US government has “shut down”, due to a political impasse on the legislation to fund its continuing operations. Government funding is a mix of taxing and borrowing. Government borrowing provides a segue into another mechanism of capital consumption.

Legitimate credit requires that the lender both know and approve. Do holders of dollars—which are often called “base money”—realize that they are extending credit to the Fed, and hence to the government to spend on its welfare state?

Most worry about the quantity of dollars, not the quality. This worry comes of the belief that one is not a creditor, but that by holding money, one owns a pro rata shares of the goods and services produced. In this view, if the government increases the quantity, it dilutes that share to a smaller fraction. This view is not correct, popular though it may be.

Legitimate credit has two other requirements. The borrower must have the means and intent to repay. And this leads us to the crux of the problem. The government this year—and every year for many decades—cannot even pay its present expenses. It must borrow to make payroll. The conclusion cannot be avoided, squirm though we might: the government has no means to repay what it borrows. Repayment would mean taking in more tax revenues than expenses. Instead of spending it on welfare, it would repay creditors. So far as we are aware, not even the most mean spirited fiscal conservative is proposing this now, or ever. The most radical wants to increase the debt, at a slower rate.

If the president, Treasury Secretary, and Congress borrow without means of repaying then this borrowing is in bad faith. They clearly lack any intent to repay.

Instead of worrying about dilution, which is a concept from the quantity theory, they should worry about the quality of the credit. And this brings us back to the consumption of capital.

What happens when a borrower takes your money and, with an oily smirk, gives you a piece of paper that is a promise to repay? He cannot repay. He knows it (and you know it too), but everyone goes through the motions, and there is a liquid market for this bad debt paper.

Two things happen. The first is in the nature of all borrowing transactions. The borrower is enabled to consume today what he would otherwise have to wait to produce. He is consuming the capital of the lender. In legitimate lending, of course, the borrower has a plan to increase his production in excess of what he consumes, and so to repay the lender with interest. But that’s not the case with borrowing to fund the welfare state. The lender’s capital is gone, replaced by a piece of paper.

This would be bad enough if everyone understood what happened. The lender is made poorer, and being poorer should reduce his own consumption. However, the nature of this particular fraud is that he is made to feel that the government’s bad debt paper is good money. Not only that, but that it’s going up! Falling interest is the flip side of rising bond prices. They are a strict mathematical inverse, like a see saw. Interest has been falling since 1981, and hence bond prices have been rising since 1981.

The richer the bond holder feels—which happens the more the price rises—the more he may feel free to spend. Think about this. The government first consumes his capital, calling it a “loan” despite that it will never be repaid. And on top of that, it deceives him into believing himself richer. Which offers him the means to spend more to consume more.

We will close with two quotes. The first is from Keynes, and we will excerpt just a brief part:

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation [which we define as the counterfeiting of credit], governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”

The other is from Ludwig von Mises:

“…Keynes did not teach us how to perform the ‘miracle … of turning a stone into bread,’ but the not at all miraculous procedure of eating the seed corn.”

The principle virtue of the gold standard is not that the total quantity of gold cannot be increased, and thus gold owners cannot be diluted. It is that it helps keep borrowers honest. It does not enable endless borrowing without means or intent to repay, as we have today. Also, it does not enable 37 year bond bull markets such as our (notwithstanding passive aggressive talk of hiking rates).

The dollar strengthen a little bit this week. No, we don’t measure it in terms of its derivatives such as euro and yuan. We measure it in the objective unit of measure of economic values, gold.

In ordinary terms (that is, backwards) gold went down from 1337 to 1331, or a six buck drop. Silver fell 20 cents, to $17. Among many other reasons, we don’t like this view because it turns money into just another colored chip for betting in the dollar casinos. We say the dollar went up, even if the whole world says that gold went down.

We note that Copernicus said the Earth revolved around the sun even though the whole world (no pun intended) said the sun revolved around Earth. He knew that a true idea had to win in the end, and in his day there was not a free market for ideas. We stand in awe of him, as he knew that men had been killed for lesser heresies than his own.

We rest comfortably, knowing that we are not as risk of being burned at the stake to say that gold is at the center of the economic universe, and the dollar moves around gold.

Let’s take a look at the only true picture of the supply and demand fundamentals for the metals. But first, here is the chart of the prices of gold and silver.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio rose.

Here is the gold graph showing gold basis, cobasis and the price of the dollar in terms of gold price.

There was not a lot of price action or basis action this week.

The Monetary Metals Gold Fundamental Price rose $6 this week, to $1,351.

Let’s take a look at the 6-month gold forward rate (MM GOFO™). It was rising through Christmas, but afterwards fell sharply.

The rise corresponds to the increasing price through that time (about $46). This is well understood, as the metal becomes more abundant as the price rises (in normal times, anyways). The sharp drop on Dec 28 is what needs explaining.

Above is an animated GIF showing the forward term structure through this same period. You can see, not just a single number moving every day as in the graph of the MM GOFO-6. You can also see the changing shape of the structure.

Note that the drop in GOFO is concentrated in the short-end of the curve. And indeed the long-end recovers its previous level even when the short end has not. So what’s going on?

The first clue is that this occurs at year-end. That points to some kind of “window dressing”, where someone is making sure the books close with good numbers. But who is the most likely candidate—and how would their dressing of their windows do this to GOFO?

Recall that lease rate = LIBOR – GOFO. A falling GOFO means higher lease rate. Who would be pushing up the lease rate?

We believe it’s gold mining companies rushing as much doré to the refiners as they can, so they can get credited with gold in their accounts, and book the revenue in calendar 2017. The refiners, of course, cannot produce the finished bars and sell them into the market. So they lease the gold in the meantime. This pushes up the lease rate. It is demand for gold metal, at least for the time needed to process the doré and sell the gold bars.

Now let’s look at silver.

In silver, we see the familiar pattern of rising price of the dollar (i.e. falling price of silver, measured in dollars) accompanied by rising cobasis (i.e scarcity). Also, we are starting to see the pressure on the March contract, which tends to push basis down and cobasis up.

The Monetary Metals Silver Fundamental Price fell 28 cents to $17.03.

By Keith Weiner


Keith Weiner

Keith Weiner
keithweiner.posterous.com/

Keith Weiner

Keith Weiner is CEO of Monetary Metals, a precious metals fund company in
Scottsdale, Arizona. He is a leading authority in the areas of gold, money,
and credit and has made important contributions to the development of trading
techniques founded upon the analysis of bid-ask spreads. He is founder of DiamondWare,
a software company sold to Nortel in 2008, and he currently serves as president
of the Gold Standard Institute USA.

Weiner attended university at Rensselaer Polytechnic Institute, and earned
his PhD at the New Austrian School of Economics. He blogs about gold and the
dollar, and his articles appear on Zero Hedge, Kitco, and other leading sites.
As a leading authority and advocate for rational monetary policy, he has appeared
on financial television, The Peter Schiff Show and as a speaker at FreedomFest.
He lives with his wife near Phoenix, Arizona.

Copyright © 2012-2017 Keith Weiner

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

Published at Mon, 22 Jan 2018 15:28:01 +0000

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Wall Street ends higher despite government shutdown threat

Wall Street ends higher despite government shutdown threat

NEW YORK (Reuters) – Wall Street rose on Friday, led by gains in consumer stocks, even as a possible government shutdown loomed.

The S&P 500 and the Nasdaq hit record closing highs, while the Dow ended the day higher after trading in a narrow range.

Nike Inc (NKE.N), Philip Morris International Inc (PM.N) and Home Depot Inc (HD.N) rose between 1.5 percent and 4.8 percent on upbeat analyst expectations, helping to boost the S&P 500. Conversely, losses in International Business Machines Corp (IBM.N) and American Express (AXP.N) capped gains on the Dow.

The Dow Jones Industrial Average .DJI rose 53.91 points, or 0.21 percent, to close at 26,071.72, the S&P 500 .SPX gained 12.27 points, or 0.44 percent, to 2,810.3 and the Nasdaq Composite .IXIC added 40.33 points, or 0.55 percent, to 7,336.38.

For the week, the Dow rose 1.04 percent, the S&P 500 added 0.86 percent and the Nasdaq gained 1.04 percent.

Nine of the 11 major S&P sectors were higher, led by a 1.1 percent gain in the consumer staples index .SPLRCS and a 0.9 percent rise in consumer discretionary stocks .SPLRCD.

FILE PHOTO: Traders work on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., January 8, 2018. REUTERS/Brendan McDermid

A disappointing full-year profit forecast from IBM pushed its shares down 4.0 percent, the biggest single-day loss since July.

American Express slipped 1.8 percent after posting its first quarterly loss in 26 years and suspending share buybacks for the next six months.

“The market has a few jitters as the result of a potential shutdown,” said Kevin Miller, chief executive of E-Valuator Funds in Bloomington, Minnesota. “From a longer-term perspective, corporate earnings are still strong, and we’re about to engage in the benefits of tax reform.”

The U.S. Senate was racing to avert a shutdown ahead of a midnight deadline on the spending measure amid lingering disagreements between Democrats and Republicans. Negotiations continued on Friday after Senate Democratic leader Chuck Schumer met with President Donald Trump at the White House to address the impasse.

Advancing issues outnumbered declining ones on the NYSE by a 1.98-to-1 ratio; on Nasdaq, a 2.51-to-1 ratio favored advancers.

The S&P 500 posted 105 new 52-week highs and nine new lows; the Nasdaq Composite recorded 171 new highs and 30 new lows.

Volume on U.S. exchanges was 6.82 billion shares, compared to the 6.32 billion average over the last 20 trading days.

Additional reporting by Sruthi Shankar in Bengaluru; Editing by Leslie Adler and James Dalgleish

Published at Fri, 19 Jan 2018 22:30:33 +0000

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Morgan Stanley raises targets, but Wall Street wants more

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Morgan Stanley raises targets, but Wall Street wants more

(Reuters) – Morgan Stanley raised key profitability and efficiency targets on Thursday, but those loftier goals failed to impress Wall Street analysts, who repeatedly asked Chief Executive Officer James Gorman why the bank could not do even better.

The new targets came after Morgan Stanley reported fourth-quarter results that beat analyst estimates and exceeded Gorman’s previously stated ambitions for wealth management, bond trading, expenses and returns on shareholder equity.

During his eight years as CEO, Gorman, 59, has been working to transform Morgan Stanley from a Wall Street firm whose risk-taking nearly capsized it during the 2007-2009 financial crisis into a bank that relies more on businesses that generate steady fees, like wealth management.

The strategic update he laid out on Thursday included annual pretax profit margins of 26 percent to 28 percent for wealth management, returns on equity (ROE) of 10 percent to 13 percent and a cost-to-revenue ratio of 73 percent or less in the coming years.

But analysts grilled Gorman about the targets during a conference call to discuss results, arguing that the bank is already at or near those goals and should be able to do much better.

The back and forth took a cheeky turn when Gorman addressed an analyst with an exasperated “Oh my God,” before again going through his rationale, including the possibility of a recession hurting profits.

“We are all in on delivering better results than what we’ve publicly said,” Gorman added. “On the other hand, we don’t have credibility as a management team if we put out things which are artificially designed to boost confidence.”

It was not the first time Wall Street has pushed Gorman to aim higher.

When he took over as CEO, the wealth management business was generating single-digit pretax profit margins. He has gradually lifted the target from mid-teens to 20 percent to a range of 23 percent to 25 percent before outlining the current goal, and each time analysts have asked for more.

Last quarter, Gorman was also quizzed about his view that bond traders needed to generate at least $1 billion in average quarterly revenue to sustain the business. Some analysts have said that while the figure represents a minimum rather than a goal, the business can do a lot better.

In an analyst note, Devin Ryan at JMP Securities wrote that they have had conversations with investors for years who were hesitant to believe that ROEs could move back into the double-digit range.

“Therefore, we do view these new targets as an important moment for the firm in its current form”, adding that he does not perceive the targets to be end points, particularly as wealth management earnings should continue to expand.

Despite the sometimes exasperated discussion, Morgan Stanley’s stock price hit its highest level in a decade on Thursday before closing up nearly 1 percent at $55.84.

With a market capitalization of $101 billion, the sixth-largest U.S. bank by assets is now more valuable than its closest competitor, Goldman Sachs Group Inc, whose shares are worth $95 billion.

Morgan Stanley’s adjusted fourth-quarter profit of $1.68 billion, or 84 cents per share, beat analysts’ average estimate of 77 cents per share, according to Thomson Reuters I/B/E/S.

Those figures exclude a $1.2 billion charge resulting from a U.S. tax overhaul signed into law in December that also caused one-time hits at other major lenders. Analysts have been looking past those charges to focus on the long-term benefits of lower tax rates.

Morgan Stanley expects its tax rate to fall to a range of 22 percent to 25 percent this year, down from 31 percent last year.

Total revenue rose 5 percent to $9.5 billion from $9.02 billion in the year-ago quarter. Analysts were expecting $9.2 billion.

Excluding the tax charge, its return on equity was 9.4 percent last year, within Gorman’s 9 percent to 11 percent target.

WEALTH HELPS DRIVE RESULTS

Wealth management was a bright spot, with revenue rising 10 percent from the year-ago quarter to a record $4.4 billion. Its pretax profit margin of 26 percent topped Gorman’s previous target for the business, and the bank gathered a record $20.9 billion worth of fee-based client assets, the type it is trying to grow.

Morgan Stanley’s underwriting business also posted strong results, particularly in equities, helped by the bank’s leading position in initial public offerings. Underwriting revenue rose 42 percent to $915 million.

And while bond trading revenue plunged 45 percent in the fourth quarter, the business still delivered more than $1 billion in average quarterly revenue for the full year.

All Wall Street banks, particularly Goldman Sachs, have faced big declines in bond trading due to historically low market volatility.

Reporting by Catherine Ngai in New York and Aparajita Saxena in Bengaluru; Additional reporting by Elizabeth Dilts; Writing by Lauren Tara LaCapra; Editing by Bernard Orr, Meredith Mazzilli and Diane Craft

Published at Fri, 19 Jan 2018 00:45:36 +0000

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Premarket: 4 things to know before the bell

Premarket: 4 things to know before the bell

premarket stocks trading futures
Click chart for in-depth premarket data.

1. China flexes: The world’s second-largest economy grew 6.9% last year, beating analyst expectations.

China’s performance was helped by government stimulus and an improving environment for global trade.

It’s the first time since 2010 that China’s official growth rate has bested the prior year. The economy grew 6.7% in 2016.

Chinese stocks gained Thursday, with Hong Kong’s Hang Seng hitting a record high. The Shanghai Composite rose to its highest level in over two years.

2. U.S. government shutdown risk: House Republican leaders are moving toward a vote Thursday to avoid a government shutdown.

But it’s unclear if GOP leaders have enough support to keep the government open.

If Congress doesn’t send a bill to the president approving more money by midnight on Friday, most federal agencies will be forced to stop operations.

A shutdown could derail a major market rally.

U.S. stock futures were soft ahead of the open. The Dow Jones industrial averageS&P 500 and Nasdaq all hit record highs on Wednesday.

The Dow soared by 323 points yesterday to close above 26,000 for the first time.

3. Earnings: Morgan Stanley (MS) will release earnings before the open, with American Express(AXP) and IBM (IBM) following after markets close.

Investors will be watching earning to see how companies assess new U.S. tax rules.

IBM, which has made a lot of money abroad, could report a big one-time hit because of a new tax on overseas earnings.

American companies with global operations are expected to pay hundreds of billions of dollars on the overseas profits they’ve amassed in recent decades.

But most companies say the tax changes are a good thing in the long run.

Apple (AAPL) said Wednesday it would make a $38 billion tax payment in relation to new tax rules.

4. Coming this week:

Thursday — Morgan Stanley (MS), IBM (IBM) earnings
Friday — January consumer sentiment report released by the University of Michigan

Published at Thu, 18 Jan 2018 09:48:47 +0000

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Reagan and Bush economic adviser says stocks are due to fall

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Reagan and Bush economic adviser says stocks are due to fall

  @CNNMoneyInvest

Martin Feldstein, one of the most influential Republican economists of the last 40 years, is warning that the stock market is poised to plunge.

That could drag down the U.S. economy, Feldstein warned.

In Wall Street Journal column with the headline “Stocks Are Headed for a Fall,” Feldstein argued that years of cheap money from the Federal Reserve has produced an overvalued stock market. He expects stocks to tumble as interest rates on bonds start to rise.

“When interest rates rise back to normal levels, share prices are also likely to revert to previous norms,” he wrote. “…The implied fall in the market would reduce the value of household equities held directly and through mutual funds by $10 trillion.”

He said that enormous decline in household wealth will take a deep bite out of consumer spending. That could shave 2% off of U.S. gross domestic product, the broad measure of the nation’s economic activity.

“The drop in equity prices would also raise the cost of equity capital, reducing business investment and further depressing GDP,” he wrote.

The prediction comes as stocks continue one of their strongest runs ever, regularly setting record highs, and going for the longest period on record without even a modest 3% pullback. Feldstein was the chairman of Council of Economic Advisers under President Reagan and an adviser to President George W. Bush credited with being one of the fathers of his administration’s tax cut plan.

He blames the steps that the Fed took in 2008 in response to the financial crisis, taking interest rates down to near 0%, and buying huge amounts of assets to pump money into the economy. Investors looking for returns on the investments moved into stocks and real estate, which inflated the value of those assets. But now with the Fed raising rates.

His column says that some of the current law is likely to increase the federal budget deficit, which he says will be another factor driving up interest rates.

Published at Wed, 17 Jan 2018 13:42:08 +0000

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Update: Predicting the Next Recession

Update: Predicting the Next Recession

by Bill McBride on 1/16/2018 01:59:00 PM

CR January 2018 Update: In 2013, I wrote a post “Predicting the Next Recession“. I repeated the post in January 2015 (and in the summer of 2015in January 2016, in August 2016, and in April 2017) because of all the recession calls. In late 2015, the recession callers were out in force – arguing the problems in China, combined with the impact on oil producers of lower oil prices (and defaults by energy companies) – would lead to a global recession and drag the US into recession.  I didn’t think so – and I was correct.

I’ve added a few updates in italics by year.  Most of the text is from January 2013.

A few thoughts on the “next recession” … Forecasters generally have a terrible record at predicting recessions. There are many reasons for this poor performance. In 1987, economist Victor Zarnowitz wrote in “The Record and Improvability of Economic Forecasting” that there was too much reliance on trends, and he also noted that predictive failure was also due to forecasters’ incentives. Zarnowitz wrote: “predicting a general downturn is always unpopular and predicting it prematurely—ahead of others—may prove quite costly to the forecaster and his customers”.

Incentives motivate Wall Street economic forecasters to always be optimistic about the future (just like stock analysts). Of course, for the media and bloggers, there is an incentive to always be bearish, because bad news drives traffic (hence the prevalence of yellow journalism).

In addition to paying attention to incentives, we also have to be careful not to rely “heavily on the persistence of trends”. One of the reasons I focus on residential investment (especially housing starts and new home sales) is residential investment is very cyclical and is frequently the best leading indicator for the economy. UCLA’s Ed Leamer went so far as to argue that: “Housing IS the Business Cycle“. Usually residential investment leads the economy both into and out of recessions. The most recent recovery was an exception, but it was fairly easy to predict a sluggish recovery without a contribution from housing.

Since I started this blog in January 2005, I’ve been pretty lucky on calling the business cycle.  I argued no recession in 2005 and 2006, then at the beginning of 2007 I predicted a recession would start that year (made it by one month with the Great Recession starting in December 2007).  And in 2009, I argued the economy had bottomed and we’d see sluggish growth.

Finally, over the last 18 months, a number of forecasters (mostly online) have argued a recession was imminent.  I responded that I wasn’t even on “recession watch”, primarily because I thought residential investment was bottoming.

[CR 2015 Update: this was written two years ago – I’m not sure if those calling for a recession then have acknowledged their incorrect forecasts and / or changed theirs views (like ECRI and various bloggers). Clearly they were wrong.] [CR April 2017 Update: Now it has been over four years!  And yes, ECRI has admitted their recession calls were incorrect.  Not sure about the rest of the recession callers.] [CR January 2018 Update: Now it has been five years!]

Now one of my blogging goals is to see if I can get lucky again and call the next recession correctly.  Right now I’m pretty optimistic (see: The Future’s so Bright …) and I expect a pickup in growth over the next few years (2013 will be sluggish with all the austerity).

The next recession will probably be caused by one of the following (from least likely to most likely):

3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.

[CR 2016 Update: The recent recession calls are mostly based on exogenous events: the problems in China and in commodity based economies (especially oil based).  There will be some spillover to the US such as fewer exports (and an impact on oil producing regions in the US), but unless there is a related financial crisis, I think the spillover will be insufficient to cause a recession in the US.]

2) Significant policy error. This might involve premature or too rapid fiscal or monetary tightening (like the US in 1937 or eurozone in 2012).  Two examples: not reaching a fiscal agreement and going off the “fiscal cliff” probably would have led to a recession, and Congress refusing to “pay the bills” would have been a policy error that would have taken the economy into recession.  Both are off the table now, but there remains some risk of future policy errors.

Note: Usually the optimal path for reducing the deficit means avoiding a recession since a recession pushes up the deficit as revenues decline and automatic spending (unemployment insurance, etc) increases.  So usually one of the goals for fiscal policymakers is to avoid taking the economy into recession. Too much austerity too quickly is self defeating.

[CR 2017 Update: Austerity was a mistake (obvious at the time).  And it is possible that we will see serious policy mistakes from the new administration (a complete wildcard).  And it is possible the Fed could tighten too quickly. ]

1) Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a “soft landing”, and frequently the result is a recession. Since inflation is not an immediate concern, the Fed will probably stay accommodative for a few more years.

So right now I expect further growth for the next few years (all the austerity in 2013 concerns me, especially over the next couple of quarters as people adjust to higher payroll taxes, but I think we will avoid contraction). [CR 2015 Update: We avoided contraction in 2013!] I think the most likely cause of the next recession will be Fed tightening to combat inflation sometime in the future – and residential investment (housing starts, new home sales) will probably turn down well in advance of the recession. In other words, I expect the next recession to be a more normal economic downturn – and I don’t expect a recession for a few years.

[CR January 2018 Update: This was written in 2013 – and my prediction for no “recession for a few years” was correct.  This still seems correct today, so no recession in the immediate future (not in 2018). ]

Read more at http://www.calculatedriskblog.com/2018/01/update-predicting-next-recession.html#mVgqPd8U6ie4AY4u.99

Published at Tue, 16 Jan 2018 18:59:00 +0000

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Schedule for Week of Jan 14, 2018

Schedule for Week of Jan 14, 2018

by Bill McBride on 1/13/2018 08:11:00 AM

The key economic report this week is December Housing Starts.

For manufacturing, December industrial production, and the January New York, and Philly Fed manufacturing surveys, will be released this week.

—– Monday, Jan 15th —–

All US markets will be closed in observance of Martin Luther King Jr. Day

—– Tuesday, Jan 16th—–

8:30 AM ET: The New York Fed Empire State manufacturing survey for January. The consensus is for a reading of 18.6, up from 18.0.

—– Wednesday, Jan 17th —–

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.
 

Industrial Production

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for December.

This graph shows industrial production since 1967.

The consensus is for a 0.4% increase in Industrial Production, and for Capacity Utilization to increase to 77.3%.

10:00 AM: The January NAHB homebuilder survey. The consensus is for a reading of  73, down from 74 in December. Any number above 50 indicates that more builders view sales conditions as good than poor.

2:00 PM: the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

—– Thursday, Jan 18th —–

8:30 AM ET: The initial weekly unemployment claims report will be released.  The consensus is for 250 thousand initial claims, up from 261 thousand the previous week.
 

Total Housing Starts and Single Family Housing Starts

8:30 AM: Housing Starts for December.

This graph shows single and total housing starts since 1968.

The consensus is for 1.280 million SAAR, down from 1.297 million SAAR in November.

8:30 AM: the Philly Fed manufacturing survey for January. The consensus is for a reading of 25.0, down from 26.2.

—– Friday, Jan 19th —–

10:00 AM: University of Michigan’s Consumer sentiment index (Preliminary for January). The consensus is for a reading of 97.0, up from 95.9.

Read more at http://www.calculatedriskblog.com/2018/01/schedule-for-week-of-jan-14-2018.html#MuKV2qbhDpBVL6zk.99

Published at Sat, 13 Jan 2018 13:11:00 +0000

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Oil Prices Higher, Up 19% Year-over-year

Oil Prices Higher, Up 19% Year-over-year

by Bill McBride on 1/11/2018 01:40:00 PM

From Bloomberg: Crude Oil Prices Are Up 49%, and It’s Not All Thanks to OPEC

The bottom line: A 49 percent surge in benchmark North American crude futures since late June, putting prices at a three-year high.

“We expect inventories are going to build this year — slightly,” said Michael Cohen, Barclays Head of Oil Markets Research, in an interview on Bloomberg TV. “You’re going to see a bunch of new crude supply coming on to the market this year from the U.S. So all in all, on a balanced basis, we don’t see the kind of shortage to bring us to $80 for a sustainable basis.”

Oil Prices

Click on graph for larger image

The first graph shows WTI and Brent spot oil prices from the EIA. (Prices today added).

According to Bloomberg, WTI is at $64.29 per barrel today, and Brent is at $69.66.

Prices really collapsed at the end of 2014 – and then rebounded a little – and then collapsed again at the end of 2015 and in early 2016.

Now, with the global economy stronger and less domestic production, oil prices are rising.
Oil Prices

The second graph shows the year-over-year change in WTI based on data from the EIA.

Six times since 1987, oil prices have increased 100% or more YoY.  And several times prices have almost fallen in half YoY.

Currently WTI is up about 19% year-over-year.

Read more at http://www.calculatedriskblog.com/2018/01/oil-prices-higher-up-19-year-over-year.html#ojU1fH0DOJEXchZi.99

Published at Thu, 11 Jan 2018 18:40:00 +0000

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Wall Street pares losses as financial stocks climb

Wall Street pares losses as financial stocks climb

(Reuters) – Wall Street’s major indexes pared earlier losses on Wednesday as higher U.S. government bond yields drove gains for banks and other financial stocks.

Markets had initially fallen on a Bloomberg report that China, the world’s biggest holder of U.S. Treasuries, was considering slowing purchases.

The S&P financial index .SPSY rose more than 1 percent, helped by gains in Wells Fargo (WFC.N) and JPMorgan (JPM.N) ahead of results on Friday.

The China report weakened the dollar, which slipped 0.25 percent, while gold jumped to its highest in four months.

At 12:31 p.m. ET (1731 GMT), the Dow Jones Industrial Average .DJI was down 13.51 points, or 0.05 percent, at 25,372.29 and the S&P 500 .SPX was down 3.93 points, or 0.14 percent, at 2,747.36.

The Nasdaq Composite .IXIC was down 22.42 points, or 0.31 percent, at 7,141.15.

“We’ve had a tremendous run, mostly unabated since Trump’s election in 2016 and with no volatility. If we do see a pullback, that’s going to be a buying opportunity,” said Michael Scanlon, managing director of Manulife Asset Management.

The S&P and the Nasdaq have closed at record highs every single day in 2018, buoyed by optimism over global growth and expectations of a strong quarterly earnings.

Earnings for S&P 500 companies are expected to increase by 11.8 percent, with biggest contribution from the energy sector, according to Thomson Reuters I/B/E/S.

“It will be the first time that Corporate America has the ability to talk about guidance that incorporates lower tax rates. It’s going to be confusing and noisy but will be fascinating,” said Art Hogan, chief market strategist at B. Riley FBR in Boston.

Berkshire Hathaway (BRKb.N) rose 1 percent after the conglomerate promoted two of its top executives, cementing their status as the most likely successors to Warren Buffett.

Eight of the 11 major S&P sectors were lower, led by a 1.75 percent fall in interest-rate sensitive real estate and 1.24 percent drop in utilities .SPLRCU.

Shares of Lennar Corp (LEN.N) gained 2 percent as No.2 U.S. homebuilder’s orders and total revenue rose more than expected in the fourth quarter.

The Dow Jones Transport index .DJT, often looked at as a gauge of the economy’s health, rose 0.45 percent after United Continental (UAL.N) reported higher traffic for December, boosting other airline stocks.

Department store operator Kohl’s (KSS.N) rose about 3 percent after two brokerages raised their price targets.

Declining issues outnumbered advancers on the NYSE by 1,786 to 1,077. On the Nasdaq, 1,624 issues fell and 1,264 advanced.

Reporting by Sruthi Shankar in Bengaluru; editing by Patrick Graham and Arun Koyyur

Published at Wed, 10 Jan 2018 18:35:33 +0000

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Schedule for Week of January 7, 2018

 

Schedule for Week of January 7, 2018

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S&P 500, Nasdaq post best week in more than a year

S&P 500, Nasdaq post best week in more than a year

NEW YORK (Reuters) – The S&P 500 and Nasdaq notched their best weekly gains in more than a year on Friday as technology stocks helped lift major indexes to records.

With the New Year’s Day holiday falling on a Monday this year, it was the strongest first four trading days to a year in more than a decade for all three major indices, according to Reuters data. For the Dow, it was the strongest start since 2003 and for the Nasdaq and S&P 500 it was the strongest since 2006.

A U.S. tax overhaul last month that includes hefty corporate tax cuts helped to fuel late-year gains and was the first major legislative victory in President Donald Trump’s pro-growth agenda since he took office a year ago.

U.S. stocks this week have been adding to momentum from 2017, driven by a series of strong economic reports from across the globe and expectations for strong fourth-quarter earnings, with all three major indexes hitting milestones in the last few days.

The Dow broke above 25,000 for the first time on Thursday, while the S&P closed above 2,700 on Wednesday and the Nasdaq settled above 7,000 earlier in the week.

“We’re up over 2 percent for the first four days of 2018, so that’s pretty good. Markets are still working to figure out the implications of tax cuts, and that’s provided some of the lift along with already good economic forecasts,” said Mike Baele, managing director at U.S. Bank Private Client Wealth Management in Portland, Oregon.

Weaker-than-expected December U.S. jobs data also could help the Federal Reserve stick to its policy of gradual interest rate hikes in 2018, which would be good for stocks, Baele said.

U.S. job growth slowed more than expected in December amid a decline in retail employment, but a pickup in monthly wages pointed to labor market strength. Non-farm payrolls increased by 148,000 jobs last month, the Labor Department said. Economists polled by Reuters had expected a rise of 190,000.

The Dow Jones Industrial Average .DJI rose 220.74 points, or 0.88 percent, to 25,295.87, the S&P 500 .SPX gained 19.16 points, or 0.70 percent, to 2,743.15 and the Nasdaq Composite .IXIC added 58.64 points, or 0.83 percent, to 7,136.56.

The S&P technology index’s .SPLRCT 1.2-percent gain led the advancers among the 11 major S&P sectors, with gains in Microsoft (MSFT.O), Apple (AAPL.O) and Google-parent Alphabet (GOOGL.O) boosting the index.

The year’s strong start follows a surprisingly sharp rally in 2017 that ended with the S&P 500 up 19.4 percent on the year.

For the week, the Dow rose 2.3 percent, the S&P 500 gained 2.6 percent and the Nasdaq climbed 3.4 percent. Those were the biggest weekly gains for the S&P and Nasdaq since December of 2016.

Among declining stocks, Francesca’s Holdings (FRAN.O) tanked 20.7 percent. The women’s apparel and accessories maker said it expected up to 17 percent decline in current-quarter same-store sales.

Advancing issues outnumbered declining ones on the NYSE by a 1.52-to-1 ratio; on Nasdaq, a 1.47-to-1 ratio favored advancers.

About 6.3 billion shares changed hands on U.S. exchanges, the same as the 6.3 billion daily average for the past 20 trading days, according to Thomson Reuters data.

(This story has been refiled to correct second paragraph to reflect it is the strongest first four trading days to a year since 2003 for the Dow and 2006 for the S&P and Nasdaq.)

Additional reporting by Sruthi Shankar in Bengaluru; Editing by Sriraj Kalluvila and Nick Zieminski

Published at Fri, 05 Jan 2018 22:34:27 +0000

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American workers in 2018: Show me the money

Photo

Republicans reveal final tax plan details
Republicans reveal final tax plan details

American workers in 2018: Show me the money

  @CNNMoney

America’s red hot job market is missing one ingredient: Strong wage growth.

It’s a big reason many Americans still feel left out of the recovery from the Great Recession.

Usually, when unemployment is this low — 4.1%, the lowest since 2000 — wages go up significantly. Companies have a hard time finding workers, and they have to pay more to recruit and retain them.

Not so in this job market. As of November, wages were only up 2.5% compared with a year ago. And since October 2010, the economy has added jobs every month, but wage growth has averaged a paltry 2.2%.

The final jobs report for 2017 comes out Friday, and it could offer hints about whether wage growth is finally starting to pick up.

In some corners of America, there are signs that it’s already happening. Small and medium-sized businesses are really feeling the pressure to find workers and raise wages.

The share of employers who found few or no qualified job applicants in December was at an all-time high, 54%, according to a report published Thursday by the National Federation of Independent Business, which polls firms with 500 employees or less.

About 23% of employers told NFIB that they plan to pay employees more in the next three to six months. That matches a level last seen in March 2000, and the only time it was higher was December 1989. NFIB has conducted its survey for 40 years.

Mike Olsen is in that boat. When he founded the education tech firm Proctorio in 2013, he says it wasn’t hard to find a qualified engineer in Scottsdale, Arizona. But now it’s become his biggest employment problem.

“We used to have the advantage, and now I feel like we don’t,” says Olsen, 29. “As unemployment decreases, these employees have the upper hand.”

To keep the workers he has, Olsen says he’s raised wages 15% in the past year. An entry-level engineer at Proctorio earns $75,000 to $80,000 a year.

Proctorio, which has 28 employees, designs camera technology that monitors students during exams to prevent them from cheating. Its technology monitors facial expressions, eye twitches and mouth movement. About 500 universities use Proctorio.

“We’re doing about 3 million exams a year. We have a lot of people trying to cheat,” Olsen says.

But he’s struggling to find qualified engineers and customer service advocates. He’s also looking for a “professional cheater” to poke holes in the software they’re developing.

Olsen is confident he’ll find a qualified cheater, but for his typical job postings, he can’t hire just anybody: Only one in 10 applicants is worth a phone call. Of the people who get phone calls, he figures one in 20 makes it to an interview. And out of that group, one in 10 gets a job offer.

Proctorio is also in a particularly hot job market. In Phoenix, small businesses raised wages in December more than any other metro area — 5.25% from a year ago, according to a report by Paychex, a payment processor, and IHS Markit, an analytics firm.

That makes sense: Unemployment in Phoenix is 3.7%, below the national average. Arizona did raise its minimum wage this week to $10.50 an hour, but for many employers like Olsen, that’s not the biggest problem.

He’s competing for engineers against Amazon(AMZN), which has an office in nearby Tempe, Arizona. Olsen says some of his engineers came to him last year saying they had offers for more money elsewhere. Knowing how hard it would be to replace them, Olsen has had no choice.

“We had to match it,” he says.

He adds that Proctorio is a business that only succeeds with speed: Schools need to know immediately if a student has cheated. Having engineers work together well as a team to make that fast judgment call is critical for the company.

Olsen has also decided to match competing offers because battling with Amazon is only his second-biggest problem. His first: A lack of skilled workers in the Phoenix area.

Olsen says many engineers educated in Arizona prefer to move to tech hubs like Austin or the Bay Area. That means Olsen has to pay up to persuade more to stay.

“I think we’re going to have to keep increasing” wages, Olsen says. “But it’s probably not sustainable.”

Published at Thu, 04 Jan 2018 15:26:53 +0000

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2018 First Impressions

2018 First Impressions

by THE MOLE

Welcome back! I hope some of you enjoyed a quiet and relaxing time away from charts and the never ending drama of our financial markets. I wish I was that lucky but as almost every year I somehow find myself stuck catching up on a myriad of chores, reading assignments, and various project related tasks. That’s right, the action (and the screaming) never stops down here at the evil lair. Now I was actually planning on ripping the lid off a major new initiative I have planned for you guys but I’m running a bit behind so let’s just take a gander at some of our key markets.

Which actually can be summed up by this chart – the U.S. Dollar (shown here are the futures), and it’s heading for a world of hurt. That formation on the monthly panel is looking extremely troubling and unless we are seeing buying interest here and that soon we will most likely see a drop to the 90 mark. Should that psychologically important support zone fail then it’ll launch a sell off of biblical proportion.

In some ways this is already happening actually, and the ongoing goldrush into crypto currencies is just one symptom of the overall disease (i.e. a systematic destruction of the greenback largely fueled by a decade of quantitative easing). Without doubt 2017 will be remembered as the year in which crypto currencies transitioned from the early adopter phase to early mainstream. And I have little doubt that 2018 is going to be the year in which consolidation in the number of markets, standardization on the exchange and trading front, and yes regulations by governments and international bodies will establish crypto as a force to be reckoned with. Currency markets will never be the same and despite all the growing pains it will most definitely for the better. More on that in the near future.

Over in the dinosaur forex pit the EUR/USD is looking bullish as heck right now and if I had any common sense I would double my subscription fees post haste. It’s in a clear break out pattern right now and a target of 1.26 by Eastern is in the cards.

One more freebie but there’s quite a bit more looming below the fold (so sign up now). The USD/JPY is still hemming and hawing, but a if it can hold its 25-day SMA I think we’re off to the races here. I would love to get a more thorough retest as to justify a long term long for a ride into 118.

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Published at Tue, 02 Jan 2018 14:39:31 +0000

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FOMC Minutes: New Tax Law “would likely provide a modest boost to capital spending”

FOMC Minutes: New Tax Law “would likely provide a modest boost to capital spending”

by Bill McBride on 1/03/2018 02:08:00 PM

A couple of excerpts, the first on the economic impact of the new tax law, and the second on the yield curve.

From the Fed: Minutes of the Federal Open Market Committee, December 12-13, 2017:

Many participants judged that the proposed changes in business taxes, if enacted, would likely provide a modest boost to capital spending, al­though the magnitude of the effects was uncertain. The resulting increase in the capital stock could contribute to positive supply-side effects, including an expansion of potential output over the next few years. However, some business contacts and respondents to business surveys suggested that firms were cautious about expanding capital spending in response to the proposed tax changes or noted that the increase in cash flow that would result from corporate tax cuts was more likely to be used for mergers and acquisitions or for debt reduction and stock buybacks.

Meeting participants also discussed the recent narrowing of the gap between the yields on long- and short-maturity nominal Treasury securities, which had resulted in a flatter profile of the term structure of interest rates. Among the factors contributing to the flattening, participants pointed to recent increases in the target range for the federal funds rate, reductions in investors’ estimates of the longer-run neutral real interest rate, lower longer-term inflation expectations, and lower term premiums. They generally agreed that the current degree of flatness of the yield curve was not unusual by historical standards. However, several participants thought that it would be important to continue to monitor the slope of the yield curve. Some expressed concern that a possible future inversion of the yield curve, with short-term yields rising above those on longer-term Treasury securities, could portend an economic slowdown, noting that inversions have preceded recessions over the past several decades, or that a protracted yield curve inversion could adversely affect the financial condition of banks and other financial institutions and pose risks to financial stability. A couple of other participants viewed the flattening of the yield curve as an expected consequence of increases in the Committee’s target range for the federal funds rate, and judged that a yield curve inversion under such circumstances would not necessarily foreshadow or cause an economic downturn. It was also noted that contacts in the financial sector generally did not express concern about the recent flattening of the term structure.

Read more at http://www.calculatedriskblog.com/2018/01/fomc-minutes-new-tax-law-would-likely.html#iJcmXbDhuzbBIXoj.99
Published at Wed, 03 Jan 2018 19:08:00 +0000

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Construction Spending increased in November

by 889520 from Pixabay

Construction Spending increased in November

by Bill McBride on 1/03/2018 11:59:00 AM

Earlier today, the Census Bureau reported that overall construction spending increased in November:

Construction spending during November 2017 was estimated at a seasonally adjusted annual rate of $1,257.0 billion, 0.8 percent above the revised October estimate of $1,247.1 billion. The November figure is 2.4 percent above the November 2016 estimate of $1,227.0 billion.

Both private and public spending increased in November:

Spending on private construction was at a seasonally adjusted annual rate of $964.3 billion, 1.0 percent above the revised October estimate of $955.1 billion. …

In November, the estimated seasonally adjusted annual rate of public construction spending was $292.7 billion, 0.2 percent above the revised October estimate of $292.0 billion.
emphasis added

Construction Spending

Click on graph for larger image.

This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted.

Private residential spending has been increasing, but is still 22% below the bubble peak.

Non-residential spending has been declining over the last year, but is 5% above the previous peak in January 2008 (nominal dollars).

Public construction spending is now 10% below the peak in March 2009, and 11% above the austerity low in February 2014.

Year-over-year Construction Spending

The second graph shows the year-over-year change in construction spending.

On a year-over-year basis, private residential construction spending is up 8%. Non-residential spending is down 3% year-over-year. Public spending is up 2% year-over-year.

This was above the consensus forecast of a 0.6% increase for November.
Read more at http://www.calculatedriskblog.com/2018/01/construction-spending-increased-in.html#wERVswDd5FLLAHOx.99

Published at Wed, 03 Jan 2018 16:59:00 +0000

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Oil Sees Strongest Start Of Year Since 2014

Oil Sees Strongest Start Of Year Since 2014


Brent crude and West Texas Intermediate started trading in 2018 above US$60 a barrel both for the first time since January 2014, before prices collapsed. WTI hit a high of US$60.68 a barrel in midmorning Asian trading before retreating somewhat to US$60.64, while Brent crude booked a high of US$67.23 a barrel before slipping to US$67.20.

Analysts saw strong demand and tightening supply behind the price rise. In fact, fundamentals and the market’s expectations about fundamental developments this year were strong enough to offset the early restart of the Forties oil pipeline on December 30. The Forties was shut down in early December to repair hairline cracks, which sent Brent soaring as the pipeline supplies some 450,000 bpd of crude oil to the UK.

The fundamental indicators also offset the resumption of production in Libya, after a pipeline blast took off somewhere between 70,000 and 100,000 bpd from daily production. According to a report by Reuters, the pipeline was repaired by December 31 and the oil flow was being gradually resumed.

The last week of 2017 also saw news about higher crude oil import quotas for independent Chinese refineries, signaling a further rise in oil demand in the world’s second-largest consumer. Beijing issued quotas for a total 121.32 million tons (2.43 million bpd) of crude oil imports for 44 companies, and this is just the first quota batch for the year.

To add to the bullish sentiment, U.S. crude oil inventories continued to fall, booking a cumulative fall of as much as 20 percent since March 2017, when they hit a record-high. Although not everyone agrees that EIA’s inventory data is an accurate indicator of supply and demand in the world’s top consumer, the authority’s weekly reports still have market-swinging power.

On the flip side, U.S. oil production continues to grow and will soon break the 10-million bpd barrier, analysts believe. At the end of the year, the daily production rate stood at 9.75 million barrels and higher prices will likely motivate a faster increase this year.

By Irina Slav for Oilprice.com

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Published at Tue, 02 Jan 2018 15:39:21 +0000

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Schedule for Week of December 31st

Schedule for Week of December 31st

by Bill McBride on 12/30/2017 08:09:00 AM

Happy New Year!

The key report this week is the December employment report on Friday.

Other key indicators include the December ISM manufacturing and non-manufacturing indexes, the November trade deficit, and December auto sales.

Also the Q4 quarterly Reis surveys for office and malls will be released this week.

—– Monday, Jan 1st —–

All US markets will be closed in observance of the New Year’s Day Holiday.

—– Tuesday, Jan 2nd —–

10:00 AM: Corelogic House Price index for November.

—– Wednesday, Jan 3rd —–

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

Early: Reis Q4 2017 Office Survey of rents and vacancy rates.

ISM PMI

10:00 AM: ISM Manufacturing Index for December. The consensus is for the ISM to be at 58.0, down from 58.2 in November.

Here is a long term graph of the ISM manufacturing index.

The ISM manufacturing index indicated expansion in October. The PMI was at 58.2% in November, the employment index was at 59.7%, and the new orders index was at 64.0%.

10:00 AM: Construction Spending for November. The consensus is for a 0.6% increase in construction spending.

Vehicle Sales

All day: Light vehicle sales for December. The consensus is for light vehicle sales to be 17.5 million SAAR in December, up from 17.4 million in November (Seasonally Adjusted Annual Rate).

This graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the November sales rate.

2:00 PM: FOMC Minutes, Meeting of December 12 – 13, 2017

—– Thursday, Jan 4th —–

8:15 AM: The ADP Employment Report for December. This report is for private payrolls only (no government). The consensus is for 185,000 payroll jobs added in December, down from 190,000 added in November.

8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for 240 thousand initial claims, down from 245 thousand the previous week.

Early: Reis Q4 2017 Mall Survey of rents and vacancy rates.

—– Friday, Jan 5th —–

8:30 AM: Employment Report for December. The consensus is for an increase of 190,000 non-farm payroll jobs added in December, down from the 228,000 non-farm payroll jobs added in November.

Year-over-year change employment

The consensus is for the unemployment rate to be unchanged at 4.1%.

This graph shows the year-over-year change in total non-farm employment since 1968.

In November the year-over-year change was 2.07 million jobs.

A key will be the change in wages.

U.S. Trade Deficit

8:30 AM: Trade Balance report for November from the Census Bureau.

This graph shows the U.S. trade deficit, with and without petroleum, through October. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

The consensus is for the U.S. trade deficit to be at $48.3 billion in November from $48.7 billion in October.

10:00 AM: the ISM non-Manufacturing Index for December. The consensus is for index to increase to 57.6 from 57.4 in November.
Read more at http://www.calculatedriskblog.com/2017/12/schedule-for-week-of-december-31st.html#IfqVB2x5J75ly4I2.99

Published at Sat, 30 Dec 2017 13:09:00 +0000

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Biggest withdrawal in four months hits U.S. domestic stock funds: ICI

 

Biggest withdrawal in four months hits U.S. domestic stock funds: ICI

NEW YORK (Reuters) – U.S. fund investors walloped domestic equities with the most selling in four months, using the proceeds to buy cheaper stocks abroad that could thrive in a global economic expansion, Investment Company Institute (ICI) data showed on Wednesday.

Nearly $9.6 billion tumbled out of funds focused on U.S. stocks during the week ended Dec. 20, the most in any week since August, while their counterparts focused outside the country took in $8 billion in their best showing since June, the trade group said.

U.S. President Donald Trump on Friday signed into law the largest tax overhaul since the 1980s, which slashes the corporate rate from 35 percent to 21 percent.

That benefit for corporations has stimulated further gains for domestic stocks, but investors have been buying abroad instead, searching for a potentially better value, especially if growth accelerates in Japan, Europe or emerging markets, too.

“I‘m more optimistic than I have been in several months,” said Tom Stringfellow, chief investment officer at Frost Investment Advisors.

“The emerging markets are not as risky as we anticipated, Europe is getting traction.”

Money is also typically shifted in the final weeks of the year in an effort to minimize taxes. Some investors, for instance, sell securities at a loss to decrease their tax liabilities.

“As we shift into a lower-tax regime in 2018, especially for corporations, we have been observing clients engaging in more aggressive tax-loss selling before lower tax rates kick in next year, because tax losses are more valuable in a higher tax environment,” said Scott Minerd, global chief investment officer at asset manager Guggenheim Partners LLC, in a note distributed to clients.

Bond funds pulled in $1.6 billion, the least amount of cash in five weeks, but still enough to record a 52nd straight week of inflows and nearly a full year without a single week of withdrawals, according to ICI. Funds that invest in commodities, such as gold or oil, posted $434 million in outflows, the most since July.

Overall, domestic equity funds are on pace to post outflows for the third straight year in 2017, according to Thomson Reuters’ Lipper unit, while debt and non-domestic stock funds are strongly positive on the year.

Much of the year-end reallocation is benefiting exchange-traded funds (ETFs), which typically track segments of the market relatively cheaply. ICI said ETFs took in nearly $11 billion during the week, compared to outflows of nearly $14 billion for mutual funds, which typically charge a higher fee and attempt to beat the market.

Reporting by Trevor Hunnicutt; Editing by Tom Brown

Published at Wed, 27 Dec 2017 19:48:50 +0000

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U.S. stock funds attract most cash since 2014: Lipper

U.S. stock funds attract most cash since 2014: Lipper

NEW YORK (Reuters) – Investors poured $24.1 billion into U.S.-based stock funds in the week to Dec. 27, Lipper said on Thursday, sending a gift to equity markets already on pace to record a year of double-digit percentage gains.

This marks the largest week of inflows for mutual funds and exchange-traded funds (ETFs) collectively since December 2014, according to the Thomson Reuters research service, and comes after U.S. lawmakers finalized a massive corporate tax cut that markets admired.

Cash is also shuffling around during a typically active period for funds, despite holidays, as investors plan for taxes and report end-of-year performance statistics. Equity fund outflows totaled $22.2 billion the week prior.

The flow result counters the dominant trend in U.S.-based funds this year – a reticence to buy stocks at home despite an S&P 500 index poised to deliver a 2017 return of more than 20 percent.

Domestic stock funds posted an estimated $23.4 billion in outflows for the year, according to Lipper, compared to $165 billion inflows for their counterparts invested abroad and $283 billion inflows for funds for taxable bonds.

“You see people attracted to equities, but they’re not backing up the truck to buy equities at 20-times earnings,” said David Lafferty, chief market strategist at Natixis Investment Managers, referring to the seemingly rich price-to-earnings ratio of the S&P 500. “I don’t see any euphoria.”

This week, though, domestic equity funds pulled in nearly $18 billion, compared to $6.4 billion to their internationally oriented peers, according to Lipper.

Healthcare stock funds, however, posted their seventh straight week of outflows. The U.S. tax bill repealed a requirement that most Americans have insurance or face penalties.

Taxable bond funds were hit with a rare week of withdrawals. High-yield bonds, invested in more speculative corporate debt, recorded $240 million in outflows during the week, Lipper said, while lower-risk Treasury funds pulled in $567 million. Money-market funds, where investors park cash, took in $19.3 billion.

Funds based in the United States but focused on Chinese stocks took in $408 million during the week, the largest inflows since June 2015, during a week in which strong demand for copper seemed to presage growth in the emerging market and around the world. [MKTS/GLOB]

Reporting by Trevor Hunnicutt; Editing by Richard Chang and James Dalgleish

Published at Thu, 28 Dec 2017 23:25:59 +0000

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Ten Economic Questions for 2018

by Gellinger from Pixabay

Ten Economic Questions for 2018

by Bill McBride on 12/27/2017 05:21:00 PM

Here is a review of the Ten Economic Questions for 2017.

Here are my ten questions for 2018. I’ll follow up with some thoughts on each of these questions.

The purpose of these questions is to provide a framework to think about how the U.S. economy will perform in 2018, and – when there are surprises – to adjust my thinking.

1) Economic growth: Heading into 2018, most analysts are pretty sanguine and expecting some pickup in growth due to the recent tax cuts.  From Goldman Sachs:

“We are adjusting our forecasts to reflect the final details of the tax bill, as well as the incremental easing in financial conditions and continued strong economic momentum to end the year. We are increasing our GDP forecasts for 2018 and 2019 by 0.3pp and 0.2pp, respectively, on a Q4/Q4 basis (to 2.6% and 1.7%).”

How much will the economy grow in 2018?

2) Employment: Through November, the economy has added just over 1,900,000 jobs this year, or 174,000 per month. As expected, this was down from the 187 thousand per month in 2016.  Will job creation in 2018 be as strong as in 2017?  Or will job creation be even stronger, like in 2014 or 2015?  Or will job creation slow further in 2018?

3) Unemployment Rate: The unemployment rate was at 4.1% in November, down 0.5 percentage points year-over-year.  Currently the FOMC is forecasting the unemployment rate will be in the 3.7% to 4.0% range in Q4 2018.  What will the unemployment rate be in December 2018?

4) Inflation: The inflation rate has increased a little recently, and some key measures are now close to the the Fed’s 2% target. Will core inflation rate rise in 2018? Will too much inflation be a concern in 2018?

5) Monetary Policy:  The Fed raised rates three times in 2017 and started to reduce their balance sheet. The Fed is forecasting three more rate hikes in 2018.  Some analysts think there will be more, from Goldman Sachs:

“We expect the next rate hike to come in March with subjective odds of 75%, and we continue to expect a total of four hikes in 2018.”

Will the Fed raise rates in 2018, and if so, by how much?

6) Real Wage Growth: Wage growth picked up in 2016 (up 2.9%), but slowed in 2017 (up 2.5% year-over-year in November).  How much will wages increase in 2018?

7) Residential Investment: Residential investment (RI) was sluggish in 2017, although new home sales were up solidly.  Note: RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales.  How much will RI increase in 2017?  How about housing starts and new home sales in 2017?

8) House Prices: It appears house prices – as measured by the national repeat sales index (Case-ShillerCoreLogic) – will be up over 6% in 2017.   What will happen with house prices in 2018?

9) Housing Inventory: Housing inventory declined in 2015, 2016 and 2017.  Will inventory increase or decrease in 2018?

10) Housing and Taxes A key change in the new tax law is limiting the deductibility of State and Local Taxes (SALT) and property taxes to $10,000. Many analysts think this will hit certain segments of the housing market in states like New York, New Jersey and California. The NAR noted their forecast today:

“Heading into 2018, existing-home sales and price growth are forecast to slow, primarily because of the altered tax benefits of homeownership affecting some high-cost areas.”

Relative to the overall market, will sales slow, inventory increase, and price growth slow in these states?

There are other important questions, but these are the ones I’m focused on right now.  I’ll write on each of these questions over the next couple of weeks.
Read more at http://www.calculatedriskblog.com/2017/12/ten-economic-questions-for-2018.html#0iutFLpdOIxkycwv.99
Published at Wed, 27 Dec 2017 22:21:00 +0000

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